Universal Insurance Holdings, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Dollar amounts below are in millions unless otherwise noted. The interim statements were reviewed by the independent accountant, not audited.
Business context
Universal is a vertically integrated property and casualty insurer focused primarily on homeowners coverage distributed through independent agents. It operated in seven states, but 94% of policies in force were in Florida; 98% included wind coverage. Policies in force declined to 546,000 from 567,000 at December 31, 2012.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total premiums earned and other revenues | $78.4 | $74.5 | $223.6 | $194.7 |
| Net premiums earned | $68.9 | $59.5 | $201.2 | $163.8 |
| Net income | $14.4 | $8.3 | $43.4 | $25.9 |
| Diluted EPS | $0.40 | $0.20 | $1.13 | $0.64 |
| Net loss and LAE ratio | 41.1% | 61.0% | 39.8% | 56.1% |
- Net income rose 74.5% in Q3 and 67.5% year to date. Management attributed the improvement principally to stronger underwriting results, including lower loss and loss-adjustment expenses and increased earned premiums.
- Net earned premiums increased 15.8% in Q3 and 22.8% for nine months, primarily reflecting rate increases and a lower reinsurance cession rate. Management also cited policy nonrenewals and other exposure-management actions; policy fees and commission revenue declined.
- Year-to-date G&A expense rose 15.8% to $69.0 million. Drivers included higher net acquisition-cost amortization, bonuses, stock compensation, salaries, regulatory fees and fines, and legal expense; FIGA assessment recoveries partly offset these increases.
- Investment results were volatile: nine-month realized investment losses were $16.0 million, partly offset by $7.9 million of unrealized gains recorded in earnings. The trading portfolio was liquidated in Q1; available-for-sale unrealized changes are generally recorded in equity. Net investment income was $0.5 million.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $187.6 million, investing cash flow was negative $368.2 million, and financing cash flow was negative $29.5 million. Cash and cash equivalents fell to $137.3 million from $347.4 million, primarily as the company invested in available-for-sale securities.
- Total assets were $972.3 million and stockholders’ equity was $166.4 million at September 30. Investments totaled $509.3 million; available-for-sale securities had fair value of $369.4 million. Restricted cash was $2.6 million.
- Long-term debt was $37.4 million, up from $20.2 million at year-end, including a $20 million RenRe Ventures term loan with $18.2 million carrying value. The $10 million Deutsche Bank revolving line was undrawn at September 30. Debt-to-total-capital was 18.4%, versus 11.0% at year-end; the company reported compliance with loan covenants.
- The company repurchased 7.258 million shares for approximately $32.4 million during the first nine months. Management said repurchases increased diluted EPS by $0.10 year to date (and $0.06 in Q3). Outstanding common shares were 35.1 million at September 30, versus 40.9 million at December 31. Dividends declared totaled $0.26 per share year to date.
Changes, outlook and material items
- Effective June 1, 2013, UPCIC reduced quota-share cessions to 45%. Management said the change was intended to improve profitability, while increasing retained risk and reducing ceding commissions. Management described the overall 2013–2014 reinsurance program as more favorable than the prior program.
- Management stated that premiums should meet working-capital needs for at least the next 12 months and that operating funds are expected to continue meeting liquidity requirements. The filing gives no earnings or revenue guidance.
- The company’s Florida regulator and UPCIC settled a market-conduct matter on October 4, after quarter-end. The consent order imposes requirements and a $1.3 million fine, accrued for in the period and paid October 18.
- Catastrophe exposure remains significant. Estimated in-force wind coverage was $122.8 billion; the company remains responsible for losses beyond reinsurance protection and for losses if reinsurers fail to pay. The filing states maximum first-event net liability of $27.5 million for UPCIC’s Florida program, subject to the described coverage terms.
- Other notable matters include a new office lease at approximately $51,000 monthly and a related $5.99 million purchase agreement, expected to close by February 2015 subject to conditions. Management disclosed no non-routine litigation expected to materially affect results or financial condition.
Key investor verification points
- Assess the sustainability of improved loss ratios, including the role of prior-year reserve adjustments, current-year claims experience, rate increases and policy attrition.
- Review catastrophe reinsurance limits, reinstatement terms, retained exposures, reinsurer credit quality and the concentration of policies in Florida and wind coverage.
- Reconcile investment losses and gains across earnings and other comprehensive income, and monitor portfolio allocation, valuation changes and investment-management costs.
- Evaluate liquidity after the substantial shift from cash into securities, planned property purchase and lease costs, debt service, dividends and any further repurchases.
- Track the regulator’s consent-order requirements and payment, as well as executive compensation, related-party transactions and loan covenant compliance.