Universal Insurance Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; balance-sheet comparisons are against December 31, 2015. The interim financial statements are unaudited and were reviewed, not audited. The company is a vertically integrated property and casualty insurer, principally writing homeowners insurance through independent agents; Florida remained its dominant market.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Direct premiums written | $241.9m | $222.6m | $741.8m | $684.1m |
| Net premiums earned | $159.5m | $146.2m | $468.4m | $353.4m |
| Total premiums earned and other revenues | $172.4m | $157.0m | $506.7m | $384.4m |
| Income before taxes | $44.2m | $47.9m | $140.2m | $127.1m |
| Net income | $26.9m | $30.3m | $85.8m | $77.3m |
| Diluted EPS | $0.75 | $0.84 | $2.41 | $2.15 |
| Net loss and LAE ratio | 46.1% | 36.8% | 42.6% | 36.0% |
| General and administrative expense ratio | 34.3% | 37.8% | 35.6% | 36.8% |
Q3 net income margin was approximately 15.6%, versus 19.3% a year earlier; nine-month margin was approximately 16.9%, versus 20.1%. The filing does not present these margins as reported measures.
- Cash flow: Nine-month operating cash flow was $178.6m, compared with $241.2m in 2015. Investing activities used $146.9m and financing activities used $23.5m. Cash and cash equivalents ended at $205.2m, up from $197.0m at year-end 2015.
- Balance sheet and debt: Total assets were $1.234bn, liabilities $861.0m, and stockholders’ equity $373.3m. Long-term debt was $15.4m, down from $24.1m; debt-to-total-capital was 4.0%, versus 7.6% at year-end 2015. The company reported no borrowings under its $15m unsecured credit line.
- Investments and liquidity: Investments, including investment real estate, totaled $643.9m. Management said operating cash flows should meet working-capital needs for at least the next 12 months. Insurance subsidiaries met stated statutory capital requirements; statutory capital and surplus was $311.2m at UPCIC and $15.0m at APPCIC.
Changes versus comparable periods
- Q3 total revenue rose 9.8%, but net income fell 11.3% and diluted EPS fell 10.7%. Net losses and LAE increased 36.6%, including $11m of incremental severe-weather losses recorded in the quarter; the net loss ratio rose to 46.1%.
- For the first nine months, revenue increased 31.8%, net income 10.9%, and diluted EPS 12.1%. Net premiums earned grew 32.6%, reflecting organic growth and the prior-year comparison after elimination of quota-share reinsurance effective June 2015. Higher retained risk and severe-weather losses also increased reported losses and expenses.
- Direct premiums written grew 8.4% for the nine months. Florida premiums grew 5.7%; other-state premiums grew 44.3%, but represented only 9.3% of total direct written premium.
- Nine-month operating expenses rose 42.5%, including higher acquisition and operating costs. The expense ratio improved to 35.6%, partly due to higher premium volume and lower stock compensation.
Outlook, risks, and unusual items
- Catastrophe exposure: The 2016–2017 UPCIC reinsurance program cost $150m for private catastrophe coverage, plus $28.4m for reinstatement-premium protection; estimated FHCF premium was $110.1m. UPCIC reported a $35m net retention per catastrophe event under the described program, subject to coverage terms and limits. Reinsurance does not eliminate the company’s responsibility for losses or reinsurer credit risk.
- Post-quarter event: Hurricane Matthew affected several states in October. As of November 2, 2016, customers had reported approximately 5,657 claims. Management estimated after-tax charges of $14m–$18m in Q4 2016; this was an estimate, not a full-year earnings forecast.
- Other weather losses: The company recorded $19.5m of incremental 2016 severe-weather losses through Q3, including $8.5m in Q1 and $11m in Q3.
- Accounting adjustment and controls: An immaterial out-of-period adjustment corrected interim recognition of ceded premiums written, increasing prepaid reinsurance and reinsurance payable equally, with no effect on earnings, equity, or cash flows. The adjustment amount is not clearly provided in the filing. Management identified a control deficiency but concluded it was not a material weakness; disclosure controls were deemed effective.
- Capital actions: The company declared dividends of $0.14 per share each quarter in 2016 and had a $20m share-repurchase authorization through December 31, 2017. It had repurchased 95,000 shares under that authorization through September 30.
- Risks and contingencies: Key risks include Florida and catastrophe concentration, claim severity and reserve estimation, reinsurance availability and recoverability, investment-market exposure, regulation, and litigation. Management considered reasonably possible legal losses it could estimate to be immaterial; actual exposure could differ. No specific full-year earnings or revenue guidance was provided.
Most important facts for investors to verify
- Matthew’s reported claim count and estimated $14m–$18m after-tax Q4 cost as claims developed.
- Whether loss trends and reserve estimates remain consistent with assumptions after the elevated Q3 loss ratio and $19.5m of year-to-date severe-weather charges.
- Reinsurance limits, retentions, pricing, and collectability—especially given the company’s Florida concentration and retained catastrophe exposure.
- The size and interim-period presentation effects of the ceded-premium accounting adjustment, which the filing describes as immaterial but does not quantify clearly.
- Statutory capital, dividend constraints, and the effects of continued dividends and share repurchases on capital available to support underwriting growth.