Universal Insurance Holdings, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company is a vertically integrated property and casualty insurer, principally writing homeowners policies through independent agents. Florida represented 98% of its 591,000 policies in force; 32% were in Miami-Dade, Broward and Palm Beach counties. Figures below are in millions of dollars except per-share data. Interim statements were reviewed, not audited.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net premiums earned | $49.5 | $41.4 | $97.5 | $74.7 |
| Total premiums earned and other revenues | $53.7 | $55.9 | $118.0 | $101.1 |
| Income before taxes | $13.1 | $17.6 | $36.2 | $29.0 |
| Net income | $7.5 | $10.8 | $21.4 | $17.7 |
| Diluted EPS | $0.19 | $0.27 | $0.53 | $0.44 |
| Net loss and LAE ratio | 52.2% | 60.0% | 53.4% | 64.9% |
- Premiums and underwriting: Q2 direct premiums written rose 2.6% to $213.5 million, while net premiums written fell 22.0% to $67.7 million as ceded premiums increased. For six months, direct premiums written rose 5.0% to $386.7 million, while net written premiums declined 1.9% to $117.0 million. Management attributed earned-premium growth to policy growth and rate increases, partly offset by wind-mitigation credits.
- Investment results and margins: Q2 revenue included $9.6 million of unrealized investment losses, versus none in the prior-year quarter; realized gains were $3.0 million versus $4.5 million. The six-month period included $7.1 million of unrealized losses and $6.6 million of realized gains. Q2 net income fell 29.9%, despite higher earned premiums and an improved loss ratio. The six-month net income increase of 21.1% reflected premium growth, partly offset by trading-portfolio losses. Net investment income was negative $0.02 million for Q2 and $0.24 million for six months.
- Expenses and taxes: Q2 operating expenses rose 6.1% to $40.6 million; six-month expenses rose 13.5% to $81.8 million, including higher acquisition and administrative costs. Effective tax rates were 42.5% for Q2 and 40.7% for six months; management cited estimated penalties and interest related to underpayment of 2011 estimated taxes.
- Cash flow and liquidity: Cash and cash equivalents were $356.7 million at June 30, versus $147.6 million at year-end 2010. Six-month operating cash flow was $215.2 million versus $97.0 million, including $126.5 million of net proceeds from sales of trading securities; the company’s accounting classification places trading-security purchases and sales in operating cash flow. Total assets were $896.7 million, total liabilities $738.5 million, and stockholders’ equity $158.2 million.
- Debt and capital: Long-term debt was $22.4 million, down from $23.2 million at year-end. Management reported debt-to-total-capital of 12.4% and debt-to-equity of 14.1%; regulated insurance subsidiaries met stated Florida capitalization requirements, and UPCIC was in compliance with surplus-note covenants.
- Investments: The portfolio shifted substantially from fixed income to equities: at June 30, equities were 96% of investment securities and debt securities 4%, compared with 42% and 58%, respectively, at year-end. Equity holdings were concentrated in metals and mining, agriculture and other commodities. Securities are classified as trading, so market-value changes flow through earnings.
Material changes, outlook and risks
- Florida approved a statewide homeowners rate increase averaging approximately 14.9%; it took effect for new business on February 7 and renewals on March 28, 2011. Management expected the increase to support future written and earned premiums. No formal earnings or revenue guidance is provided.
- The 2011–12 reinsurance program began June 1. UPCIC ceded 50% of wind premiums and losses under its quota-share arrangement and obtained catastrophe coverage. Management estimated first-event maximum pre-tax net liability of $157.6 million, with catastrophe protection described for losses up to $1.8 billion. Coverage and modeled probable-maximum-loss estimates vary by catastrophe model; losses beyond or outside coverage remain UPCIC’s responsibility.
- UPCIC’s estimated traditional Florida Hurricane Catastrophe Fund coverage was 90% of $1.193 billion above a $465 million retention, subject to final exposure reporting and the Fund’s actual claims-paying capacity. Management warned that reduced Fund capacity could require additional, potentially more costly private reinsurance. The company also reported $31 million of collateral in trust for T25 reinsurance arrangements.
- Catastrophe risk is concentrated in Florida, and results and liquidity could be materially affected by hurricanes, reinsurance recoverability or availability, and catastrophe-model assumptions. Other disclosed risks include investment-market volatility, competition, regulatory or legislative changes, claims-estimate uncertainty and reinsurer credit exposure.
- Management said premiums should meet working-capital needs for at least 12 months, while noting there can be no assurance. It limited 2011 estimated tax payments because of uncertainty about hurricane-season losses and their tax effect. The company declared and paid a $0.10-per-share common dividend in April; no common dividend was declared for Q2. Routine claims-related lawsuits were described as not material by management. No material subsequent events were identified through issuance.
Important facts for investors to verify
- Whether the approved rate increases translate into sustained premium growth after policy attrition and wind-mitigation credits.
- The scale, composition and volatility of the trading portfolio, particularly its equity and commodity exposure and earnings impact.
- Final 2011–12 reinsurance terms, costs, collateral requirements, FHCF coverage and claims-paying capacity, and net retention under multiple catastrophe events.
- Reserve adequacy, loss trends and reinsurance recoverability, given Florida concentration and the company’s continued primary responsibility for insured claims.
- The effect of estimated tax penalties and interest, and the timing and amount of future dividends subject to board and regulatory constraints.