Universal Insurance Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company is a vertically integrated property and casualty insurer focused mainly on homeowners coverage; Florida remains its largest market. Financial statements are unaudited interim statements reviewed by the independent accountant, which did not express an audit opinion.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Direct premiums written | $358.0m | $342.8m | $647.2m | $612.8m |
| Net premiums earned | $210.4m | $192.3m | $420.1m | $374.8m |
| Total revenues | $233.7m | $209.8m | $470.3m | $401.3m |
| Losses and loss adjustment expenses | $113.3m | $89.8m | $226.4m | $165.8m |
| Net income | $37.3m | $46.1m | $77.4m | $86.1m |
| Diluted EPS | $1.08 | $1.29 | $2.22 | $2.42 |
| Net investment income | $7.4m | $5.8m | $15.6m | $10.6m |
| Operating cash flow | — | $56.0m | $158.1m |
- Q2 net loss ratio was 53.9%, up from 46.7%; the six-month ratio was 53.9%, versus 44.2%. Management cited higher core losses, business growth, and fewer ceded claim-adjustment-fee benefits as hurricanes claims concluded.
- Q2 general and administrative expense was $69.5m, or 33.0% of net earned premiums, versus $58.7m and 30.5%. The 2018 comparison included a $6.5m premium-tax refund; excluding that benefit, management said the Q2 2019 expense ratio improved 0.9 percentage points.
- Six-month net realized investment losses were $13.1m, mainly from equity-security sales, partly offset by $21.8m of unrealized equity gains. Q2 realized investment losses were $1.6m, while unrealized equity gains were $3.8m.
Balance sheet, liquidity and capital
- At June 30, total assets were $2.064bn, stockholders’ equity $566.1m, cash and cash equivalents $181.6m, and invested assets $942.3m. Book value per share was $16.57, up from $14.42 at year-end 2018.
- Long-term debt was $10.7m, consisting of a surplus note; debt-to-total capital was 1.8%. The company reported compliance with the note terms and statutory capital requirements.
- Six-month cash flow was $56.0m from operations, $(2.1)m from investing, and $(38.7)m from financing. Financing included $24.2m of share repurchases and $11.2m of common dividends.
- Management stated it expects operating cash flows to meet working-capital requirements for at least the next twelve months. This is subject to claim payments, reinsurance payments and other liquidity needs.
- Prepaid reinsurance premiums rose to $382.0m and reinsurance payable to $424.2m, primarily reflecting the June 1 renewal of the 2019–2020 program. Reinsurance recoverable was $331.6m.
- The company repurchased 806,382 shares for approximately $24.2m during the first half. A new authorization permits up to $40m of repurchases through December 2020. The quarterly common dividend was $0.16 per share.
Material changes, outlook and risks
- Premium growth was 4.4% in Q2 and 5.6% for the first half. Other-state direct premiums written grew 28.7% in Q2 and 29.9% year to date; Florida growth was 0.5% and 1.8%, respectively. The company was actively writing in 17 states outside Florida and received approval to write in Wisconsin.
- Despite revenue growth, Q2 net income fell 19.1% and first-half net income fell 10.1% year over year, largely as loss and operating costs rose faster than revenue. Diluted EPS declined 16.3% in Q2 and 8.3% for the first half.
- The 2019–2020 reinsurance program provides UPCIC a $3.28bn first-event tower, with a $43m all-states retention. Total program cost for both insurance entities was projected at $417m, approximately 33.3% of estimated direct premiums earned for the treaty year. The filing also notes future multi-year reinsurance commitments of $117.6m in 2020 and $83.6m in 2021.
- Management raised its current-year core loss ratio estimate from 33% to 37%, citing assignment-of-benefits (AOB) claims, claim severity and frequency trends, and expansion into states with generally higher non-catastrophe loss ratios. It filed a 2.6% Florida rate increase, effective April 2019 for new business and May 2019 for renewals, and changed some new-business binding guidelines. Management was evaluating Florida HB 7065, signed May 23, 2019, which aims to curtail AOB abuse.
- Prior-year reserve strengthening was $100.2m gross and $99.7m ceded for the first half, leaving $0.5m net adverse development; management associated it principally with Hurricanes Matthew, Florence and Irma. Ultimate reserve outcomes remain uncertain.
- Principal risks include Florida concentration, catastrophe and weather exposure, claims inflation and litigation, reinsurance availability and collectability, investment-market changes, regulation, and reliance on subsidiary distributions. Management reported no material risk-factor changes from the 2018 Form 10-K. It reported no material adverse effect expected from pending legal matters, while cautioning that actual losses could differ from estimates.
- No specific earnings or premium guidance was provided. Management noted that interim results are not necessarily indicative of full-year results. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track whether the higher 37% core loss ratio, Florida rate actions and AOB legislation translate into improved claim trends and underwriting results.
- Verify catastrophe-season losses, reserve development and the timing and collectability of the $331.6m reinsurance recoverable, including counterparty exposure.
- Assess the cost, coverage and installment-payment demands of the renewed reinsurance program, including the projected $417m cost and multi-year commitments.
- Review investment results and portfolio credit quality: management reported an average fixed-income rating of A+ during the period, compared with AA− in the comparable 2018 period.
- Monitor operating cash flow, statutory insurer capital and surplus, subsidiary dividend restrictions, and use of cash for buybacks and dividends.