UVE

Business Context and Reporting Period

Universal Insurance Holdings, Inc. (the Company) filed its Quarterly Report on Form 10-Q for the period ended September 30, 2009. The Company operates primarily through its subsidiary, Universal Property & Casualty Insurance Company (UPCIC), which focuses on homeowners' and dwelling fire insurance, predominantly in Florida. As of the reporting date, UPCIC serviced approximately 536,000 policies with in-force premiums of roughly $563 million. The Company is an accelerated filer and is not a shell company.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: Decreased 3.9% to $31.6 million for the nine-month period compared to $32.9 million in the same period of 2008. However, for the three-month period ended September 30, 2009, net income increased 56.2% to $11.5 million from $7.4 million.
• Premiums: Direct premiums written increased 10.7% to $436.6 million (nine months). However, net premiums earned decreased 1.3% to $107.9 million due to higher ceded premiums and state-mandated wind mitigation discounts.
• Investment Income: Net investment income decreased 61.8% to $1.4 million due to a shift in portfolio composition. Conversely, the Company recognized $13.6 million in realized gains on investments and $6.2 million in foreign currency gains, compared to zero in the prior year.
• Losses: Net losses and loss adjustment expenses (LAE) increased 27.5% to $68.7 million, driven by the servicing of additional policies. The net loss ratio rose to 63.7% from 49.3% in the prior year.
• Expenses: General and administrative expenses increased 25.5% to $36.8 million, attributed to higher employee counts and salaries.

Outlook, Risks, and Management Commentary

• Rate Increases: Management secured approval from the Florida Office of Insurance Regulation (OIR) for premium rate increases averaging 14.6% for homeowners and 14.8% for dwelling fire programs. These are expected to take effect in late 2009 and early 2010, improving future premium volume.
• Reinsurance: The Company renewed its reinsurance program effective June 1, 2009, including a quota share treaty with Everest Reinsurance Company. The program covers up to the 114-year Probable Maximum Loss (PML). The Company relies heavily on the Florida Hurricane Catastrophe Fund (FHCF), noting that reduced FHCF capacity could increase private reinsurance costs.
• Wind Mitigation: State-mandated wind mitigation credits have significantly reduced average premiums per policy (from $1,151 in 2008 to $1,050 in 2009), negatively impacting net income despite policy count growth.
• Liquidity: The Company holds $275 million in cash and equivalents, with $240 million held by UPCIC for claims and surplus. Management believes current capital resources are sufficient for the next 12 months.
• Risks: Key risks include catastrophic weather events exceeding reinsurance limits, reinsurer insolvency, regulatory changes in Florida, and the inability to maintain financial stability ratings (currently rated 'A' by Demotech).

Investor Verification Checklist

• Reinsurance Capacity: Verify the current claims-paying capacity of the Florida Hurricane Catastrophe Fund (FHCF) and the Company's exposure if FHCF capacity is reduced.
• Rate Implementation: Confirm the actual uptake and timing of the approved 14.6% and 14.8% rate increases on new and renewal business.
• Loss Reserves: Monitor the adequacy of unpaid loss reserves given the increased loss ratio and the inherent uncertainty in catastrophe modeling.
• Investment Portfolio: Review the composition of the $89.4 million investment portfolio, specifically the 79.2% allocation to equity securities and associated market volatility risks.
• Regulatory Compliance: Ensure continued compliance with the surplus note covenants, specifically the net written premium to surplus ratio requirements effective January 1, 2010.