UNIVERSAL INSURANCE HOLDINGS, INC. annual report, FY2021

Business context and reporting period

Universal Insurance Holdings, Inc. (NYSE: UVE) filed this Form 10-K for the fiscal year ended December 31, 2021. The company is a vertically integrated property-and-casualty insurer focused mainly on homeowners insurance, operating in 19 states through UPCIC and APPCIC; Florida generated 83.1% of 2021 direct premiums written. The filing also reports unaudited fourth-quarter results.

Financial performance and position

Despite year-over-year improvement, the combined ratio remained above 100%, indicating an underwriting loss before investment and other income. Net investment income fell 38.5% to $12.5 million, and net realized investment gains declined to $5.9 million from $63.4 million. The 2020 gains included substantial sales of debt securities to realize market appreciation.

At year-end, cash and cash equivalents were $250.5 million, invested assets were $1,093.7 million, total assets were $2,056.1 million, and stockholders’ equity was $429.7 million. Long-term debt, net, was $103.7 million, including $100 million of 5.625% senior unsecured notes due 2026. The company also had an undrawn $35 million revolving credit facility. Book value per share decreased 4.6% to $13.76.

Material changes versus the prior comparable period

• Direct premiums written rose 10.1% and net premiums earned increased 12.1%, primarily reflecting rate increases; policies in force fell 4.2% to 943,593 as the company moderated new business and managed exposure.
• The net loss and LAE ratio improved, mainly because weather losses beyond expectations were much lower than in 2020. However, the core loss ratio increased to 67.3% from 58.3%, reflecting higher expected claims costs and reserve selections.
• 2021 included $54.5 million of net unfavorable prior-year reserve development, versus $58.3 million in 2020. Unfavorable development on non-hurricane claims was a significant driver; hurricane development was partly offset by reinsurance recoveries.
• Reinsurance costs rose: ceded premiums earned increased 18.9% to $561.2 million, and reinsurance costs rose to 35.1% of direct earned premiums from 33.8%.
• Cash from operations increased substantially, while cash and cash equivalents rose to $250.5 million. The increase was partly supported by the $100 million notes issuance.
• Fourth-quarter 2021 included a $48.1 million net loss, compared with a $17.7 million loss in fourth-quarter 2020; 2021’s fourth-quarter losses reflected higher current-year core losses, weather claims and adverse prior-year development.

Outlook, commentary, risks and unusual items

• Management described Florida as a hard market and is pursuing rate adequacy, exposure management and disciplined underwriting. Florida regulators approved a 14.9% homeowners rate increase in September 2021 and a further 3.9% increase effective in 2022; increases were also being implemented in several other states. The filing provides no formal earnings or revenue guidance.
• Management cited inflation in construction materials and labor, supply-chain constraints, and Florida claims solicitation, representation and litigation as drivers of claim severity, frequency and expenses. Florida legislative reforms enacted in 2021 may help limit litigation, but management said it was too early to assess their effects.
• Loss reserves are a key estimation risk. The $346.2 million unpaid-loss and LAE liability includes estimated subrogation recoveries of approximately $118.6 million; ultimate claims and recoveries may differ materially from estimates. The independent auditor identified loss reserves as a critical audit matter.
• Catastrophe exposure remains concentrated in Florida. Reinsurance programs met regulatory and Demotech requirements, but leave retained losses and exposure to coverage limits, pricing, availability and reinsurer credit risk. The 2021–2022 programs’ projected total cost was $584 million.
• Insurer statutory combined results remained mixed: UPCIC reported a 112% statutory combined ratio, while APPCIC reported 45%. Both insurers met applicable capital and risk-based capital requirements and retained Demotech A ratings. Neither could pay an ordinary dividend to its parent in 2022; UVE made capital contributions to UPCIC, including a further $90 million contribution funded in February 2022 and recognized in statutory surplus at year-end.
• UVE declared $0.77 per common share in 2021, including a $0.13 special dividend, and repurchased 116,886 shares for $1.6 million. Future dividends and repurchases remain subject to board discretion, financial conditions and applicable restrictions.
• Management reported no direct material COVID-19 impact in 2021 but identified indirect effects on claims costs and continuing uncertainty. Interest-rate increases also reduced fair values of available-for-sale securities, contributing to $18.9 million of other comprehensive loss.
• The financial statements received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective. Management estimated reasonably possible losses on other legal proceedings to be immaterial, while noting estimates are uncertain and do not represent maximum exposure.

Important facts for investors to verify

• Track Florida claim frequency, litigation, inflation and the emergence of reserve development, especially non-hurricane claims and subrogation recoveries.
• Assess whether approved rate increases are sufficient and timely to offset underlying loss trends and higher reinsurance costs, while monitoring policy retention and Citizens’ competition.
• Review catastrophe exposure, reinsurance tower limits, renewal pricing and terms, and reinsurer recoverability; compare actual loss experience with catastrophe models.
• Monitor quarterly underwriting results: the annual combined ratio exceeded 100%, and the fourth quarter posted a substantial net loss.
• Evaluate investment-income sensitivity to yields and market values, as well as debt service and parent-company liquidity given the new notes and limits on insurer dividends.