Universal Insurance Holdings, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2017; results are unaudited and presented against Q3 and nine-month 2016. The company is a vertically integrated property and casualty insurer, primarily writing homeowners policies through independent agents. Florida remains its largest market; it reported operations in 15 states and said Florida accounted for 88% of nine-month direct premiums written.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Direct premiums written | $274.7m | $241.9m | $816.4m | $741.8m |
| Net premiums earned | $174.5m | $159.5m | $505.1m | $468.4m |
| Total premiums earned and other revenues | $190.2m | $172.4m | $550.6m | $506.7m |
| Net income | $10.0m | $26.9m | $70.5m | $85.8m |
| Diluted EPS | $0.28 | $0.75 | $1.96 | $2.41 |
| Loss and LAE ratio, net | 66.7% | 46.1% | 52.9% | 42.6% |
| G&A expense ratio | 32.8% | 34.3% | 34.0% | 35.6% |
For the nine months, operating cash flow was $286.2m, compared with $178.6m in 2016. Investing activities provided $5.1m, versus $146.9m used in the prior period; financing activities used $30.9m. Cash and cash equivalents were $366.2m at September 30, 2017, up from $105.7m at year-end 2016. The balance included $114m in reinsurer advances for Hurricane Irma.
Total assets were $1.857bn and stockholders’ equity was $420.6m at quarter-end. Long-term debt was $13.2m; debt-to-total-capital was 3.0%. The $412.7m reinsurance recoverable and $440.4m unpaid losses and LAE largely reflect Irma-related estimates. Invested assets totaled $651.6m, including $609.2m of fixed maturities.
Material changes versus prior comparable periods
- Q3 net income fell 62.9% and nine-month net income fell 17.7%, primarily reflecting $37m of net pre-tax Irma losses, higher other claims costs, and growth-related costs.
- Q3 total revenues rose 10.3%; nine-month revenues rose 8.7%. Direct written premiums increased 13.6% in Q3 and 10.1% year to date. Other-state direct premiums grew faster than Florida premiums: 38.8% versus 10.5% in Q3 and 41.7% versus 6.8% for nine months.
- Q3 losses and LAE increased 58.2% to $116.4m; nine-month losses and LAE increased 33.7% to $267.1m. Expense ratios improved, but the higher loss ratios more than offset that benefit.
- Cash rose substantially, alongside large increases in reinsurance recoverables, unpaid losses, prepaid reinsurance premiums and reinsurance payables associated with the 2017–18 reinsurance program and Irma.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said operating cash flows should meet working-capital requirements for at least the next 12 months.
- Irma generated $452m of gross losses and LAE; the company reported $37m of net Irma losses after reinsurance. Management said the reinsurance program performed as expected and that coverage remained available for the rest of the 2017–18 hurricane season. UPCIC’s stated first-event coverage, including FHCF and third-party reinsurance, was up to $2.71bn, subject to program terms and limits.
- Management cited higher underlying claims frequency, severe-weather activity, expansion into states with generally higher non-catastrophe loss ratios, and Florida assignment-of-benefits challenges. Catastrophe severity, reserve adequacy, reinsurance availability and reinsurer credit are material risks.
- The 2017–18 program’s stated UPCIC private catastrophe reinsurance cost was $155.5m, plus $25.7m for reinstatement premium protection. Higher exposure and reinsurance costs increased ceded premiums.
- The nine-month effective tax rate was 37.0%, including $0.8m of excess share-based compensation tax benefits and a $1.2m credit for anticipated tax recoveries.
- The company declared a $0.14-per-share dividend and repurchased approximately 406,000 shares for $9.0m in Q3. A further $20m buyback authorization was approved through December 31, 2018.
- Management reported no material change in risk factors or internal controls. It considered reasonably possible legal losses estimable to be immaterial, while noting actual outcomes could differ. The interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- How Irma claims develop versus reserves, and whether the $412.7m reinsurance recoverable is collected promptly and in full.
- Whether the catastrophe program’s coverage, exclusions, reinstatements and remaining limits are adequate for further events, and how much risk remains above program limits.
- Whether elevated non-catastrophe claims frequency, Florida assignment-of-benefits issues and geographic expansion continue to pressure loss ratios.
- Insurance-subsidiary statutory capital and dividend constraints: UPCIC had $57.7m of 2017 ordinary dividend capacity, of which $30m had been paid by September 30; APPCIC had no ordinary dividend capacity for 2017.
- Whether management’s liquidity assessment remains sound after considering claims payments, reinsurance collections, required reinsurance premiums, and cash held within regulated insurance subsidiaries.