Universal Insurance Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company is a vertically integrated property and casualty insurer, principally writing residential homeowners’ insurance; Florida represented 83.0% of direct premiums written in the first half. The interim financial statements were reviewed by Plante & Moran, PLLC, which reported no material modifications needed for GAAP conformity; this was a review, not an audit.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $339.6 million | $292.0 million | $656.1 million | $579.5 million |
| Net premiums earned | $303.3 million | $277.1 million | $585.5 million | $546.1 million |
| Net investment income | $11.3 million | $5.2 million | $22.0 million | $9.3 million |
| Net income | $28.6 million | $7.4 million | $52.7 million | $24.9 million |
| Diluted EPS | $0.93 | $0.24 | $1.72 | $0.80 |
| Combined ratio | 99.1% | 100.9% | 99.5% | 99.4% |
| Net loss and LAE ratio | 73.8% | 72.3% | 73.4% | 70.6% |
Q2 net income increased 287.6% year over year, supported by higher net premiums earned and investment income, improved investment results versus prior-year losses, higher commission revenue, and lower general and administrative expenses. The six-month increase reflected similar revenue drivers. These results included investment-market gains; management’s non-GAAP adjusted diluted EPS was $0.87 for Q2 and $1.65 for the first half, compared with $0.47 and $1.12, respectively, in 2022.
Direct premiums written rose 2.7% in Q2 and 3.0% in the first half. Net premiums earned increased 9.5% and 7.2%, respectively. The expense ratio improved to 25.3% in Q2 from 28.6%, and to 26.1% in the first half from 28.8%. Q2’s combined ratio moved below 100%, indicating an underwriting profit by the company’s definition; the first-half ratio was roughly flat year over year. However, the net loss and LAE ratio rose in both comparisons. Prior-year reserve development was adverse by $13.8 million in Q2 and $17.1 million in the first half, primarily reflecting non-catastrophe weather claims and Hurricanes Irma and Sally.
Cash, capital and balance sheet
- At June 30, total assets were $2.918 billion, total liabilities $2.583 billion, and stockholders’ equity $334.7 million, up from $287.9 million at year-end 2022.
- Cash and cash equivalents were $291.7 million, down $97.0 million from year-end. Restricted cash was $68.6 million, including $66.0 million held in a reinsurance captive trust. Combined cash and restricted cash was $360.3 million.
- Operating cash flow was $1.4 million for the first half, versus $225.4 million in 2022. Cash and restricted cash decreased by $31.0 million. Management attributed the reduction in cash principally to Hurricane Ian claim settlements and cash flows used in investing and financing activities exceeding operating cash flow.
- Long-term debt, net, was $102.4 million; principal outstanding was $104.8 million, including $100 million of 5.625% senior unsecured notes due 2026. The company was in covenant compliance. Its new $40 million unsecured revolver was undrawn at quarter-end and matures in June 2024. Debt-to-total capital was 23.4%, versus 26.3% at year-end.
- Book value per common share was $11.12, compared with $9.47 at year-end. Adjusted book value per share, a non-GAAP measure excluding accumulated other comprehensive income or loss, was $14.31, versus $12.89.
- The company declared $0.32 per common share in dividends during the first half and repurchased 396,371 shares for approximately $6.1 million. A new $20 million repurchase authorization was approved in June.
Material changes and management commentary
- Investment income more than doubled year over year in Q2 and rose 137.3% for the first half, as cash and maturing investments were reinvested at higher rates. First-half other comprehensive income was $7.9 million, versus a $72.6 million loss in 2022, as unrealized losses on available-for-sale debt securities eased. The portfolio still had $126.8 million of pretax net unrealized losses at June 30.
- Policies in force fell 4.6% from year-end to 809,685; compared with June 2022, they were down 9.5%. Premium in force increased 6.4% year over year, while total insured value declined 0.8%. Management cited rate increases, inflation adjustments to insured values, disciplined exposure management, selected non-renewals, and competition from Florida’s Citizens insurer.
- Management reported the 2023–2024 reinsurance program provides approximately $2.8 billion in first-event protection. Estimated cost is $624 million, or 31.8% of projected direct premiums earned for the treaty year, compared with 37.6% for the prior program. Coverage includes the company’s captive arrangement; costs, retentions, exclusions, and recoveries remain important to evaluate.
- Management said Florida’s December 2022 and 2023 insurance-law reforms are intended to reduce claims litigation and related costs, but their effectiveness and timing are not yet clear. Rate filings and exposure-management actions continue; a July 2023 Florida rate increase was filed after quarter-end. No full-year earnings or revenue guidance is provided in the filing.
Risks, contingencies and unusual items
- The company remains highly exposed to Florida catastrophe, weather, inflation, claims-litigation, rate adequacy, and regulatory risks. Management cautions that claims and LAE may exceed reserves, and that rate approvals and premium earning can lag cost increases.
- The Insurance Entities began commutation of their 2017–18 Florida Hurricane Catastrophe Fund contract in June 2023, relating to Hurricane Irma. The final recoverable amount is uncertain and may be subject to disagreement or actuarial dispute resolution; later claim settlements could differ from the commuted estimate.
- The insurers reported combined statutory net losses of $28.4 million for the first half. They met statutory capitalization requirements, but had no capacity to pay ordinary dividends to the parent as of June 30, limiting one potential source of holding-company liquidity.
- Reinsurance recoverables were $590.4 million, and amounts due from major reinsurers included $188.6 million from Allianz Risk Transfer. The company remains exposed to reinsurer nonpayment and losses outside coverage or above retentions.
- Future multi-year reinsurance commitments include $72.7 million payable in 2024 and $52.6 million in 2025. The filing estimates total material cash requirements of $995.4 million within 12 months, including reinsurance payable and estimated loss payments; loss-payment timing and amounts are uncertain.
- Legal matters are generally contested, and management estimated reasonably possible losses beyond recorded amounts to be immaterial where estimable. It cautions that this is not the maximum exposure. The filing reports no other recognized or unrecognized subsequent events requiring disclosure, apart from a July 20 declaration of a $0.16 quarterly dividend.
Key facts for investors to verify
- Whether reserve development, particularly for Irma, Sally, and non-catastrophe claims, continues and whether actuarial assumptions remain adequate.
- The ultimate outcome and timing of the 2017–18 FHCF commutation, including any difference between company and fund estimates.
- Actual 2023–2024 reinsurance costs, reinstatement premiums, coverage limits, retentions, and collectability of recoverables.
- Whether rate increases and Florida legal reforms improve underwriting results as policies renew, given declining policy counts and competitive pressure from Citizens.
- Operating cash generation, liquidity after claim and reinsurance payments, and holding-company access to subsidiary funds given dividend restrictions.
- Interest-rate effects on investment income and the fair value of the debt portfolio, as well as equity-market exposure; a hypothetical 20% decline in equity security prices would reduce fair value by $15.1 million at June 30.