Universal Insurance Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021, compared with the three months ended March 31, 2020 unless otherwise noted. Balance-sheet comparisons are to December 31, 2020. The interim financial statements were reviewed by the company’s independent accountant, not audited.
Business context
Universal is a vertically integrated property-and-casualty insurer focused primarily on residential homeowners’ coverage, distributed mainly through independent agents. It wrote business in 19 states, with Florida accounting for 84% of Q1 direct premiums written. The company uses reinsurance to manage catastrophe exposure.
Key financial results
| Metric | Q1 2021 | Q1 2020 or prior-date comparison |
|---|---|---|
| Direct premiums written | $365.3 million | $334.6 million; up 9.2% |
| Net premiums earned | $243.3 million | $220.8 million; up 10.2% |
| Total revenue | $262.8 million | $235.3 million; up 11.7% |
| Net investment income | $3.0 million | $6.8 million; down 56.3% |
| Losses and LAE | $144.0 million | $135.0 million |
| General and administrative expenses | $82.4 million | $72.6 million |
| Net income | $26.4 million | $20.1 million; up 31.6% |
| Diluted EPS | $0.84 | $0.61 |
| Operating cash flow | $61.3 million | $45.6 million |
| Cash and cash equivalents, excluding restricted cash | $90.8 million | $167.2 million at Dec. 31, 2020 |
| Total invested assets | $1,017.3 million | $919.9 million at Dec. 31, 2020 |
| Stockholders’ equity | $454.7 million | $449.3 million at Dec. 31, 2020 |
| Long-term debt | $8.1 million | $8.5 million at Dec. 31, 2020 |
The net loss and LAE ratio improved to 59.2% from 61.2%; the expense ratio rose to 33.9% from 32.9%. Together these imply an approximate combined ratio of 93.1%, versus 94.1% a year earlier. Net underwriting income, calculated as net premiums earned less losses and G&A, was approximately $16.9 million. Comprehensive income fell to $9.5 million from $11.1 million, reflecting a $16.9 million after-tax other comprehensive loss, primarily from changes in available-for-sale securities.
Changes and management commentary
- Premium growth reflected rate increases and business growth, partly offset by management’s efforts to restrain new business exposure. Policies in force declined 0.9% from year-end to 976,250.
- Ceded premiums earned rose 25.9%; reinsurance costs increased to 35.2% of direct premiums earned from 32.3%. Management attributed this to higher insured exposure, pricing, and program structure.
- Net investment income declined due to lower reinvestment yields after sales of securities in 2020 and lower returns on cash. Management expects investment income to remain pressured relative to prior portfolio yields.
- There were no current-year weather losses above expected levels. Prior-year development was $1.2 million net favorable, despite $92.1 million of gross adverse development, principally related to Hurricane Sally and reinsurance recoveries. Q1 2020 had $4.3 million of net adverse prior-year development, principally tied to Hurricane Irma.
- Q1 operating cash flow was more than offset by investing outflows of $131.4 million and financing outflows of $6.2 million; cash and restricted cash declined $76.3 million. Investing activity included substantial purchases of debt securities.
- The company contributed $77 million to UPCIC during the quarter. The Insurance Entities reported a combined statutory net loss of $7.4 million, while each remained above stated minimum statutory capitalization requirements. UPCIC’s ordinary dividend capacity for 2021 was $2.1 million; APPCIC had none.
Outlook, risks, and contingencies
- Management said operating cash flows should be sufficient for working-capital needs for at least the next 12 months, while noting liquidity and economic conditions will continue to be monitored. No earnings or revenue guidance was provided.
- Management described the COVID-19 impact to date as not materially adverse to operations or liquidity, but noted uncertainty and possible court delays that could affect litigation outcomes and claim costs.
- Florida claim inflation, litigation frequency and severity, catastrophe losses, reserve estimation, reinsurance availability and collection, and the company’s geographic concentration are significant risks. Reinsurers’ failure to pay, or losses exceeding reinsurance protection, could adversely affect results and liquidity.
- The 2020–2021 reinsurance programs were projected to cost $499.8 million, approximately 34.0% of estimated direct premiums earned for the 12-month treaty period. In March, UPCIC added a three-year catastrophe-bond-backed agreement providing $150 million of named-windstorm protection. Future-year reinsurance commitments were disclosed; the contractual-obligations table lists $252.3 million in total reinsurance payable and multi-year commitments.
- Legal proceedings arise in the ordinary course, including policy claims. Management estimated reasonably possible losses it could quantify as immaterial, while cautioning that actual results could differ and estimates do not represent maximum exposure.
- The company declared a $0.16-per-common-share dividend in March and declared another $0.16 dividend in April, payable in May. It repurchased 15,444 shares during Q1 for approximately $0.2 million.
Important facts for investors to verify
- Whether rate actions and exposure-management measures can keep pace with Florida claims inflation, litigation trends, and catastrophe risk.
- Whether reserve estimates and reinsurance recoveries—especially for Hurricane Sally and Irma—develop as expected, and whether counterparties remain able to pay.
- The affordability and availability of future reinsurance, including the substantial scheduled commitments and the cost of the next program.
- How lower reinvestment yields, interest-rate movements, and equity-market changes affect investment income, fair values, and reported equity.
- Liquidity and subsidiary statutory capital after the $77 million contribution, given restricted cash, regulatory limits on dividends, and catastrophe-related obligations.