Universal Insurance Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Balance-sheet comparisons are with December 31, 2015. The interim financial statements were reviewed by the independent accountant, not audited.
Business context
Universal is a vertically integrated property and casualty insurer focused primarily on homeowners insurance. Florida remained its principal market, representing 91.8% of Q1 direct premiums written; the company operated in 12 states and used independent agents. Management emphasized organic growth, geographic diversification, disciplined underwriting and reinsurance protection.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Direct premiums written | $228.0 million | $211.6 million; up 7.7% |
| Net premiums written | $153.9 million | $105.1 million; up 46.4% |
| Net premiums earned | $152.4 million | $94.4 million; up 61.6% |
| Total revenues | $164.4 million | $103.8 million; up 58.4% |
| Losses and loss adjustment expenses | $66.1 million | $33.6 million; up 96.8% |
| General and administrative expenses | $57.2 million | $32.2 million; up 77.7% |
| Income before taxes | $41.1 million | $38.0 million; up 8.1% |
| Net income | $25.2 million | $22.3 million; up 13.0% |
| Diluted EPS | $0.71 | $0.62 |
| Operating cash flow | $43.7 million | $60.7 million |
The net loss ratio rose to 43.4% from 35.6%; the expense ratio increased to 37.5% from 34.1%. Together, these reported ratios imply a combined ratio of 80.9% versus 69.7%, calculated as loss ratio plus expense ratio. Net investment income was $1.6 million, compared with $0.9 million; realized investment gains were $0.7 million, compared with $0.2 million. The effective tax rate was 38.6%, down from 41.3%. Comprehensive income was $28.5 million, including $3.3 million of after-tax other comprehensive income.
At March 31, cash and cash equivalents were $160.0 million, down from $197.0 million at year-end. Total assets were $1.029 billion; stockholders’ equity was $314.3 million. Long-term debt was $23.1 million, down from $24.1 million. Management reported a 6.8% debt-to-total-capital ratio and 7.3% debt-to-equity ratio. The company had an undrawn $15 million credit line and said operating cash flows should meet working-capital needs for at least the next 12 months. Insurer subsidiaries met stated statutory capitalization requirements; UPCIC had capacity for $52.9 million in ordinary dividends during 2016, while APPCIC had none.
Cash used in investing was $67.5 million, mainly reflecting purchases of fixed maturities and equity securities; cash used in financing was $13.3 million, including dividends, share repurchases and debt repayment. Cash declined by $37.0 million during the quarter.
Material changes and management commentary
- The company eliminated UPCIC’s 30% quota-share reinsurance effective June 1, 2015, retaining more premiums and associated risk. This was a major driver of higher net earned premiums, losses and expenses year over year; the company also no longer received quota-share ceding commissions.
- Q1 2016 included $8.5 million of incremental losses and LAE from severe weather events, in addition to amounts reflected in underlying loss assumptions. Management attributed much of the higher loss ratio to this charge.
- Management attributed increased direct earned premiums to organic growth and rate changes effective in Q2 2015. Direct premiums written outside Florida rose to $18.6 million from $12.5 million, increasing from 5.9% to 8.2% of the total.
- Higher acquisition-cost amortization contributed to expense growth, including $16.6 million associated with the absence of quota-share ceding commissions and $2.6 million associated with organic growth.
- The company paid a $0.14-per-share dividend and repurchased 100,000 shares for approximately $1.9 million in Q1. The board declared another $0.14-per-share dividend for payment in July.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management said the current reinsurance program was designed to protect against catastrophe losses and described the terms as more favorable than the prior program, but cautioned that favorable operating or financial effects were not assured. UVE separately maintained a catastrophe risk-linked contract providing for an $80 million payment plus forgiveness of related debt upon specified exhaustion of UPCIC catastrophe coverage; it ran through May 31, 2016.
Key risks include Florida and catastrophe concentration, reserve estimation and claim severity, pricing and underwriting, reinsurance availability and counterparty credit, regulatory restrictions on insurer dividends and rates, investment market risk, and litigation. Management estimated reasonably possible legal losses that it could estimate to be immaterial, while noting actual exposure could differ and the estimate was not a maximum-loss measure. The filing reported no material change in previously disclosed risk factors and no material control changes; management concluded disclosure controls were effective.
Subsequent event: On April 28, 2016, UVE sold 583,771 shares to RenaissanceRe Ventures Ltd. at $17.13 per share for stated total consideration of $10 million, consisting of $2.965 million cash and cancellation of $7.035 million of outstanding indebtedness. Verify the resulting debt and share-count effects in subsequent filings.
Important facts for investors to verify
- Whether the higher retained premium after ending quota-share reinsurance translates into sustainable underwriting profitability, particularly through catastrophe seasons.
- The development of the $8.5 million severe-weather loss charge and whether subsequent claims or reserve changes alter estimates.
- Reinsurance coverage, cost, limits, exclusions and recoverability, including the status of the risk-linked contract that expired May 31, 2016.
- The extent of Florida concentration, progress in newer states, and the effect of regulatory or weather conditions on growth and capital.
- The April 2016 RenaissanceRe transaction’s debt cancellation, dilution, and effect on liquidity and capital structure.
- Investment portfolio valuation and sensitivity: a hypothetical 20% equity-price decline at quarter-end would have reduced fair value by an estimated $6.4 million.