Universal Insurance Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The interim financial statements were reviewed by the independent accountant, not audited.
Business context
Universal is a vertically integrated property-and-casualty insurer focused primarily on residential homeowners’ insurance, distributed through independent agents and online channels. It operated in 18 states, with the business still concentrated in Florida. Catastrophe exposure is managed through reinsurance.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net premiums earned | $206.6 million | $188.9 million | $626.7 million | $563.8 million |
| Total premiums earned and other revenues | $229.6 million | $206.2 million | $699.9 million | $607.4 million |
| Losses and loss adjustment expenses | $132.6 million | $85.9 million | $359.0 million | $251.7 million |
| Net income | $20.1 million | $37.4 million | $97.6 million | $123.5 million |
| Diluted earnings per share | $0.59 | $1.04 | $2.82 | $3.45 |
| Net loss ratio | 64.3% | 45.5% | 57.3% | 44.6% |
- Direct premiums written increased 10.9% in Q3 to $342.9 million and 7.4% year to date to $990.1 million. Other-state premium growth outpaced Florida growth.
- General and administrative expense was $69.2 million in Q3 and $208.4 million year to date. The reported expense ratio was 33.5% for Q3 and 33.3% year to date.
- Net investment income rose to $7.6 million in Q3 and $23.2 million year to date. Year-to-date net realized investment losses were $13.2 million, partly offset by $22.4 million of net unrealized gains on equity securities.
- Operating cash flow was $56.6 million for the first nine months, versus $224.5 million in 2018. Investing activities provided $7.1 million; financing activities used $70.5 million, including $49.9 million of treasury-stock purchases and $16.6 million of common dividends.
- At September 30, cash and cash equivalents were $159.6 million, restricted cash was $2.6 million, and invested assets totaled $937.4 million. Stockholders’ equity was $569.0 million; long-term debt was $10.3 million, a surplus note. Debt was 1.8% of total capital.
Material changes and drivers
- Despite premium and revenue growth, net income fell 46.1% in Q3 and 21.0% year to date. Higher losses and LAE were the primary pressure; year-to-date operating costs rose 28.0%, faster than revenue.
- Management attributed increased claims costs to business growth and mix, a higher core loss ratio (37% versus 33% in 2018), weather, and a reduced financial benefit from ceded claim-settlement fees. The net benefit from claims management and ceded claim fees was $3.2 million year to date, compared with $35.5 million in 2018.
- Year-to-date weather losses beyond expected levels were $22.0 million net, compared with $12.5 million in 2018. Q3 included $15.0 million of such losses, principally related to Hurricane Dorian and other weather events.
- Prior-year reserve development was $305.3 million gross and $301.6 million ceded, or $3.7 million net, year to date. The gross development principally reflected higher estimated Hurricane Irma losses, which were fully ceded. Net adverse development primarily reflected a reallocation of Hurricane Michael recoveries that increased retained losses; the filing reports no change to gross Hurricane Michael losses.
- Book value per share increased to $17.13 from $14.42 at December 31, 2018. The company repurchased 1.77 million shares for $49.9 million and declared $0.48 per common share in dividends during the first nine months.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said operating cash flows should meet working-capital needs for at least the next 12 months.
- The 2019–2020 reinsurance program met Florida regulatory requirements. Management projected program costs of $420 million, about 33.5% of estimated direct premiums earned for the treaty year. The program’s UPCIC first-event all-states tower was $3.32 billion; coverage remains subject to retentions, terms and reinsurer performance.
- Reinsurance payable and multi-year commitments totaled $501.3 million at quarter-end; disclosed future multi-year premiums included $117.6 million in 2020 and $83.6 million in 2021. Insurers remain responsible for covered claims if reinsurers fail to pay.
- Key risks include catastrophe severity and frequency, reserve estimation, reinsurance availability and collectibility, Florida concentration, claims inflation and assignment-of-benefits litigation, competition, regulation, investment-market exposure, and subsidiary dividend restrictions. Management cited Florida’s 2.6% rate increase and revised underwriting and claims practices in response to loss trends; it was still evaluating the effect of the state’s HB 7065 assignment-of-benefits law.
- Management considered reasonably possible legal losses that it could estimate to be immaterial, while noting actual outcomes could differ and exposure could exceed accrued amounts. Both insurance subsidiaries exceeded stated minimum statutory capitalization requirements at September 30, 2019.
Investor verification priorities
- Track core loss trends, weather claims, reserve development, and whether the lower claims-management benefit persists.
- Verify reinsurance program cost, retentions, coverage availability, recoverable collection, and obligations under multi-year contracts.
- Assess the effects of Florida rate actions, HB 7065, assignment-of-benefits claims, and geographic expansion on retention and loss ratios.
- Reconcile the large year-over-year decline in operating cash flow with claims and reinsurance-payment timing, and monitor liquidity against contractual obligations.
- Separate recurring investment returns from equity-market gains, realized losses, and property-sale gains when evaluating earnings quality.