Universal Insurance Holdings, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2021, compared with the same 2020 periods. Universal is a vertically integrated property and casualty insurer focused primarily on homeowners’ coverage, operating through its insurance subsidiaries in 19 states. Florida remains its largest market. The interim financial statements received an accountant’s review, not a full audit.
Financial performance and position
Amounts are in millions of dollars, except per-share data, ratios and policy counts.
- Q3 revenue and earnings: Total premiums earned and other revenues were $287.3, down 7.8% from $311.7. Net premiums earned rose 13.0% to $264.7. Net income was $20.2, versus a $3.2 loss; diluted EPS was $0.64 versus a $0.10 loss.
- Nine-month results: Total premiums earned and other revenues increased 3.7% to $829.2. Net income rose 86.3% to $68.5, and diluted EPS increased to $2.19 from $1.14.
- Drivers and margins: Q3 net premiums earned benefited from premium growth, while lower investment income and substantially lower realized investment gains than in Q3 2020 reduced total revenue. The net loss and LAE ratio improved to 70.9% from 101.8%; the combined ratio improved to 98.6% from 134.7%. For nine months, those ratios were 65.3% versus 77.0% and 96.4% versus 109.8%, respectively.
- Cash flow: Operating activities provided $274.0 in the first nine months, compared with $173.5 in 2020. Investing activities used $194.6 and financing activities used $18.6. Cash and restricted cash increased $60.8 to $240.7, including $224.8 of unrestricted cash and cash equivalents.
- Balance sheet and debt: At September 30, total assets were $2,143.2, total liabilities $1,649.0 and stockholders’ equity $494.3. Invested assets totaled $1,112.4, including $1,029.2 of available-for-sale debt securities. Debt was $7.4; debt-to-equity was 1.5%. The company had an undrawn unsecured revolving credit facility of up to $35.0, maturing 364 days after borrowing.
- Shareholder returns: The company declared quarterly common dividends of $0.16 per share. It repurchased 116,886 shares for $1.6 during the nine months.
Material changes versus the prior comparable periods
- Direct premiums written rose 5.8% in Q3 to $433.0 and 10.7% for nine months to $1,271.9. Florida accounted for 81.9% of Q3 direct premiums written. Policies in force fell 1.0% from June 30 and 1.7% from year-end 2020, while year-over-year premium in force rose 13.0% and total insured value rose 9.8%.
- Investment income fell to $2.8 in Q3 from $4.6 and to $8.6 for nine months from $17.6, reflecting lower yields after the 2020 sale and reinvestment of securities. Net realized investment gains were $4.3 in Q3 versus $53.8 a year earlier, and $5.4 for nine months versus $54.3.
- Prior-year reserve development remained adverse: $11.5 net in Q3 and $18.0 net for nine months in 2021, compared with $30.1 and $34.9, respectively, in 2020. Current-period development included increased estimates for prior hurricanes and litigated claims. No current-year weather events exceeded expected levels during the 2021 quarter or nine-month period.
- Reinsurance costs increased: ceded premiums earned rose 18.7% in Q3 and 22.2% for nine months. The reported cost of reinsurance increased as a share of direct earned premium. Reinsurance payable was $399.9 at quarter-end, and prepaid reinsurance premiums were $386.5.
- Stockholders’ equity increased to $494.3 from $449.3 at year-end, principally reflecting net income and share-based compensation, partly offset by dividends, repurchases and investment-related other comprehensive losses. Unpaid losses and LAE declined to $212.5 from $322.5 at year-end.
Outlook, management commentary and risks
- Management described Florida homeowners’ insurance as a hard market, citing escalating premiums, tighter underwriting and less favorable reinsurance pricing or terms. The company is raising rates and managing exposure; Florida approved a 14.9% UPCIC rate increase in September 2021, effective for new business in September and renewals in November.
- Management cited higher claim costs, litigation and claim solicitation in Florida as ongoing pressures. It increased its current-year core loss pick by two loss-ratio points during 2021, retroactive to January 1, reflecting claim trends and uncertainty.
- The 2021–2022 reinsurance programs met stated regulatory requirements. Their projected total cost was approximately $584 million, or 33.7% of estimated direct premium earned for the 12-month treaty period. Protection does not eliminate exposure: the insurers retain losses before coverage attaches and remain exposed to losses beyond coverage and potential reinsurer nonpayment.
- The company said operating cash flows should meet working-capital needs for at least the next 12 months. It also said lower investment yields were expected to continue relative to the yields on securities sold in 2020. Management expected full-year 2021 other operating cost results to be in line with the first-nine-month operating-ratio run rate; the filing provides no specific earnings guidance.
- UPCIC and APPCIC met statutory capitalization requirements, but had no capacity to pay ordinary dividends to their parent as of September 30. UPCIC received a $15.0 capital contribution in Q3; a further $20.0 subordinated surplus debenture funded in October was permitted to count in statutory surplus but was not recognized under U.S. GAAP at quarter-end.
- Florida law changes effective July 2021 shortened the deadline for new or reopened claims to two years and introduced a pre-suit demand requirement, among other provisions. The company said it was too early to assess the reforms’ effects; some provisions faced legal challenges. COVID-related court delays could increase claim outcomes and costs, although management reported no material pandemic impact on operations or liquidity to date.
- Other material risks include catastrophe severity and frequency, reserve estimation, reinsurance availability and recoverability, Florida market concentration, investment and interest-rate risk, regulatory changes and litigation. Management considered reasonably estimable legal losses immaterial, while noting actual losses may differ and could exceed accrued amounts.
Most important facts for investors to verify
- Whether subsequent reserve development, especially for prior hurricanes and litigated claims, confirms or exceeds the estimates recorded at September 30.
- Whether rate increases and exposure management offset claim-cost inflation and higher reinsurance expense, including the projected $584 million 2021–2022 program cost.
- Reinsurer credit quality, recoveries and the company’s net exposure to a severe or multiple-event catastrophe beyond reinsurance limits.
- Insurance-subsidiary statutory capital and restrictions on upstream dividends, alongside the parent’s liquidity, undrawn credit facility and future reinsurance payment commitments.
- Investment portfolio yields, fair-value changes and credit quality, given the decline in investment income and sensitivity to interest rates and equity prices.