Universal Insurance Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company is a vertically integrated property-and-casualty insurer focused primarily on homeowners coverage, predominantly in Florida. Interim financial statements are unaudited and were reviewed, not audited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total premiums earned and other revenues | $123.6m | $87.0m | $227.4m | $161.3m |
| Net premiums earned | $112.9m | $73.4m | $207.2m | $137.2m |
| Income before taxes | $41.2m | $30.4m | $79.2m | $53.5m |
| Net income | $24.7m | $17.1m | $47.0m | $30.7m |
| Diluted EPS | $0.69 | $0.49 | $1.31 | $0.87 |
| Net loss and LAE ratio | 35.2% | 37.7% | 35.4% | 39.7% |
- Q2 revenue rose 42.1% and net income rose 44.2%; six-month revenue rose 41.0% and net income rose 53.3%.
- Cash from operations was $207.5m for the first half, versus $98.2m a year earlier. Cash and equivalents were $213.3m at June 30, up from $115.4m at year-end.
- At June 30, total assets were $1,047.4m, stockholders’ equity $255.3m, and long-term debt $24.6m, down from $30.6m at year-end. Debt-to-equity was 9.6%, compared with 15.3% at year-end.
- Investments totaled $504.0m, including $359.6m of fixed maturities, $38.5m of equity securities, $100.0m of short-term investments, and $5.8m of investment real estate.
- Common dividends declared were $0.12 per share in each quarter. The company repurchased 200,000 common shares for approximately $5.1m during Q2.
Material changes and management commentary
- UPCIC reduced its quota-share cession from 45% in the 2013–14 program to 30% in 2014–15, then eliminated quota-share reinsurance effective June 1, 2015. This increases premiums retained and expected profitability, but also increases retained losses and catastrophe exposure and eliminates related ceding commissions.
- Management attributed premium growth to lower ceded premiums and increased policy count. Direct premiums written increased 13.6% in Q2 and 12.1% for the first half; net premiums written rose 68.6% and 62.4%, respectively, reflecting the reinsurance change as well as growth.
- Management said claims-processing improvements and lower third-party adjusting costs helped reduce loss ratios. General and administrative expenses increased 47.6% in Q2 and 40.6% for the first half, largely due to higher net deferred acquisition-cost amortization following changes to quota-share ceding and increased stock compensation and performance bonuses.
- Florida rate changes approved in April were expected to raise average homeowners rates about 2.2% statewide and dwelling-fire rates about 4.9%, with phased effective dates in 2015. Policy count was 592,278 at June 30; 89.9% were in Florida. Management reported other-state policy growth of 21.4% since year-end 2014.
Outlook, risks, and contingencies
- Management expects operating cash flows to meet working-capital needs for at least the next 12 months. No earnings or revenue guidance was provided.
- Management described the 2015–16 reinsurance terms as more favorable, but cautioned that results may not improve. UPCIC’s catastrophe program provides coverage up to $2.054bn, with a $35m pre-tax retention for each of the first three catastrophic events; estimated UPCIC catastrophe and FHCF costs were $261.6m. The company remains liable for insured losses if reinsurers fail to pay.
- Catastrophe frequency and severity, reserve adequacy, reinsurance availability and counterparty credit, Florida concentration, regulatory restrictions, investment-market movements, and debt covenants are key risks. Florida represented 89.9% of policies and 86.4% of insured value.
- Insurers met stated Florida statutory capital requirements; UPCIC had $213.0m and APPCIC $14.2m of statutory capital and surplus at June 30. No subsidiary dividends were paid to the parent in the first half; insurer dividends are subject to regulatory limits.
- Routine claims-related lawsuits were not considered material by management. An IRS examination was underway concerning a 2009 tax-year loss carryback. Management reported no material changes to previously disclosed risk factors and no material subsequent events requiring disclosure.
Investor facts to verify
- How much of the earnings and written-premium growth reflects underlying policy and rate growth versus reduced ceded reinsurance, and how will the fully retained quota-share risk affect future loss volatility?
- Review the 2015–16 catastrophe program’s attachment points, limits, reinstatement terms, total cost, and reinsurer credit quality against the company’s Florida exposure.
- Assess reserve development and claims trends, particularly given the increase in retained losses and the estimated nature and timing of unpaid claims.
- Reconcile the filing’s differing descriptions of operating footprint: the notes refer to homeowners coverage in ten states, while MD&A says the company was licensed in thirteen states.
- Monitor cash-flow quality: first-half operating cash flow benefited materially from movements in reinsurance balances, prepaid reinsurance, and unearned premiums.