Universal Insurance Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Frank Wilcox:]

Hello and welcome to the Fourth Quarter and Full Year 2014 Earnings Presentation for Universal Insurance Holdings, Inc. I’m Frank Wilcox, the Chief Financial Officer. Making the presentation with me today are Sean Downes, Chairman, President, and Chief Executive Officer; and Jon Springer, Director, Executive Vice President, and Chief Operating Officer. Earlier today, we filed our Form 10-K with the Securities and Exchange Commission and issued our earnings release. To find copies of these documents, please visit the SEC Filings and Press Releases sections of our website at www.universalinsuranceholdings.com. Our SEC filings can also be found on the SEC’s website. An audio recording of this presentation will be available on the homepage of our website until March 25, 2015. 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 views regarding future events and are typically associated with the use of words such as believe, expect, anticipate, and similar expressions. We caution those listening, including investors, not to rely on forward-looking statements. They imply risks and uncertainties, some of which cannot be predicted or quantified, and future results could differ materially from expectations. We encourage you to carefully consider the risks described in our filings with the SEC, available on the SEC’s website or the SEC filings section of our website. We do not undertake any obligation to update or correct any forward-looking statements. With that said, I would like to turn the presentation over to Sean Downes.

[Sean Downes:]

Thank you, Frank. I like to start by providing some highlights from the quarter and year. Jon will then discuss our operational highlights and then Frank will conclude by discussing our financial results for the quarter and full year period. We are pleased to report our best fourth quarter and full year results in the history of the company. Our results underscore the merits of our strategy to grow our business organically and through prudent expansion into new markets, increase profitability and deliver value to shareholders. For both of full year and fourth quarter, we delivered record total revenues, earned premiums, and net income indicating that the initiatives we put in place starting in early 2013 to drive profitable growth are paying off. Frank will provide specific details of our financial results later in the presentation. Our results in the quarter were driven by our continued focus on maintaining disciplined underwriting standards and writing high quality rate adequate business. This disciplined approach coupled with our decision in 2014 to reduce our quota share reinsurance to retain a greater portion of our rate adequate business to support our strong bottom-line performance. We also continue to make steady progress on our geographic diversification and expansion efforts and maintained strong organic growth momentum in 2014. We received approval to write business in Delaware and Indiana in 2014, bringing us to a total of nine states in which we are currently licensed and operating as of December 31 2014. For the full year, policy count for business outside of Florida increased by approximately 37.2% year-over-year demonstrating that our proven business model is also delivering results in newer markets. This momentum has continued in 2015 as we received approval in January to write business in Pennsylvania with an additional application pending in Minnesota. In terms of our organic growth, we have also seen increases in policy count in Florida since December 31, 2013. During the fourth quarter, we also saw an increase in both new and renewal policy submissions in Florida compared to the same quarter in 2013. In short, we continued to follow our business strategy of increasing our market share by writing organically growing rate adequate business. Highlighting our commitment to delivering increasing shareholder value, in 2014 we repurchased approximately 2.4 million shares of common stock and completed the $10 million share repurchase program announced on June 17. In the fourth quarter, Universal declared a cash dividend of $0.25, comprised of the expected $0.10 cash dividend and an additional special dividend of $0.15 per share, and more recently announced an increased quarterly cash dividend of $0.12 expected for 2015. These distributions of capital represent our continuing track record of deploying capital opportunistically and to the benefit of our shareholders. The company also sold 1 million registered shares in a privately negotiated transaction to Nephila Capital, a significant partner of ours. This transaction will enable us to lower our 30% quota share to 0% allowing us to retain approximately $230 million of additional organically grown business. At this time, I would like to turn it over to Jon Springer.

[Jon Springer:]

Hey Sean. I would like to expand a little on the Nephila transaction. The capital generated from this transaction, along with strong retained earnings from 2014 puts the company in its strongest capital position in history. From a quota share reinsurance perspective, this enhanced capital position will afford us the opportunity, as Sean mentioned previously, to retain 100% of our own business effective June 1, 2015 to further drive profitability. One minor point of clarification related to the Nephila transaction, the originally signed agreement in early December contained a provision whereby Universal would repurchase the original shares from Nephila at Nephila’s option at $19 per share if any catastrophic event occurred that triggered a recovery by Universal Insurance Holdings from its $80 million covered loss index swap. This provision was subsequently removed from the agreement. However, from an accounting perspective, this provision was technically in place as of December 31, 2014. So therefore the equity was required to be temporarily classified as mezzanine equity. The equity is now permanent equity and as of February 19, increases our stockholders equity by a full $19 million. You will see some notes on this in the year-end financials. With respect to our plans for the upcoming reinsurance renewal, we continue to explore ways to maximize efficiency in the catastrophe coverage space through both enhancements to traditional products and the possibility of alternative mechanisms like a catastrophe bond. The number of additional parties providing capital to the reinsurance arena has created an extremely efficient buying environment for companies with a proven track record like ours. We plan to continue reinsuring both of the insurance subsidiaries to similar conservative levels as past years. I will now turn the discussion over to Frank Wilcox for our financial highlights.

[Frank Wilcox:]

Thank you, Jon. I would like to provide a little bit more detail around the financial results for the quarter and full year and their drivers. Net income for the fourth quarter totaled $21 million, an increase of 35% compared to $15.6 million in 2013. This reflects our efforts to build a higher quality and more rate adequate portfolio of policies that led to beneficial changes in the structure of our 2014-2015 reinsurance program effective June 1, 2014 including a reduction in our quota share session rate to 30% compared to 45% for the prior period. Diluted EPS for the fourth quarter was $0.59 which is a $0.44 or 34% increase from the same quarter in 2013 reflecting an increase in net income. The increase in net earned premiums of $28.9 million or 44% for the quarter compared to the same period in 2013 reflects a decrease in ceded earned premiums of $28.3 million and an increase in direct earned premiums of $0.7 million. The reduction in the cession rate of our quota share reinsurance contracts was significant factor behind the increase in net earned premium. Commission revenue of $3.3 million for the quarter was down by $0.9 million or 21% as a result of both a decrease in the cost of certain reinsurance contracts and differences in the structure of our reinsurance programs. We generated net realized gains on investments of $274,000 during the fourth quarter of 2014 compared to $1.2 million in the fourth quarter of 2013. These gains were generated as a result of selling securities ahead of potential volatility in the equity markets. Net investment income decreased by $596,000 for the fourth quarter of 2014 compared to the same period in 2013 reflecting a shift to a higher portion of conservative fixed income investments in the fourth quarter of 2014. While operating expenses increased by 31%, losses and loss adjustment expenses of $34.6 million for the quarter were $6 million or 21% higher than the fourth quarter of 2013 as a result of a decrease in the amount of losses and loss adjustment expenses ceded to reinsurers under our quota share reinsurance contract effective with the 2014-2015 reinsurance program. However, losses and loss adjustment expenses as a percentage of earned premium decreased to 36.3% for the fourth quarter of 2014 compared to 43% for the same period in 2013. This decrease reflects both the higher level of rate adequacy in our book of business and operational initiatives we have taken to expedite the settlement of claims which has resulted in a reduction in the severity of losses, and the amount of loss adjustment expenses incurred in settling claims. General and administrative expenses were $33 million for the fourth quarter of 2014 compared to $23 million for the same quarter in 2013. The majority of the increase of 10 million, or 43% is due to $4.7 million of additional amortization of net deferred acquisition costs, resulting from the reduction in the rate of ceded premium from 45% to 30% in our quota share contracts effective June 1 of 2014. The increase in general administrative expenses is also due to an increase in stock-based compensation of $1.8 million resulting from the increase in the market price of UVE shares and an increase in marketing and promotional expenses of $1.2 million. Now let me turn briefly to our results for the full year. Net income increased by $14 million or 24% in 2014 compared to 2013. This reflects an increase in net earned premiums from the changes made to the structure of our reinsurance program, the absence of trading losses generated in the first quarter of 2013, and an increase in net realized gains from investment sold from our investment -- portfolio of investments available for sale. These were partially offset by a decrease in commissions and an increase in operating costs and expenses. Diluted earnings per share for 2014 increased by $0.52 or 33% compared to 2013. In closing, we believe our results for the quarter and full year reflect the strategic initiatives, underwriting discipline, and investments we have made to improve our long-term financial position. I will now turn it back to Sean for closing comments.

[Sean Downes:]

Thanks, Frank. In summary, it was a historically strong quarter and year for Universal. Our record results demonstrate the continued successful execution of our business strategy to grow our business, increase profitability, and deliver value to shareholders. We entered 2015 with significant operational momentum and a healthy financial position and believe we are well positioned to capitalize on organic growth opportunities as well as to continue to drive shareholder value. Before I conclude, as always I would like to thank all of our agents, policy holders, and our employees. I would also like to thank all of our Directors and shareholders as well as our management team for their loyalty and dedication to the company. Thank you for taking the time to join us today. This concludes our presentation.