Universal Insurance Holdings, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. The company is a vertically integrated property-and-casualty insurer focused mainly on homeowners coverage, with most policies in Florida. The interim financial statements were reviewed, not audited.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Direct premiums written | $191.9 million | $204.1 million | -6.0% |
| Net premiums written | $70.3 million | $62.8 million | +11.9% |
| Net premiums earned | $63.8 million | $65.4 million | -2.4% |
| Total premiums earned and other revenues | $74.3 million | $67.5 million | +10.2% |
| Losses and loss adjustment expenses | $26.8 million | $26.5 million | +1.3% |
| General and administrative expenses | $24.4 million | $21.2 million | +14.9% |
| Income before tax | $23.1 million | $19.8 million | +17.0% |
| Net income | $13.5 million | $12.0 million | +13.3% |
| Basic / diluted EPS | $0.41 / $0.38 | $0.30 / $0.29 | Higher, partly due to fewer shares |
- The net loss and LAE ratio rose to 42.0% from 40.5%. The filing attributes the increase to lower earned premiums and slightly higher losses.
- Investment results changed sharply year over year: Q1 2014 had $0.9 million of realized gains and $0.5 million of net investment income; Q1 2013 included $16.0 million of realized losses and $7.9 million of unrealized gains tied to the trading portfolio. The company had liquidated that trading portfolio in March 2013.
- Operating cash flow was $29.9 million, versus $147.5 million in Q1 2013; investing cash outflow was $4.0 million and financing cash outflow was $20.3 million. Cash and cash equivalents ended the quarter at $122.8 million, up from $117.3 million at year-end.
- At March 31, total assets were $901.4 million, total liabilities $730.4 million, and stockholders’ equity $171.0 million. Investments, including cash and restricted cash, totaled $485.9 million.
- Long-term debt was $37.1 million, comprising a surplus note and term loan; the $10 million unsecured revolving facility was undrawn. Debt-to-total-capital was 17.8%, versus 17.5% at year-end. The company reported compliance with applicable debt covenants.
- The board declared a $0.10-per-share dividend in January, paid in March; a further $0.10 dividend was declared in April for payment in July.
Material changes and management commentary
- Net income increased by $1.6 million, primarily because Q1 2014 avoided the prior-year trading losses and produced higher net investment income. Lower earned premiums and other revenues, higher claims expenses, higher G&A, and higher taxes partly offset those benefits.
- Direct written premiums declined, while lower ceded premiums lifted net written premiums. Net earned premiums fell as Florida policy count decreased, partly offset by lower reinsurance costs and rate increases over the prior year.
- G&A rose $3.2 million. Management cited about $2.0 million of higher insurance costs, including catastrophe-linked protection; $983,000 of higher stock-based compensation and related costs; increased marketing and claims-operation investment; and higher interest, advertising, rent, and consulting costs. Some increases were offset by lower deferred acquisition-cost amortization and other operating expenses.
- Florida policy count was 491,984 at quarter-end versus 499,949 at year-end. Other-state policy count was 39,078, up 8.4% since year-end and 47.8% year over year. Florida represented 92.6% of policies. The company reported a 2.4% homeowners rate reduction effective for new business in January and renewals in March 2014, alongside efforts to improve retention and claims service.
- The company repurchased 1.225 million shares from its former CEO for $14.7 million, at stated prices below then-current market prices. Management said cumulative share repurchases increased Q1 diluted EPS by $0.07. Outstanding shares declined, and equity also reflected dividends and repurchases.
Outlook, risks, and unusual items
- Management stated premiums should meet working-capital needs for at least the next 12 months and expected operating cash generation to continue meeting liquidity requirements. No specific earnings or revenue guidance was provided; quarterly results are seasonal and not necessarily indicative of full-year results.
- Catastrophe exposure, especially hurricanes and Florida concentration, is a central risk. Reinsurance reduces but does not eliminate exposure; the company remains responsible for losses beyond coverage and for reinsurer nonpayment. Management reported that the 2013–2014 reinsurance program provided additional protection at lower cost than the preceding program.
- Other disclosed risks include claim severity/frequency and reserve estimates, reinsurance availability and credit quality, regulatory limits on pricing and dividends, investment-market volatility and interest-rate risk, competition, and debt covenant restrictions.
- Florida statutory capital requirements were met by both insurance subsidiaries. UPCIC had capacity for only $290,000 of ordinary dividends in 2014 without prior approval; APPCIC had no ordinary dividend capacity for 2014. Both subsidiaries’ capital and surplus exceeded the stated regulatory minimums.
- The company reported an ongoing IRS examination concerning the carryback of 2012 securities losses to tax year 2009. Routine litigation was not expected by management to materially affect results, financial condition, or liquidity.
- UPCIC has a purchase agreement for adjacent office space for $5.99 million, with closing due no later than February 5, 2015, subject to conditions; management expected to fund the purchase with cash on hand.
- Q1 effective tax rate increased to 41.4% from 39.5%, primarily due to state taxes and nondeductible items, including certain compensation. Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether policy growth outside Florida and retention initiatives can offset Florida policy attrition and the effect of rate reductions and wind-mitigation discounts.
- Reinsurance renewal pricing, coverage limits, counterparty strength, and the company’s net exposure to a major catastrophe.
- Claims development and reserve adequacy, including the increase in the net loss ratio and the effects of expanded claims operations.
- Whether investment income remains stable and how interest-rate or equity-market moves could affect earnings, liquidity, and policyholder capital.
- Cash use for share repurchases, dividends, debt service, and the planned office-property purchase; also confirm dividend and repurchase capacity under debt covenants and insurance regulation.
- Outcome of the IRS examination and any material changes in litigation, regulatory requirements, or insurer financial-strength ratings.