Universal Insurance Holdings, Inc. — Q3 2012 Form 10-Q
Business and period: Vertically integrated property-and-casualty insurer focused on homeowners coverage, principally in Florida, distributed through independent agents. This unaudited quarterly report covers the three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless noted. Florida represented 96% of policies in force; total policies declined to 574,000 from 593,000 at December 31, 2011. The interim statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net premiums earned | $59.5m | $49.6m | $163.8m | $147.2m |
| Total premiums earned and other revenues | $74.5m | $49.4m | $194.7m | $167.4m |
| Operating costs and expenses | $60.6m | $48.2m | $151.5m | $130.0m |
| Income before taxes | $14.0m | $1.2m | $43.2m | $37.4m |
| Net income | $8.3m | $1.0m | $25.9m | $22.4m |
| Diluted EPS | $0.20 | $0.02 | $0.64 | $0.55 |
- Q3 net premiums earned rose 19.9%; nine-month net premiums earned rose 11.3%. Management attributed growth mainly to rate increases, partly offset by policy nonrenewals and Florida wind-mitigation credits.
- Net loss and loss-adjustment expense ratios were 61.0% for Q3 (59.1% prior year) and 56.1% for the nine months (55.3%). Management cited prior-year claims development, the $5.4m reinsurer-related write-off and $2.2m of pre-tax losses from Tropical Storm/Hurricane Isaac.
- Investment results were volatile: Q3 recorded $3.1m of realized losses and $8.1m of unrealized gains; nine months recorded $12.3m of realized losses and $11.5m of unrealized gains. Metals and mining accounted for a substantial share of trading-portfolio exposure and related gains or losses.
- Net investment income was $0.2m for Q3 and $0.2m for nine months, versus $0.1m and $0.4m, respectively, in 2011. G&A expense increased 28.9% in Q3 and 22.6% for the nine months, partly due to acquisition-cost accounting and lower ceded commissions.
Financial position, cash flow and capital
- At September 30, 2012, total assets were $979.9m, liabilities $813.9m and shareholders’ equity $166.0m. Cash and cash equivalents were $365.7m; restricted cash was $95.1m. Restricted funds include regulatory deposits and reinsurance collateral.
- Operating cash flow was $144.9m for the nine months, compared with $124.4m in 2011. The cash-flow statement includes substantial purchases and sales of trading securities, so operating cash flow should not be read as a simple measure of underwriting cash generation.
- Long-term debt was $20.6m, down from $21.7m at year-end. Management reported debt-to-total-capital of 11.0% and debt-to-equity of 12.41%; UPCIC was in compliance with surplus-note covenants and statutory capital requirements.
- Statutory capital and surplus was $125.7m at UPCIC and $9.1m at APPCIC. Neither insurer had capacity to pay ordinary dividends to the parent during 2012 based on 2011 statutory results; no subsidiary dividends were paid to the parent in the first nine months.
Changes, outlook and material risks
- Effective June 1, 2012, UPCIC reduced its quota-share cession from 50% to 45%, aiming to improve profitability but retaining more losses and reducing ceding commissions. Management described the 2012–2013 reinsurance program as more favorable overall, while emphasizing that losses beyond coverage and reinsurer nonpayment remain the company’s responsibility.
- Florida rate increases approved for 2012 were expected to average 14.9% for homeowners and 8.8% for dwelling-fire policies. The company expanded into Massachusetts and Maryland during 2012. It expected premiums to meet working-capital needs for at least the next 12 months; no quantified earnings or revenue guidance was provided.
- Management expected to declare another quarterly dividend of $0.08 per share in Q4 2012, subject to board discretion and financial and regulatory considerations. A $0.08 dividend declared in September was paid October 9.
- Adoption of revised insurance acquisition-cost accounting reduced first-quarter pre-tax earnings by $2.7m ($1.7m after tax, or $0.04 per diluted share), primarily changing the timing of expense recognition.
- The company wrote off a $5.4m receivable from a predecessor quota-share reinsurer after deciding collection costs and business considerations outweighed pursuing recovery. The after-tax impact was $0.08 per diluted share.
- Hurricane Sandy affected states where the insurers write business. At October 28, the company had wind-covered policies in several affected states but had not determined insured losses; Florida, where most wind policies were located, was not severely affected.
- Key risks include catastrophe and claims-severity exposure, reserve uncertainty, reinsurance availability and creditworthiness, heavy Florida concentration, regulatory limits on rates and distributions, market volatility, and potential changes to UPCIC’s Demotech financial-strength rating. UPCIC’s rating was affirmed at A in October 2012.
Investor verification priorities
- Track catastrophe losses, prior-period reserve development and the adequacy and collectability of reinsurance recoverables, including exposure to major reinsurers.
- Reconcile the reported profit improvement with volatile realized and unrealized investment gains/losses and the $5.4m reinsurer-receivable write-off.
- Assess the effect of the 45% quota-share cession, reinsurance costs and retained catastrophe exposure on underwriting profitability and statutory capital.
- Monitor Florida concentration, policy counts, rate approvals, wind-mitigation credits and claims arising from Hurricane Sandy.
- Confirm subsidiary capital and dividend restrictions, parent liquidity, and whether future shareholder dividends are declared and supported by cash flows.