Business context and reporting period
Universal Insurance Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company is a vertically integrated property-and-casualty insurer focused primarily on homeowners insurance, distributed mainly through independent agents. Its business remains concentrated in Florida: 91.1% of policies and 87.9% of insured value were in the state at year-end.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $369.3 million | $301.2 million | +22.6% |
| Net premiums earned | $326.9 million | $267.7 million | +22.1% |
| Net income | $73.0 million | $59.0 million | +23.8% |
| Diluted EPS | $2.08 | $1.56 | +33.3% |
| Operating cash flow | $123.3 million | $157.0 million | Lower |
Fourth-quarter 2014 revenue was $104.5 million, net premiums earned were $95.4 million, and net income was $21.0 million, compared with $77.6 million, $66.5 million, and $15.6 million, respectively, in fourth-quarter 2013.
- Net losses and loss-adjustment expenses (LAE) were $123.3 million; the net loss-and-LAE ratio was 37.7%, versus 40.6% in 2013. The statutory combined ratios were 75% for UPCIC and 88% for APPCIC, compared with 85% and 205%, respectively, in 2013.
- General and administrative expenses rose 28.7% to $118.4 million, including higher deferred acquisition-cost amortization, stock compensation and bonuses. The effective tax rate increased to 42.8% from 41.3%.
- Cash and cash equivalents were $115.4 million at year-end, compared with $117.3 million; restricted cash was $2.6 million. Investments totaled $423.6 million, up from $354.4 million.
- Total assets were $911.8 million; total liabilities were $692.9 million. Long-term debt was $30.6 million, versus $37.2 million. Reported stockholders’ equity was $199.9 million; pro forma equity was $218.9 million after a subsequent amendment reclassified $19.0 million of contingently redeemable shares to permanent equity.
- Management said operating cash flows should meet working-capital needs for at least the next 12 months. No amount was drawn on the $10 million revolving credit line at year-end; the company reported compliance with debt covenants.
Material changes and management commentary
- Effective June 1, 2014, UPCIC reduced its quota-share reinsurance cession from 45% to 30%, retaining more premiums and risk. Management attributed much of the growth in net written and earned premiums to this change and to lower reinsurance costs. It also increased losses retained and reduced ceding commissions.
- Florida policy counts increased after May 2014, while policy count outside Florida grew 37.2% year over year. UPCIC began writing in Delaware and received approval to operate in Indiana; expansion into other states is part of the diversification strategy.
- Management cited disciplined underwriting, selective pricing, claims-process improvements, investment portfolio changes, share repurchases and higher dividends as priorities. The company reported no significant catastrophe effects in 2014.
- 2014 included $5.6 million in realized investment gains, compared with $14.7 million in realized losses in 2013, when the company liquidated its trading portfolio. Net investment income was $2.4 million, up from $1.9 million.
- Common dividends declared were $0.55 per share for 2014, including a $0.15 special dividend. The company repurchased shares, and separately sold 1 million shares for $19 per share in December 2014.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expects continued operating cash-flow sufficiency but cautions that actual results may vary. The principal risks include Florida hurricane and windstorm exposure, catastrophe-model uncertainty, reinsurance availability and counterparty credit, reserve estimation, rate and discount regulation, competition, investment-market changes, and reliance on agents and Florida markets.
- At year-end, unpaid losses and LAE were $134.4 million gross, or $87.0 million net of reinsurance. Prior-year development in 2014 was favorable by $0.7 million; management and its actuaries considered reserves adequate, but ultimate claims may differ materially.
- UPCIC’s 2014-2015 Florida catastrophe program provided coverage up to $1.794 billion, with a stated $21 million retention for each of the first three catastrophe events. Reinsurance does not release the insurers from obligations to policyholders, and recoveries depend on reinsurer performance and contract terms.
- Wind-mitigation credits reduced in-force Florida premium by 36.7% for UPCIC and 63.7% for APPCIC, according to the filing. The company warns that mandated discounts and limits on rate approvals may affect adequacy and profitability.
- The company reported routine litigation and claims-related suits, but did not expect currently pending matters to materially affect results, financial condition or liquidity. It also disclosed a $1.3 million regulatory fine paid in 2013 under a consent order.
- Demotech affirmed an “A” Financial Stability Rating for the Insurance Entities in November 2014. The company reported that its insurance subsidiaries exceeded statutory capitalization and risk-based capital requirements.
- Auditors issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2014.
Most important facts for investors to verify
- Whether the lower quota-share cession continues to improve earnings after accounting for the additional retained catastrophe and claims risk.
- Whether the $87.0 million net loss and LAE reserve remains adequate as claims mature, especially recent accident years and litigated claims.
- The sufficiency, cost and collectability of catastrophe reinsurance, including coverage terms, retentions and reinsurer credit quality.
- How Florida concentration, mandated wind discounts and regulatory rate decisions affect premium adequacy and future growth.
- Cash generation and capital availability after dividends, share repurchases, debt service and any future reinsurance or catastrophe needs.
- The effect of the post-year-end share agreement amendment and the reported-to-pro-forma equity reclassification.