Universal Insurance Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company is a vertically integrated property and casualty insurer, focused primarily on homeowners coverage in Florida and distributed mainly through independent agents. Its interim financial statements were reviewed by its independent accountant, not audited.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
- Q3 revenue and earnings: Total premiums earned and other revenues were $206.2 million, up 8.4% from $190.2 million. Net premiums earned were $188.9 million, up 8.3%. Net income was $37.4 million versus $10.0 million; diluted EPS was $1.04 versus $0.28.
- Nine-month results: Total premiums earned and other revenues were $607.4 million, up 10.3%; net premiums earned were $563.8 million, up 11.6%. Net income was $123.5 million versus $70.5 million; diluted EPS was $3.45 versus $1.96.
- Premium growth: Direct premiums written rose 12.5% in Q3 to $309.2 million and 12.9% for nine months to $921.9 million. For nine months, Florida premiums grew 9.9% and other-state premiums grew 34.9%; Florida represented 85.6% of written premiums.
- Losses and expense ratios: The Q3 net loss ratio was 45.5%, compared with 66.7% a year earlier; the net expense ratio was 36.5%, versus 32.8%. The nine-month net loss ratio was 44.6%, versus 52.9%, while the expense ratio was 33.9% in both periods. Q3 losses and loss adjustment expenses (LAE) were $85.9 million, including a $16.7 million net benefit from claim-settlement fees reimbursed by reinsurers.
- Investment results: Net investment income was $6.6 million in Q3 and $17.2 million for nine months, up from $3.1 million and $9.0 million, respectively. Equity-security fair-value losses recognized in earnings were $2.5 million in Q3 and $9.1 million for nine months under newly adopted accounting guidance; nine-month realized securities losses were $2.1 million.
- Cash flow: Operating activities provided $224.5 million for nine months, down from $286.2 million. Investing activities used $150.6 million and financing activities used $35.1 million. Cash and restricted cash increased $38.8 million to $254.9 million.
- Balance sheet and debt: At September 30, total assets were $1.723 billion, total liabilities $1.192 billion, and stockholders’ equity $531.0 million. Cash and cash equivalents were $252.3 million; invested assets were $853.2 million. Long-term debt was $11.8 million, consisting of a surplus note; debt-to-equity was 2.2%.
- Capital returns: Dividends declared totaled $0.44 per share for the first nine months, including $0.16 per share for Q3. The company repurchased 342,749 shares for approximately $11.1 million during the first nine months.
Material changes and key drivers
- Profit increased sharply against Q3 2017, which included substantial Hurricane Irma losses. Q3 2018 also benefited from a lower effective tax rate (26.9% versus 40.0%) and higher investment income. The nine-month effective tax rate was 24.7%, versus 37.0%.
- Hurricane Irma’s estimated ultimate loss increased to $754.0 million from $446.7 million at 2017 year-end. The $311.7 million increase in direct losses for the first nine months resulted in $2.2 million of net adverse development after reinsurance. Management cited continuing reported claims and Florida litigation costs.
- Q3 direct losses from significant weather events were $41.9 million, including $35.0 million from Hurricane Florence; reinsurance limited Florence’s net cost to $5.0 million. For the first nine months, significant weather-event losses were $46.9 million direct and $12.5 million net, compared with $461.0 million direct and $46.0 million net in the prior-year period, which included Irma.
- Reinsurance costs and ceded premiums increased with business growth and the 2018–2019 program renewal. Ceded earned premiums were 34.5% of direct earned premiums in Q3, compared with 31.5% a year earlier. The company reported $13.5 million of fully earned reinstatement premiums related to Irma loss estimates.
- General and administrative expenses rose 20.6% in Q3 to $69.0 million, driven by acquisition costs, geographic expansion, performance bonuses, and stock-option grants. Nine-month expenses included a $6.5 million benefit from settling prior-year Florida premium-tax audits.
Outlook, risks and contingencies
- Hurricane Michael: The October 10, 2018 storm occurred after the reporting date. The company estimated gross losses and LAE of $300–$350 million and anticipated total net pre-tax losses and LAE of $35 million; possible recoveries under supplemental non-Florida reinsurance could reduce that retention. These were estimates, not reported final losses.
- Reinsurance and catastrophe exposure: The 2018–2019 UPCIC program provides estimated first-event coverage up to $3.13 billion, including Florida Hurricane Catastrophe Fund coverage, with a stated $35 million net retention before tax for covered events up to the program limit. The company remains responsible for losses above coverage, uncovered losses, and amounts not collected from reinsurers. Future multi-year reinsurance commitments were $82.3 million in 2019 and $33.9 million in 2020.
- Liquidity and regulation: Management said operating cash flows should meet working-capital needs for at least the next twelve months. Insurance-subsidiary dividends are restricted; no dividends were paid to the parent during the first nine months of 2018. Both insurers exceeded minimum statutory capitalization requirements, but APPCIC did not qualify to pay ordinary dividends in 2018.
- Risks and legal matters: Key exposures include Florida concentration, severe weather and climate risk, reserve uncertainty, assignment-of-benefits claims and litigation, pricing and underwriting risk, reinsurance availability and counterparty credit risk, investment-market volatility, and regulation. Management considered estimable reasonably possible legal losses immaterial, while noting actual losses could differ materially and estimates were not maximum exposure.
- Guidance: The filing provides no specific earnings or revenue guidance. Management described organic growth, expansion outside Florida, disciplined underwriting, and reinsurance optimization as strategic priorities.
Most important facts for investors to verify
- How Hurricane Michael’s final insured losses, reinsurance recoveries, and net retention compare with the initial $35 million estimate.
- Whether Irma claims development and Florida litigation continue, and whether reported reserves and reinsurance recoverables remain adequate.
- Whether growth outside Florida improves diversification without materially weakening underwriting results or raising acquisition costs.
- How the cost and availability of future catastrophe reinsurance affect net premiums, liquidity, and catastrophe protection.
- Whether investment income growth offsets equity-market losses and the portfolio’s increased exposure to lower-rated debt securities.
- How statutory capital and dividend restrictions affect cash available to the parent, dividends, and share repurchases.