Universal Insurance Holdings, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are unaudited. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Universal is a vertically integrated property-and-casualty insurer focused primarily on homeowners’ coverage, distributed mainly through independent agents. Its insurance subsidiaries are UPCIC and APPCIC. At year-end, the company had approximately 536,000 policies in force; 93% were in Florida and 98% included wind coverage. Florida represented about 91% of total insured value.
Key financial results
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $301.2 million | $269.9 million | +11.6% |
| Net premiums earned | $267.7 million | $231.1 million | +15.8% |
| Net income | $59.0 million | $30.3 million | +94.6% |
| Diluted earnings per share | $1.56 | $0.75 | +$0.81 |
| Net losses and LAE | $108.6 million | $126.2 million | -13.9% |
| Cash from operating activities | $157.0 million | $142.5 million | +$14.5 million |
The net loss and loss-adjustment-expense ratio improved to 40.6% from 54.6%. Statutory combined ratios were 85% for UPCIC (104% in 2012) and 205% for APPCIC (55% in 2012); APPCIC represented less than 1% of policies in force. Total operating expenses fell 7.7% to $200.6 million, while general and administrative expenses were nearly flat at $92.0 million. The implied net-income-to-total-revenue ratio was approximately 19.6%, versus 11.2% in 2012.
Net investment income was $1.9 million, up from $0.4 million. Net realized investment losses were $14.7 million, partly offset by $7.9 million of net unrealized investment gains recognized in earnings. The company reported an $8.2 million net loss on its trading portfolio, largely associated with liquidating that portfolio in the first quarter. It moved to a more traditional available-for-sale portfolio managed with Deutsche Bank.
Financial position, cash flow and capital
- Total assets were $920.1 million, compared with $925.7 million a year earlier; stockholders’ equity rose to $175.6 million from $163.5 million.
- Cash and cash equivalents were $117.3 million, down from $347.4 million. Restricted cash was $2.6 million, versus $33.0 million. The company attributed the cash shift primarily to portfolio restructuring and investment purchases; it reported $352.7 million of net cash used in investing activities.
- Operating cash flow was $157.0 million. Financing activities used $34.4 million, including $32.4 million for treasury-stock purchases and $17.7 million for common dividends, partly offset by $20.0 million of term-loan proceeds.
- Long-term debt was $37.2 million, up from $20.2 million. Debt to total capital was 17.5%, versus 11.0%; debt to equity was 21.2%, versus 12.4%. The company also had an undrawn $10 million revolving credit facility.
- Total investments were $474.3 million, including $289.4 million in fixed maturities and $65.0 million in equity securities. The company said operating cash flows should meet working-capital needs for at least the next 12 months.
- UPCIC and APPCIC reported statutory capital and surplus of $161.8 million and $13.7 million, respectively, and met stated minimum-capital and risk-based-capital requirements.
Material changes and management commentary
- Revenue growth reflected higher direct earned premiums, driven primarily by rate increases over the prior 24 months. Direct premiums written rose 0.5% to $783.9 million, while net premiums written edged down 0.3% to $261.8 million. Policies in force declined from about 567,000 to 536,000, reflecting rate-related attrition and selective nonrenewals intended to manage risk and profitability.
- Management attributed the improved underwriting result to lower current-year losses and favorable prior-year reserve development of $2.9 million, compared with unfavorable development of $6.7 million in 2012. The favorable 2013 development included lower-than-expected settlements on older catastrophe claims and improved estimates for 2011–2012 non-catastrophe losses.
- In 2013, UPCIC received Florida approval for average rate increases of approximately 14.1% for homeowners and 14.5% for dwelling fire. An overall 2.4% homeowners rate decrease and an 8.1% dwelling-fire increase were approved for early 2014. The filing provides no quantified earnings guidance.
- The 2013–2014 reinsurance program was described by management as more favorable overall than the prior program. UPCIC reduced its quota-share cession rate to 45%, retaining more premium and risk. Reinsurance limits do not eliminate exposure to losses above coverage, excluded losses, or reinsurer nonpayment.
- Common-stock repurchases totaled approximately 7.3 million shares during 2013, including purchases from former executives; management said the reduced share count increased 2013 diluted EPS by $0.17. A further 675,000 shares were repurchased from the former CEO on January 2, 2014 for about $11.11 per share.
Outlook, risks and contingencies
The filing does not provide formal financial forecasts. Management’s outlook depends on maintaining underwriting discipline, obtaining regulatory approval for adequate rates, managing catastrophe exposure and sustaining liquidity. Principal risks include hurricane and severe-weather losses, Florida geographic concentration, reserve-estimation uncertainty, reinsurance availability and counterparty credit, mandated wind-mitigation discounts, regulatory restrictions, investment-market volatility, and debt covenants. The filing states that 60% of UPCIC policyholders received wind-mitigation credits, reducing its in-force premium by 33.8% at year-end.
UPCIC paid a $1.3 million administrative fine in October 2013 under a consent order with Florida regulators. The company reported no non-routine litigation expected by management to materially affect results, financial condition or liquidity, and no off-balance-sheet arrangements in 2013. The independent auditor reported fairly presented financial statements and effective internal control over financial reporting.
Most important facts for investors to verify
- Whether improved loss ratios and favorable reserve development are sustainable, especially as recent accident years mature.
- The adequacy and cost of catastrophe reinsurance, remaining net exposure after multiple events, and collectability of recoverables from major reinsurers.
- Whether rate approvals, policy attrition and wind-mitigation discounts support adequate premiums relative to loss and reinsurance costs.
- The reasons for the substantial decline in cash balances, the liquidity available to the parent versus regulated insurers, and compliance with debt covenants and dividend restrictions.
- The economics, funding and share-count effects of executive-related repurchases, including the January 2014 transaction, and the impact of compensation-related dilution.