Universal Insurance Holdings, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; comparisons are primarily with FY 2011. The filing also reports fourth-quarter results. The company is a vertically integrated homeowners’ property and casualty insurer, with most business written in Florida.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $269.9 million | $225.9 million |
| Net premiums earned | $231.1 million | $199.0 million |
| Income before taxes | $52.6 million | $33.7 million |
| Net income | $30.3 million | $20.1 million |
| Diluted earnings per share | $0.75 | $0.50 |
| Operating cash flow | $142.0 million | $110.1 million |
- Direct premiums written rose 8.1% to $780.1 million; net premiums written increased 25.9% to $262.5 million. Net premiums earned rose 16.1%, mainly reflecting rate increases. Policy count declined from about 593,000 to 567,050, partly due to nonrenewals and customer attrition.
- The net loss and loss-adjustment-expense ratio improved to 54.6% from 62.5%. Statutory combined ratios were 104% for UPCIC and 55% for APPCIC, versus 117% and 49%, respectively, in 2011.
- General and administrative expenses increased 34.4% to $91.2 million. Drivers included acquisition-cost accounting changes and a $6.3 million Florida Insurance Guaranty Association assessment, expected to be recouped through policy surcharges beginning February 2013.
- Trading-portfolio net losses narrowed to $2.5 million from $16.1 million in 2011. FY 2012 included $11.9 million of realized investment losses, mostly in metals and mining, partly offset by $9.4 million of unrealized gains. Net investment income was $0.4 million.
- At year-end, total assets were $925.7 million, liabilities $762.2 million, and stockholders’ equity $163.5 million. Cash and cash equivalents were $347.4 million, with another $33.0 million restricted. Long-term debt was $20.2 million; debt was 11.0% of total capital. The company generated $142.0 million from operations, paid $18.7 million of common dividends, and ended with $347.4 million cash.
- Unpaid losses and LAE reserves totaled $193.2 million gross and $111.8 million net of reinsurance, up from $187.2 million gross and $99.2 million net. Management and its actuaries considered reserves adequate, while acknowledging material estimation uncertainty.
Changes, outlook, and notable items
- Profit increased 50.7% year over year, primarily on higher earned premiums and improved investment results. Quarterly net income was $4.4 million in Q4 2012, compared with a $2.3 million net loss in Q4 2011; Q4 2012 earnings were affected by higher expenses and a 52.9% quarterly effective tax rate.
- Management said recent rate increases were improving premium results but were partly offset by Florida wind-mitigation discounts. UPCIC’s 2012 Florida increases averaged 14.9% for homeowners and 8.8% for dwelling fire. Further increases averaging 14.1% and 14.5%, respectively, were approved in February 2013 and became effective for new and renewal business on specified dates in 2013.
- For its June 2012–May 2013 program, UPCIC reduced its quota-share cession from 50% to 45%, increasing retained risk as well as potential profitability. The filing describes catastrophe protection through multiple events, but losses above coverage, uncovered losses, and reinsurer nonpayment remain exposures. The company replaced its related-party T25 catastrophe arrangement with unaffiliated reinsurers effective January 1, 2013.
- Management planned to transition investments toward a more traditional insurer portfolio, with an investment adviser, aiming for more stable investment income and less market volatility. No specific earnings or growth guidance is provided.
- Approximately 96% of policies in force and 94.5% of insured value were in Florida; 98.1% of policies included wind coverage. Catastrophe severity, reserve adequacy, reinsurance availability and credit quality, rate regulation, investment volatility, and Florida market conditions are key risks.
- Former CEO Bradley I. Meier resigned effective February 22, 2013; Sean P. Downes became CEO and Jon W. Springer became COO. A November 2012 reinsurer lawsuit seeks injunctive relief and $13.0 million in liquidated damages; the court denied the injunction, but the possible loss amount and timing remain undetermined.
- UPCIC and APPCIC met stated Florida minimum capitalization and risk-based capital requirements at year-end. UPCIC retained an A Financial Stability Rating. No material non-routine litigation expected to affect results, financial condition, or liquidity was reported as of December 31, 2012.
Investor verification priorities
- Reconcile reported revenue, investment gains and losses, and the impact of the trading portfolio; assess whether investment performance is repeatable.
- Review reserve development and actuarial assumptions, particularly prior-year non-catastrophe losses, adjusting expenses, and the net reserve increase.
- Check catastrophe-reinsurance limits, retentions, renewal pricing, collateral arrangements, and counterparty recoverables; confirm that actual exposures remain within coverage.
- Track the recovery of the $6.3 million FIGA assessment and the effect of the lower quota-share cession on both earnings and retained catastrophe risk.
- Monitor Florida concentration, policy attrition, wind-mitigation discounts, approved rate increases, and resulting policyholder retention and underwriting margins.
- Verify subsequent developments in the $13.0 million reinsurer dispute, leadership transition, dividend policy, and the planned investment-portfolio transition.