Universal Insurance Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The company is a property-and-casualty insurer and services provider, focused mainly on homeowners insurance, with most business in Florida. This is an annual report, not a quarterly filing; quarterly figures are noted where relevant. Amounts below are in U.S. dollars.
Business context and operating footprint
Universal writes through its insurance subsidiaries UPCIC and APPCIC, using independent agents and online channels. It operated in 17 states, with licenses in three additional states. Florida represented 85.1% of 2018 direct premiums written. The company reported 828,653 policies in force and $228.7 billion of total insured value at year-end; 43.5% of Florida policies and 56.5% of Florida in-force premium were in Broward, Miami-Dade and Palm Beach counties.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Direct premiums written | $1,190.9 million | $1,055.9 million |
| Net premiums earned | $768.4 million | $688.8 million |
| Total revenue | $823.8 million | $751.9 million |
| Losses and loss-adjustment expenses (LAE) | $414.5 million | $350.4 million |
| Income before taxes | $152.9 million | $170.5 million |
| Net income | $117.1 million | $106.9 million |
| Diluted EPS | $3.27 | $2.99 |
| Net loss ratio / expense ratio / combined ratio | 53.9% / 33.4% / 87.3% | 50.9% / 33.5% / 84.4% |
| Net investment income | $24.8 million | $13.5 million |
| Operating cash flow | $230.1 million | $245.0 million |
| Cash and cash equivalents | $166.4 million | $213.5 million |
| Total assets / stockholders’ equity | $1,858.4 million / $501.6 million | $1,455.0 million / $440.0 million |
| Long-term debt | $11.4 million | $12.9 million |
Net income rose 9.5%, while pretax income fell 10.3%; the lower effective tax rate (23.4%, versus 37.3%) was a key reason net income increased. The combined ratio remained below 100%, indicating underwriting profitability on the company’s reported consolidated measure, though it worsened year over year. Statutory combined ratios differed by insurer: UPCIC was 98% and APPCIC 133% in 2018.
Cash provided by operations was $230.1 million; investing activities used $212.3 million and financing activities used $64.9 million. The ending cash-flow total, including restricted cash, was $169.1 million. Year-end liabilities included $472.8 million of unpaid losses and LAE, $601.7 million of unearned premiums and $102.8 million of book overdrafts. The company said operating cash flows should meet working-capital needs for at least the next 12 months. Debt-to-equity was 2.3%.
Material changes and unusual items
- Direct premiums written grew 12.8%; Florida grew 9.7% and other states grew 34.6%. Management cited policy growth, agent expansion, a 3.4% Florida rate increase and online sales.
- Net losses and LAE increased 18.3%. The company recorded $99.5 million of net adverse prior-year reserve development, primarily associated with reopened and new claims, litigation, and higher claim frequency and severity in Florida. Hurricane Irma claim estimates also increased; the filing gives differing gross cumulative Irma reserve figures in different sections, so a single clear value is not provided.
- Hurricanes Florence and Michael generated $14.8 million of net losses and LAE. Management said the reinsurance program substantially limited the storms’ impact. Reinsurance recoverables increased to $418.6 million from $182.4 million.
- Fourth-quarter 2018 net loss was $6.5 million, compared with $36.4 million net income in fourth-quarter 2017. The filing attributes the loss chiefly to prior-year reserve strengthening, with Hurricane Michael and equity-market declines also contributing. Fourth-quarter unrealized equity losses were $8 million.
- For full-year 2018, a $17.2 million unrealized loss on equity securities was recognized in earnings following adoption of new accounting guidance; realized securities losses were $2.1 million. Net investment income increased 84.4%, supported by larger invested assets and higher book yields.
- The 2018–2019 reinsurance program included FHCF and private coverage. UPCIC’s stated first-event combined coverage was up to $3.146 billion, subject to contract terms, retentions and limits; its modeled net after-tax loss for a repeat of the 2004 hurricane season was approximately $110 million.
- Shareholders received $0.73 per common share in declared dividends, including a special dividend, and the company repurchased 688,689 shares for $25.3 million. The regular quarterly dividend was raised to $0.16 per share in 2018.
Outlook, risks and contingencies
The filing provides no specific 2019 earnings or revenue guidance. Management’s stated priorities included customer experience, disciplined underwriting, balance-sheet strength, geographic diversification and reinsurance protection. It expected operating cash flows to cover working-capital requirements for at least 12 months, but noted that future dividends and repurchases remain subject to business conditions, capital needs, board discretion and regulatory constraints. UPCIC had capacity to pay $14.0 million in ordinary dividends in 2019 without prior regulatory approval; APPCIC did not qualify to pay ordinary dividends then.
Key risks include catastrophe exposure and Florida concentration, uncertainty in loss reserves and subrogation recoveries, assignment-of-benefits-related litigation, rate regulation, reinsurance availability and counterparty credit risk, investment-market volatility, and regulatory capital requirements. Management estimated reasonably possible legal losses it could estimate as immaterial, but cautioned that actual exposure could differ and may exceed accrued amounts. The independent auditor issued an unqualified opinion and concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How subsequent development of Irma and other prior-year claims compares with the $99.5 million net reserve strengthening recorded in 2018, and whether reserve estimates remain adequate.
- Whether the $418.6 million reinsurance recoverable is collected promptly and in full, and how reinsurer credit quality and contract terms affect recovery.
- How Florida litigation and assignment-of-benefits trends, claim frequency and severity, and any regulatory or legislative changes affect loss costs and rate adequacy.
- Whether catastrophe exposure remains appropriately covered after retentions, reinstatement terms and aggregate limits, particularly given South Florida concentration.
- The quality and liquidity of investments, including the effect of interest-rate and equity-price movements on earnings and capital.
- Liquidity and holding-company cash access, including book overdrafts, insurance-subsidiary dividend restrictions and capital needs alongside dividends and repurchases.
- Reconcile the differing gross Irma reserve figures in the filing and review statutory results, especially APPCIC’s 133% combined ratio.