Universal Insurance Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 26 Jul 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to UVE Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Dean Evans. Sir, you may begin.

[Dean Evans:]

Thank you, Ashley. Good morning everyone. Welcome to the second quarter 2018 earnings conference call for Universal Insurance Holdings, Inc. My name is Dean Evans; I am the Vice President of Investor Relations here at Universal. With me in the room today are Chairman and Chief Executive Officer, Sean Downes; President and Chief Risk Officer, Jon Springer; and Chief Financial Officer, Frank Wilcox. Following Sean’s opening remarks, Jon will provide an update on several important current topics and Frank will review financial results. The call will then be reopened for questions. Yesterday afternoon, we issued our earnings press release, which is available under the press release’s section of our website at www.universalinsurancehodlings.com. A replay of this presentation will be available on the homepage of our website until August 9, 2018. Before we begin, please note that this presentation may contain forward-looking statements about our business and financial results. Forward-looking statements reflect our current view of future events and are typically associated with words such as believe, expect and anticipate or similar expressions. We caution those listening, including investors, not to rely solely on forward-looking statements as they imply risks and uncertainties, some of which cannot be predicted or quantified and future results can differ materially from our expectations. We encourage you to carefully consider the risks described in our filings with the Securities and Exchange Commission, which are available on the SEC's website or the SEC filing section of our website. We do not undertake any obligation to update or correct any forward-looking statements. With that, I would like to turn the presentation over to our Chairman and Chief Executive Officer, Sean Downes.

[Sean Downes:]

Thank you, Dean. And thank you everyone for joining us today. As usual, I will begin by providing some highlights from the quarter and we will then review our growth initiatives and strategy. Jon will cover several important current topics and Frank will conclude by discussing financing results. We will then open the call for questions. Overall, we are pleased with our second quarter 2018 results. As we reported net income of $46.1 million and diluted EPS of $1.29, which equates to an annualized ROE of 37.8%. We reported excellent top line growth in the second quarter with 15.7% growth in direct premiums written including 13% growth within Florida and 36.5% growth in other states. Our underwriting profitability was strong, with a 77.2% combined ratio for the quarter. This includes weather losses above expectations of $5 million or 2.6 points as well as $2.3 million or 1.2 points of adverse reserve development, primarily related Hurricane Matthew. These items are offset by $6.5 million or 3.4 points of benefits received due to a settlement of prior year premium tax audit. Our service companies' subsidiaries continue produce benefits in the aftermath of Hurricane Irma as Universal Adjusting Corporation and Blue Atlantic Reinsurance Corporation contributed $8.4 million, and $0.9 million respectively to second quarter results. Lastly, as with the case during the first quarter, our effective tax rate benefit from the Federal Tax Reform that was passed in 2017, which had a meaningful positive impact on our net income for the quarter when compared to the prior year. I would like to briefly discus our growth outlook heading forward. We believe we have positioned Universal well for the future by pursuing various organic growth avenues, which have resulted in a more stable, diversified and balanced business. Our core Florida book continues to produce strong organic growth with direct written premium growth of 13% in the second quarter. This includes our growth in policy count, as well as the average state wide rate increase of 3.4% that was approved in December 2017. We continue to believe that we can profitably grow on an organic basis in Florida running business through both our robust agency network in our direct-to-consumer platform Universal Direct. Geographic expansion is another key element of our growth strategy. In direct premiums written within other state book grew strong 36.5% in the second quarter. After writing our first policy in New Hampshire in early April, we are now active in 17 states with licenses in additional three states, Illinois, Iowa and West Virginia. We expect to continue to expand our geographic footprint in a prudent and conservative manner going forward. Universal Direct, our unique direct-to-consumer online home owner insurance platform is available on all of our active states and continues to demonstrate a solid growth trajectory. We currently have 10,800 policies in force for approximately $30 million of imports premium. We continue to believe that Universal is extremely well positioned going forward. We continue to grow our book of business. We remain confidence that our multi core organic growth strategy will enable us to deliver profitable premium growth. We have a solid balance sheet with a conservative investment portfolio, minimal debt or goodwill and appropriately set loss reserve position. We are protected by comprehensive reinsurance program which we enhanced at the most recent mid-year reinsurance renewal to include additional conservatism, and our unique virtually integrated structured positions us well to capitalize in the event of a disruptive industry event. As highlighted by our hurricane Erma performance, which continue to manifests itself favorably in the current quarter's result. Given these strength, we are excited about what the future holds for Universal. And we expect to continue to deliver substantial value to our shareholders with the remainder of 2018 and into the future. With that I will turn the call over to Jon Springer.

[Jon Springer:]

Thank you, Sean. I would like to first start with an update on Hurricane Irma and we will also provide a brief update on Hurricane Matthew, discuss the 2018 weather event to date and recap our update reinsurance program following the June 1 renewal. Following another three months of actively settling Hurricane Irma claims, we have increased our estimate of gross losses related to Hurricane Irma to $600 million. This change in growth loss estimate comes primarily due to the continuation of new reporting claims and the aggressive nature of plan of attorneys on the claims in Florida. We stress that this increase in gross losses for Hurricane Irma had a negligible change on our net retention which remains at approximately $29 million for the event. We had 7,746 new claims reported during the quarter, down from over 10,000 reported in the first quarter bringing our total claim count as of 630 to 81,723. We have closed over 74,000 roughly 90% of these claims with an average loss and LAE severity of approximately 6,000 across all claims and an average loss and LAE severity of 8,400 on claims closed with pay. From a financial impact standpoint, we have now booked to a level that reaches the portion of our reinsurance program that we are now responsible for paying reinstatement premiums. Specifically, for any hurricane Irma losses ceded to our traditional reinsurance program in excess of $595 million, we will incur reinstatement cost of 9% for the first $193 million and 4.75% for the next $125 million. To the extent that this occurs, we would expect any additional reinstatement costs to likely be offset by further revenues earned by our provider subsidiaries. As a result of Hurricane Irma, the past three quarters have each include the benefit of additional revenues within our service provider subsidiary which led to a higher-- to a higher level of profitability that would otherwise be the case in a normal quarter. Blue Atlantic Reinsurance Corporation receives $900,000 of reinstatement commissions during the second quarter of 2018, and Universal Adjusting Corporation produced $8.4 million of pretax profit during the second quarter of 2018. The vast majority of which were related to additional revenues created due to the continued increased workload as a result of Hurricane Irma. Turning now to Hurricane Matthew. Second quarter 2018 results include $2.6 million or 1.3 points of net unfavorable prior year reserve development related to Hurricane Matthew, which occurred in the fourth quarter of 2016. The prior year's quarter included $1.1 million, or 0.7 points of net unfavorable prior year reserve development also related to Hurricane Matthew. As of June 30, 2018 Hurricane Matthew incurred loss stood at $42.7 million with only 78 remaining open claims. However, we elected to book this loss at $45 million to hopefully avoid any further development mistakes. The net unfavorable prior year reserve development during this quarter is related to a negotiation on a specific multi-reinsurance treaty that resulted in our agreement to cat losses ceded from Hurricane Matthew at $40 million gross for that particular reinsurance treaty in exchange for favorable treatment on reinstatement costs going forward. Second quarter 2018 includes $5 million or 2.6 points of weather events beyond plan in calendar year 2018 to date compared to $6 million or 3.6 points of weather events beyond the plan worked during the second quarter of 2017. The current quarter's losses relate to several meaningful weather event that occurred during the first six months of 2018 including winter storm losses in early January and again in early March, a windstorm loss in late March and another in mid April and the Hawaiian Volcano in late May. During the quarter, we completed our 2018-2019 reinsurance programs for both of our insurance companies and continue to build on a recent trend of adding additional conservatism to our reinsurance program without increasing the percentage of premium spent on reinsurance. Even with UPCIC growing business, we structured our detachable coverage in a similar manner and maintained the same $35 million catastrophe retention for our Florida losses and the same $5 million catastrophe retention for loss involving states other than Florida. UPCIC also continued to purchase the contract to reduce the second, third, quarter and fourth event retention for catastrophe loss involving states other than Florida and expanded the top of its reinsurance tower for a single event up to $3 million. With the manner in which UPCIC purchased its catastrophe coverage and order through the company to utilize all of this purchase limit, UPCIC would need to incur two events of nearly $2 billion or three events of $1.3 billion or four events of about $1 billion. In any of these catastrophe scenarios, the company would be responsible for its retention up to a maximum of $35 million pre-event of a one-time reinstatement cost not to exceed $24.8 million. To further insulate itself for future years UPCIC has also now successfully secured over $365 million of catastrophe coverage with contractually agreed limits that extend for two or more years. American Platinum was also able to continue the conservatism trend by utilizing a lower percentage of premiums spent on reinsurance and adding coverage to the top end while maintaining the same $2 million catastrophe retention. With that, I will now turn the discussion over to Frank Wilcox for our financial highlights.

[Frank Wilcox:]

Thank you, Jon. For the second quarter of 2018 net income totaled $46.1 million, an increase of 56.9% compared to the second quarter of 2017. Diluted EPS was a $1.29, up $0.82 for the second quarter of 2017. We reported strong total revenue growth of 13.1% for the quarter driven by growth in premium volumes, net investment income, commission revenue and policy fees. Direct premiums earned grew 12% to $174 million, while net premiums earned grew 13.8% to $192.3 million. Ceded premiums earned as a percent of direct premiums earned was 29.8% for the second quarter of 2018 compared to 30.9% in the second quarter of 2017. Commission revenue and policy fees each posted solid growth versus the prior year's quarter up 22.9% and 9.8% respectively, while other revenues declined slightly by 1.1%. Included within commission revenue was $0.9 million of fee income related to reinstatement commissions received by Blue Atlantic during the second quarter of 2018. We generated a net combined ratio of 77.2% in the second quarter of 2018 compared to 81.3% in the second quarter of 2017. The net loss and LAE ratio improved to 46.7% from 47.4% in the prior year's quarter. Second quarter 2018 included $5 million or 2.6 points of weather events above plan compared to the $6 million or 3.6 points of weather losses above plan in the second quarter of 2017. Second quarter of 2018 results include $2.3 million, or 1.2 points of unfavorable prior-year reserve development primarily related to Hurricane Matthew compared to $1.1 million, or 0.7 points of unfavorable development during the second quarter of 2017. The second quarter of 2018 loss adjustment expenses include a benefit of $8.4 million, or 4.4 points from additional revenues earned by Universal Adjusting Corporation related to Hurricane Irma. Our underlying loss and LAE ratio increase compared to the prior year reflecting continued geographic expansion as non-catastrophe loss ratios in our other state are generally higher than in Florida, and the marketplace dynamics within our home state of Florida including the impact of AOB related claims. Our net expense ratio was 30.5% in the second quarter of 2018 compared to 33.9% in the second quarter of 2017. Our net policy acquisition cost ratio improved to 17.4% from 19.5% in the second quarter, driven primarily by a $6.5 million, or a 3.4 point benefit included in the second quarter of 2018 from a settlement of prior-year premium tax audit including both a refund and a reversal of premium tax accruals. Excluding this item, the policy acquisition cost ratio would have increased modestly driven by geographic expansion as our other states' book typically have a higher commission expense than within Florida. Our other operating expense ratio was 13% in the second quarter of 2018 versus 14.4% in the prior year's quarter, which generally reflects the benefits of economies of scale. Net investment income was $5.8 million, growth of 79.5% from the second quarter of 2017 driven by growth in cash and total investments, improving yields and actions taken to optimize treasury management. We reported 145,000 of realized investment gains during the second quarter of 2018 compared to $1.7 million of realized investment gains in the second quarter of 2017. We reported $1.5 million of unrealized investment losses during the second quarter of 2018, driven by a decline in the value of our equity securities portfolio. This line item was added in the first quarter as a result in the adoption of accounting guidance for equity securities. The comparable number from our equity portfolio for the second quarter of 2017 was $0.6 million of pretax losses, which was included in other comprehensive income on an after-tax basis rather than within net income. Total unrestricted cash and invested assets were $1.06 billion at June 30, 2018, growth of 20.2% from June 30, 2017. We take a conservative approach to managing our investment to maintain a high quality investment portfolio composed primarily of fixed maturities which are 99.5% investment grade. The weighted average duration of the fixed maturity investment in our available-for-sale portfolio as of June 30, 2018 was 2.8 years. The effective tax rate for the second quarter of 2018 was 24.8% compared to 38.7% in the prior year's quarter. The decrease in our effective tax rate was primarily the result of the enactment of the Tax Cuts and Jobs Act of 2017 which resulted in a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The second quarter of 2018 included net discrete items of $0.6 million or a one percentage point primarily from excess tax benefits resulting from stock-based awards divested and/or were exercised during the quarter. We remain committed to actively managing our capital position. During the second quarter of 2018, we repurchased 250,000 shares for $8.4 million, an average cost of $33.48 per share. Our current share repurchase authorization program at $8.7 million remaining and run through December 31, 2018. We paid a regularly quarter quarterly dividend in the second quarter 2018 of $0.14 per share which equates to an annualized dividend yield of 1.5% based on current share price levels. Additionally, we announced during the quarter that we had increased our regular quarterly dividend by $0.02 per share or 14.3% beginning with the third quarter dividend; this increased dividend was paid on July 16 to shareholders of record on July 2, 2018. Stockholders' equity was $492.1 million at June 30, 2018, growth of 5.8% from March 31, 2018 while book value per common share was $14.11 as of June 30, 2018; growth of 6.2% from the first quarter of 2018 or 16.7% from the end of the second quarter of 2017. Combined surplus for our insurance subsidiaries was $357 million at June 30, 2018 compared to $338 million at March 31, 2018 and $324 million at December 31, 2017. Annualized return on average common equity was 37.8% for the second quarter of 2018 compared to 27.9% in the prior year's quarter. We remain dedicated to providing value to our shareholders and believe that this level of return on average equity is an excellent result. At this point I would like to turn the call back to the operator for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Arash Soleimani with KBW. Your line is now open. Sir, your line is now open.

[Arash Soleimani:]

Am I coming through?

[Sean Downes:]

Yes, we got you. Go ahead buddy.

[Arash Soleimani:]

Okay. The premium growth in Florida, the 13% growth there versus the 6% tiff growth, I know there is a rate increase, but what's getting it up to 13%? Is it that you are growing more now in Try County or areas of the state where you have higher than average rate increase?

[Sean Downes:]

Yes, I think there is a few contributing factors. One obviously is the 3.4% rate increase aggregate across the state of Florida rolling through our books. Two, obviously Universal Direct I think is helping us with regards to that and that is why I think there is someone of a disruption in the marketplace as it relates to certain parts of Florida, and obviously we are getting into hurricane season and sometimes you see an increase there it being a cyclical cycle where people buying insurance going into hurricane season. So I think all those are contributing factors that contribute to that rate.

[Arash Soleimani:]

Okay. Thanks. And I guess going forward do you expect to still be in the double digit range for the rest of the year in Florida?

[Sean Downes:]

I think the guidance we have given previously was in the high single digits. So I think that's the expectation going forward.

[Arash Soleimani:]

Okay. And just a quick question on the premium ratio; that was down a bit obviously this quarter and is the $81.8 million of ceded premiums earned, is that sort of fair run rate going forward or how should we look at that?

[Jon Springer:]

Well, I think there are a couple of things going on there. We did save some money on our reinsurance program relative to our expected earned premiums and then as you just asked and Sean just answered, we had a large growth of premium in the second quarter. So that extended their ratio out a little bit.

[Arash Soleimani:]

I just wanted to touch base on the adjusting income that you've been making at UAC, so obviously that's been very strong. Did get any pushback ever from your reinsurance partners on your ability to generate income as the losses go up?

[Sean Downes:]

No. It's the contrary actually. Obviously when a third party handles a loss, Arash, the loss adjustment expense is greater than when we handle it. And obviously with our large adjusting firm and litigation firm, our ability to control the costs from a loss adjustment expense is greater than a third-party. So they are pleased with it. Either way they have to pay the expense. They would much rather pay to us where it's than paying a third-party.

[Arash Soleimani:]

And how does it work in cases as you get further away from the storm where you could have claims that might be unclear for losses or from Irma or from different type of event? Is there a conversation with the reinsurers in that sort of scenario?

[Sean Downes:]

I am not really getting your question. Obviously, we do our due diligence to determine what the cause of loss is and how obviously the damage that occurred. From the parallel, number one a; is it covered under the policy and two, is it directly co-related to Irma. It's not really that hard to determine. There are some cases obviously that get into a litigation environment, where we have to determine that but to answer your question, no, there won't be any pushback or any issues with the reinsurers with regards to that.

[Arash Soleimani:]

Okay. And looking ahead into the third quarter do you expect to see further income from the adjusting operations that you have?

[Sean Downes:]

I think it will be minimal. Obviously, we continue to receive claims, but I think the claims that you are going to be getting in over the next few months will be much smaller. We will have some-- we will be generating some income on our existing cases, but I think it's much smaller number than that we put up the last two quarters and frankly I think it would be minimal.

[Arash Soleimani:]

All right. Thanks. And I think John had mentioned that you are at the point where you would have to pay the reinstatement premiums, but you also have said that if the gross loss goes up you expect that reinstatement premium to be offset by adjusting income. I guess I was just curious what would cause it be kind of perfectly offset?

[Sean Downes:]

Well, obviously when the loss increases then the loss adjustment expense piece increases. So that if we are on the hook for 9% of the overall loss, that would be covered by the loss adjustment expense correlated directly to that overall increase in incurred loss. So that's kind of my stance on me saying it would be minimal going forward with any quarters we are putting up with Universal Adjusting Corporation.

[Arash Soleimani:]

Thanks. And then-- maybe this is a question for Jon, but how did you-- you mentioned $29 million retention, does that include American Platinum? And if, so how do you get from the 37th to the 29th?

[Jon Springer:]

Yes, it includes American Platinum. The difference would be the recoveries that we had from our other states catastrophe program that serve to offset the core retention.

[Arash Soleimani:]

Okay. And a quick one for Frank, on the net investment income, I know that yields on invested assets were up year-over-year, but I'm looking sequentially from Q1, 2018 to Q2, 2018, you had about a $1 million uptick in net investment income. So I just wanted to get a better sense for what-- what drove that?

[Frank Wilcox:]

Well, I mean, we have several things. We're continuing to grow our cash and investment balances obviously with a premium that we are generating as we got relatively short duration portfolios that has our securities mature, we are reinvesting at a higher rates, the rate action-- the actions that the Fed has taken. We-- after Irma, we also realized that we need to tap into the portfolio for liquidity. So we got a little more aggressive and we migrated some of the mix from our US Treasury obligations over the corporate.

[Arash Soleimani:]

So is it fair to assume that the $5.8 million of net investment income this quarter showed basically carry forward to future quarters of reading get bigger?

[Jon Springer:]

I think the current yield is indicative of what to expect for going forward.

[Arash Soleimani:]

Okay. And I know there was a court case recently that basically said you could have multiple AOBs on the same claims, does that-- do you see any impact-- do you guys from that?

[Sean Downes:]

No. Obviously there were two court cases recently that have been in the media regarding specifically cases from a homeowner's perspective. One is the --one with HCI as related to the fee-- sorry the multiple AOB as you mentioned and then the fee multiplier from federated. We haven't really seen anything on either one. Each one of our specific divisions handles any particular case differently. So in other words we have an expert who would handle the water extraction. We have somebody who would handle the public adjuster from a represented perspective. We have somebody who would handle the case if it's in litigation. So all those different entities that would be on the same AOB case are covered and handled globally. So we never had an instance that have occurred for us, so that's has been an issue. And to touch base a little bit on the fee multiplier the people have been talking about recently, that's been around since 1985. So there hasn't been anything at all that's been different. I just think that was something it's been in the media to cause some sort of upheaval regarding what's going on this AOB marketplace. But that isn't anything that we've experienced, and isn't anything right now that we think is an issue for us frankly or anybody.

[Arash Soleimani:]

Okay. Perfect. And just last question. Can you break up the UVE direct premiums for the quarter?

[Sean Downes:]

The Universal Direct?

[Arash Soleimani:]

Yes, Universal Direct.

[Sean Downes:]

It was $2.7 million for the quarter.

[Arash Soleimani:]

Okay. And then what was the policy count?

[Sean Downes:]

Policy count currently right now for the quarter--?

[Arash Soleimani:]

Is it as of the end of Q2?

[Sean Downes:]

I will get back to you. I don't have the quarter right now.

[Operator:]

Thank you. And the next question comes from the line of Samir Khare with Capital Returns. Your line is now open.

[Samir Khare:]

Hi. Thank you. Good morning. Just from the Hawaiian cat losses, how many claims did you get and did that trigger any of your Other States insurance coverages?

[Jon Springer:]

Yeah we had 16 claims reported to date, and given that the majority of those occurred in May when we had satisfied our otherwise recoverable on our aggregate program, we will have a reinsurance recovery there.

[Samir Khare:]

Okay. Great. And then on the rate increases, what you guys putting in for rate increases for this year and in Florida and outside Florida?

[Sean Downes:]

Yes. We just started the process right now for Florida; other states are ongoing. We will we get to that information. But Florida right now it's early days, but we should have a pretty good idea in the next month or so.

[Samir Khare:]

And then guys, in the press release, talked about, I guess, the cat losses that were above budget. In your, I guess, budgeted loss ratio, how much do you guys think that kind of budget for storms?

[Jon Springer:]

To dig that out real quick I could comment a little bit on the events that led to us booking the additional five. I actually did I think in my pre prepared remarks, couple of winter storms, storm losses that got up into the $2 million, $3 million, as well as some windstorm in March and April, also in the three to four range for those.

[Samir Khare:]

Okay. But what's your, I guess, planned loss ratio that you guys booked on the post basis? Is that in 30s?

[Jon Springer:]

Okay. On a direct basis 4.5 points

[Samir Khare:]

Okay and just about the increase of the Irma loss, when did you apprised reinsurers of that?

[Jon Springer:]

We have ongoing discussions with our reinsurers literally every day.

[Samir Khare:]

I am just trying to figure out that a Q2 I guess increase for them or was it a Q3 increase?

[Jon Springer:]

I think that's necessarily for us to comment on Samir.

[Samir Khare:]

Okay. Would we expect there to be any reinstatement commission income to Blue Atlantic in 3Q?

[Jon Springer:]

Well, we are paying -- Blue Atlantic is paid reinsurance, excuse me, reinstatement brokerage as losses are billed and paid. So while we advise that were booking Hurricane Irma to $600 million, we have not yet build are collected the $600 million so yes, there would be future reinstatements brokerage commissions for Blue Atlantic although they will be small.

[Samir Khare:]

I was wondering if you can elaborate on what you're seeing under Irma claims. I think you guys talked about you're seeing an increase of reopened claims. When did you start seeing that acceleration? What do you think is causing them? And then does your outlook on litigated -- your litigation rates on Irma claims change at all?

[Sean Downes:]

Let me answer your first question, first you kind of faded out in the second part. I'll let you come back to that, but no we haven't really seen an increase at all in our reopens for the guidance we gave previously in quarter one. Currently, right now we received around 7,800 claims in Q2 and closed those claims in Q2. So we're turning over the claims pretty quickly. We're not seeing a lot of reopens any greater than the number that we gave last quarter. So it's running in line actually it's decreasing a little bit. What was the second part your question, Samir?

[Samir Khare:]

I think you answered it. That's fine. Thank you.

[Operator:]

Thank you. And we do have a follow-up question from Arash Soleimani with KBW. Your line is now open.

[Arash Soleimani:]

I'm not sure if you just heard but Jon I just wanted to know if you could repeat in statement. Was it 9% of $193 million and then 4.75% of the next $125 million?

[Jon Springer:]

Yes. And that would be beyond what we've booked already. So we booked the loss, we marked the loss to $600 million. So to the extent that we cede losses to our traditional program, every dollar of the first $193 million we will be responsible for 9%, and then as you said, the additional $125 million at 4.75%.

[Operator:]

Okay, thank you. And I am not showing any further questions at this time. I would now like to return the call back over to Sean Downes for any closing remarks.

[Sean Downes:]

Thank you. As always in closing, I would personally like to thank all of our shareholders, employees, Board of Directors, policyholders and my management team for their hard work and loyalty to Universal. This concludes the call. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.