Universal Insurance Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. The company is a vertically integrated property and casualty insurer, primarily writing homeowners coverage through independent agents. Florida remains its largest market. Interim financial statements were reviewed by the independent accountant, not audited.
Financial performance and position
- Premiums and revenue: Direct premiums written rose 10.0% to $270.0 million; net premiums earned increased 13.0% to $182.6 million. Total premiums earned and other revenues were $191.5 million, up 9.5%.
- Profit: Net income was $40.1 million, up 28.4% from $31.2 million. Diluted EPS increased to $1.12 from $0.86. Income before tax was $51.7 million.
- Loss and expense ratios: The net loss and LAE ratio improved to 41.6% from 43.7%; the expense ratio improved to 34.9% from 35.2%. These ratios total 76.5% before other items.
- Investment results: Net investment income rose to $4.8 million from $2.7 million. Securities sales produced a $2.6 million realized loss, and a newly recognized $5.1 million unrealized loss on equity securities reduced reported income. Comprehensive income was $36.0 million versus $33.7 million.
- Cash flow and liquidity: Operating cash flow was $52.3 million, compared with $72.0 million a year earlier. Cash and cash equivalents were $244.7 million at quarter-end; including restricted cash, the total was $247.3 million. Management said operating cash flows should meet working-capital needs for at least the next 12 months.
- Balance sheet and debt: Total assets were $1.296 billion, liabilities $830.6 million, and stockholders’ equity $465.1 million. Long-term debt, consisting of an insurance subsidiary surplus note, was $12.5 million; debt-to-total-capital was 2.6%. Total invested assets were $729.7 million.
- Capital returns: The company declared a $0.14-per-share dividend and repurchased 92,749 shares for approximately $2.7 million during the quarter.
Changes versus Q1 2017 and quarter-end 2017
- Direct premiums written grew 10.0%; Florida premiums rose 7.2%, while premiums in other states grew 32.7%. Other states’ share of direct written premium increased to 13.3% from 11.0%.
- Net income increased 28.4%, aided by premium growth, underwriting profitability, and a lower effective tax rate. The reported tax rate fell to 22.5% from 34.1%; the 2018 quarter included a $1.8 million tax benefit from stock-based awards.
- Q1 2018 had no weather-event losses beyond expected levels; Q1 2017 included $3.0 million of such losses.
- Compared with December 31, 2017, total assets fell $159.3 million and liabilities fell $184.4 million, while equity increased $25.1 million. Management attributed much of the decline in unpaid losses and reinsurance recoverables to settlement of Hurricane Irma claims.
Outlook, commentary, and risks
- No numerical earnings or revenue guidance was provided. The company described goals of profitable organic growth, geographic diversification, disciplined underwriting, and optimizing reinsurance. It began writing its first New Hampshire homeowners policy in April 2018.
- Management cited approximately $10.4 million of estimated pretax profit at its claims-adjusting subsidiary, primarily related to additional Hurricane Irma claims-handling revenue. This supported the quarter’s loss ratio and may not recur at the same level.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. Adoption of new equity-security accounting moved fair-value changes into earnings; the company recorded a $5.1 million unrealized equity loss in Q1. The filing also describes transition reclassifications between accumulated other comprehensive income and retained earnings.
- Key risks include catastrophe severity and frequency, reserve estimation, reinsurance availability and counterparty collectability, Florida concentration and regulation, investment-market volatility, and claims litigation, including challenges involving assignment of benefits. The company remains responsible for insured losses even if reinsurers fail to pay.
- Both insurance subsidiaries exceeded stated statutory capitalization requirements. However, dividend capacity is regulated: UPCIC could pay up to $36.2 million in ordinary dividends during 2018 without prior approval based on year-end calculations; APPCIC did not meet the requirements to pay ordinary dividends. Neither subsidiary paid dividends to its parent in Q1.
- Management stated that estimated reasonably possible legal losses it could quantify were immaterial, while noting actual losses could differ and its estimate is not a maximum exposure. The IRS notified the company of an examination of its 2015 tax return.
Investor verification priorities
- Check whether premium growth outside Florida continues and whether geographic expansion maintains underwriting profitability.
- Assess the sustainability of the 41.6% loss ratio, including the contribution from Irma-related claims-adjusting profits and the effect of assignment-of-benefits claims.
- Review catastrophe reinsurance coverage, renewal pricing, retentions, recoverables, and reinsurer credit exposure ahead of the June 1 renewal cycle.
- Separate recurring operating performance from equity-market marks, realized securities losses, tax benefits, and Irma-related service-company profits.
- Monitor statutory capital, subsidiary dividend restrictions, cash generation, and the remaining authorization under the share-repurchase program.