Universal Insurance Holdings, Inc. — Q3 2022 Form 10-Q
Business and period: The company is a vertically integrated property and casualty insurer focused primarily on residential homeowners’ coverage, principally in Florida, and operated in 19 states. This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. The independent accountant performed an interim review, not an audit, and reported no material modifications needed to conform the statements to U.S. GAAP.
Financial performance
Dollar amounts below are in millions except per-share data and ratios.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $312.8 | $287.3 | $892.3 | $829.2 |
| Net premiums earned | $290.6 | $264.7 | $836.8 | $764.1 |
| Net income (loss) | $(72.3) | $20.2 | $(47.4) | $68.5 |
| Diluted EPS | $(2.36) | $0.64 | $(1.54) | $2.19 |
| Net loss and LAE ratio | 113.7% | 70.9% | 85.5% | 65.3% |
| Combined ratio | 139.2% | 98.5% | 113.2% | 96.4% |
- Direct premiums written rose 15.6% in Q3 to $500.7 million and 12.4% for the nine months to $1.430 billion. Rate increases and higher insured values contributed; higher reinsurance costs reduced the benefit to net earned premiums.
- Losses and loss adjustment expenses were $330.4 million in Q3, up from $187.6 million, and $715.9 million for the nine months, up from $498.8 million. Management cited Hurricane Ian, worsening core loss trends, inflation in repair costs and prior-year reserve development.
- Net investment income increased to $6.1 million in Q3 and $15.3 million for the nine months, as reinvestment yields rose. Investment-market movements also weighed on results: equity securities produced unrealized losses of $4.2 million in Q3 and $16.4 million year to date. After-tax other comprehensive losses were $27.5 million and $100.1 million, respectively, largely reflecting lower fair values of available-for-sale debt securities as interest rates rose.
- General and administrative expenses were $74.0 million in Q3 and $231.6 million year to date. The expense ratio improved to 25.5% for Q3 and 27.7% for the nine months, partly reflecting reduced renewal commissions.
Financial position, cash flow and capital
- At September 30, 2022, total assets were $3.127 billion, total liabilities $2.866 billion and stockholders’ equity $260.6 million, down from $429.7 million at December 31, 2021. Equity was affected by the net loss, investment-related accumulated other comprehensive losses, dividends and repurchases.
- Cash and cash equivalents were $307.4 million, with a further $2.7 million restricted. Operating cash flow for the nine months was $223.2 million, versus $274.0 million in 2021; cash increased by $57.0 million including restricted cash. Management attributed higher cash partly to reinsurer cash calls supporting Ian claims.
- Available-for-sale debt securities had a fair value of $996.8 million, versus amortized cost of $1.151 billion. The filing attributes most unrealized losses to interest-rate and market movements; management said it generally expects to hold most debt securities to maturity.
- Long-term debt, net, was $103.0 million, principally $100 million of 5.625% senior unsecured notes due 2026. The company reported compliance with debt covenants and no revolver borrowings as of the filing. Its subsequent October 31, 2022 revolving facility provides up to $37.5 million and matures in October 2023.
- The debt-to-total-capital ratio increased to 28.3% from 19.4% at year-end 2021. The company declared $0.16 per common share for each of the first three quarters. It repurchased $9.8 million of stock in the first nine months.
- The insurance subsidiaries exceeded stated minimum statutory capitalization requirements. However, they had no capacity to pay ordinary dividends to their immediate parent in 2022, and no such dividends were paid in the first nine months.
Material changes and significant items
- Hurricane Ian: The company estimated gross ultimate losses of approximately $1 billion, below its approximately $3 billion reinsurance tower. Estimated net losses and LAE for the Insurance Entities after reinsurance recoveries were $45 million; this included $66 million recoverable from the company’s prefunded captive arrangement, eliminated in consolidation. Including losses under that funded captive arrangement, consolidated net Ian losses were estimated at $111 million. The estimates are subject to change as claims develop.
- Reserves: Q3 prior-year development was $26.4 million gross and $2.7 million net unfavorable, principally related to Hurricane Irma. Nine-month prior-year development was $100.6 million gross and $7.1 million net unfavorable, also principally hurricane-related. The company reported increasing current-year loss estimates in response to deteriorating claim trends and repair-cost inflation.
- Investment values and equity: Rising rates increased investment income but reduced the fair value of fixed-income holdings. Accumulated other comprehensive loss reached $115.7 million at September 30, compared with a $15.6 million loss at December 31, 2021.
- Policies and retention: Policies in force fell 7.5% from December 31, 2021 to 872,926; they were down 9.8% year over year. Premium in force increased 11.1% and total insured value 1.7% year over year. Management cited rate increases, lower renewal retention, selected non-renewals and disciplined new-business growth.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it is pursuing rate adequacy, exposure management and geographic diversification while moderating new-business growth. A 14.9% Florida homeowners’ rate increase for UPCIC became effective for new business June 1, 2022 and renewals November 4, 2022. Management noted that premium increases take time to earn and may not keep pace with rising claims costs.
- The 2022–2023 reinsurance program was projected to cost $696 million, approximately 37.6% of estimated direct premium earned for the 12-month treaty period. Reinsurance protects against catastrophe exposure, but the insurers remain responsible for retentions, losses beyond coverage and amounts not recovered if a reinsurer fails to pay.
- Management identified Florida litigation and claims practices, inflation in labor and materials, catastrophe frequency and severity, reserve estimation, reinsurance pricing and availability, investment-market volatility, regulatory and statutory-capital requirements, and geographic concentration as risks. The effects of recent Florida legislative reforms on claims and litigation remain uncertain.
- Future reinsurance premium commitments were $105.6 million in 2023, $157.5 million in 2024 and $66.3 million in 2025. The filing’s material cash requirements table totals $2.073 billion, including estimated unpaid losses and LAE; timing and ultimate amounts of claim payments are uncertain. Management stated that operating cash flows should meet working-capital needs for at least the next 12 months.
- Management characterized reasonably possible losses from other legal proceedings, where estimable, as immaterial, but cautioned actual results may vary and its estimate is not a maximum exposure.
Important facts for investors to verify
- How Hurricane Ian claim estimates, reinsurance recoveries and reinstatement costs develop, including the collection of amounts due from reinsurers.
- Whether Florida rate increases and other pricing actions keep pace with claims inflation, litigation costs and reinsurance expenses, and how retention and policy counts trend.
- Whether current and prior-year loss reserves prove adequate as claims settle, particularly for Florida litigation and older hurricane years.
- How investment fair values, interest rates and any need to sell securities affect reported equity and liquidity.
- The insurance subsidiaries’ statutory capital position and the parent’s liquidity, given restrictions on insurer dividends and significant reinsurance and claims cash requirements.