Universal Insurance Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Universal Insurance Holdings Inc First Quarter 2017 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 turn the conference over to the Dean Evans Vice President, Investor Relations. Please begin.

[Dean Evans:]

Thank you, Latoya and good morning everyone. Welcome to the first quarter 2017 earnings conference call for Universal Insurance Holdings Inc. My name is Dean Evans and 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 reinsurance and Frank will review financial results. The call will then be reopened for questions. Yesterday afternoon we issued our earnings 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 Web site until May 11, 2017. 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 Web site or SEC filing section of our Web site. 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'll then review our growth initiatives and strategy. Jon will then cover our reinsurance program and Frank will conclude by discussing our financial results. We are pleased to report another profitable quarter with strong top-line growth. For the first quarter, we delivered a 6.3% increase in total revenues and a 6% increase in net earned premiums. We reported strong underwriting profitability with a solid 78.9% net combined ratio for the quarter. Although, the quarter included some unexpected whether events, our claims handling team once again performed up to our high expectations. And these events had a minimal impact on our quarterly earnings with only $3 million of pre-tax net losses and LAE as a result. We reported net income of $31.2 million and diluted EPS of $0.86, which equates to return on average common equity of 31.4%. We believe we have positioned Universal for the future by pursuing various organic growth avenues; it includes further growth in our home state of Florida, expanding our footprint into new states; strategic initiatives, such as Universal Direct and new business lines such as a commercial residential product. These initiatives have resulted in a more stable, diversified and balanced business that is well positioned to drive growth and long-term shareholder value. Our core Florida market continues to produce solid top line growth with policies in force, premiums and total insured value, each increasing by roughly 5% in the first quarter. While we are certainly a large part of the Florida marketplace, we continue to believe that we have the opportunity to continue to grow organically, given our tremendous agency network in Universal Direct. Geographic expansion remains a core element of our growth strategy, and we continue to see an increase in policy count, premiums in force and total ensured value for states outsides of Florida in the first quarter; with each showing growth of more than 40% from the comparable quarter of last year. Of note, during the first quarter, we received our Certificate of Authority from Iowa. Currently, Universal is writing business in 14 states, and is now licensed in additional five states. Universal Direct, our direct-to-consumer online platform for home owners insurance, is now available on all of our active states. Since launch, we have over 3,000 policies in force for more than 3.5 million in premium. We continue to receive positive feedback from customers who appreciate the flexibility and convenience of purchasing home owners insurance online. We recently partnered with BBMC, a National Mortgage Company, who offers a complete line of residential mortgage, refinance and specialty loans. Universal Direct will provide real time quotes to BBMC customers during the mortgage qualification process. This partnership is the first to be rolled up under the Universal Direct affiliate program, which we hope to expand in the future to include other businesses in the home purchasing arena; through utilizing the proprietary B2B tool that we have created. We are confident in our business model, coupled with our commitment to providing best-in-class product offerings and service to our policy holders, which we believe positions universal for profitable growth in 2017 and beyond. With that, I will turn the call over to Jon.

[Jon Springer:]

Thanks, Sean. I think the most relevant current topic to discuss would be an update on the status of our reinsurance placement to be effective June 1, 2017. Over the course of the past two months, we’ve met fact-to-face with vast majority of our reinsurance partners to discuss this upcoming renewal. As of late yesterday, after receiving and evaluating quotes from our lead reinsurers, we entered the market with firm order terms on the core all states catastrophe tower for UPCIC and authorizations have already started to arrive this morning. When you take into account the coverage provided by the Florida Hurricane catastrophe fund, the coverage we previously negotiated within multiyear transactions and the pricing levels released yesterday, we have now established the cost of over 90% of our desired catastrophe capacity. At this point, the 2017 renewal is shaping up to be a year where we’ll be keeping our catastrophe retention at the same level on a growing book of business, buying catastrophe coverage to a higher level and spending less as a percent of earned premium to do so. With that, I'll turn it over to Frank.

[Frank Wilcox:]

Thank you, Jon. For the first quarter of 2017, net income totaled $31.2 million, an increase of 23.7% compared to 2016. Diluted EPS was $0.86, up from $0.71 for the first quarter of 2016 due to the increase in net income, partially offset by a modest increase in diluted shares outstanding. During this quarter, we continue to experience top line growth with increases in every major category of revenue compared to the prior year's quarter. Direct premiums earned of $236.4 million offset by ceded premiums earned of $74.8 million, generated $161.6 million of net earned premiums for Q1 of ‘17 compared to $152.4 million in Q1 of ‘16. The increase was the result of organic growth from both Florida and other state growth initiatives. Ceded premiums earned, as a percentage of direct premiums earned, was 32% and 31% respectively during Q1 '17 and Q1 '16. Commission revenue of $4.6 million for the quarter grew 11.8% compared to the same quarter in 2016, reflecting the differences in our reinsurance programs and effect during those periods, including an increase in our exposures covered by reinsurance. Policy fees of $4.5 million for the quarter grew 9% year-over-year from increase in the number of policies written during the first quarter of 2017 compared to the prior year quarter. Other revenues of $1.6 million, which is comprised primarily of financing fees and charges, grew 6.1% from prior year's quarter, reflecting both growth and consumer behaviors underlying the policies written during the periods being compared. Net investment income for the quarter was $2.7 million, growth of 68% from Q1 of '16. This reflects both an increase in our invested assets and actions taken to maximize yields while maintaining high credit quality as securities mature. We realized $63,000 in losses from the sale of investment securities during the quarter compared to $667,000 in realized gains in Q1 of 2016. We continue to maintain a high quality investment portfolio comprised of 90% fixed maturity securities of which, 98.6% are investment grade securities; and we take a conservative approach to managing our investments. Total invested assets reached $666.1 million as if March 31, 2017 compared to $541 million one year prior, an increase of 23%. The weighted average duration of the fixed maturity investments in our available for sale portfolio at March 31, 2017 was 3.4 years while the book yield of this portfolio was 1.79% for the first quarter of '17 versus 1.25% in the first quarter of '16. We generated a net combined ratio of 78.9% for the first quarter of 2017 compared to 80.8% for the first quarter of 2016. The net loss and LAE ratio was 43.7% compared to 43.4% in the prior year's quarter. We recorded $3 million or 1.9 points of losses in LAE related to weather events beyond plan in the first quarter of '17 compared to $8.5 million or $5.6 points during the first quarter of 2016. While there was 3.7 loss ratio of point less of an impact from weather events beyond plan in the first quarter of '17 versus '16, this was offset by an increase in the underlying net loss ratio of 4%. Our net expense ratio for the quarter of 2017 was 35.2% compared to 37.5% for the same period in 2016. Our net acquisition cost ratio increased slightly to 20.1% from 19.4%, largely reflecting increased acquisition cost related to our other state expansion. This was more than made up for by decline in other operating expense ratio, which was 15.1% in the first quarter of 2017 versus 18% in the prior year's quarter. The primary factors behind this decrease were reduction in executive compensation and economies of scale. The effective income tax rate was 34.1% in the first quarter of 2017 compared to 38.6% for the same quarter in 2016. The first quarter of 2017 reflects two discrete items. The first was a credit to income tax expense of $0.8 million for excess tax benefits, resulting from stock-based awards divested and/or were exercised during the first quarter of 2017. This credit to income tax expense represents the application of a new accounting pronouncement. Prior to this quarter, excess benefits were reflected in stockholders’ equity. The other discrete item is a credit to income tax expense of $1.3 million, resulting from anticipated recoveries of income taxes paid for the years 2013 through 2015. Collectively, these discreet items lowered our effective tax rate by 4.3%, leaving our underlying effective tax rate for Q1 2017 in line with expectations. Our balance sheet continues to strengthen with stockholders’ equity and book value per common share of $398.8 million and $11.37 per share as of March 31, 2017, an annual growth of 26.9% and 25.9% respectively. Consolidated unrestricted cash and cash equivalents were $160.4 million and combined surplus for our insurance subsidiaries was $350 million as of March 31, 2017, respectively. We are committed to actively managing our capital position, and took several actions on that front in the first quarter of ‘17. We repurchased over 100,000 shares for $2.5 million or an average cost of $25.46 per share. We believe these repurchases represented a tremendous value in light of our current return on equity; $15.4 million remains on our current repurchase authorization; we paid dividends of $0.14 per share in the first quarter, equating to an annualized dividend yield of 2.4% at current share price levels. Return on equity was 31.4% in the first quarter of 2017 compared to 32.6% in the first quarter of 2016. We remain dedicated to providing value to our shareholders, and believe this 31.4% return on equity coupled with our 2.4% dividend yield is an excellent result. At this point, I'd like to turn the call back to the operator.

[Operator:]

Thank you [Operator Instructions]. And the first question is from Adam Davidson, Private Investor. Your line is open.

[Unidentified Analyst:]

I know on the last call you mentioned potential expansion into New York and New Jersey. Could you just provide an update on how that progresses? Thanks very much.

[Sean Downes:]

We have our rates and forms filed in New York and hope for an approval sometime this year. Last week, we actually received an approval in New Jersey, and as of today, we are live in New Jersey writing business. I'm pleased to say that we actually wrote our first policy this morning. We've had our folks in New Jersey for the last few months, getting agencies appointed and basically just replicating the same model that we’ve used in other states. We will have our FAST TRACK folks in New Jersey to handle claims as they arise. So we’re happy and pleased to be a part of the New Jersey marketplace.

[Operator:]

Thank you. And the next question is from Arash Soleimani of KBW. Your line is open.

[Arash Soleimani:]

Can you talk about what you’re seeing in terms of frequency of AOB law suites year-over-year, and also relative to the fourth quarter?

[Sean Downes:]

We're not really seeing a large spike in law suits, Arash, I'm sure that you’re referring to the case glide form. Any moment in time you see how that goes up and down, I think it's a seasonal thing, to be honest with you. We have seen somewhat of increase as it relates to playanates attorneys, being a little bit more aggressive. But one thing that we've done really that's different than first quarter of ’16 is that all of our AOB claims that are in latitudinous environment are being handled by our internal law firm but more than 20 attorneys; so we're not really having to deal with outside of attorneys, we’re not having that extra cost that you would, if you were using the third party law firm. So we believe that that is going to pay dividends to us down the road. And as far as the frequency is concerned from a law suit perspective, we're seeing if that's up a little bit. We're seeing the overall AOB frequency relatively flat or down by a tick or so. But I do want to make it clear that the AOB issue is an issue for our Company the same way it is everybody else. I just think that what we put into place over the last three years as it relates to our own legal law firm, if you will, in-house, our FAST TRACK division, our subrogation division, when you couple all of those things together it's lessening the severity when you compare us to some others. But it is an issue and we're doing everything we can to lessen the severity.

[Arash Soleimani:]

So basically you’re saying the frequency is up a bit, but all the stuff you’re doing way just kind of offsetting that from a severity perspective?

[Sean Downes:]

I would say, as a percentage of AOB frequency related to playanates attorneys that is up. Overall, AOB is relatively flat or down a tick or two.

[Arash Soleimani:]

Also are you seeing any spread outside of Tri County with AOB?

[Sean Downes:]

Yes, more than 50% of our AOB claims are outside of the Tri County area.

[Arash Soleimani:]

But is it becoming more prevalent outside of Tri County than it was maybe a year go or so?

[Sean Downes:]

No the ratios are basically in line with what they were a year ago as far as the spread of the overall AOB claims.

[Arash Soleimani:]

And the other question I was going to ask, have you filed for rate increases you have to see in Florida, and if so, what are you expecting? And when do you expect to implement it?

[Sean Downes:]

We're just about at the end right now of our rate indication process. I'm sure as you're aware, '14 we had a minus reduction of roughly 2.4; in '15, we had an increase of about 2.2; last year, we were flat; and this year, we're looking at probably somewhere I'm guessing right now something to change here the last week or two. But I believe we'll be filing for some mid-range single digit increase sometime next month.

[Arash Soleimani:]

And when do you think you'll be able to implement that, if approved?

[Sean Downes:]

Probably September 1, give or take.

[Arash Soleimani:]

The other question I have was around the liability for unpaid losses. So I know you guys have some subrogation efforts and FAST TRACK that help. But I saw that drop quite a bit again in the first quarter, so just wanted to get an understanding of what was driving that?

[Jon Springer:]

I think as I've said in the past, you really need to take a holistic view of loss reserves in looking at the number of remaining open claims and in turn how many claims have closed in whatever period of time you're looking at. So when you take into account what our FAST TRACK team is doing in terms of new claims and how quickly we're getting those claims and closing them in addition to what we've been able to do with the quote on quote legacy claims; what you would see occurring during the first quarter is that we closed nearly 50% of the open claims that existed on the books as of 12/31/2016. In addition to closing nearly half of those, we also paid out over $50 million of partial payments on those remaining open claims. So after you take into account all the claims closed and all the partial payments on the remaining opens then lastly you would look at the IBNR and of course take into account the amount of anticipated subrogation recoveries to be included on top of the IBNR.

[Arash Soleimani:]

And is -- I mean is the FAST TRACK program, I guess, is it more robust in a sense than it was a quarter ago? Or are you seeing major strides with that program or -- I'm just trying to think of what caused FAST TRACK to contribute that much more this time?

[Sean Downes:]

Well again this is more bodies to the ground bolstering that division, creating some timelines that are even stringent than they were in the past; and basically handling 80% of all of our claims through the FAST TRACK division, which is obviously contributing to lesser cost as it relates to LAE. Then again, when claims are and with this arena, we're having our own internal law firm handle the claims handle the claims; all first party lawsuits, AOB claims are all being handled by our internal law firm.

[Arash Soleimani:]

The 80% you mentioned for FAST TRACK can you just, for comparison, what would have been about a year ago?

[Sean Downes:]

I believe, right now, and I just talk about claims, these are claims that are eligible for FAST TRACK. So almost look at it as a triage when you’re going into a hospital; claims that we can get to we can pay immediately and settle within a few days. I believe that number probably in early '16 off the top of my head was more like 60 something early 60. So when you compare that to where we're at now, it's a big difference.

[Arash Soleimani:]

And from a prior period development perspective, I guess question for Frank. Was there any development in the quarter?

[Frank Wilcox:]

There was, Arash. It was negligible, 96,000 less than 1%.

[Arash Soleimani:]

And was that favorable or unfavorable?

[Frank Wilcox:]

That was unfavorable.

[Arash Soleimani:]

And when you mentioned the plan you have for storms, what do you guys assume as I guess normal or expected?

[Frank Wilcox:]

When we set aside embedded within the loss ratio that we book to an amount for Florida and a separate amount for outside of Florida for weather events. So if you look at the loss ratio we book to, we break that into two pieces, a portion of it for weather, a portion of it for all other payrolls.

[Arash Soleimani:]

And my last question on the expense ratio improvement. How much of that came from economies of scale improving executive compensation declining?

[Frank Wilcox:]

Each benefited us by about a 1.5%.

[Operator:]

Thank you. The next question is from Samir Khare of Capital Returns Management. Your line is open.

[Samir Khare:]

Just on the planned storms, do you have the numbers of the loss ratio for Florida of expected weather losses?

[Sean Downes:]

Samir, could you just say that a little bit -- you lost you a little bit there at the end?

[Samir Khare:]

I’m just asking to quantify the expected loss ratio for Florida weather on an expected basis.

[Jon Springer:]

Let me tell you the whole picture in terms of first quarter 2017. So we booked to 29.5% loss ratio overall, specific to Florida and that would be 27% loss ratio within Florida, approximately 50% loss ratio outside of Florida. Then breaking down that 27% for Florida approximately 24.5% would be for all other payrolls and approximately 2.5% for Florida weather losses.

[Samir Khare:]

So it sounds like there were some considerable weather losses outside of Florida. Is that correct?

[Jon Springer:]

So, I guess, the number didn’t give you is approximately 50% loss ratio outside of Florida is broken down roughly 40% for all payrolls and 10% for expected weather losses. The activity outside of Florida in the first quarter including five different PCS events totaled a loss amounts beyond what we had planned for, the largest of which was PCS 17-13 happening in mid January. We had over 700 claims from that; second would have been PCS 17-21 happening in late March. We picked over 150 claims from that event.

[Samir Khare:]

And just a few other questions on the subrogation; and specifically on the GAAP prior period development, any particular accident year losses that produced any noteworthy favorable or unfavorable development?

[Jon Springer:]

No, nothing that stands out.

[Samir Khare:]

And just to make sure I understand the subrogation. On a GAAP basis, that’s considered in the incurred loss and the reserve numbers, but instead it’s not. Is that right?

[Jon Springer:]

It’s scheduled to be, it’s presented gross.

[Samir Khare:]

But out of the reserve numbers on the balance sheet, it is incorporated on the staff. Is that correct?

[Jon Springer:]

Yes.

[Samir Khare:]

And how often are you guys doing reserve reviews fully blown versus actual versus expected now?

[Jon Springer:]

In terms of our outside actuary?

[Samir Khare:]

Yes, or in early…

[Jon Springer:]

I mean, internally, we’re looking at it regularly as you might imagine. In terms of our outside actuaries, we will continue the two separate analysis a year.

[Samir Khare:]

And that will include an analysis of the subrogation reserves as well?

[Jon Springer:]

Absolutely.

[Samir Khare:]

And was there any material increase or decrease to the subrogation reserve from year end 2016 and prior?

[Jon Springer:]

No.

[Samir Khare:]

And then just on the subrogation, you guys take credit for it as you see the opportunities within your claims files? Or are you guys incorporating some allowance or any recurrence accident year loss ratio pick?

[Jon Springer:]

It's within the go forward loss ratio pick. So the actuarial study that was done provided a predictable savage in subro rate, which then of course was incorporated into loss reserves and in turn incorporated into future loss picks.

[Samir Khare:]

And could you quantify how many points to this?

[Jon Springer:]

No, I can't, not off the top of my head.

[Samir Khare:]

And just in light of your stock price, any share repurchases quarter-to-date?

[Jon Springer:]

We've not done any since the first quarter.

[Operator:]

And at this time, I'd like turn the call back over to Sean Downes for 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. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.