Universal Insurance Holdings, Inc. — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. Universal is a vertically integrated property-and-casualty insurer, focused primarily on homeowners insurance distributed through independent agents. Nearly 98% of its 593,422 policies in force and insured value were in Florida, and approximately 98% of policies included wind coverage.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Direct premiums written | $721.5 million | $666.3 million | Up 8.3% |
| Net premiums written | $208.5 million | $199.6 million | Up 4.4% |
| Net premiums earned | $199.0 million | $170.4 million | Up 16.7% |
| Total revenue | $225.9 million | $239.9 million | Down 5.9% |
| Income before income taxes | $33.7 million | $62.3 million | Down 45.9% |
| Net income | $20.1 million | $37.0 million | Down 45.6% |
| Diluted earnings per share | $0.50 | $0.91 | Down from $0.91 |
| Net loss and LAE ratio | 62.5% | 66.5% | Improved 4.0 percentage points |
Figures are consolidated unless otherwise noted. Premium growth reflected more policies and approved rate increases, partly offset by wind-mitigation discounts. Total revenue and earnings fell mainly because investment results reversed: the trading portfolio recorded net losses of $16.1 million in 2011 versus net gains of $24.4 million in 2010. Within 2011 results, realized investment gains were $2.4 million, while unrealized losses were $18.4 million. Net investment income was $0.8 million.
Losses and loss adjustment expenses were $124.3 million, up 9.7%; general and administrative expenses were $67.8 million, up 5.5%. UPCIC’s statutory combined ratio was 120% (113% in 2010), while APPCIC’s was 49% and was an estimate because the new insurer had no paid claims at year-end. The filing does not provide a consolidated combined ratio.
Cash and cash equivalents were $229.7 million, with a further $78.3 million restricted, including regulatory deposits and collateral held in trust. Operating cash flow was $110.1 million, compared with cash used of $4.1 million in 2010; 2011 operating cash flow included $119.9 million of net proceeds from trading securities. Total assets were $894.0 million, total liabilities $744.0 million, and stockholders’ equity $150.0 million. Long-term debt was $21.7 million; debt was 12.6% of total capital. Management said operating funds were expected to meet liquidity needs for at least the next 12 months.
The investment portfolio totaled $407.6 million, including $229.7 million cash, $78.3 million restricted cash, $99.6 million trading investments and a small amount of other investments. Trading investments were heavily weighted to equities, including metals and mining; a hypothetical 20% decline in equity and commodity holdings would have reduced fair value by $19.2 million. Loss and LAE reserves were $187.2 million gross and $99.2 million net of reinsurance recoverables.
Material changes versus the prior year
- Net earned premiums rose 16.7%, while net income declined 45.6%, principally due to the swing from investment gains to losses.
- The net loss and LAE ratio improved to 62.5% from 66.5%, as premium growth outpaced loss growth. However, prior-year reserve development increased to $11.5 million from $5.9 million.
- The portfolio shifted substantially: debt securities declined to $3.8 million from $130.1 million, while cash and restricted cash increased. All securities were classified as trading, with fair-value changes recorded in earnings.
- UPCIC received a 14.9% average statewide Florida homeowners rate increase effective for new business in February 2011 and renewals in March. UPCIC began writing in Georgia, and APPCIC wrote its first Florida homeowners policy.
Fourth-quarter 2011 net loss was $2.3 million, compared with net income of $6.2 million in fourth-quarter 2010. Management attributed the deterioration primarily to investment trading losses and higher losses and LAE.
Outlook, risks, contingencies and unusual items
- Outlook: No quantified earnings or premium guidance was provided. Management said 2012 results would be significantly affected by investment portfolio management and financial-market conditions.
- Rates and coverage: In January 2012, regulators approved average Florida rate increases of 14.9% for homeowners and 8.8% for dwelling fire coverage. Proposed policy changes would offer sinkhole coverage by endorsement with an added surcharge and mandatory 10% deductible; the filing said the forms filing was pending. Catastrophic ground-cover collapse would remain covered under standard forms.
- Accounting change: The company planned to adopt new insurance acquisition-cost guidance on January 1, 2012. It expected net deferred policy acquisition costs to fall by approximately 20%–30%, creating a material first-quarter 2012 earnings charge, described as accelerated recognition of costs otherwise expected to be expensed within 12 months.
- Catastrophe exposure and reinsurance: The company retained exposure to losses exceeding or excluded from reinsurance, and to reinsurer nonpayment. Florida accounted for nearly all insured exposure. The 2011–2012 program included substantial private reinsurance and Florida Hurricane Catastrophe Fund coverage; modeled protection ranged from approximately a 94-year to 137-year probable maximum loss depending on catastrophe model/version and assumptions. No hurricanes made landfall in Florida during the 2011–2012 contract year, and there were no catastrophe losses in 2011.
- Reserves and regulation: Loss reserves are estimates subject to uncertainty, and the filing identifies reopened claims, public adjuster activity, sinkhole claims, legal changes, inflation and catastrophe severity as factors that could increase losses. Florida rate regulation and mandated wind-mitigation discounts may constrain premium adequacy. UPCIC’s Financial Stability Rating remained A, subject to review.
- Other matters: Management reported no material non-routine litigation and no off-balance-sheet arrangements. Routine claims litigation was covered by recorded reserves. The 2011 audit opinion was unqualified; management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether investment gains or losses, particularly from the concentrated equity portfolio, materially affect subsequent earnings and capital.
- Whether prior-year reserve strengthening and the increased net reserve balance prove adequate as claims mature.
- Actual catastrophe protection, net retentions, recoverability from reinsurers and exposure to Florida Hurricane Catastrophe Fund capacity and cost.
- How approved rate increases, wind-mitigation discounts and any sinkhole-policy changes affect renewal retention, premiums and loss experience.
- The actual first-quarter 2012 accounting charge from the acquisition-cost standard and its effect on reported earnings.
- Liquidity available to the parent versus cash restricted for insurance operations, and the capacity for regulated subsidiaries to pay dividends.