Universal Insurance Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company is a vertically integrated property and casualty insurer focused primarily on homeowners coverage, with substantial exposure to Florida. Interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Direct premiums written | $409.4m | $342.9m | $1,148.7m | $990.1m |
| Net premiums earned | $234.2m | $206.6m | $681.4m | $626.7m |
| Total premiums earned and other revenues | $311.7m | $229.6m | $799.6m | $699.9m |
| Net investment income | $4.6m | $7.6m | $17.6m | $23.2m |
| Net realized investment gains (losses) | $53.8m | $(0.02)m | $54.3m | $(13.2)m |
| Losses and loss adjustment expenses | $238.5m | $132.6m | $524.9m | $359.0m |
| General and administrative expenses | $77.0m | $69.2m | $223.5m | $208.4m |
| Net income (loss) | $(3.2)m | $20.1m | $36.8m | $97.6m |
| Diluted EPS | $(0.10) | $0.59 | $1.14 | $2.82 |
- Q3 net loss and LAE ratio was 101.8%, versus 64.3% a year earlier; the nine-month ratio was 77.0%, versus 57.3%. Q3 combined ratio was approximately 134.7%, calculated from reported operating costs and net premiums earned.
- Q3 expense ratio was 32.9%, versus 33.5%; the nine-month expense ratio was 32.8%, versus 33.3%.
- Nine-month operating cash flow was $173.5m, compared with $56.6m in 2019. Investing activities provided $112.3m, including substantial securities sales and maturities; financing activities used $44.4m.
- Cash and cash equivalents were $405.1m and restricted cash was $21.1m at September 30, 2020. Stockholders’ equity was $474.8m, down from $493.9m at year-end 2019. Long-term debt was $8.8m; debt-to-total capital was 1.8%.
- Book value per common share was $15.15, compared with $15.13 at December 31, 2019. The company declared $0.16 per common share in Q3.
Material changes and unusual items
- Q3 direct premiums written grew 19.4% year over year; net premiums earned grew 13.4%. Nine-month net income fell 62.3% and diluted EPS fell 59.6% year over year.
- Q3 included $53.8m of realized gains from sales of available-for-sale debt securities. Management said the sales monetized market recovery gains and enhanced UPCIC’s surplus; proceeds were being reinvested. The company expects lower future investment income as reinvestment yields are below the book yields of securities sold.
- Q3 losses included $68m of weather losses net of reinsurance, including Hurricanes Sally and Isaias, and $30.1m of net adverse prior-year reserve development. The latter was principally related to Hurricane Irma losses not recoverable from the Florida Hurricane Catastrophe Fund and increased companion claims. Nine-month net adverse prior-year development was $34.9m.
- Florida approved a 12.4% homeowners rate increase, effective May 2020 for new business and July 2020 for renewals. Management also changed certain new-business underwriting guidelines and expanded claims and litigation management efforts.
- The company contributed $74m of capital to UPCIC during the first nine months, including $44m in Q3. It repurchased $26.5m of shares in the nine-month period and paid $15.5m in common dividends.
- Accumulated other comprehensive income fell to $1.7m from $20.4m at year-end, reflecting investment-security fair-value movements and reclassification of gains on securities sold.
Outlook, liquidity, and risks
- Management stated that it had not experienced a material COVID-19 impact on operations, financial position, liquidity, or policyholder service through Q3. It noted that the pandemic’s longer-term economic and investment-market effects remain uncertain and that it would continue to monitor liquidity and capital.
- Management expected lower investment returns amid low market yields and stated that operating cash flows should meet working-capital needs for at least the next 12 months.
- The 2020–2021 reinsurance programs met Florida regulatory requirements. Their projected combined cost was $494m, approximately 34.6% of estimated direct premiums earned for the 12-month treaty period. Reinsurance does not eliminate exposure to retained losses, losses beyond coverage, or reinsurer nonpayment.
- Contractual obligations totaled $762.6m, including $550.9m of reinsurance payable and multi-year commitments and $202.7m of unpaid losses and LAE. Future multi-year reinsurance commitments included $128.3m in 2021 and $71.3m in 2022.
- Key risks include catastrophe frequency and severity, reserve-estimate uncertainty, Florida claims inflation and litigation, reinsurance availability and collectability, geographic concentration, investment-market risk, regulatory constraints, and COVID-19-related uncertainty. Management described reasonably possible estimable legal losses as immaterial, while noting actual outcomes may differ.
Important facts for investors to verify
- How much of the sharp Q3 loss increase reflects recurring claim-cost trends versus weather losses and reserve development, especially remaining Hurricane Irma exposure.
- Whether approved rate increases and underwriting or claims actions can offset higher Florida claim severity, litigation, and reinsurance costs.
- The sustainability of earnings excluding the $53.8m Q3 realized investment gain, and the effect of reinvestment at lower yields.
- Reinsurance program cost, coverage, recoverability, and multi-year obligations relative to catastrophe exposure and available liquidity.
- Statutory capital and dividend restrictions at the insurance subsidiaries, and the impact of continued capital contributions, repurchases, and dividends on parent-company resources.