Business context and reporting period
Universal Insurance Holdings, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company is a vertically integrated property-and-casualty insurer, primarily writing homeowners policies through independent agents. Florida remains its largest market. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2014 period.
- Third quarter: Total premiums earned and other revenues were $157.0 million, up 51.7%; net premiums earned were $146.2 million, up 55.0%. Net income was $30.3 million, up 42.0%; diluted EPS was $0.84 versus $0.61. Net loss and loss-adjustment expense (LAE) ratio was 36.8%, versus 36.3%.
- Nine months: Total premiums earned and other revenues were $384.4 million, up 45.2%; net premiums earned were $353.4 million, up 52.7%. Net income was $77.3 million, up 48.7%; diluted EPS was $2.15 versus $1.48. Net loss and LAE ratio improved to 36.0% from 38.3%.
- Cash flow: Nine-month operating cash flow was $241.2 million, investing cash outflow was $127.2 million, and financing cash outflow was $27.6 million. Cash and cash equivalents increased $86.4 million to $201.8 million.
- Balance sheet and liquidity: At September 30, total assets were $1.078 billion, total liabilities $795.4 million, and stockholders’ equity $283.0 million. Investments, including investment real estate, totaled $545.2 million. Management said operating cash flows should meet working-capital needs for at least the next 12 months.
- Debt and capital: Long-term debt was $24.3 million, down from $30.6 million at December 31, 2014; the $15 million unsecured credit line was undrawn. The company reported a 7.9% debt-to-total-capital ratio and an 8.6% debt-to-equity ratio. Insurance subsidiaries met stated statutory capital requirements.
- Shareholder returns: The company declared three 2015 dividends of $0.12 per common share each. It repurchased $7.7 million of common stock during the first nine months, including $2.6 million under a newly authorized $10 million repurchase program.
Material changes versus the prior comparable period
- Growth reflected both increased direct business and, importantly, a reduced share of premiums ceded to reinsurers. The company eliminated UPCIC’s 30% quota-share reinsurance effective June 1, 2015, after reducing the cession from 45% to 30% in June 2014. This boosted retained premiums but also increased retained losses and LAE and eliminated quota-share ceding commissions.
- Direct premiums written rose 13.9% in the quarter and 12.6% year to date; net premiums written rose 64.7% and 63.1%, respectively. Policy count was 612,353, up from 556,348 at December 31, 2014. Other-state policy count increased 35.6% over that date, while Florida accounted for 89.1% of policies.
- Operating costs rose alongside premium growth. General and administrative expense increased 71.9% in the quarter and 52.3% year to date, largely reflecting higher net deferred policy acquisition cost amortization after quota-share ceding commissions ended, as well as increased share-based compensation and performance bonus accruals.
- Net investment income increased to $1.3 million for the quarter and $3.4 million year to date. Year-to-date realized investment gains fell to $0.3 million from $5.4 million in 2014. Other comprehensive loss was $0.7 million for the nine months.
- The effective tax rate declined to 36.7% for the quarter and 39.2% year to date, from 42.6% in both prior-year periods. The company cited lower nondeductible executive compensation and state tax adjustments, including a $1.2 million discrete adjustment.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said the 2015–2016 reinsurance program had more favorable terms and lower costs than the prior program and expected retaining more premium to improve profitability; it cautioned that favorable results are not assured.
- UPCIC’s catastrophe program provides coverage up to $2.123 billion, with a stated $35 million pretax retention for each of the first four catastrophic events. Estimated UPCIC catastrophe and Florida Hurricane Catastrophe Fund coverage cost was $267.6 million. The company remains responsible for losses beyond coverage and for amounts reinsurers fail to pay.
- Catastrophe frequency and severity, reserve estimation, reinsurance availability and counterparty credit, Florida concentration, regulation, investment-market changes, and litigation are among the stated risks. The company reported no material changes to previously disclosed risk factors.
- Management estimated reasonably possible losses from pending litigation, where estimable, to be immaterial, but said this is not the maximum exposure and actual outcomes may differ.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also reported that the IRS Joint Committee completed its review of a prior loss-carryback audit with no material change.
- The filing’s business description gives differing state counts: the nature-of-operations note says homeowners insurance was offered in ten states, while MD&A says the company was licensed in 15 states. The filing text does not reconcile these figures.
Important facts for investors to verify
- How much of premium and earnings growth reflects underlying policy and rate growth versus the quota-share change, and how retained catastrophe risk affects future results.
- Whether catastrophe protection, reinsurance counterparties and recoverables remain adequate relative to insured exposure, particularly given the Florida concentration.
- Claims development and reserve adequacy, including whether the improved year-to-date loss ratio persists.
- The sustainability of operating cash flow and liquidity after considering claims payments, reinsurance settlements, acquisition costs, dividends and repurchases.
- The state-count discrepancy and the company’s ongoing geographic diversification, as well as applicable restrictions on dividends from regulated insurance subsidiaries.
- Investment portfolio sensitivity: the filing estimates that a hypothetical 20% decline in equity-security prices would reduce fair value by $9.3 million; it also reports $6.2 million of gross unrealized investment losses at September 30, 2015.