Universal Insurance Holdings, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in millions of dollars unless stated otherwise. The interim financial statements were reviewed, not audited, by the independent accountant.
Business context
Universal is a vertically integrated property and casualty insurer, principally writing homeowners insurance through independent agents. Florida accounted for 98% of its 595,000 policies in force at September 30, 2011; 32% were in Miami-Dade, Broward and Palm Beach counties. The company uses reinsurance to manage catastrophe exposure.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net premiums earned | $49.6 | $48.8 | $147.2 | $123.5 |
| Total premiums earned and other revenues | $49.4 | $70.7 | $167.4 | $171.8 |
| Income before tax | $1.2 | $21.3 | $37.4 | $50.3 |
| Net income | $1.0 | $13.1 | $22.4 | $30.8 |
| Diluted EPS | $0.02 | $0.32 | $0.55 | $0.76 |
- Net written premiums rose 7.4% in Q3 to $47.4 million; nine-month net written premiums increased 0.6% to $164.4 million. Nine-month net premiums earned grew 19.2%.
- Investment results drove the earnings decline: Q3 unrealized investment losses were $16.0 million, versus gains of $6.3 million a year earlier. Nine-month unrealized losses were $23.0 million, versus gains of $6.3 million. Realized gains were $5.9 million in Q3 and $12.5 million year to date.
- Net loss and loss-adjustment-expense ratio improved to 59.1% from 60.1% in Q3 and to 55.3% from 63.0% for nine months. Prior-year loss development was adverse: $4.4 million of prior-year losses incurred in the nine-month period, compared with a small prior-year benefit in 2010.
- At September 30, cash and cash equivalents were $328.8 million, investments at fair value were $153.5 million, total assets were $966.9 million, and stockholders’ equity was $156.9 million. Cash increased from $147.6 million at year-end 2010.
- Nine-month operating cash flow was $176.0 million versus $131.9 million. The company classified trading-security purchases and sales in operating cash flows; net proceeds from those transactions were $89.0 million, so reported operating cash flow includes substantial investment-portfolio activity.
- Long-term debt was $22.1 million, down from $23.2 million. Management reported debt-to-total-capital of 12.3% and debt-to-equity of 14.1%. The balance sheet also showed a $34.9 million bank overdraft.
- Common dividends declared were $0.08 per share in Q3 and $0.18 per share for the first nine months. A $0.08 dividend was paid October 6, 2011.
Material changes, outlook and risks
- Management attributed higher earned premiums to policy growth and prior rate increases, partly offset by growing wind-mitigation credits. Policies eligible for those credits reached 57.1% by September 30.
- Q3 total revenues fell 30.1%, and net income fell 92.5%, principally because the trading portfolio’s market-value losses are recorded in earnings. Nine-month net income declined 27.2%.
- UPCIC’s 2011–2012 reinsurance program included 50% quota-share coverage on wind premiums and catastrophe coverage. The filing states maximum pre-tax net liability of $157.6 million for the first catastrophe event, up to $1.781 billion of losses. Coverage depends in part on reinsurer performance and Florida Hurricane Catastrophe Fund capacity.
- On October 28, 2011, UPCIC deposited $45.5 million with the Florida Department of Financial Services for anticipated T25 reinsurance premiums. Payments to T25 were expected in January and April 2012, unless the contract was commuted; the company said it might propose commutation in December.
- Homeowners and dwelling-fire rate filings submitted in September sought average statewide increases of 14.8% and 8.8%, respectively, and changes to sinkhole coverage. Both filings were pending regulatory approval. Georgia homeowners rates and forms had been approved, with business expected to begin in the near future.
- Management said premiums should meet working-capital needs for at least 12 months and expected operating funds to continue meeting liquidity needs, while noting there could be no assurance. Key risks include catastrophe losses beyond reinsurance, reserve-estimation uncertainty, reinsurance availability and cost, Florida concentration, regulatory decisions, and investment-market volatility.
- A new insurance acquisition-cost accounting standard was expected to be adopted January 1, 2012. Management estimated it could reduce net deferred acquisition costs by 20%–30%, with a corresponding charge to earnings; evaluation was not complete.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Routine claims-related litigation was described as not material. The filing also disclosed related-party claims-adjusting fees of $0.5 million for nine months.
Key investor verification points
- Reconcile the statement’s reported Q3 total revenues of $49.4 million with net earned premiums of $49.6 million and the large unrealized investment loss; assess earnings sensitivity to market movements.
- Review investment portfolio composition and concentration, particularly equity and commodity-linked positions, and confirm how trading-security cash flows affect operating-cash-flow comparisons.
- Assess catastrophe coverage, the stated $157.6 million first-event net retention, FHCF reimbursement capacity, and the status and collateral implications of the $45.5 million T25 deposit and possible commutation.
- Track approval and implementation of the pending Florida rate and policy-form filings, and whether premium increases offset mitigation credits and loss-cost changes.
- Monitor reserve development, insurer statutory capital and surplus, and the impact of the 2012 acquisition-cost accounting change.