Universal Insurance Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The interim financial statements are unaudited and were reviewed by the independent accountant, not audited. Universal is a vertically integrated property-and-casualty insurer, primarily writing homeowners insurance in Florida and 18 other states.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $292.0 million | $279.2 million | $579.5 million | $541.9 million |
| Net premiums earned | $277.1 million | $256.2 million | $546.1 million | $499.5 million |
| Net income | $7.4 million | $21.9 million | $24.9 million | $48.3 million |
| Diluted EPS | $0.24 | $0.70 | $0.80 | $1.54 |
| Net loss and LAE ratio | 72.3% | 65.3% | 70.6% | 62.3% |
| Combined ratio | 100.9% | 97.3% | 99.4% | 95.2% |
- Q2 direct premiums written grew 12.4% to $532.5 million; six-month direct premiums written grew 10.7% to $929.0 million. Growth was mainly driven by rate increases, with Florida representing 85% of Q2 written premiums.
- Operating cash flow was $225.4 million for the first half, compared with $257.1 million in 2021. Cash and cash equivalents at June 30 were $317.0 million, plus $20.1 million of restricted cash.
- At June 30, total assets were $2.383 billion, total liabilities $2.016 billion, and stockholders’ equity $366.6 million, down from $429.7 million at year-end 2021. Accumulated other comprehensive loss widened to $88.1 million, largely reflecting lower fair values of available-for-sale debt securities as interest rates rose.
- Net long-term debt was $103.2 million. The company had $100 million of 5.625% senior notes due in 2026 and an undrawn $35 million revolving facility; it reported compliance with debt covenants.
- Net investment income increased to $5.2 million for Q2 and $9.3 million for the first half. Equity-security unrealized losses were $8.9 million and $12.3 million, respectively, reducing reported earnings.
Changes versus prior periods
- Despite premium growth, net income fell 66% in Q2 and 49% for the first half. Higher current-year claims costs, inflation, and a higher net loss ratio outweighed revenue growth and lower general and administrative expenses.
- The Q2 combined ratio rose to 100.9%, indicating an underwriting loss for the quarter, from 97.3% a year earlier. The first-half ratio rose to 99.4% from 95.2%.
- First-half direct and net prior-year reserve development was $74.3 million gross and $4.4 million net unfavorable, principally related to Hurricane Irma. The comparable 2021 period included $209.0 million gross and $6.5 million net unfavorable development.
- Policies in force fell 5.2% from December 31, 2021, to 894,618; versus June 2021, they were down 8.5%. Management said lower retention and disciplined new-business growth reduced policy counts, while premium in force increased 9.1% year over year.
Outlook, risks, and unusual items
- Management provided no specific full-year earnings or revenue guidance. It said rate increases and inflation adjustments are flowing into premiums over policy periods, while it moderates new-business growth and manages exposure. Recently approved Florida rate increases included 14.9%; management cautioned that rates may take time to earn and may lag claims-cost inflation.
- The 2022–2023 reinsurance program provides approximately $3.2 billion of total limit protection. Its projected cost is $696 million, or about 37.6% of estimated direct earned premium for the treaty year, versus 36.4% for the prior program. Reinsurance capacity, pricing, recoverability, and catastrophe losses remain significant risks.
- Management cited Florida claims litigation, claim severity and frequency, attorney involvement, and inflation in labor and building materials as pressures on losses and reserves. Florida enacted additional insurance-market reforms in May 2022; management was optimistic but said their effect would take time to assess.
- Interest-rate increases weighed on fixed-income security values: the fair value of available-for-sale debt securities was $1.021 billion against $1.138 billion amortized cost. Management said it generally expects to hold most debt securities to maturity, but market-value volatility remains a risk.
- The Insurance Entities exceeded statutory minimum capital requirements, but had no capacity to pay ordinary dividends as of June 30, 2022. The filing lists future-year multi-year reinsurance commitments of $80.5 million in 2023, $91.5 million in 2024, and $66.3 million in 2025.
- Management believed operating cash flows would meet liquidity needs for at least the next 12 months. Legal proceedings were described as ordinary-course matters; management estimated reasonably possible losses it could estimate as immaterial, while noting actual losses could differ.
- The company repurchased 603,080 shares for $7.4 million in the first half and declared a $0.16-per-share quarterly dividend. The July 19, 2022 dividend was payable August 9.
Important facts for investors to verify
- Whether Florida reforms and implemented rate increases improve claim trends and underwriting margins, and how quickly premium increases are earned.
- Current and future reserve adequacy, especially for Hurricane Irma and other prior-year claims, and the degree to which reinsurance recoveries are collectible.
- The final cost and effectiveness of the 2022–2023 reinsurance program, including protection available for multiple catastrophe events.
- Liquidity and capital at the regulated insurance subsidiaries, given restrictions on subsidiary dividends and substantial scheduled reinsurance payments.
- The effect of continued interest-rate and equity-market movements on investment values, reported equity, and earnings.