Universal Insurance Holdings, Inc. — Q2 2018 Form 10-Q
Business context and period. The company is a vertically integrated property and casualty insurer focused on residential homeowners coverage, primarily in Florida. This unaudited, reviewed filing covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. Florida accounted for 86.4% of first-half direct written premiums; the company was writing in 16 other states.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Direct premiums written | $342.8m | $296.2m | $612.8m | $541.6m |
| Net premiums earned | $192.3m | $169.0m | $374.8m | $330.6m |
| Total premiums earned and other revenues | $209.8m | $185.5m | $401.3m | $360.4m |
| Net income | $46.1m | $29.4m | $86.1m | $60.6m |
| Diluted EPS | $1.29 | $0.82 | $2.42 | $1.68 |
| Net loss ratio | 46.7% | 47.4% | 44.2% | 45.6% |
| Expense ratio | 30.4% | 33.9% | 32.7% | 34.5% |
Q2 net income increased 56.9%; first-half net income rose 42.2%. Management attributed improvement to premium growth, underwriting profitability, and lower effective tax rates: 24.8% versus 38.7% in Q2 and 23.7% versus 36.4% for the first half. Net investment income increased to $5.8m in Q2 and $10.6m year to date. First-half realized securities losses were $2.5m, and unrealized equity-security losses recognized in earnings were $6.6m.
Cash flow and balance sheet. First-half operating cash flow was $158.1m; investing activities used $32.3m and financing activities used $28.2m. Cash and cash equivalents were $311.1m at June 30, plus $2.6m restricted cash. Total assets were $1.71bn, stockholders’ equity $492.1m, and long-term debt $12.1m, consisting of a surplus note. Debt was 2.4% of total capital. Invested assets totaled $747.2m.
Material changes and drivers
- Direct written premiums grew 15.7% in Q2 and 13.1% in the first half. Other-state premiums grew 36.5% and 34.8%, respectively; Florida premiums grew 13.0% and 10.3%. A 3.4% average Florida rate increase contributed to growth.
- Management reported a $6.5m benefit from settlement of prior-year Florida premium-tax audits, reducing the expense ratio by 3.4 percentage points in Q2 and 1.7 points for the first half.
- Service subsidiary UAC generated estimated pretax earnings of $8.4m in Q2 and $18.9m in the first half, principally from handling Hurricane Irma claims; these amounts reduced recorded losses and LAE.
- Adoption of new accounting guidance moved equity-security fair-value changes into earnings. The company recorded a $3.6m transition adjustment to retained earnings; the resulting 2018 equity-security losses make comparisons with 2017 less direct.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance was provided. Management said operating cash flows should meet working-capital needs for at least the next 12 months and described profitable organic growth, geographic diversification, disciplined underwriting, and reinsurance optimization as priorities.
- The 2018–2019 reinsurance program took effect June 1. UPCIC’s private catastrophe program cost $175.3m, plus $15.0m for reinstatement-premium protection; the estimated Florida Hurricane Catastrophe Fund premium was $128.3m. Combined FHCF and third-party coverage was estimated at up to $3.0bn for a first event. Coverage does not eliminate exposure: the insurer retains losses and remains responsible for losses above limits, uncovered losses, and reinsurer defaults.
- The estimated ultimate Hurricane Irma loss increased to $603.5m from $447.4m recorded in Q1 2018, reflecting continued reported claims and plaintiff-attorney activity. Reinsurance cessions resulted in a reported $0.3m net retention benefit from this gross development. Hurricane Matthew also had $2.6m of net adverse reserve development in Q2, associated with 78 remaining open claims.
- Management cited Florida claim-cost growth, litigation and assignment-of-benefits activity, catastrophe exposure, reserve-estimation uncertainty, reinsurance availability and credit risk, investment-market risk, and regulatory limits on insurer dividends. The company reported that its insurance subsidiaries met statutory capitalization requirements; no subsidiary dividends were paid to the parent in the first half.
- The company declared a $0.16-per-share third-quarter dividend. It repurchased 342,749 shares for approximately $11.1m in the first half. Legal matters were described as not expected to have a material adverse effect, although actual losses could exceed estimates. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Hurricane Irma and Matthew claim development, open claims, and reinsurance recoveries support the recorded reserve estimates.
- The net economics and collectability of the 2018–2019 reinsurance program, including total costs, FHCF terms, limits, retentions, and reinsurer credit quality.
- How much of earnings growth reflects recurring underwriting and premium growth versus the lower tax rate, the $6.5m audit settlement benefit, and UAC’s Irma-related earnings.
- Whether growth outside Florida and Florida pricing can offset higher non-catastrophe loss ratios, litigation trends, and catastrophe concentration.
- The effect of market movements and the accounting change on investment income, equity-security earnings volatility, and accumulated other comprehensive income.