Universal Insurance Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. The company is a vertically integrated property-and-casualty insurer, primarily writing homeowners coverage through independent agents. Florida remains its largest market. The interim financial statements were reviewed by the independent accountant, not audited.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Direct premiums written | $296.2 million | $271.9 million | $541.6 million | $499.9 million |
| Net premiums earned | $169.0 million | $156.5 million | $330.6 million | $308.9 million |
| Total premiums earned and other revenues | $185.5 million | $169.8 million | $360.4 million | $334.2 million |
| Losses and loss adjustment expenses | $80.2 million | $60.1 million | $150.8 million | $126.2 million |
| Net income | $29.4 million | $33.6 million | $60.6 million | $58.9 million |
| Diluted earnings per share | $0.82 | $0.94 | $1.68 | $1.65 |
| Net loss and LAE ratio | 47.4% | 38.4% | 45.6% | 40.9% |
| G&A expense ratio | 33.9% | 35.0% | 34.6% | 36.3% |
- Cash flow: First-half operating cash flow was $141.0 million, investing cash flow was positive $20.3 million, and financing cash flow was negative $21.5 million. Cash and cash equivalents rose to $245.5 million from $105.7 million at year-end.
- Balance sheet: Total assets were $1.370 billion and stockholders’ equity was $421.1 million. Long-term debt was $13.6 million, down from $15.0 million. Debt-to-total-capital was 3.1%, versus 3.9% at year-end.
- Investments: Invested assets totaled $634.9 million. Fixed maturities were $609.9 million; the portfolio’s average credit rating was AA- during the first half.
- Dividends and buybacks: The company declared dividends of $0.14 per share in each quarter. It repurchased about 354,000 shares for $8.9 million during the first half.
Material changes and management commentary
- Second-quarter revenue increased 9.2%, but net income fell 12.7%, as losses and LAE rose 33.5%. Management attributed higher claims costs to more severe weather than expected, a higher 2017 accident-year core loss ratio, increased premium volume, and $1.1 million of net adverse prior-year development, principally to strengthen reserves related to Hurricane Matthew.
- For the first half, revenue increased 7.8% and net income increased 2.9%. Losses and LAE rose 19.5%, including $1.2 million of net adverse prior-year development, principally related to Hurricane Matthew. The first-half effective tax rate fell to 36.4% from 38.7%, partly reflecting $0.8 million of share-based compensation tax benefits and a $1.2 million tax recovery credit.
- Direct written premiums grew 8.9% in Q2: Florida increased 5.6% and other states 42.2%. For the first half, growth was 8.3% overall, with Florida up 5.0% and other states up 43.4%. Management reported reaching $1 billion of in-force premium and writing its first New Jersey policy.
- Management said expense ratios improved through scale and that operating cash flows should meet working-capital needs for at least the next twelve months. No specific earnings or revenue guidance was provided.
Reinsurance, risks and contingencies
- The 2017–2018 reinsurance program began June 1, 2017. UPCIC’s private catastrophe reinsurance cost was $155.5 million, plus $25.7 million for reinstatement premium protection; the estimated Florida Hurricane Catastrophe Fund premium was $116.6 million. Management described up to $2.65 billion of first-event coverage for UPCIC when FHCF and third-party coverage are combined, with a $35 million net retention subject to program terms and limits. Losses above available coverage remain the company’s responsibility.
- Prepaid reinsurance premiums rose to $285.5 million from $124.4 million, and reinsurance payable rose to $311.9 million from $80.9 million, mainly reflecting the renewed program and installment payment obligations.
- The company is highly exposed to Florida weather and catastrophe risk. Other identified risks include reserve estimation, reinsurance availability and counterparty credit, pricing and claims severity, regulation, investment-market movements, and dependence on independent agents. Growing non-Florida business may diversify exposure but management noted it carries a higher loss ratio than Florida business.
- UPCIC filed for an overall 3.4% Florida rate increase, subject to regulatory approval. The revolving credit facility expired July 31, 2017; no amounts had been borrowed, and the company was discussing a replacement facility with banks.
- Management said pending litigation and reasonably estimable possible losses were not expected to be material, while noting actual outcomes could differ and exposure could exceed accrued amounts. Insurance-subsidiary dividends are restricted; no dividends were paid to the parent in the first half.
Important facts for investors to verify
- Whether elevated weather-related losses and adverse development persist, and how reserves for Hurricane Matthew and current-year claims develop.
- Actual catastrophe losses, recoveries, reinstatement costs, and reinsurer collectability under the renewed reinsurance program.
- Regulatory disposition and realized effect of the proposed 3.4% Florida rate increase.
- Whether the company renews or replaces the expired credit facility, and whether cash and liquidity remain adequate under severe-catastrophe scenarios.
- Whether rapid growth outside Florida remains profitable given management’s disclosure of higher loss ratios in those markets.
- The effect of investment-market changes and tax items on earnings; first-half results include discrete tax benefits and investment gains.