Universal Insurance Holdings, Inc. — Q2 2016 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Universal is a vertically integrated property and casualty insurer, primarily writing homeowners insurance through independent agents. Florida remained its largest market, accounting for 91.4% of first-half direct written premiums. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total premiums earned and other revenues | $169.8m | $123.6m | $334.2m | $227.4m |
| Net premiums earned | $156.5m | $112.9m | $308.9m | $207.2m |
| Net income | $33.6m | $24.7m | $58.9m | $47.0m |
| Diluted earnings per share | $0.94 | $0.69 | $1.65 | $1.31 |
| Net loss and LAE ratio | 38.4% | 35.2% | 40.9% | 35.4% |
| General and administrative expense ratio | 35.0% | 37.8% | 36.3% | 36.1% |
| Combined ratio, calculated from reported ratios | 73.4% | 73.0% | 77.2% | 71.5% |
Direct premiums written increased 8.8% in Q2 to $271.9m and 8.3% in the first half to $499.9m. Other-state first-half direct premiums grew 45.5% to $43.1m. The company reported first-half comprehensive income of $65.0m, including $6.1m of after-tax other comprehensive income.
Cash flow and financial position. First-half operating cash flow was $152.6m, versus $207.5m in 2015; investing activities used $117.4m and financing activities used $16.9m. Cash and cash equivalents were $215.3m at June 30, up from $197.0m at year-end 2015. Total assets were $1.150bn, liabilities $798.1m, and stockholders’ equity $351.4m. Long-term debt was $15.8m, down from $24.1m; debt-to-total-capital was 4.3%, versus 7.6% at year-end. Management said operating cash flows should meet working-capital needs for at least the next 12 months.
Material changes and management commentary
- Net income rose 36.2% in Q2 and 25.2% in the first half. Management attributed growth to organic premium expansion and the elimination of quota-share reinsurance effective June 1, 2015, which increased premiums retained and changed the comparison of earned premiums, claims and acquisition costs.
- Net loss and LAE ratios increased year over year. First-half 2016 results included $8.5m of incremental losses from severe weather events in Q1; management said the underlying gross loss ratio, excluding those events, was consistent with its latest actuarial study. Q2 prior-year reserve development was not material.
- Higher general and administrative expenses partly reflected the loss of ceding-commission offsets after quota-share termination. Management reported acquisition costs before ceding commissions of 13.5% of gross written premium in Q2 and first-half expense ratios of 36.3% in 2016 versus 36.1% in 2015.
- The company completed its 2016–2017 reinsurance program. UPCIC’s private catastrophe program cost $150m, plus $28.4m for reinstatement-premium protection; estimated FHCF premium was $105.6m. UPCIC’s stated net catastrophe retention was $35m per event, subject to program terms, coverage limits and losses exceeding the top layer. Reinsurance does not eliminate the company’s responsibility to policyholders if a reinsurer fails to pay.
- In April, the company sold 583,771 shares to RenaissanceRe for $10m of consideration: $2.965m cash and $7.035m cancellation of indebtedness. The RenRe term loan was cancelled. The company also completed a prior repurchase authorization and initiated a new program authorizing up to $20m of repurchases through December 31, 2017. It declared a $0.14 per-share dividend.
- Management described continued expansion outside Florida, including writing its first Alabama policy and extending its online direct platform to Alabama and Minnesota. No specific earnings or revenue guidance was provided.
Outlook, risks and contingencies
Management’s outlook emphasizes profitable organic growth, expansion into other states, disciplined underwriting and optimization of reinsurance. Results remain exposed to Florida concentration, hurricanes and severe weather, claim frequency and severity, reserve estimation, reinsurance availability and counterparty credit, investment-market movements, regulation, and dependence on independent agents. Insurance-subsidiary dividends to the parent are restricted; UPCIC had capacity for $52.9m in ordinary dividends during 2016 based on year-end calculations, while APPCIC had none. Both insurers met stated statutory capitalization requirements at June 30, 2016.
The company reported ongoing litigation in the ordinary course and estimated reasonably possible losses, where estimable, to be immaterial; actual losses could differ and exceed accrued amounts. Management reported no material changes to previously disclosed risk factors, no material change in internal control over financial reporting, and effective disclosure controls. The filing identified new accounting standards under evaluation; it did not quantify their expected impact where not yet determined.
Important facts for investors to verify
- How much of premium and earnings growth reflects underlying policy growth and pricing versus the prior-year quota-share reinsurance change.
- Whether catastrophe losses, claim trends and reserve development remain consistent with actuarial assumptions, particularly after the $8.5m Q1 weather charge.
- The coverage, exclusions, exhaustion and reinstatement provisions of the 2016–2017 reinsurance program, as well as reinsurer collectability and costs.
- Florida concentration, statutory capital and restrictions on moving cash from regulated insurance subsidiaries to the holding company.
- Investment portfolio credit and market exposure, including the company’s assessment that unrealized losses are temporary and that it can hold affected securities until recovery.
- Cash generation, capital allocation, and the effects of dividends, repurchases and the RenRe share-and-debt transaction on per-share results and liquidity.