Universal Insurance Holdings(UVE) - 2019 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Presents the company's unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with detailed explanatory notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands): | Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total assets | $2,064,123 | $1,858,390 | | Total liabilities | $1,498,057 | $1,356,757 | | Total stockholders' equity | $566,066 | $501,633 | - Total assets increased by $205.7 million (11.1%) from December 31, 2018, to June 30, 2019, primarily driven by increases in available-for-sale debt securities and prepaid reinsurance premiums[16] - Total liabilities increased by $141.3 million (10.4%) over the same period, mainly due to higher unearned premiums and reinsurance payable, net[16] Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (in thousands, except per share data): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Premiums earned, net | $210,357 | $192,272 | $420,084 | $374,849 | | Total premiums earned and other revenues | $233,722 | $209,788 | $470,308 | $401,288 | | Net income | $37,293 | $46,084 | $77,441 | $86,139 | | Basic earnings per common share | $1.09 | $1.32 | $2.24 | $2.47 | | Diluted earnings per common share | $1.08 | $1.29 | $2.22 | $2.42 | | Cash dividend declared per common share | $0.16 | $0.14 | $0.32 | $0.28 | - Net income decreased by 19.1% for the three months ended June 30, 2019, and by 10.1% for the six months ended June 30, 2019, compared to the respective prior-year periods[19] - Net earned premiums increased by 9.4% for the three months and 12.1% for the six months ended June 30, 2019, driven by growth in direct premiums[19] Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in thousands): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income | $37,293 | $46,084 | $77,441 | $86,139 | | Other comprehensive income (loss), net of taxes | $11,955 | $(1,849) | $23,939 | $(5,899) | | Comprehensive income | $49,248 | $44,235 | $101,380 | $80,240 | - Comprehensive income increased by 11.3% for the three months and 26.3% for the six months ended June 30, 2019, primarily due to a significant increase in other comprehensive income (loss) from unrealized gains on available-for-sale securities[20] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands): | Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total stockholders' equity | $566,066 | $501,633 | | Retained earnings | $614,067 | $553,224 | | Accumulated other comprehensive income (loss) | $15,929 | $(8,010) | | Treasury shares, at cost | $(154,623) | $(130,399) | - Total stockholders' equity increased by $64.4 million from December 31, 2018, to June 30, 2019, driven by net income and positive changes in accumulated other comprehensive income, partially offset by treasury stock repurchases and dividends[17][21] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands): | Item | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $55,988 | $158,081 | | Net cash provided by (used in) investing activities | $(2,109) | $(32,291) | | Net cash provided by (used in) financing activities | $(38,693) | $(28,188) | | Net increase (decrease) during the period | $15,186 | $97,602 | | Balance, end of period (Cash and cash equivalents, and restricted cash and cash equivalents) | $184,249 | $313,723 | - Net cash provided by operating activities significantly decreased to $56.0 million for the six months ended June 30, 2019, from $158.1 million in the prior year, primarily due to increased operating costs and lower net income[27] - Cash used in financing activities increased to $38.7 million, mainly due to higher common stock dividends and increased treasury stock purchases[27] Notes to Condensed Consolidated Financial Statements Note 1. Nature of Operations and Basis of Presentation - Universal Insurance Holdings, Inc is a vertically integrated insurance holding company primarily engaged in property and casualty insurance, offering residential homeowners' insurance in 18 states, with Florida comprising the vast majority of policies[30] - Revenues are generated from premiums, investment income, brokerage commissions from reinsurers, policy fees, and payment plan fees[31] Note 2. Significant Accounting Policies - No new or revised disclosures or quarterly disclosures were required regarding significant accounting policies compared to the Annual Report on Form 10-K for the year ended December 31, 2018[35] Note 3. Investments Available-for-sale debt securities (in thousands): | Category | June 30, 2019 Fair Value | December 31, 2018 Fair Value | | :--- | :--- | :--- | | U.S. government obligations and agencies | $73,576 | $66,637 | | Corporate bonds | $458,443 | $428,865 | | Mortgage-backed and asset-backed securities | $335,423 | $309,597 | | Municipal bonds | $3,507 | $3,362 | | Redeemable preferred stock | $13,144 | $11,977 | | Total | $884,093 | $820,438 | Credit Quality of Available-for-Sale Debt Securities (June 30, 2019): | S&P Credit Ratings | Fair Value | % of Total Fair Value | | :--- | :--- | :--- | | AAA | $419,914 | 47.5% | | AA | $102,686 | 11.6% | | A | $232,297 | 26.3% | | BBB | $124,880 | 14.1% | | BB and Below | $0 | 0.0% | | No Rating Available | $4,316 | 0.5% | | Total | $884,093 | 100.0% | - The Company sold investment real estate during the six months ended June 30, 2019, receiving $10.5 million in net cash proceeds and recognizing a pre-tax gain of $1.2 million[45] Note 4. Reinsurance - The Company uses reinsurance agreements, primarily catastrophe excess of loss reinsurance, to reduce risk from catastrophic losses, with programs generally renewing on June 1st each year[48] Reinsurance Recoverable (in thousands): | Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Prepaid reinsurance premiums | $381,982 | $142,750 | | Reinsurance recoverable on paid losses and LAE | $134,450 | $25,238 | | Reinsurance recoverable on unpaid losses and LAE | $197,117 | $393,365 | | Total Reinsurance recoverable | $331,567 | $418,603 | - Ceded premium earned increased by $11.0 million (13.4%) for the three months ended June 30, 2019, and by $17.0 million (10.5%) for the six months ended June 30, 2019, reflecting increased reinsurance costs for the new 2019-2020 program[51] Note 5. Insurance Operations Deferred Policy Acquisition Costs (DPAC) (in thousands): | Item | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | DPAC, beginning of period | $83,284 | $84,686 | | Capitalized Costs | $50,694 | $92,215 | | Amortization of DPAC | $(43,448) | $(86,371) | | DPAC, end of period | $90,530 | $90,530 | - UPCIC had the capacity to pay ordinary dividends of $14.0 million during 2019, while APPCIC did not meet the regulatory requirements to pay ordinary dividends[55] - Both UPCIC and APPCIC exceeded minimum statutory capitalization requirements as of June 30, 2019[56] Note 6. Liability for Unpaid Losses and Loss Adjustment Expenses Change in Liability for Unpaid Losses and LAE (in thousands): | Item | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Balance at beginning of period | $366,356 | $472,829 | | Total incurred | $113,296 | $226,390 | | Total paid | $119,402 | $214,675 | | Balance at end of period | $288,296 | $288,296 | - The liability for unpaid losses and LAE decreased by $184.5 million to $288.3 million as of June 30, 2019, primarily due to the settlement of claims from previous hurricane and storm events[155] Note 7. Long-Term Debt Long-Term Debt (in thousands): | Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Surplus note | $10,662 | $11,397 | - The surplus note, entered into in 2006 with the State Board of Administration of Florida, has a twenty-year term with quarterly principal and interest payments[61] Note 8. Stockholders' Equity - The Board of Directors authorized a new share repurchase program on May 6, 2019, allowing the repurchase of up to $40 million of common stock through December 31, 2020. Under this program, 338,274 shares were repurchased for approximately $9.7 million through June 30, 2019[64][171] - The previous $20 million share repurchase program, authorized on December 12, 2018, was completed in May 2019, with 468,108 shares repurchased for approximately $14.5 million during the six months ended June 30, 2019[65][171] Note 9. Income Taxes Income Tax Expense and Effective Tax Rate (ETR): | Period | Income Tax Expense (in thousands) | ETR | | :--- | :--- | :--- | | Three Months Ended June 30, 2019 | $13,637 | 26.8% | | Three Months Ended June 30, 2018 | $15,164 | 24.8% | | Six Months Ended June 30, 2019 | $27,233 | 26.0% | | Six Months Ended June 30, 2018 | $26,808 | 23.7% | - The ETR increased for both the three and six months ended June 30, 2019, compared to the prior year, due to changes in permanent differences and a lower amount of net discrete items[121][144] Note 10. Earnings Per Share Earnings Per Share Data: | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Basic earnings per common share | $1.09 | $1.32 | $2.24 | $2.47 | | Diluted earnings per common share | $1.08 | $1.29 | $2.22 | $2.42 | | Weighted average diluted common shares outstanding | 34,612 | 35,589 | 34,903 | 35,636 | - Diluted EPS decreased by $0.21 (16.3%) for the three months and $0.20 (8.3%) for the six months ended June 30, 2019, compared to the prior year, despite a decrease in weighted average diluted common shares outstanding[74] Note 11. Other Comprehensive Income (Loss) Other Comprehensive Income (Loss), Net of Taxes (in thousands): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net changes related to available-for-sale securities (pre-tax) | $15,861 | $(2,456) | $31,761 | $(7,725) | | Other comprehensive income (loss), net of taxes | $11,955 | $(1,849) | $23,939 | $(5,899) | - Other comprehensive income, net of taxes, significantly improved to $12.0 million for the three months and $23.9 million for the six months ended June 30, 2019, from losses in the prior year, primarily due to unrealized holding gains on available-for-sale securities[76] Note 12. Commitments and Contingencies - The Company has multi-year reinsurance contract commitments of $117.6 million for 2020 and $83.6 million for 2021[77] - Management believes that liabilities from legal proceedings will not have a material adverse effect on financial condition or results of operations, with reasonably possible losses estimated to be immaterial[78][80] Note 13. Fair Value Measurements Assets Measured at Fair Value on a Recurring Basis (June 30, 2019, in thousands): | Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Available-For-Sale Debt Securities | $0 | $884,093 | $0 | $884,093 | | Equity securities | $42,368 | $0 | $0 | $42,368 | | Total assets accounted for at fair value | $42,368 | $884,093 | $0 | $926,461 | - The Company primarily uses Level 2 inputs for valuing available-for-sale debt securities and Level 1 inputs for equity securities (common stock and mutual funds)[87] Note 14. Subsequent Events - No recognized or unrecognized subsequent events were identified that would require adjustment or additional disclosure in the financial statements as of June 30, 2019[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on the company's financial condition and results of operations, highlighting key performance indicators and influencing factors Overview - The Company is a vertically integrated holding company offering property and casualty insurance and related services, primarily in personal residential homeowners' insurance across 18 states, with a focus on Florida[94] - Strategic priorities include achieving underwriting profit, maintaining a strong balance sheet, and generating investment income[94] - The Company surrendered its license in West Virginia and received a Certificate of Authority in Wisconsin during the second quarter of 2019[94] Results of Operations - Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018 Key Financial Highlights (Three Months Ended June 30, in thousands, except per share data): | Item | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Direct premiums written | $357,960 | $342,781 | $15,179 | 4.4% | | Net earned premiums | $210,357 | $192,272 | $18,085 | 9.4% | | Total premiums earned and other revenues | $233,722 | $209,788 | $23,934 | 11.4% | | Net income | $37,293 | $46,084 | $(8,791) | (19.1)% | | Diluted earnings per common share | $1.08 | $1.29 | $(0.21) | (16.3)% | | Loss ratio | 53.9% | 46.7% | 7.2% | 15.4% | | General and administrative expenses | $69,496 | $58,698 | $10,798 | 18.4% | - Direct premiums written grew by 4.4%, with Florida growing by 0.5% and other states by 28.7%, reflecting rate increases and geographic expansion[104][105] - Net investment income increased by 28.1% due to growth in cash and invested assets and higher yields[107] - Losses and LAE, net, increased by 26.1% due to business growth, an increased core loss ratio (37% in 2019 vs 33% in 2018) to address emerging loss trends in Florida (e.g., AOB issues), and reduced benefits from claim settlement fees[115][116] - General and administrative expenses increased by 18.4%, partly due to a non-recurring $6.5 million premium tax refund benefit in the prior year[120] Results of Operations - Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018 Key Financial Highlights (Six Months Ended June 30, in thousands, except per share data): | Item | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Direct premiums written | $647,194 | $612,765 | $34,429 | 5.6% | | Net earned premiums | $420,084 | $374,849 | $45,235 | 12.1% | | Total premiums earned and other revenues | $470,308 | $401,288 | $69,020 | 17.2% | | Net income | $77,441 | $86,139 | $(8,698) | (10.1)% | | Diluted earnings per common share | $2.22 | $2.42 | $(0.20) | (8.3)% | | Loss ratio | 53.9% | 44.2% | 9.7% | 21.9% | | General and administrative expenses | $139,244 | $122,573 | $16,671 | 13.6% | - Direct premiums written increased by 5.6%, with Florida contributing 1.8% growth and other states 29.9%, reflecting continued geographic expansion and rate adjustments[126][127] - Net investment income rose by 47.1% due to increased invested assets and higher yields[131] - Losses and LAE, net, increased by 36.6%, driven by business growth, an increased core loss ratio (37% in 2019 vs 33% in 2018) to address AOB issues and emerging claim trends, and reduced claim settlement fee benefits[138][139] - General and administrative costs increased by 13.6%, influenced by higher policy acquisition costs and the non-recurring premium tax refund benefit in the prior year[143] Analysis of Financial Condition—As of June 30, 2019 Compared to December 31, 2018 Investment Carrying Values (in thousands): | Type of Investment | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Available-for-sale debt securities | $884,093 | $820,438 | | Equity securities | $42,368 | $63,277 | | Investment real estate, net | $15,792 | $24,439 | | Total | $942,253 | $908,154 | - Prepaid reinsurance premiums increased by $239.2 million to $382.0 million due to the new 2019-2020 catastrophe reinsurance program[148] - Reinsurance recoverable decreased by $87.0 million to $331.6 million, primarily due to collections from reinsurers for prior hurricane and storm events[149] - Unpaid losses and LAE decreased by $184.5 million to $288.3 million, as claim settlements exceeded new emerging claims[155] Liquidity and Capital Resources - Cash and cash equivalents increased to $181.6 million as of June 30, 2019, from $166.4 million at December 31, 2018, driven by operating cash flows exceeding investing and financing activities[163] - The Company's capital resources increased by $63.7 million, reflecting higher stockholders' equity and a reduction in long-term debt[161] Capital Resources (in thousands): | Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Stockholders' equity | $566,066 | $501,633 | | Total long-term debt | $10,662 | $11,397 | | Total capital resources | $576,728 | $513,030 | | Debt-to-total capital ratio | 1.8% | 2.2% | | Debt-to-equity ratio | 1.9% | 2.3% | - The Company repurchased 806,382 shares of common stock for $24.2 million during the six months ended June 30, 2019, under two authorized programs[171][192] Contractual Obligations Contractual Obligations as of June 30, 2019 (in thousands): | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | Over 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Reinsurance payable and multi-year commitments | $625,346 | $424,187 | $201,159 | $0 | $0 | | Unpaid losses and LAE, direct | $288,296 | $178,455 | $80,435 | $22,199 | $7,207 | | Long-term debt | $11,617 | $1,287 | $4,952 | $3,126 | $2,252 | | Total contractual obligations | $925,259 | $603,929 | $286,546 | $25,325 | $9,459 | Critical Accounting Policies and Estimates - There were no material changes to the Critical Accounting Policies and Estimates previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[174] Recent Accounting Pronouncements Not Yet Adopted - The Company is evaluating the impact of ASU 2016-13 (Financial Instruments-Credit Losses), effective for fiscal years beginning after December 15, 2019, which introduces a new process for recognizing credit losses[175] - The Company is evaluating the timeline for adopting ASU 2018-13 (Fair Value Measurement - Disclosure Framework), effective for fiscal years beginning after December 15, 2019, which affects disclosure requirements but is not expected to impact results of operations, financial position, or liquidity[176] Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses the company's exposure to market risks, primarily interest rate and equity price risk, arising from its investment portfolio - The investment portfolio is comprised of available-for-sale debt securities and equity securities, exposing the Company to interest rate and equity price changes[178] Fixed Income Financial Instruments (June 30, 2019, in thousands): | Maturity | Amortized Cost | Fair Market Value | Coupon Rate | Book Yield | | :--- | :--- | :--- | :--- | :--- | | Due in one year or less | $125,392 | $125,260 | 2.32% | 2.10% | | Due after one year through five years | $430,647 | $437,007 | 2.97% | 2.70% | | Due after five years through ten years | $296,314 | $310,958 | 3.47% | 3.16% | | Due after ten years | $9,515 | $9,656 | 3.82% | 3.64% | | Perpetual maturity securities | $1,153 | $1,212 | 5.79% | 5.81% | | Total | $863,021 | $884,093 | 3.23% | 3.01% | - A hypothetical 20% decrease in market prices of equity securities would result in an $8.5 million decrease in fair value as of June 30, 2019[182] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control - Disclosure controls and procedures were deemed effective as of June 30, 2019, ensuring timely and accurate reporting of information[183] - No material changes in internal control over financial reporting occurred during the period covered by the report[184] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various ordinary course lawsuits, primarily related to insurance claims, which are not expected to have a material adverse effect - Lawsuits primarily involve claims under policies and other ordinary course business operations[185] - Management estimates that reasonably possible losses for legal proceedings are immaterial and will not materially adversely affect financial condition or results of operations[185][187] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes to previously disclosed risk factors were identified during the period[188] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the company's common stock repurchase activities during the quarter, totaling 485,882 shares at an average price of $29.00 per share Common Stock Purchases (Three Months Ended June 30, 2019): | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | 4/1/2019 - 4/30/2019 | 50,000 | $29.81 | | 5/1/2019 - 5/31/2019 | 392,500 | $28.90 | | 6/1/2019 - 6/30/2019 | 43,382 | $28.99 | | Total | 485,882 | $29.00 | - As of June 30, 2019, 1,085,990 shares remained available for repurchase under the December 2020 Share Repurchase Program[190] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and iXBRL formatted financial statements - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32) and iXBRL formatted financial statements (101.1)[194] Signatures The report was duly signed by the Chief Executive Officer and Chief Financial Officer on August 2, 2019 - The report was signed by Stephen J. Donaghy (CEO) and Frank C. Wilcox (CFO) on August 2, 2019[197]