Universal Insurance Holdings, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited; the independent accountant performed a review, not an audit. Dollar amounts below are in millions except per-share data.
Business context
Universal is a vertically integrated property-and-casualty insurer focused on homeowners coverage, distributed mainly through independent agents. It operated in seven states, but 95% of policies were in Florida and 98% included wind coverage. Policies in force fell to 554,000 from 567,000 at year-end 2012. The company uses reinsurance to manage catastrophe exposure.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total premiums earned and other revenues | $77.8 | $59.9 | $145.2 | $120.2 |
| Net premiums earned | $66.9 | $55.7 | $132.3 | $104.3 |
| Losses and loss adjustment expenses | $25.2 | $29.4 | $51.7 | $55.6 |
| General and administrative expenses | $22.9 | $17.5 | $44.1 | $35.3 |
| Income before taxes | $29.7 | $13.0 | $49.5 | $29.2 |
| Net income | $17.0 | $7.8 | $29.0 | $17.7 |
| Diluted EPS | $0.44 | $0.19 | $0.73 | $0.44 |
| Net loss and LAE ratio | 37.7% | 52.9% | 39.1% | 53.3% |
At June 30, cash and cash equivalents were $180.9, down from $347.4 at December 31, 2012; restricted cash was $2.7. Six-month operating cash flow was $193.2, investing cash outflow was $341.1, and financing cash outflow was $18.6. Total assets were $1,001.8, total liabilities $845.8, and stockholders’ equity $156.0. Long-term debt was $37.5; debt-to-total-capital was 19.4%, versus 11.0% at year-end.
The investment portfolio totaled $526.4, including $342.9 of available-for-sale securities. Six-month net realized investment losses were $16.0; net unrealized investment gains recognized in earnings were $7.9. Available-for-sale unrealized losses reduced other comprehensive income and equity by $2.6 after tax. The company declared common dividends of $0.08 per share in each of the first two quarters.
Material changes versus comparable periods
- Q2 net income rose 119% to $17.0; first-half net income rose 64% to $29.0. Higher net earned premiums and lower loss expenses drove improvement.
- Net earned premiums increased 20% in Q2 and 27% for the first half, primarily reflecting prior rate increases and a lower quota-share cession rate. Direct premiums written were slightly lower in Q2 but up 3% for the half.
- Net loss and LAE ratios improved materially, reflecting better current-year claims experience and favorable prior-year development.
- G&A expenses increased 31% in Q2 and 25% for the half. Drivers included higher acquisition-cost amortization, bonuses, stock compensation, regulatory fees and fines, and legal costs.
- First-half realized investment losses increased to $16.0 from $9.2, primarily due to liquidation of the trading portfolio. The company shifted its remaining fixed maturities and invested in available-for-sale securities.
- Cash declined substantially as the company invested approximately $318 million in available-for-sale securities. It repurchased 6.666 million shares from former CEO Bradley Meier for $28.1 million, funded using term-loan proceeds and cash.
Outlook, risks and unusual items
- Management outlook: No quantified earnings or revenue guidance was provided. Management stated that premiums should meet working-capital needs for at least the next 12 months and expects operating cash flows to continue to meet liquidity requirements. Management described the 2013–2014 reinsurance program’s overall terms as more favorable than the prior program.
- Rates and retention: Florida rate increases were approved, averaging 14.1% for UPCIC homeowners, 14.5% for its dwelling-fire program, and 18.3% for APPCIC homeowners. Management said rate increases and nonrenewal of inadequately priced policies supported premium growth, while contributing to moderate policy attrition; Florida wind-mitigation credits continue to reduce premiums.
- Catastrophe and reinsurance exposure: Estimated insured wind exposure was $124.8 billion. UPCIC reduced its quota-share cession to 45%, which may improve profitability but increases retained risk and reduces ceded commissions. The insurers remain liable for covered losses beyond reinsurance limits and if reinsurers fail to pay. Concentration in Florida and catastrophe frequency/severity are key risks.
- Regulatory contingency: A Florida insurance regulator order alleges violations and seeks requirements and a $1.3 million penalty against UPCIC. The amount was accrued; UPCIC intends to dispute the order at a formal administrative hearing.
- Debt and liquidity: A $20 million unsecured RenRe Ventures term loan carries a stated rate of 0.50%, with a 5.99% effective rate after discount amortization. A separate $10 million Deutsche Bank revolving facility was undrawn at June 30. Both facilities have financial and other covenants, including restrictions on dividends in specified default circumstances. The company reported covenant compliance.
- Other notable items: The OIR penalty contributed to higher taxes and expense. The company entered into related reinsurance, catastrophe-risk and capacity arrangements with RenRe and affiliates; the term loan is part of those transactions. Subsequent to quarter-end, UPCIC agreed to lease office space and entered into an agreement to purchase the property for $6.0 million, subject to conditions.
Important facts for investors to verify
- Claims development and the sustainability of the sharply improved loss ratios, including the extent of favorable prior-year reserve development.
- Reinsurance limits, reinstatement costs, counterparty credit quality, and the company’s retained exposure following the 45% quota-share cession.
- The outcome and potential operational consequences of the OIR examination order and proposed $1.3 million penalty.
- Drivers of policy attrition, Florida concentration, approved rate increases, and the continuing effect of wind-mitigation credits.
- Cash-flow quality, investment liquidity and valuation changes, and the effect of share repurchases and new debt on capital and liquidity.
- Compliance with debt covenants and restrictions on dividends; insurer subsidiaries had no capacity to pay ordinary dividends to the parent during 2013 based on 2012 statutory results.