Universal Insurance Holdings, Inc.
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Frank Wilcox:]

Hello and welcome to the first quarter 2015 earnings presentation for Universal Insurance Holdings Inc. I'm Frank Wilcox, the chief financial officer and 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-Q with the Securities and Exchange Commission and issued our earnings release. To find copies of these documents, please visit the Financial Information 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 June 1, 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’d like to start providing some highlights from the quarter. Jon will then discuss our operational highlights and then Frank will conclude by discussing our financial results for the period. 2015 is off to a strong start. We are pleased that we have achieved the highest quarterly net income and diluted EPS in company history. Our results reflect our continued focus on writing, rate adequate and organically growing business. Highlighting the success of our initiatives we've seen an increase in policy count of approximately 3% since the beginning of the year. In February of 2015 we acquired the assets of Aplin Peer & Associates, an independent adjusting firm for insurance claims. We also hired over 30 of their experienced adjuster/employees. This transaction enabled us to further bolster our claims infrastructure and with this addition we have seen improvements in our claim severity in the first quarter of 2015. At the same time we have realized a slight improvement in our claims frequency. We also delivered an approximately 48% increase in net earned premiums, a result of growth in our policies in force, as well as a reduction in the cessionary of the company’s quota share reinsurance contracts. The latter point is a follow-on benefit of our decision in June 1, 2014 to reduce our quota share reinsurance from 45% to 30% which allowed us to retain a greater portion of our business and increase profitability. As we indicated last quarter, we intend to eliminate our current 30% quota share effective June 1, 2015, a change that will enable us to retain a 100% of our business. This reduction will enable us to retain $230 million of our own organically grown premium, further driving profitability and shareholder value. Our strong performance and healthy financial position have enabled us to continue to return capital to our shareholders. In January, our Board of Directors declared a cash dividend of $0.12 per share, an increase from the previous $0.10 per share and declared a regular quarterly $0.12 per share dividend in April. We continuously evaluate our capital needs and remain focused on deploying our excess cash to deliver additional value to our shareholders. In short, we continue to build momentum and remain confident in our ability to grow our business organically and through prudent expansion into new markets, increase profitability and deliver value to shareholders. With that, I will turn the call over to Jon Springer. Jon?

[Jon Springer:]

Thank you, Sean. Just a few further comments with respect to our June 1, 2015 reinsurance renewal. We are of course in the midst of placing the desired coverage for both UPCIC and APPCIC. We’ve been extremely pleased with the response of the reinsurance market and looking to partner with companies with a proven track record like ours. Our reinsurance partners continue to place value on our commitment to our claims department and our overall disaster preparedness. So far the renewal is playing out as expected and we will report more when the specific reinsurance treaties abound. Lastly from a primary rate perspective we recently received approval from the Florida office of insurance regulation for a 2.2% rate increase on UPCIC’s Florida homeowners business and a 4.9% rate increase on UPCIC's Florida dwelling fire business. These changes will continue to drive rate adequacy throughout our Florida portfolio. I will now turn the call over to Frank Wilcox for our financial highlights.

[Frank Wilcox:]

Thank you, Jon. I’d like to provide a little bit more detail around the financial results for the quarter and their drivers. Net income for the first quarter of 2015 totaled $22.3 million, an increase of 65% compared to $13.5 million in 2014. This reflects our efforts to build a higher quality and more rate adequate portfolio policies that led to beneficial changes in the structure of our 2014-2015 reinsurance program effective June 1 of 2014, including a reduction in our quota share cession rate to 30% compared to 45% for the prior period. Diluted EPS for the first quarter was $0.62 which is a $0.24 or 63% increase from the same quarter in 2014, reflecting the increase in net income. An increase in net earned premiums of $30.6 million or 48% for the quarter compared to the same period in 2014 reflects a decrease in ceded earned premiums of $24.6 million and an increase in direct earned premiums of $6 million. The increase in direct earned premiums is due to an increase in the number of policies in force. The reduction in the cession rate of our quota share reinsurance contracts was a significant factor behind the increase in net earned premium. Net investment income increased by $344,000 or 66% for the first quarter of 2015 to $862,000. This reflects both an increase in the amount of invested assets and a greater percentage of interest-earning investments. We generated net realized gains on investments of $171,000 during the first quarter of 2015 compared to $902,000 for the same period in 2014. The security sold were comprised primarily of equity securities. Commission revenue of $3.2 million for the quarter was down by $921,000 or 23% as a result of both a decrease in the cost of certain reinsurance contracts and differences in the structure of our reinsurance programs. While total revenues increased by 40%, operating expenses increased by only 29%. Losses and loss adjustment expenses of $33.6 million for the quarter were $6.8 million or 25% higher than the first quarter of 2014 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 net earned premium decreased to 36.3% for the first quarter of 2015 compared to 42% for the same period in 2014. This decrease reflects both lower losses and loss adjustment expenses as a percentage of earned premium as a result of operational initiatives to settle claims combined with the benefit of lower reinsurance costs relative to the increase in net earned premiums. General and administrative expenses were $32.2 million for the first quarter of 2015 compared to $24.4 million for the same quarter in 2014. The majority of the increase of $7.8 million or 32% is due to $5.5 million of additional amortization of net deferred acquisition costs resulting mostly from the reduction in the rate of ceded premium from 45% to 30% in our quota share contracts effective June 1, 2014. There were also increases in stock-based compensation of $1.1 million reflecting appreciation in the market price of our common shares and performance bonus accruals $975,000 resulting from the increase in income before income taxes. In closing, we believe our results for the quarter reflect the strategic and operational initiatives 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 strong quarter for Universal. We continue to follow our business model of writing rate adequate business and expanding our footprint via geographic expansion. With our healthy balance sheet we believe we are positioned to continue to take advantage of growth opportunities and continue to drive shareholder value. Before I conclude, as always, I would like to thank all of our agents, policyholders 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. End of Q&A