Universal Insurance Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company is a vertically integrated property-and-casualty insurer focused on residential homeowners coverage, principally in Florida, and operates in 18 states. Its interim financial statements were reviewed by its independent accountant, not audited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Direct premiums written | $404.7 million | $358.0 million | $739.2 million | $647.2 million |
| Net premiums earned | $226.4 million | $210.4 million | $447.2 million | $420.1 million |
| Total premiums earned and other revenues | $252.7 million | $233.7 million | $488.0 million | $470.3 million |
| Net income | $19.9 million | $37.3 million | $39.9 million | $77.4 million |
| Diluted EPS | $0.62 | $1.08 | $1.23 | $2.22 |
| Net loss ratio | 66.9% | 53.9% | 64.0% | 53.9% |
| Expense ratio | 32.7% | 33.0% | 32.8% | 33.2% |
| Combined ratio | 99.5% | 86.9% | 96.8% | 87.0% |
Combined ratio is operating costs and expenses divided by net premiums earned; below 100% indicates underwriting profit. Revenue growth did not offset higher claims costs: Q2 operating expenses rose 23.2% while total revenues rose 8.1%. Q2 pre-tax income fell 46.1% to $27.4 million. Investment income declined 16.6% to $6.2 million in Q2 and 16.3% to $13.0 million for the half year. H1 results also included a $4.2 million unrealized loss on equity securities, versus a $21.8 million gain in the prior-year period.
Financial position and liquidity
- At June 30, total assets were $2.05 billion, total liabilities $1.52 billion, and stockholders’ equity $527.7 million, up from $493.9 million at year-end 2019. Book value per share was $16.56, up 9.5% from $15.13.
- Cash and cash equivalents were $331.7 million, versus $182.1 million at December 31, 2019. Operating cash flow for the first six months was $190.8 million, compared with $56.0 million in 2019; cash, including restricted cash, increased $149.9 million.
- Long-term debt was $9.2 million. Debt-to-total-capital and debt-to-equity ratios were each 1.7%, down from 2.0%. The company said operating cash flows should meet working-capital needs for at least 12 months.
- Invested assets totaled $934.5 million; the fixed-income portfolio had an average A+ credit rating and 3.4-year duration. The company held $50.7 million of net unrealized gains on fixed-income securities before credit losses at quarter-end.
- Reinsurance payable was $499.7 million and prepaid reinsurance premiums were $453.0 million, reflecting the June 1 renewal of the catastrophe program. Unpaid losses and loss-adjustment expenses were $147.7 million.
Material changes and management commentary
- Q2 direct premiums written grew 13.1%; Florida grew 12.8% and other states 14.5%. H1 direct premiums written increased 14.2%. Management cited growth, rate increases, and slightly improved retention.
- Claims were the main pressure on earnings. Q2 net losses and loss-adjustment expenses rose 33.6% to $151.3 million; management attributed the increase to higher core losses, $17.0 million of weather losses above expected levels, and business growth. The core loss ratio increased from 37% to 40%.
- For H1, net losses and loss-adjustment expenses rose 26.5% to $286.4 million. The period included $18.0 million of weather losses above expected levels and $4.8 million of net adverse prior-year reserve development, principally from revised hurricane loss estimates. Q2 net adverse development was $0.5 million.
- Management highlighted elevated Florida claim frequency and severity, represented and litigated claims, and assignment-of-benefits disputes. A 12.4% Florida homeowners rate increase was approved, effective May 2020 for new business and July 2020 for renewals; the company also changed underwriting guidelines and expanded claims and litigation management efforts.
- The 2020–2021 reinsurance program began June 1. Its projected combined cost for the insurance entities was $494 million, approximately 34.6% of estimated direct premiums earned for the treaty year. UPCIC’s first-event tower extends to $3.26 billion. Multi-year reinsurance commitments include $128.3 million in 2021 and $71.3 million in 2022.
- Management reported no material COVID-19 impact through Q2, but increased cash as a precaution, paused purchases of equity securities, and accumulated cash as investments matured or paid down. It cautioned that lower reinvestment yields could reduce investment income and that the pandemic’s longer-term effects remain uncertain. Premium-payment grace periods and late-fee waivers were implemented; management had not seen significant use as of the filing.
Outlook, risks, and contingencies
- The filing provides no earnings or revenue guidance. Management was cautiously optimistic about renewals and premium production but said it would monitor COVID-19, the economy, liquidity, and capital resources.
- Key risks include catastrophe losses exceeding retained or reinsured amounts, reinsurance availability, pricing and collection risk, Florida geographic concentration, reserve-estimation uncertainty, investment-market and interest-rate volatility, and litigation and regulatory developments.
- The company reported that both insurance entities exceeded minimum statutory capital requirements. UPCIC could pay $12.1 million of ordinary dividends in 2020 without prior regulatory approval; APPCIC had no such ordinary-dividend capacity. No dividends were paid by the insurance entities to their parent in the first half.
- Management considered reasonably estimable possible losses from legal proceedings immaterial, while noting actual losses could vary and exceed accrued amounts. The company also disclosed $856.3 million of contractual obligations, including reinsurance commitments and estimated unpaid losses.
- The board declared a $0.16-per-share Q3 2020 dividend, payable August 7, 2020. The company repurchased 884,175 shares for $16.6 million during H1 under its share-repurchase program.
Most important facts for investors to verify
- Whether higher Florida claims costs, litigation, weather losses, and adverse reserve development continue to pressure loss and combined ratios, and whether approved rate increases and claims actions improve results.
- Whether the reinsurance program delivers the disclosed catastrophe protection at its projected cost, and the company’s exposure to reinsurer nonpayment or losses beyond coverage.
- Whether premium collections, liquidity, and investment income withstand the ongoing economic effects of COVID-19 and lower interest rates.
- How the $494 million reinsurance cost and $199.6 million of future multi-year reinsurance commitments affect cash needs and margins.
- The Q2 share-repurchase disclosures differ on average price: the MD&A highlights $17.53, while the quarterly repurchase table reports $17.50. Verify the correct figure; both report 572,068 shares repurchased.