Universal Insurance Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company is a vertically integrated property-and-casualty insurer, principally writing homeowners coverage through independent agents in eight states; Florida remains its largest market. Financial statements are unaudited; the independent accountant conducted an interim review, not an audit.
Financial performance and condition
Amounts below are in millions of dollars except per-share data, percentages, and policy counts.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total premiums earned and other revenues | $103.5 | $78.4 | $264.8 | $223.6 |
| Net premiums earned | $94.3 | $68.9 | $231.5 | $201.2 |
| Income before income taxes | $37.2 | $25.1 | $90.7 | $74.6 |
| Net income | $21.3 | $14.4 | $52.0 | $43.4 |
| Diluted EPS | $0.61 | $0.40 | $1.48 | $1.13 |
| Loss and LAE ratio | 36.3% | 41.1% | 38.3% | 39.8% |
- Q3 net income rose 48.1%; nine-month net income rose 19.9%. Diluted EPS growth also benefited from share repurchases.
- Net investment income was $0.6 million for Q3 and $1.6 million year to date. Nine-month realized investment gains were $5.4 million, versus $16.0 million in realized losses in 2013; the prior period also included $7.9 million of unrealized investment gains. The 2013 trading portfolio was liquidated in March of that year.
- Operating cash flow was $133.9 million for the nine months, compared with $183.8 million in 2013. Investing cash outflow was $31.1 million versus $368.2 million; financing cash outflow was $49.8 million versus $25.7 million. Cash and cash equivalents increased $53.1 million to $170.4 million from year-end 2013.
- At September 30, total assets were $940.3 million, total liabilities $751.1 million, and stockholders’ equity $189.1 million. Long-term debt was $30.8 million, down from $37.2 million at December 31, 2013. Management reported debt-to-total-capital of 14.0% and debt-to-equity of 16.3%.
- Investments, including cash and restricted cash, totaled $562.8 million. Restricted cash was $6.6 million. The company reported $411.9 million of unearned premiums and $136.9 million of unpaid losses and LAE.
- The nine-month effective tax rate was 42.6%, compared with 41.8% in 2013; Q3 rates were 42.6% in both years.
Material changes versus comparable periods
- Net premiums written increased 50.4% in Q3 and 45.6% year to date, mainly reflecting a lower quota-share cession rate. The company reduced the ceded share from 45% to 30% effective June 1, 2014, retaining more premium and risk. Direct premiums written were up 5.0% in Q3 and down 0.5% year to date.
- Net earned premiums grew 36.8% in Q3 and 15.0% year to date, principally because less premium was ceded. Lower cessions also increased the company’s retained losses and LAE and reduced ceding commissions. Commission revenue fell 25.3% in Q3 and 24.6% year to date.
- Losses and LAE increased to $34.2 million in Q3 and $88.7 million year to date, while the net loss ratios improved year over year to 36.3% and 38.3%, respectively. General and administrative expenses increased 29.1% in Q3 and 23.8% year to date, including higher net acquisition-cost amortization and share-based compensation.
- Policy count was 547,187 at September 30, up from 535,988 at December 31, 2013. Other-state policy count grew 27.6% from year-end; Florida represented 91.6% of policies. Florida homeowners rates had been reduced 2.4% for new business effective January 2014 and renewals effective March 2014.
- Stockholders’ equity increased from $175.6 million at year-end despite dividends and repurchases. The company repurchased 2.39 million shares for a total of $29.7 million during the first nine months, including purchases from former CEO Bradley Meier and open-market purchases. It declared $0.10 per-share dividends in each of the first three quarters.
Outlook, commentary, risks and unusual items
- Management said operating funds should meet liquidity needs for at least the next 12 months. It did not provide specific earnings or revenue guidance, and cautioned that interim results are not necessarily indicative of future periods.
- Management attributed improved results to growth initiatives, underwriting and claims-process improvements, investment-portfolio changes, and reduced quota-share cessions. Its stated investment aim is to increase return while maintaining liquidity and limiting risk.
- The 2014–2015 reinsurance program provides UPCIC catastrophe coverage up to $1.8 billion for Florida, with a stated $21 million pre-tax retention for each of the first three catastrophic events. Management estimated UPCIC’s catastrophe, FHCF and per-risk coverage cost at $173.8 million. APPCIC coverage is up to $40.8 million, with $2.5 million pre-tax retention for each of its first two events; estimated program cost is $5.0 million.
- Despite reinsurance, the insurers remain responsible for covered losses if reinsurers fail to pay, and for losses above or outside coverage. A major or multiple catastrophe, reinsurer insolvency, reserve deterioration, reinsurance availability or pricing, and Florida regulatory constraints are material risks. Florida’s mandated wind-mitigation discounts reduced in-force premium by 36.0% for UPCIC and 63.4% for APPCIC.
- Claims reserves reflected both favorable and unfavorable prior-year development. Management cited improved claim settlement rates, favorable development in most segments, and offsetting unfavorable development from closing previously litigious claims.
- Both insurance subsidiaries met Florida statutory capitalization requirements and debt covenants. UPCIC’s ordinary dividend capacity for 2014 was $0.29 million; APPCIC had no ordinary dividend capacity. No subsidiary dividends were paid to the parent during the nine-month period.
- Routine claims-related lawsuits were not considered material by management; no non-routine litigation was expected to materially affect results, financial condition, or liquidity. An IRS examination was underway concerning a 2012 securities-loss carryback applied to the 2009 tax year.
- UPCIC had agreed to buy an adjacent Fort Lauderdale office building for $5.99 million, with closing due no later than February 5, 2015, subject to conditions; management intended to use cash on hand. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the lower 30% quota-share cession rate continues to improve profitability after accounting for the greater retained catastrophe and claims exposure.
- Loss-reserve adequacy, including the development of previously litigious claims and the effects of changing settlement rates.
- Reinsurance coverage, pricing, recoverability, and counterparty strength, especially against Florida catastrophe exposure.
- Drivers and sustainability of higher general and administrative expenses, including acquisition-cost amortization and stock-based compensation.
- Investment-portfolio credit, interest-rate and equity-market exposure; the filing reports $3.0 million of gross unrealized losses at September 30, 2014 and a $4.1 million estimated fair-value decline under a hypothetical 20% equity-price drop.
- Cash available to the parent versus insurance-subsidiary funds subject to statutory and regulatory restrictions, as well as liquidity needs for dividends, debt service, repurchases, and the planned property purchase.