Universal Insurance Holdings, Inc. — Q1 2017 Form 10-Q
Business context and period. The company underwrites residential property and casualty insurance, primarily through independent agents. Florida remains its core market; it also writes in other states. This unaudited quarterly report covers the three months ended March 31, 2017, compared with Q1 2016; balance-sheet comparisons are with December 31, 2016. The interim statements were reviewed by the independent accountant, not audited.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Direct premiums written | $245.4 million | $228.0 million; up 7.7% |
| Net premiums earned | $161.6 million | $152.4 million; up 6.0% |
| Total revenue | $174.9 million | $164.4 million; up 6.3% |
| Losses and LAE, net | $70.6 million; 43.7% loss ratio | $66.1 million; 43.4% loss ratio |
| General and administrative expense | $56.9 million; 35.3% of net earned premiums | $57.2 million; 37.5% |
| Income before taxes | $47.4 million | $41.1 million; up 15.3% |
| Net income | $31.2 million | $25.2 million; up 23.7% |
| Diluted EPS | $0.86 | $0.71 |
| Operating cash flow | $72.0 million | $43.7 million |
At March 31, 2017, total assets were $1.060 billion, stockholders’ equity was $398.8 million, cash and cash equivalents were $160.4 million, and long-term debt was $14.0 million. Total invested assets were $666.1 million. Debt was 3.4% of total capital, versus 3.9% at year-end 2016. The company reported an unused $15 million unsecured credit line and said it was in compliance with its covenants. Management expects operating cash flows to cover working-capital needs for at least the next twelve months.
Material changes and operating drivers
- Direct written premiums grew 7.7%. Florida premiums rose 4.3% to $218.4 million; other-state premiums rose 44.9% to $27.0 million. Other states represented 11.0% of written premiums, compared with 8.2% a year earlier.
- Net investment income increased to $2.7 million from $1.6 million, reflecting a larger portfolio and investment in higher-yielding securities. The company recorded a $63,000 realized investment loss, versus a $667,000 gain in Q1 2016.
- Losses and LAE increased by $4.5 million. The core loss ratio rose to 28.7% from 26.1%; weather losses beyond expected were $3.0 million versus $8.5 million. The overall net loss ratio was 43.7%, compared with 43.4%.
- General and administrative expenses declined slightly, as lower other operating costs more than offset higher acquisition costs. The expense ratio improved to 35.3% from 37.5%.
- Cash rose by $54.6 million from year-end, while unpaid losses and LAE fell to $31.5 million from $58.5 million. The company attributed the liability decline partly to faster claims payments and anticipated subrogation collections.
- Stockholders’ equity increased to $398.8 million from $371.2 million. The quarter included $2.5 million of share repurchases and a $0.14-per-share dividend.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management describes goals of profitable organic growth, expansion outside Florida, disciplined underwriting, and optimization of reinsurance. Results are seasonal and interim results are not necessarily indicative of full-year performance.
- Catastrophe protection: The 2016–2017 catastrophe reinsurance program runs through May 31, 2017. UPCIC’s stated retention is $35 million per catastrophe event before tax, with coverage described up to $2.487 billion for the first event; the company remains responsible for losses above coverage limits and for reinsurer nonpayment. Reinsurance cost and availability are significant risks.
- Geographic and underwriting risks: The substantial majority of business remains in Florida, exposing results to Florida weather, regulation, market conditions, and catastrophe losses. Management also cites uncertainty in pricing, claims estimates, catastrophe models, and reserves.
- Tax items: The effective tax rate was 34.1%, versus 38.6% in Q1 2016. Q1 2017 included an approximately $0.8 million excess share-based compensation tax benefit under newly adopted guidance and a $1.3 million credit related to anticipated recovery of taxes paid for 2013–2015. These items improved the reported tax rate.
- Commitments and contingencies: A covered-loss index swap agreement requires minimum annual spending of $5 million through May 2025; $4.1 million remained for the year ending May 31, 2017. The company reported ordinary-course litigation and estimated reasonably possible losses it could quantify as immaterial, while noting actual outcomes may differ and losses could exceed accruals.
- Capital and distributions: UPCIC had capacity to pay $57.7 million in ordinary dividends during 2017 without prior regulatory approval; APPCIC had no such capacity. Neither insurer paid dividends to its parent in Q1. The company declared a further $0.14-per-share dividend payable July 3, 2017.
Important facts for investors to verify
- Whether premium growth outside Florida can continue while maintaining underwriting profitability and adequate pricing.
- Loss trends, reserve adequacy, claims-payment development, and the impact of future weather or catastrophe events.
- Renewal pricing, terms, capacity, and counterparty strength for reinsurance after May 31, 2017, including the company’s retained exposure.
- The sustainability of earnings excluding the quarter’s discrete tax credits and the effect of future tax examinations or recoveries.
- Availability of cash at the parent company versus regulated insurance subsidiaries, including statutory capital and dividend restrictions.
- Outstanding commitments under the covered-loss index swap arrangement and the company’s stated litigation exposure.