Universal Insurance Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Financial statements are unaudited and were reviewed by the independent accountant, not audited.
Business context
Universal is a vertically integrated property-and-casualty insurer focused primarily on residential homeowners’ insurance. It operated in 19 states, with Florida accounting for 82.3% of direct premiums written. Catastrophe exposure is managed in part through reinsurance.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $316.5 | $287.5 | +10.1% |
| Net premiums earned | $282.2 | $269.1 | +4.9% |
| Net investment income | $10.7 | $4.0 | +$6.7 |
| Losses and loss-adjustment expenses | $206.2 | $185.1 | +11.4% |
| General and administrative expenses | $75.9 | $78.3 | -3.0% |
| Income before taxes | $32.8 | $22.5 | +45.9% |
| Net income | $24.2 | $17.5 | +37.8% |
| Diluted earnings per share | $0.79 | $0.56 | +$0.23 |
| Net cash used in operating activities | $(50.3) | $(27.1) | Greater cash use |
- The combined ratio was 100.0%, versus 97.9% a year earlier; the net loss and LAE ratio rose to 73.1% from 68.8%. A 100% combined ratio indicates approximately breakeven underwriting before investment income and other revenue.
- Direct premiums written were $410.1 million, up 3.4%. Direct premiums earned increased 9.8%, while higher ceded reinsurance premiums limited growth in net premiums earned.
- Cash and cash equivalents were $330.2 million at quarter-end, down from $388.7 million at year-end. Total assets were $2.55 billion; total liabilities were $2.23 billion.
- Long-term debt, net, was $102.6 million. Stockholders’ equity was $321.8 million. Debt-to-equity was 31.9%, versus 35.7% at year-end. The $100 million senior unsecured notes bear 5.625% interest and mature in 2026; the $37.5 million revolving facility was undrawn.
- Book value per common share was $10.57, compared with $9.47 at year-end. After-tax other comprehensive income was $13.8 million, primarily reflecting improved fair values of available-for-sale debt securities.
Material changes and management commentary
- Net income rose despite increased claims costs, supported by higher earned premiums, a $6.7 million increase in net investment income, greater commission revenue and lower general and administrative expenses. Investment income benefited from reinvesting maturities and cash at higher rates.
- Higher loss estimates for the current accident year and increased reinsurance costs contributed to the higher loss ratio. Prior-year reserve development was $3.3 million net adverse, principally related to Hurricane Sally, compared with $0.7 million net adverse in Q1 2022.
- Reinsurance costs as a share of direct premiums earned rose to 38.0% from 35.1%. Hurricane Ian reinstatement premiums contributed to higher ceded premiums and commission revenue.
- Management reported policies in force declined 2.5% during the quarter to 827,981, citing exposure management and declining retention. Premium in force increased 9.4% year over year, while policies in force decreased 9.7% and total insured value increased 0.5% year over year.
- Florida rate filings and policy inflation adjustments are increasing premiums, but management noted that rate changes take time to implement and earn. Management is seeking rate adequacy, moderating exposure growth and diversifying beyond Florida.
Liquidity, outlook, risks and contingencies
- Management stated operating cash flows and available liquidity are expected to meet working-capital requirements for at least the next 12 months. The quarter’s operating cash outflow and lower cash balance were attributed largely to Hurricane Ian claim settlements and operational cash-flow timing.
- The 2022–2023 reinsurance program was projected to cost $696 million for its 12-month treaty period, before any potential reinstatement premiums. The company remains responsible for retentions, losses beyond coverage, uncovered losses and any reinsurer nonpayment.
- Future reinsurance commitments were disclosed at $91.1 million in 2023, $157.5 million in 2024 and $66.3 million in 2025. The cash requirements table estimated $183.1 million of reinsurance payable and multi-year commitments due in the next 12 months.
- The Insurance Entities’ 2017–18 Florida Hurricane Catastrophe Fund commutation process was to begin in 2023. The final Hurricane Irma covered-loss amounts could be uncertain and may be disputed; the filing says the potential outcome could be material. Management also cautioned that reimbursements may not ultimately cover all future settlements on those claims.
- Florida’s December 2022 legislation eliminated the statutory one-way right to attorneys’ fees and prohibited assignments of post-loss benefits, among other changes. Management was optimistic but said effects on claim costs and litigation would take time to assess. Florida litigation, inflation in repair costs, catastrophe activity, reserve uncertainty and reinsurance availability/pricing remain significant risks.
- The company reported no material change in risk factors from its 2022 Form 10-K and no material effect from COVID-19, while noting indirect inflationary effects on claims costs. It provided no specific earnings or revenue guidance.
- UPCIC and APPCIC exceeded stated minimum statutory capitalization requirements, but had no capacity to pay ordinary dividends as of March 31, 2023. The holding company therefore depends on permitted subsidiary payments and other liquidity sources.
- Management estimated reasonably possible legal-proceeding losses that it could estimate to be immaterial, while cautioning that actual outcomes may differ. The company reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- How current-year loss estimates, Hurricane Sally reserve development and the overall 100.0% combined ratio develop in subsequent quarters.
- The outcome and settlement value of the 2017–18 FHCF commutation, including potential effects on Hurricane Irma recoveries.
- Renewal retention, policy counts, premium growth and the timing and adequacy of rate increases, particularly in Florida.
- Reinsurance renewal pricing, capacity, reinstatement costs, counterparty collectability and the company’s ability to fund the disclosed future commitments.
- Cash generation and claim-payment needs, given the operating cash outflow and quarter-end cash decline; also monitor the undrawn revolving facility’s October 2023 maturity/renewal.
- Whether Florida legal reforms reduce litigation frequency and severity, and whether investment income gains persist as interest rates and portfolio values change.