Universal Insurance Holdings, Inc. — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The company provides property and casualty insurance, primarily homeowners coverage, through independent agents. Its business is concentrated in Florida. Interim financial statements were reviewed, not audited.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2013 | Q1 2012 / prior date | Change |
|---|---|---|---|
| Net premiums earned | $65.4 | $48.6 | +34.5% |
| Total premiums earned and other revenues | $67.5 | $60.2 | +12.0% |
| Net income | $12.0 | $9.9 | +21.1% |
| Diluted EPS | $0.29 | $0.24 | Up $0.05 |
| Loss and LAE ratio, net | 40.5% | 53.8% | Improved 13.3 percentage points |
| Operating cash flow | $150.4 | $95.3 | +$55.1 |
| Cash and cash equivalents | $482.9 | $347.4 at Dec. 31, 2012 | +$135.5 |
| Total assets | $964.1 | $925.7 at Dec. 31, 2012 | +$38.4 |
| Total liabilities / stockholders’ equity | $792.0 / $172.1 | $762.2 / $163.5 at Dec. 31, 2012 | — |
| Long-term debt | $19.9 | $20.2 at Dec. 31, 2012 | -$0.4 |
Income before taxes was $19.8 million versus $16.2 million; income tax expense was $7.8 million versus $6.4 million. Net income as a percentage of reported total revenues was approximately 17.7%, compared with 16.4%. Net investment income was only $0.012 million. Reported total revenues include trading-investment gains and losses.
Material changes and management commentary
- Direct premiums written rose 7.4% to $204.1 million, while ceded premiums written fell to $141.3 million from $163.4 million. Net premiums written increased 136.4% to $62.8 million. Management attributed stronger earned premiums principally to rate increases and a lower quota-share cession rate.
- The quota-share cession rate fell from 50% to 45% under the program effective June 1, 2012. This retains more risk and premium but reduces ceding commissions.
- Net losses and LAE were nearly flat at $26.5 million. The improved net loss ratio reflected higher net earned premiums and a lower cession rate; prior-year reserve development was a small favorable $0.2 million.
- General and administrative expenses increased 18.9% to $21.2 million. Management cited higher deferred acquisition-cost amortization, bonuses and legal expenses, partly offset by recoveries of Florida Insurance Guaranty Association assessments.
- The company liquidated all trading equity securities during the quarter. Net realized investment losses were $16.0 million and unrealized gains were $7.9 million, producing an $8.2 million net trading-portfolio loss versus a $1.7 million gain in Q1 2012. It transferred remaining fixed maturities to available-for-sale and said it sought a steadier investment-income stream with less market volatility.
- Policies in force declined to 562,000 from 567,000 at year-end. About 95% were in Florida, 98% included wind coverage, and 28% had wind coverage in South Florida. Management cited nonrenewal of certain policies and noted continuing premium effects from mandated wind-mitigation discounts.
- Florida approved average rate increases of approximately 14.1% for homeowners and 14.5% for dwelling-fire policies, with new-business and renewal effective dates beginning in January and March 2013.
Liquidity, capital, debt and distributions
- Operating cash flow was $150.4 million, but included substantial investment-sale activity and movements in operating balances; cash rose $135.5 million in the quarter. Cash included a $21.99 million receivable for securities sold that settled shortly after quarter-end.
- Restricted cash fell to $2.7 million from $33.0 million, largely following release of deposits associated with a terminated reinsurance arrangement. Management said premiums should meet working-capital requirements for at least the next 12 months.
- Total capital was $192.0 million: $172.1 million equity and $19.9 million debt. Debt-to-total-capital was 10.4%, and debt-to-equity was 11.6%.
- The company entered into a $10 million unsecured Deutsche Bank revolving facility, maturing March 27, 2015, at a rate elected between LIBOR plus 5.50% and the bank’s prime rate plus 3.50%. No amount had been drawn as of March 31 or May 1, 2013; the company reported covenant compliance.
- Insurance subsidiaries met Florida capital and premium-to-surplus requirements. However, UPCIC and APPCIC had no capacity to pay ordinary dividends to their parent during 2013 based on 2012 statutory results; no subsidiary dividends were paid in Q1.
- A $0.08-per-share dividend declared in February was paid April 5. A further $0.08 dividend was declared April 18, payable June 17.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management’s stated liquidity view was that premiums should cover working-capital needs for at least 12 months; it cautioned that quarterly results are not necessarily indicative of full-year results.
- Catastrophe exposure is substantial: insured wind values in force were approximately $126.9 billion. The company remains responsible for losses above reinsurance protection and for amounts a reinsurer fails to pay. Reinsurer credit and reinsurance availability or pricing are material risks.
- Business concentration in Florida, severe weather and catastrophe risk, claims severity and reserve adequacy, regulatory limits on rates and dividends, wind-mitigation discounts, investment volatility, and competition are highlighted risks. The filing reports 95% of policies in Florida.
- On April 1, 2013, the company agreed to repurchase 4 million shares from former CEO Bradley Meier at $4.02 per share, below the then-current market price. The initial 2 million shares were repurchased that day; the remaining 2 million were to be repurchased by June 1. The agreement also grants a right of first refusal on certain future share transfers through December 31, 2014.
- Leadership changed in February: Bradley Meier resigned as chairman, president and CEO; Sean Downes became president and CEO. Routine litigation was not expected by management to materially affect results, financial condition or liquidity. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Adoption of updated insurance-contract acquisition-cost guidance had reduced Q1 2012 earnings by $2.7 million pretax, $1.7 million after tax, or $0.04 per diluted share; this timing-related charge affects comparability with Q1 2013.
Important facts for investors to verify
- How the lower 45% quota-share cession and upcoming reinsurance renewals affect retained catastrophe risk, earnings and recoverables.
- Whether approved rate increases offset wind-mitigation discounts and support premium growth despite the decline in policies in force.
- The sustainability and composition of the unusually high quarterly operating cash flow, including investment-sale proceeds and settlement timing.
- The consequences of the trading-portfolio liquidation, investment-adviser mandate and shift toward available-for-sale investments for future earnings volatility and investment income.
- Completion, funding and share-count effects of the remaining 2 million-share repurchase, alongside dividends and subsidiary restrictions on upstream distributions.
- Reserve adequacy and reinsurance collectability, including the company’s Florida concentration and exposure to severe weather.