Universal Insurance Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Balance-sheet comparisons are with December 31, 2018. The company is a vertically integrated property and casualty insurer focused on homeowners coverage, operating in 18 states as of quarter-end, with most business in Florida. Financial statements are unaudited; the independent accountant performed a review, not an audit. Dollar amounts below are in millions unless stated otherwise.
Key financial results and condition
- Premiums and revenue: Direct premiums written rose 7.1% to $289.2; net premiums earned rose 14.9% to $209.7. Total premiums earned and other revenues increased 23.5% to $236.6.
- Profit: Net income was $40.1, essentially flat versus $40.1. Diluted EPS increased to $1.14 from $1.12. Comprehensive income was $52.1, up from $36.0.
- Investment results: Net investment income increased 70.2% to $8.1. Net realized losses on securities were $11.5 versus $2.6, primarily from equity-security sales. The company recorded an $18.0 unrealized gain on equity securities, compared with a $5.1 unrealized loss in Q1 2018.
- Losses and margins: Losses and loss adjustment expenses (LAE) increased 49.0% to $113.1; the net loss ratio rose to 53.9% from 41.6%. General and administrative expenses rose 9.2% to $69.7, but declined to 33.3% of net earned premiums from 35.0%. Income before taxes was $53.7 versus $51.7; the effective tax rate was 25.3% versus 22.5%.
- Cash flow and liquidity: Operating cash flow was $31.5, down from $52.3; cash and cash equivalents were $185.1 at quarter-end, up from $166.4 at year-end. Total cash, including restricted cash, was $187.7. Management said operating cash flows should meet working-capital needs for at least the next 12 months.
- Balance sheet and debt: Total assets were $1,697.9, down from $1,858.4; stockholders’ equity rose to $539.1 from $501.6. Long-term debt was $11.0, consisting of a surplus note. Debt-to-equity was 2.0%. Invested assets totaled $918.3.
- Shareholder returns: The company declared and paid a $0.16-per-share common dividend during Q1 and repurchased 320,500 shares for $10.1 under its $20 million repurchase authorization.
Material changes and management commentary
- Direct premiums written grew 7.1%; Florida business increased 3.4% and other-state business 31.5%. Florida accounted for 83.7% of direct premiums written. The company began writing in Illinois during the quarter.
- Management attributed higher losses to business growth, an increase in its core loss ratio from 33% to 37%, a $5.0 weather event in Brevard County, Florida, and lower benefits from claim-adjustment fees ceded to reinsurers as older hurricane claims concluded. Prior-year reserve development was slightly favorable on a net basis.
- Management cited assignment-of-benefits (AOB) issues, litigation and emerging claim severity and frequency trends, particularly in Florida. It said it filed for Florida rate increases, approved in April 2019, changed certain new-business binding requirements, and was developing specialized claims and litigation-management efforts.
- Reinsurance recoverables declined $95.3 to $323.3, mainly as prior hurricane and storm recoveries were collected. Unpaid losses and LAE declined $106.5 to $366.4 as settlements of prior-event claims exceeded new claims.
- Equity-market movements materially affected reported revenue: the favorable unrealized gain in Q1 2019 and the prior-year unrealized loss were partly offset by larger realized losses in 2019. Net income therefore remained nearly unchanged despite higher premiums and total reported revenue.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects operating cash flows to be sufficient for working-capital needs over at least the next 12 months; interim results are not necessarily indicative of full-year results.
- Catastrophe exposure, Florida concentration, claim inflation and litigation, reinsurance availability and collectability, pricing and risk-model uncertainty, competition, regulation, investment-market risk, and cybersecurity are among the stated risks. The insurer remains responsible for covered claims if reinsurers fail to pay and for losses above reinsurance protection or retained amounts.
- Future reinsurance commitments were disclosed as $82.3 for 2019 and $33.9 for 2020; contractual obligations also include unpaid losses and LAE. The filing estimates $164.4 of reinsurance payable and multi-year commitments in total at quarter-end.
- Management said reasonably possible losses from legal proceedings that it could estimate were immaterial, while cautioning that actual outcomes could differ and exposures could exceed accrued amounts. Insurance-subsidiary dividends are restricted; UPCIC had capacity for $14.0 of ordinary dividends during 2019, while APPCIC did not meet requirements to pay ordinary dividends. No subsidiary dividends were paid in Q1.
- Management considered unrealized losses on available-for-sale debt securities temporary and stated it expected to recover amortized cost. The company is evaluating the expected-credit-loss accounting standard due to take effect for it in 2020.
Most important facts for investors to verify
- Whether the higher 37% core loss ratio and Florida claim trends persist, and the effect of rate increases and underwriting changes.
- The adequacy and collectability of loss reserves and reinsurance recoverables, including exposure to catastrophe losses and reinsurer default.
- How much reported earnings depend on equity-security valuation changes and realized investment gains or losses.
- Cash needs for reinsurance commitments, claims, and shareholder returns, alongside regulatory limits on insurance-subsidiary dividends.
- Whether geographic growth outside Florida continues and improves the company’s risk concentration without weakening underwriting results.