Universal Insurance Holdings, Inc. — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The company is a vertically integrated property and casualty insurer, primarily writing homeowners insurance in 18 states, with most policies in Florida. The interim financial statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Direct premiums written | $334.6 million | Up 15.7% from Q1 2019 |
| Net premiums earned | $220.8 million | Up 5.3% |
| Total revenue | $235.3 million | Down 0.6%; lower investment income and equity-security valuation losses offset premium and other revenue growth |
| Net income | $20.1 million | Down 50.0% from $40.1 million |
| Diluted EPS | $0.61 | Down from $1.14; diluted weighted-average shares fell 7.0% to 32.7 million |
| Net loss ratio | 61.2% | Up from 53.9% |
| General and administrative expense ratio | 32.9% | Down from 33.3% |
| Operating cash flow | $45.6 million | Up from $31.5 million |
Net realized investment gains were $0.3 million versus losses of $11.5 million in Q1 2019. However, equity securities produced an $8.0 million unrealized loss in earnings, versus an $18.0 million unrealized gain in the prior-year quarter. Other comprehensive loss was $8.9 million, compared with $12.0 million of income.
Financial position and liquidity
- At March 31, total assets were $1.546 billion, stockholders’ equity was $494.3 million, cash and cash equivalents were $180.8 million, and invested assets were $928.6 million.
- Long-term debt was $9.6 million; debt was 1.9% of total capital and 1.9% of equity. Operating cash flow was positive, and management said cash flows from operations should meet working-capital needs for at least the next 12 months.
- Unpaid losses and loss-adjustment expenses were $196.0 million; unearned premiums were $669.9 million. Reinsurance recoverables were $108.5 million.
- Contractual obligations totaled $473.8 million, including $267.6 million of reinsurance payables and multi-year commitments. The filing identifies $118.9 million of future reinsurance commitments in 2020 and $84.3 million in 2021.
- The insurance subsidiaries exceeded stated minimum statutory capitalization requirements. UPCIC reported statutory capital and surplus of $296.5 million and APPCIC $16.3 million at March 31. The parent contributed $30 million to UPCIC during the quarter; no dividends were paid by the insurance subsidiaries to their parent.
Material changes and management commentary
- Premium growth reflected expansion in Florida and other states, rate increases, and slightly improved retention. Florida direct premiums written rose 15.0%; other-state premiums rose 19.0%.
- Losses and loss-adjustment expenses increased 19.4% to $135.0 million. The net loss ratio rose 7.3 percentage points, driven by higher estimated core losses, prior-year adverse reserve development, and higher reinsurance costs; lower excess weather losses partly offset these factors.
- Prior-year reserves had $42.5 million of gross adverse development, of which $38.2 million was ceded, leaving $4.3 million net. The development principally related to Hurricane Irma.
- Management cited increased litigated and represented claims in Florida, including claims involving assignments of benefits. UPCIC filed for a 12.4% Florida rate increase in February, anticipated to take effect May 25, 2020, subject to regulatory review. The company also planned underwriting-guideline changes and specialized claims and litigation efforts.
- Reinsurance costs rose: ceded premium earned increased to $105.1 million, and reinsurance costs as a share of direct premium earned increased to 32.3% from 29.0%. The 2019–2020 program was projected to cost $420 million, approximately 33.5% of estimated direct premium earned for its 12-month treaty period.
- COVID-19 had not materially affected operations, financial position, liquidity, or policyholder service through Q1, other than reducing investment values. The company shifted most employees to remote work, offered premium grace periods and waived late fees, and directed advisors to accumulate cash as investments mature while pausing equity purchases. Management said the pandemic’s ultimate effects could not be predicted.
Outlook, risks, and unusual items
- The filing provides no specific earnings or full-year financial guidance. Management said it would monitor the economic effects of COVID-19, liquidity, capital, and investment markets.
- Key risks include Florida concentration, catastrophe and claims severity, reserve estimation, litigation, reinsurance availability and collectability, investment-market losses, policyholder payment delays, regulatory constraints or delays in rate approvals, and potential changes to premium-payment rules or coverage obligations.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $0.6 million reduction to opening retained earnings. At March 31, it reported a $0.8 million allowance for credit losses on available-for-sale debt securities and premiums receivable.
- Q1 included $6.6 million of share repurchases and a $0.16-per-share common dividend. A further $0.16-per-share dividend was declared April 16, payable May 21, 2020.
- Management considered reasonably possible losses from other legal proceedings immaterial where estimable, while noting actual outcomes could differ and exposure could exceed accrued amounts.
Important facts for investors to verify
- Whether the Florida rate increase received approval on the expected timetable, and whether it offsets rising claims costs.
- Subsequent trends in Florida litigated claims, core loss ratios, and Hurricane Irma reserve development.
- The cost, renewal terms, and counterparty reliability of reinsurance, including the company’s exposure to the Florida Hurricane Catastrophe Fund.
- Whether COVID-19 affected premium collection, policy retention, claims operations, investment values, or regulatory requirements after quarter-end.
- Statutory capital and dividend capacity at the insurance subsidiaries, and the effect of planned dividends and repurchases on holding-company liquidity.