Universal Insurance Holdings, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. The company underwrites homeowners and other property-casualty insurance, primarily in Florida, and manages catastrophe exposure through reinsurance. These interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Direct premiums written | $190.0 | $173.2 | +9.7% |
| Net premiums written | $26.6 | $49.3 | -46.1% |
| Net premiums earned | $48.6 | $48.0 | +1.3% |
| Total premiums earned and other revenues | $60.2 | $64.3 | -6.4% |
| Income before taxes | $16.2 | $23.1 | -29.7% |
| Net income | $9.9 | $13.9 | -29.0% |
| Basic / diluted EPS | $0.24 / $0.24 | $0.35 / $0.34 | Lower |
| Operating cash flow | $95.3 | $119.8 | Lower |
- Net loss and loss-adjustment expense ratio improved to 53.8% from 54.5%. Loss and LAE expense was nearly flat at $26.2 million. General and administrative expenses rose 18.4% to $17.8 million.
- Net investment results included $7.4 million of realized losses, versus $3.7 million of realized gains a year earlier, partly offset by $9.2 million of unrealized gains. Net investment income was negative $36,000, versus $257,000 of income.
- Q1 operating cash flow was $95.3 million; investing cash use was $1.5 million and financing cash provided was $2.5 million. Cash and cash equivalents increased to $326.0 million. Restricted cash was $48.2 million.
Financial position and material changes
- Total assets were $936.7 million, up from $894.0 million at year-end; total liabilities were $780.1 million and stockholders’ equity was $156.6 million.
- Long-term debt was $21.3 million, down from $21.7 million. Management reported a 12.0% debt-to-total-capital ratio and 13.6% debt-to-equity ratio, and said UPCIC complied with surplus-note covenants.
- Net written premiums fell despite higher direct premiums written, as ceded premiums written increased to $163.4 million from $123.9 million. Management attributed the increase in ceded earned premiums in part to catastrophe reinsurance.
- Policies in force declined to approximately 584,000 from 593,000 at December 31, 2011. Florida represented 98% of policies; 30% were in Miami-Dade, Broward and Palm Beach counties.
- Cash and cash equivalents rose substantially, while restricted cash declined. The company generated less operating cash than in Q1 2011, including lower net proceeds from sales of investment securities relative to purchases.
Outlook, commentary and risks
- Management said premiums should meet working-capital requirements for at least the next 12 months and expects operating cash flows to continue meeting liquidity needs. It gave no earnings or revenue guidance.
- Florida regulator-approved rate increases averaged approximately 14.9% for homeowners and 8.8% for dwelling-fire policies. Management said prior rate increases supported direct earned premiums but also contributed to moderate policy attrition; wind-mitigation discounts continue to reduce premium.
- The company adopted new insurance acquisition-cost accounting guidance on January 1, 2012. Management reported a $2.7 million pretax earnings reduction ($1.7 million after tax, or $0.04 per diluted share), principally reflecting costs recognized earlier than under the prior method. The filing says this changes the timing of expense recognition, not total charges over time.
- The company was renegotiating its 2012–2013 reinsurance program and did not expect materially different terms based on then-current discussions, but gave no assurance of obtaining comparable coverage, terms or pricing. UPCIC’s windstorm exposure was approximately $127.5 billion; losses beyond reinsurance protection remain its responsibility.
- Key risks include Florida and catastrophe concentration, claim severity and reserve uncertainty, reinsurance availability and counterparty credit, investment volatility, regulatory limits, and the possibility of a downgrade to UPCIC’s financial-strength rating. Demotech affirmed UPCIC’s A rating on April 17, 2012; the filing highlights updated Demotech guidance that no longer gives full credit for the Florida Hurricane Catastrophe Fund mandatory layer.
- Management expected to declare additional quarterly dividends of $0.08 per share in Q3 and Q4 2012, subject to board discretion, earnings, cash flows, capital needs and regulatory constraints. The Q1 $0.10 dividend was paid April 6; a subsequent $0.08 dividend was declared for payment in July.
- Management said routine litigation was not material and identified no non-routine litigation expected to materially affect results, financial condition or liquidity. The IRS was examining the company’s 2009 federal income tax return.
Most important facts for investors to verify
- Whether the realized investment losses and gains, including exposure to metals and mining investments, remain volatile; the portfolio included $97.0 million of equity securities and related exposures at quarter-end.
- Renewal pricing, policy counts, Florida concentration and the impact of approved rate changes and wind-mitigation credits.
- Final cost, limits, counterparties and modeled catastrophe protection for the 2012–2013 reinsurance program, including FHCF treatment and remaining net exposure.
- Reinsurer credit exposure: the filing reports $261.7 million of unsecured amounts due from Everest Re and the Florida Hurricane Catastrophe Fund, including prepaid premiums, receivables and recoverables.
- Impact of the acquisition-cost accounting change on reported expenses and future period comparisons; whether expected dividends remain supportable and permissible given insurer capital restrictions.