Universal Insurance Holdings, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Universal is a vertically integrated homeowners insurer, operating primarily through Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). It distributes mainly through independent agents and writes in 14 states. Florida remained the core market: 90.2% of 2016 direct written premium and 79.1% of insured value were in Florida. The company reported a 9.6% Florida market share based on the latest available regulator data at September 30, 2016.
Financial and operating results
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Direct premiums written | $954.6 million | $883.4 million | +8.1% |
| Net premiums earned | $632.4 million | $504.0 million | +25.5% |
| Total revenue | $685.3 million | $546.5 million | +25.4% |
| Losses and loss adjustment expenses | $301.2 million | $187.7 million | +60.5% |
| Income before taxes | $162.9 million | $175.0 million | -6.9% |
| Net income | $99.4 million | $106.5 million | -6.6% |
| Diluted EPS | $2.79 | $2.97 | -6.0% |
| Operating cash flow | $121.4 million | $219.3 million | Down $97.9 million |
- The net loss and LAE ratio rose to 47.6% from 37.2%; the net expense ratio improved to 35.0% from 36.5%. Together, these imply a net combined ratio of approximately 82.6% versus 73.7%.
- 2016 weather events generated $51.4 million in gross losses and LAE, including severe first-quarter storms and Hurricanes Hermine and Matthew; reported net weather-event losses were $46.1 million.
- Net investment income increased 85.1% to $9.5 million. Net realized investment gains were $2.3 million, versus $1.1 million.
- At year-end, total assets were $1.06 billion, stockholders’ equity was $371.2 million, and long-term debt was $15.0 million. Debt-to-equity was 4.0%, down from 8.2%.
- Cash and cash equivalents fell to $105.7 million from $197.0 million. The investment portfolio, including investment real estate, totaled $651.6 million. Management said operating cash flows should meet working-capital requirements for at least the next 12 months.
Material changes versus the prior year
- Net earned premiums grew substantially as direct premiums increased and ceded earned premiums declined. UPCIC eliminated quota-share reinsurance effective June 1, 2015, retaining more premium and risk; catastrophe reinsurance coverage and related ceded premiums increased in 2016.
- Direct written premiums rose 5.3% in Florida and 43.0% in other states. Non-Florida insured value increased to 20.9% of the total from 16.0% at year-end 2015.
- Loss and LAE expense increased faster than revenue, reflecting 2016 weather losses and higher retained exposure. The fourth-quarter net income was $13.7 million, down 53.2% from $29.2 million in fourth-quarter 2015, with Hurricane Matthew identified as the principal factor.
- Unpaid losses and LAE declined to $58.5 million from $98.8 million. Management attributed the decrease partly to faster claim payments and its Fast Track claims process; it also reported $4.7 million of favorable prior-year reserve development, principally from increased estimated subrogation recoveries.
- Cash used in investing activities was $174.3 million, mainly reflecting portfolio purchases and investment in property and equipment; financing activities used $38.4 million, including dividends, share repurchases, and debt repayment.
Reinsurance, outlook, and risks
- For the 2016–2017 program, UPCIC reported a $35 million per-event net retention for covered losses up to $2.487 billion, with lower retention for qualifying non-Florida events. The program includes Florida Hurricane Catastrophe Fund coverage and private catastrophe protection. Management’s modeled estimate of net after-tax loss from a repeat of the four major 2004 Florida hurricanes was approximately $84 million; actual losses could differ and losses above coverage remain the company’s responsibility.
- Management stated the reinsurance structure and pricing were favorable, but gave no quantified earnings or premium guidance. The filing emphasizes continued organic growth, expansion outside Florida, disciplined underwriting, and ongoing review of reinsurance. The direct-to-consumer Universal Direct platform wrote 1,320 policies and $1.4 million of gross written premium in 2016.
- Key risks include catastrophe severity and concentration in Florida’s coastal counties; adequacy of pricing and reserves; reinsurance availability, pricing, and counterparty performance; regulatory limits on rates and insurer dividends; competition and reliance on independent agents; investment-market movements; and litigation, claims handling, and cybersecurity risks.
- Management said reasonably possible legal losses it could estimate were immaterial, while cautioning that actual outcomes could differ and maximum exposure was not represented. No premium-deficiency provision was considered necessary at year-end. The company reported Demotech “A” Financial Stability Ratings for both Insurance Entities and statutory capital above applicable requirements.
- The annual financial statements received an unqualified audit opinion. The auditor and management concluded internal control over financial reporting was effective as of December 31, 2016.
Important facts for investors to verify
- How 2016 weather losses, claim frequency and severity, and subsequent reserve development compare with management’s assumptions, especially given the reserve decline and favorable development.
- The full reinsurance economics and protection in force, including reinstatement terms, the FHCF layer, exclusions, counterparty credit quality, and potential losses above coverage.
- Whether growth outside Florida continues to diversify risk meaningfully, and whether new-state business achieves adequate pricing and underwriting returns.
- Cash generation and liquidity after dividends, repurchases, investment purchases, and reinsurance payments; also review debt maturities, covenants, and restrictions on insurer distributions.
- The sustainability of dividends and repurchases: 2016 common dividends were $0.69 per share, and the company had a separate $20 million repurchase authorization through December 31, 2017.