Universal Insurance Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a vertically integrated property-and-casualty insurer focused on homeowners coverage, primarily in Florida. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Direct premiums written | $473.6m | $404.7m | $838.9m | $739.2m |
| Net premiums earned | $256.2m | $226.4m | $499.5m | $447.2m |
| Total premiums earned and other revenues | $279.2m | $252.7m | $541.9m | $488.0m |
| Net investment income | $2.9m | $6.2m | $5.8m | $13.0m |
| Net income | $21.9m | $19.9m | $48.3m | $39.9m |
| Diluted EPS | $0.70 | $0.62 | $1.54 | $1.23 |
| Combined ratio | 97.3% | 99.5% | 95.2% | 96.8% |
| Net loss and LAE ratio | 65.3% | 66.9% | 62.3% | 64.0% |
All dollar amounts are U.S. dollars; financial-statement amounts above are rounded to millions. The combined ratio was below 100% in both periods, indicating underwriting profit under the company’s definition. Q2 revenue rose 10.5% and net income rose 10.4% year over year; six-month net income rose 21.0%. Premium growth reflected rate increases and business growth, while higher reinsurance costs reduced net earned premium growth.
- Claims and expenses: Q2 losses and loss adjustment expenses (LAE) were $167.2m, up 10.5%; general and administrative expenses were $81.9m, up 10.8%. The six-month figures were $311.2m and $164.3m, respectively.
- Cash flow: Operating cash flow was $257.1m for the six months, versus $190.8m a year earlier. Investing activities used $132.5m and financing activities used $11.9m. Cash and cash equivalents were $286.5m; including restricted cash, $292.6m.
- Balance sheet and debt: Total assets were $2.34bn and stockholders’ equity $480.8m at June 30, versus $1.76bn and $449.3m at year-end 2020. Long-term debt was $7.7m; debt-to-equity was 1.6%. Reinsurance payable was $581.8m, mainly reflecting the annual program renewal.
- Capital and shareholder returns: Book value per share was $15.37 at June 30. The company declared and paid a $0.16 common dividend per share for Q2; a further $0.16 dividend was declared in July. Six-month treasury-stock purchases were $0.2m.
Material changes and operating developments
- Direct premiums written increased 17.0% in Q2; Florida accounted for 84.5% of Q2 written premiums. Policies in force were 977,251 at June 30, up slightly from March 31 but down 0.8% from December 31, 2020 as management moderated new business and exposures.
- Net investment income fell 53.7% in Q2 and 55.1% for the six months. Management attributed the decline primarily to lower reinvestment yields after selling securities in 2020 and to lower returns on cash investments.
- Q2 net loss and LAE ratio improved despite higher core losses: there were no weather losses beyond expected levels in Q2 2021, compared with $17.0m in Q2 2020. Core claim costs and litigation trends remained elevated.
- Prior-year reserve development was $7.7m adverse net in Q2 and $6.5m adverse net for the six months. Gross hurricane reserve increases were largely offset by ceded reinsurance recoveries; non-hurricane development reflected litigated claims settling above prior estimates.
- Accumulated other comprehensive income moved from $3.3m at year-end to a $5.6m loss, reflecting changes in the fair value of available-for-sale debt securities. Six-month comprehensive income was $39.4m, down from $57.1m.
Outlook, risks and contingencies
- Outlook: The filing provides no specific earnings or revenue guidance. Management said operating cash flows should be sufficient for working-capital needs for at least the next twelve months, while noting that future investment income is expected to reflect lower yields under current market conditions.
- Reinsurance: The 2021–2022 programs were completed and met stated Florida regulatory requirements. Their projected combined cost was $583m, approximately 35.8% of estimated direct premium earned over the treaty period. UPCIC’s first-event all-states retention was $45m and its tower extended to $3.413bn. The company remains responsible for retained losses, losses beyond coverage and amounts not collected from reinsurers. Contractual reinsurance commitments include $94.3m in 2022, $138.2m in 2023 and $72.1m in 2024.
- Claims, litigation and regulation: Management cited persistent Florida claim-cost inflation, represented and litigated claims, and attorneys’ fees as key pressures. A further 14.9% statewide average Florida rate increase was filed in May 2021. Florida legislation effective mainly July 1, 2021 may affect the market, but its impact and susceptibility to legal challenge are uncertain.
- Other risks: Catastrophes and severe weather, reserve-estimate uncertainty, reinsurance availability and credit risk, Florida concentration, investment-market and interest-rate exposure, regulatory capital requirements, litigation, and possible COVID-19 effects. Management reported no material COVID-19 impact to date but said longer-term effects remain uncertain.
- Management estimated reasonably possible losses from other legal proceedings to be immaterial where estimable, while cautioning that actual outcomes may differ and estimates are not maximum exposure. The insurance subsidiaries exceeded stated statutory capitalization requirements; dividends from them to their parent are subject to regulatory limits.
Important facts for investors to verify
- Whether the filed Florida rate increase is approved and whether approved rate actions keep pace with claim and reinsurance cost trends.
- Whether hurricane and litigated-claim reserves develop as estimated, including the collectability and timing of related reinsurance recoveries.
- Actual cost, coverage, reinstatement terms and counterparty strength of the 2021–2022 reinsurance program, as well as payment obligations under multi-year contracts.
- Whether premium growth and exposure management translate into sustained underwriting profitability, given Florida concentration and modest policy-count changes.
- Investment portfolio yields, fair-value changes and liquidity after scheduled reinsurance premium payments; management’s cash-flow sufficiency statement is forward-looking.
- The effect of Florida’s 2021 legislation, court delays and litigation trends on claims costs and results.