Universal Insurance Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The interim statements were reviewed by the independent accountant, not audited. The company is a property-and-casualty insurer focused primarily on homeowners insurance, with most policies in Florida.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total premiums earned and other revenues | $103.8 million | $74.3 million; up 39.7% |
| Net premiums earned | $94.4 million | $63.8 million; up 47.9% |
| Income before taxes | $38.0 million | $23.1 million; up 64.5% |
| Net income | $22.3 million | $13.5 million; up 64.8% |
| Diluted EPS | $0.62 | $0.38 |
| Loss and LAE ratio | 35.6% | 42.0% |
| Operating cash flow | $60.7 million | $29.9 million |
- Net income margin was approximately 21.5%, compared with 18.2% a year earlier. Net investment income rose to $0.9 million from $0.5 million; realized investment gains declined to $0.2 million from $0.9 million.
- At March 31, cash and cash equivalents were $182.3 million, versus $115.4 million at year-end. Investments totaled $406.8 million, down from $423.6 million.
- Total assets were $967.2 million; total liabilities were $725.2 million; stockholders’ equity was $241.9 million. Long-term debt was $31.8 million, up from $30.6 million. Management reported debt-to-total-capital of 11.6% and debt-to-equity of 13.1%.
- Net cash provided by investing activities was $9.9 million, including investment purchases and sales, maturities, property and equipment purchases, and a $1.0 million business acquisition. Financing activities used $3.6 million, including $4.2 million of common dividends.
Material changes and management commentary
- Net written premiums increased 49.6% to $105.1 million. Direct premiums written rose 10.3%, while ceded premiums written fell 12.5%. Management attributed much of the increase in earned premiums to lower reinsurance cessions and costs, as well as policy growth.
- Effective June 2014, the company reduced UPCIC’s quota-share cession rate from 45% to 30%. Management expects retaining more premium to improve profitability, while acknowledging that it also increases retained catastrophe and other loss exposure and reduces ceding commissions.
- Losses and LAE increased 25.2% to $33.6 million, but the net loss ratio improved to 35.6% from 42.0%. General and administrative expenses rose 32.2% to $32.2 million, partly due to higher net policy acquisition cost amortization, stock-based compensation, and performance bonus accruals.
- Policy count reached 571,350 at March 31, up from 556,348 at December 31. Florida accounted for 90.6% of policies; out-of-state policy count grew 9.1% from year-end and 38.0% year over year.
- In April 2015, Florida regulators approved average rate increases of approximately 2.2% for homeowners and 4.9% for dwelling fire policies, with new-business and renewal effective dates beginning in April and May/June, respectively.
Outlook, risks, and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management stated that operating cash flows should meet working-capital needs for at least the next 12 months.
- Catastrophe losses, severe weather, reserve uncertainty, reinsurance availability and cost, reinsurer credit risk, Florida concentration, regulatory limits, and investment-market changes are key risks. The company remains responsible for covered losses even if reinsurers fail to pay.
- Under the 2014–2015 program, UPCIC retained $21 million for each of the first three Florida catastrophe events, with stated coverage up to $1.794 billion. Management cautioned that catastrophe or reinsurer failure could materially affect solvency, results, and liquidity.
- The company acquired assets from Aplin Peer, an independent claims adjusting company, for $1.0 million; it recorded $2.3 million of goodwill and expects the acquisition to support claims-process efficiency. The filing says the transaction was not material.
- An amended agreement with Ananke removed a redemption feature on shares sold in 2014; $19.0 million was reclassified from contingently redeemable stock to permanent equity. No consideration was exchanged.
- Routine claims-related lawsuits were not considered material by management. An IRS examination was underway concerning a loss carryback to the 2009 tax year. The company reported effective disclosure controls and compliance with applicable debt covenants.
Important facts for investors to verify
- Whether the lower quota-share cession rate continues to improve earnings after accounting for increased retained losses and reduced reinsurance commissions.
- Current catastrophe exposure, reinsurance protection, program renewal terms, and reinsurer credit quality, particularly given the company’s Florida concentration.
- Claims development and reserve adequacy, including whether the improved loss ratio is sustainable.
- Cash and investment liquidity at the insurance subsidiaries, statutory capital requirements, and limits on dividends to the holding company.
- Effects of approved Florida rate increases, expansion outside Florida, and the Aplin Peer acquisition on future growth and expenses.