UVE

Business Context and Reporting Period

Company: Universal Insurance Holdings, Inc. (UIH)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: UIH is a vertically integrated insurance holding company primarily engaged in homeowners' property and casualty insurance through its subsidiary, Universal Property & Casualty Insurance Company (UPCIC). As of December 31, 2010, 98% of in-force policies were located in Florida. The company also operates a premium finance subsidiary (Atlas Premium Finance), a reinsurance intermediary (Blue Atlantic Reinsurance), and a second insurance subsidiary (American Platinum) which had not yet underwritten policies as of year-end.

Key Financial Metrics

Note: The Combined Ratio is net of reinsurance. A ratio below 100% indicates underwriting profitability.

Material Changes vs. Prior Period

• Revenue Growth: Net premiums earned increased 20.3% to $170.4 million, driven by an increase in direct premiums written (up 18.4%) and a proportionally lower increase in ceded premiums due to reinsurance program changes.
• Profitability Improvement: Net income rose 28.5% to $37.0 million. The statutory combined ratio improved significantly from 139% in 2009 to 113% in 2010, reflecting better loss experience and expense management.
• Loss Ratios: The net loss and LAE ratio decreased from 74.9% in 2009 to 66.5% in 2010. Direct loss and LAE ratio improved from 39.6% to 37.2%.
• Investment Income: Net investment income decreased 31.7% to $0.99 million due to a change in the composition of the investment portfolio. However, net realized gains on investments increased to $27.7 million.
• Accounting Change: Effective July 1, 2010, the company reclassified its investment portfolio from "available-for-sale" to "trading," causing unrealized gains and losses to be recognized in current earnings rather than other comprehensive income.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Rate Increases: The company received approval for premium rate increases averaging approximately 14.9% statewide in Florida, effective February 2011 for new business and March 2011 for renewals. Management expects these increases to have a favorable effect on future premiums.
• Wind Mitigation Credits: State-mandated wind mitigation discounts continue to reduce premiums, affecting 54.2% of policyholders as of year-end, reducing in-force premiums by 32.3%. Management notes the rate of decrease in premiums due to these discounts was less in 2010 than in 2009.
• Capital: The company contributed $30 million to UPCIC in 2010 to maintain its "A" financial stability rating from Demotech, Inc.

• Catastrophe Exposure: The company is highly exposed to hurricane and windstorm losses, primarily in Florida. While no catastrophic events occurred in 2010, the company relies heavily on reinsurance (including the Florida Hurricane Catastrophe Fund) to manage this risk. There is no assurance reinsurance will be available at current levels or costs.
• Reserve Uncertainty: Establishing liabilities for unpaid losses involves significant estimation. The company recorded a $5.9 million increase in prior year loss reserves in 2010 due to actual loss development on non-catastrophe losses.
• Regulatory Environment: The company is subject to extensive Florida insurance regulation, including rate approvals and capital requirements. Legislative changes regarding Citizens Property Insurance Corporation and the FHCF could impact profitability.
• Internal Control Weakness: Management identified a material weakness in internal controls related to the detection of a coding error in investment transactions by an external provider. Remediation steps were taken, and the error was deemed isolated.

Investor Verification Checklist

• Reinsurance Adequacy: Verify the sufficiency of the reinsurance program (specifically the FHCF capacity and private market coverage) against the 127-year Probable Maximum Loss (PML) model.
• Reserve Development: Monitor future loss development on prior years, particularly non-catastrophe losses, which drove a $5.9 million reserve increase in 2010.
• Rate Implementation: Track the actual impact of the approved 14.9% rate increase on new and renewal business starting in 2011.
• Wind Mitigation Impact: Assess the ongoing erosion of premium revenue due to state-mandated wind mitigation credits, which affected over half of the policy base.
• Investment Strategy: Review the performance and risk profile of the reclassified "trading" investment portfolio, which now impacts net income directly through unrealized gains/losses.