Universal Insurance Holdings(UVE) - 2022 Q3 - Quarterly Report

Report of Independent Registered Public Accounting Firm The independent auditor reviewed interim financial statements, confirming GAAP conformity and the fair statement of the December 31, 2021 balance sheet - The independent auditor conducted a review of the interim financial statements, which is less extensive than an audit, and found no material modifications needed for GAAP conformity[8][10] - The auditor previously issued an unqualified audit opinion on the consolidated financial statements as of December 31, 2021, and confirmed the fair statement of the derived balance sheet information[9] PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and detailed notes for Universal Insurance Holdings, Inc. and its subsidiaries Condensed Consolidated Balance Sheets Total assets and liabilities significantly increased as of September 30, 2022, driven by reinsurance recoverable and unpaid losses, while stockholders' equity decreased Condensed Consolidated Balance Sheets Summary (in thousands) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Assets | $3,126,894 | $2,056,141 | $1,070,753 | 52.1% | | Total Liabilities | $2,866,257 | $1,626,439 | $1,239,818 | 76.2% | | Total Stockholders' Equity | $260,637 | $429,702 | $(169,065) | (39.3)% | | Reinsurance recoverable | $935,810 | $185,589 | $750,221 | 404.3% | | Unpaid losses and loss adj. expenses | $1,153,627 | $346,216 | $807,411 | 233.2% | Condensed Consolidated Statements of Income The company reported a net loss for both the three and nine-month periods ended September 30, 2022, primarily due to a substantial increase in losses and loss adjustment expenses Condensed Consolidated Statements of Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Premiums earned, net | $290,631 | $264,654 | $836,756 | $764,131 | | Total revenues | $312,810 | $287,254 | $892,298 | $829,192 | | Losses and LAE | $330,444 | $187,581 | $715,854 | $498,765 | | Net Income (Loss) | $(72,275) | $20,183 | $(47,368) | $68,532 | | Basic EPS | $(2.36) | $0.65 | $(1.54) | $2.19 | - Net investment income significantly increased by 117.2% for the three months and 77.5% for the nine months ended September 30, 2022, compared to the prior year periods[17] Condensed Consolidated Statements of Comprehensive Income The company reported a comprehensive loss for both periods ended September 30, 2022, primarily due to net loss and substantial other comprehensive losses from unrealized investment losses Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(72,275) | $20,183 | $(47,368) | $68,532 | | Other comprehensive income (loss), net of taxes | $(27,531) | $(1,827) | $(100,097) | $(10,741) | | Comprehensive income (loss) | $(99,806) | $18,356 | $(147,465) | $57,791 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity significantly decreased from December 31, 2021, to September 30, 2022, due to net loss, accumulated other comprehensive loss, and treasury stock purchases Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Total Stockholders' Equity | $260,637 | $429,702 | | Retained Earnings | $501,349 | $563,713 | | Accumulated Other Comprehensive Income (Loss), net of taxes | $(115,665) | $(15,568) | | Treasury Shares, at cost | $(236,915) | $(227,115) | - The accumulated other comprehensive loss, net of taxes, worsened significantly from $(15,568) thousand at December 31, 2021, to $(115,665) thousand at September 30, 2022, reflecting increased unrealized losses on investments[15][19] Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased, while investing cash use decreased and financing cash use increased, leading to a net increase in cash and cash equivalents Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash from operating activities | $223,157 | $273,980 | | Net cash from investing activities | $(140,031) | $(194,585) | | Net cash from financing activities | $(26,131) | $(18,608) | | Net increase (decrease) in cash | $56,995 | $60,787 | | Cash and cash equivalents, end of period | $310,138 | $240,658 | - Purchases of equity securities and available-for-sale debt securities were substantial, totaling $67.7 million and $178.8 million respectively, for the nine months ended September 30, 2022[23] - The company purchased $9.8 million in treasury stock during the nine months ended September 30, 2022, an increase from $1.6 million in the prior year[23] 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, with Florida being the majority market - UVE operates as a vertically integrated insurance holding company, performing underwriting, distribution, and claims services through its subsidiaries[26] - The primary product is residential homeowners' insurance, offered in 19 states, with Florida accounting for the majority of policies in force[26] - Key revenue sources include premiums, investment returns, brokerage commissions from reinsurers, policy fees, and payment plan fees[27] Note 2. Significant Accounting Policies The company's significant accounting policies remain consistent with its Annual Report on Form 10-K for December 31, 2021, with no new or revised quarterly disclosures - No new or revised significant accounting policies or disclosures were reported for the quarterly period[32] Note 3. Investments The investment portfolio primarily consists of available-for-sale debt and equity securities, experiencing significant unrealized losses on debt securities due to interest rate changes Investment Portfolio Summary (in thousands) | Investment Type (in thousands) | Sep 30, 2022 Fair Value | Dec 31, 2021 Fair Value | | :----------------------------- | :---------------------- | :---------------------- | | Available-for-sale debt securities | $996,783 | $1,040,455 | | Equity securities | $82,387 | $47,334 | | Total Invested Assets | $1,084,922 | $1,093,680 | Investment Income and Gains (Losses) (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net investment income | $6,074 | $2,797 | $15,337 | $8,641 | | Net realized gains (losses) on investments | $292 | $4,319 | $(375) | $5,357 | | Net change in unrealized gains (losses) of equity securities | $(4,150) | $(3,759) | $(16,430) | $(3,024) | - Gross unrealized losses on available-for-sale debt securities increased from $(21,377) thousand at December 31, 2021, to $(153,122) thousand at September 30, 2022, primarily due to interest rate changes[33] - The allowance for expected credit losses on available-for-sale debt securities increased from $489 thousand at December 31, 2021, to $724 thousand at September 30, 2022[33][35] Note 4. Reinsurance The company uses reinsurance to mitigate catastrophic loss risks, with recoverable amounts significantly increasing due to Hurricane Ian, and maintains relationships with highly-rated reinsurers Reinsurance Metrics (in thousands) | Reinsurance Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Prepaid reinsurance premiums | $452,230 | $240,993 | | Reinsurance recoverable | $935,810 | $185,589 | Reinsurance Effect on Income (in thousands) | Reinsurance Effect on Income (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Ceded premium earned | $(161,819) | $(145,967) | $(459,102) | $(414,670) | | Ceded losses and loss adjustment expenses | $(938,900) | $(76,487) | $(1,008,875) | $(278,903) | - Reinsurance recoverable increased by $750.2 million, or 404.3%, from December 31, 2021, to September 30, 2022, primarily due to Hurricane Ian[52] - The company's largest reinsurers, such as Allianz Risk Transfer and Chubb Tempest Reinsurance, Ltd., hold strong credit ratings (A+ to A++ from AM Best, AA- to AA from S&P)[49] Note 5. Insurance Operations The company defers policy acquisition costs and amortizes them, with its insurance entities exceeding minimum statutory capitalization but unable to pay ordinary dividends in 2022 DPAC and Statutory Capital (in thousands) | DPAC (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | DPAC, end of period | $111,861 | $113,979 | $111,861 | $113,979 | | Capitalized Costs | $55,552 | $55,054 | $165,983 | $170,996 | | Amortization of DPAC | $(54,674) | $(57,046) | $(162,944) | $(167,631) | Statutory Capital and Surplus (in thousands) | Statutory Capital and Surplus (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------------- | :----------- | :----------- | | UPCIC | $386,934 | $378,750 | | APPCIC | $22,446 | $16,104 | - Both UPCIC and APPCIC exceeded the minimum statutory capitalization requirement of $15.0 million or ten percent of total liabilities as of September 30, 2022[57] - The Insurance Entities were not able to pay any ordinary dividends during 2022, as per Florida Insurance Code[56] Note 6. Liability for Unpaid Losses and Loss Adjustment Expenses The liability for unpaid losses and loss adjustment expenses significantly increased due to Hurricane Ian, with adverse prior years' reserve development mainly from Hurricane Irma Unpaid Losses and LAE Summary (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Balance at end of period | $1,153,627 | $346,216 | | Reinsurance recoverable | $929,768 | $115,860 | Incurred Losses and LAE (in thousands) | Incurred Related to (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Current year | $327,729 | $176,092 | $708,774 | $480,782 | | Prior years | $2,715 | $11,489 | $7,080 | $17,983 | - Hurricane Ian's gross ultimate loss is estimated at approximately $1 billion, with a projected net exposure of $45 million for the Insurance Entities after reinsurance recoveries. Total net losses from Hurricane Ian, including the prefunded captive insurance arrangement, are estimated at $111 million[59] - Adverse prior years' reserve development for the three months ended September 30, 2022, was $2.7 million net, primarily due to Hurricane Irma[60] Note 7. Long-term Debt Long-term debt includes a surplus note and senior unsecured notes, with interest expense increasing due to new notes, and an unsecured revolving loan facility was renewed and increased Long-term Debt (in thousands) | Long-term Debt (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :---------------------------- | :----------- | :----------- | | Surplus note | $5,882 | $6,985 | | 5.625% Senior Unsecured Notes | $100,000 | $100,000 | | Total long-term debt, net | $102,968 | $103,676 | Interest Expense (in thousands) | Interest Expense (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Surplus note | $49 | $29 | $115 | $84 | | 5.625% Senior Unsecured Notes | $1,406 | $0 | $4,328 | $0 | | Total | $1,630 | $29 | $4,969 | $84 | - The unsecured revolving loan facility was increased to $37.5 million (from $35.0 million) and renewed on October 31, 2022, maturing on October 30, 2023. No amounts have been borrowed under this facility as of November 2, 2022[70][105] Note 8. Stockholders' Equity The company's Board authorized a share repurchase program, under which 806,324 shares for $9.8 million were repurchased during the nine months ended September 30, 2022 Share Repurchase Activity (in thousands, except shares) | Share Repurchase Activity (in thousands, except shares) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------------------ | :-------------------------- | :-------------------------- | | Total Number of Shares Repurchased | 806,324 | 116,886 | | Aggregate Purchase Price | $9,800 | $1,609 | - The November 2020 share repurchase program authorized up to $20 million in repurchases through November 3, 2022. As of September 30, 2022, approximately $8.0 million remained available under this program[73][295] Note 9. Income Taxes The company recorded an income tax benefit for both periods ended September 30, 2022, a shift from expense, with the effective tax rate decreasing due to pre-tax results and Hurricane Ian's impact Income Tax Metrics (in thousands) | Income Tax Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense (benefit) | $(20,962) | $6,281 | $(12,718) | $24,342 | | Effective Tax Rate (ETR) | 22.5% | 23.7% | 21.2% | 26.2% | - The state tax benefit was reduced in the third quarter of 2022 due to the absence of a state tax deduction for the Variable Interest Entity (VIE) following Hurricane Ian[77] - Management concluded that a valuation allowance is not required on deferred tax assets, believing the likelihood of utilization is certain[78] Note 10. Earnings Per Share Basic and diluted earnings per share reflect a net loss for both periods ended September 30, 2022, with dilutive common share equivalents excluded in loss periods as anti-dilutive EPS Metrics | EPS Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $(2.36) | $0.65 | $(1.54) | $2.19 | | Diluted EPS | $(2.36) | $0.64 | $(1.54) | $2.19 | | Weighted average diluted common shares outstanding | 30,604 | 31,337 | 30,858 | 31,302 | - There is no difference between basic and diluted income or loss per share in loss periods because potential dilutive instruments would have an anti-dilutive effect[81] Note 11. Other Comprehensive Income (Loss) Other comprehensive income (loss) significantly deteriorated for both periods ended September 30, 2022, primarily due to substantial unrealized holding losses on available-for-sale debt securities Other Comprehensive Income (Loss) Metrics (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Other comprehensive income (loss), net of taxes | $(27,531) | $(1,827) | $(100,097) | $(10,741) | | Unrealized holding gains (losses) arising during the period (pre-tax) | $(36,715) | $(1,635) | $(134,148) | $(13,796) | - The significant increase in other comprehensive loss reflects the negative impact of rising market yields on the fair value of available-for-sale debt securities[84] Note 12. Commitments and Contingencies The company has multi-year reinsurance contract commitments and is involved in legal proceedings, but management believes any resulting liabilities will not materially adversely affect financial condition Multi-Year Reinsurance Commitments (in millions) | Multi-Year Reinsurance Commitments (in millions) | Amount Payable | | :----------------------------------------------- | :------------- | | 2023 | $105.6 | | 2024 | $157.5 | | 2025 | $66.3 | - Management estimates that reasonably possible losses for legal proceedings, whether in excess of accrued liability or where no accrued liability exists, are immaterial[88] Note 13. Fair Value Measurements Assets measured at fair value are classified into a three-level hierarchy, with available-for-sale debt securities primarily Level 2 and equity securities Level 1 Fair Value of Assets (in thousands) | Asset Type (in thousands) | Sep 30, 2022 Fair Value | Dec 31, 2021 Fair Value | | :------------------------ | :---------------------- | :---------------------- | | Available-For-Sale Debt Securities | $996,783 | $1,040,455 | | Equity Securities | $82,387 | $47,334 | | Total assets accounted for at fair value | $1,079,170 | $1,087,789 | - Available-for-sale debt securities are predominantly classified as Level 2, indicating observable market-based inputs or unobservable inputs corroborated by market data[96] - Equity securities (common stock and mutual funds) are classified as Level 1, reflecting unadjusted quoted prices for identical assets in active markets[96] Note 14. Variable Interest Entities The company consolidates a Variable Interest Entity (VIE), Isosceles Insurance Ltd. Separate Account UVE-01, which was fully triggered by Hurricane Ian, resulting in a $66 million loss paid to UPCIC - The company consolidates Isosceles Insurance Ltd. Separate Account UVE-01 as a VIE, where it is the primary beneficiary[99] - Hurricane Ian triggered a full policy limit loss of $66 million from the VIE to UPCIC, which was fully paid in September 2022[100] Restricted Cash (in thousands) | Restricted Cash (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------- | :----------- | :----------- | | Restricted cash and cash equivalents | $67 | $0 | Note 15. Subsequent Events The only recognized subsequent event was the renewal of the unsecured revolving loan agreement on October 31, 2022, which was increased to $37.5 million with no amounts borrowed - The unsecured revolving loan facility was renewed on October 31, 2022, increasing the aggregate commitment to $37.5 million (from $35.0 million)[105] - No amounts have been borrowed under the new 2022 Revolving Loan as of November 2, 2022[105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, highlighting Hurricane Ian's impact, Florida market trends, and strategic initiatives, with analysis of revenues, expenses, liquidity, and non-GAAP measures Cautionary Note Regarding Forward-Looking Statements This section advises that forward-looking statements are subject to uncertainties and risks, including claims severity, reinsurance availability, market trends, and regulatory changes - Forward-looking statements are based on estimates, assumptions, and plans, and actual results may differ due to various risks and uncertainties[107] - Key risks include unanticipated increases in claims (especially catastrophes), failure of risk mitigation strategies, reliance on models, reinsurance availability, industry trends, geographic concentration in Florida, and regulatory actions[108] Overview Universal Insurance Holdings, Inc. is a vertically integrated holding company providing property and casualty insurance, primarily residential homeowners' insurance in 19 states, mostly Florida - The company is a vertically integrated holding company offering property and casualty insurance and related services[109] - Primary insurance entities, UPCIC and APPCIC, offer products in 19 states, predominantly Florida[109] - Strategic objectives include achieving long-term underwriting profit, maintaining a conservative balance sheet, and generating investment income[109] Trends The Florida homeowners' market is a hard market with escalating premiums and tightening underwriting, facing challenges from increased litigation, inflation, and supply chain issues - The Florida personal lines homeowners' market is a hard market with escalating premium rates and tightening underwriting standards[111] - Increased costs for losses and LAE in Florida are driven by an industry around claim solicitation and litigation, exacerbated by a one-way right of attorneys' fees against insurers and rising inflation in labor and material costs[112] - Recent legislative reforms in Florida (April 2021 and May 2022) aim to curtail litigation abuses, including new pre-suit notice requirements and restrictions on assignment of policyholders' rights to attorneys' fees, but their full impact is yet to be seen[113][115][118] - The company has implemented various initiatives to mitigate negative trends, such as Fast Track claims processing, increased subrogation, in-house water remediation experts, and specialized legal staff[117] - The COVID-19 pandemic has indirectly contributed to inflationary pressures on claims costs due to supply chain and labor constraints[120] Key Performance Indicators This section defines key performance indicators and GAAP/non-GAAP measures used to evaluate financial performance, including adjusted book value, combined ratio, and direct premiums written - Key performance indicators include Adjusted book value per common share, Combined Ratio, Core Loss Ratio, Direct Premiums Written (DPW), Expense Ratio, Losses and Loss Adjustment Expense Ratio, Policies in Force, and Premium in Force[124][131][132][137][139][140][143][144] - Non-GAAP measures like Adjusted net income (loss) attributable to common stockholders and Adjusted operating income (loss) are used to evaluate underlying profitability by excluding investment market fluctuations[126][127] - A combined ratio below 100% indicates underwriting profit, while above 100% indicates underwriting losses[131] Reinsurance The company's reinsurance strategy protects against catastrophic events, with programs for UPCIC and APPCIC meeting regulatory requirements and extending to significant coverage towers - Reinsurance programs for UPCIC and APPCIC meet FLOIR requirements and Demotech, Inc. standards for maintaining Financial Stability Ratings® of A (Exceptional)[150] - UPCIC's 2022-2023 reinsurance program has a first event All States retention of $45 million and a tower extending to $3.012 billion[153] - APPCIC's 2022-2023 reinsurance program has a first event All States retention of $3.5 million and a tower of $50.5 million[158] - The total projected cost of the 2022-2023 reinsurance programs for UPCIC and APPCIC is $696 million, or approximately 37.6% of estimated direct premium earned[160] Results of Operations and Analysis of Financial Condition The company reported a net loss in Q3 and the first nine months of 2022, primarily due to Hurricane Ian and higher core losses, despite premium growth, with increased reinsurance costs and unrealized investment losses - Hurricane Ian resulted in an estimated $1 billion gross ultimate loss, with a net exposure of $45 million for the Insurance Entities and $111 million including the prefunded captive insurance arrangement[163] - Direct premiums written increased by 15.6% for Q3 2022 and 12.4% for the nine months ended September 30, 2022, driven by rate increases in Florida and other states[166][199] - Net loss for Q3 2022 was $72.3 million (vs. $20.2 million net income in Q3 2021), and for the nine months was $47.4 million (vs. $68.5 million net income in 9M 2021)[165][198] - The combined ratio for Q3 2022 was 139.2% (vs. 98.5% in Q3 2021) and for the nine months was 113.2% (vs. 96.4% in 9M 2021), reflecting the impact of Hurricane Ian and higher core losses[165][189][198][220] - Core losses increased to 47.9% of direct premium earned for Q3 2022 (vs. 42.9% in Q3 2021) and 45.8% for the nine months (vs. 40.8% in 9M 2021), due to worsening weather trends and higher repair costs from inflation[184][216] - Total policies in force declined by 7.5% from December 31, 2021, to September 30, 2022, due to reduced new business, lower renewal retention, and selected policy non-renewals[166][200] Analysis of Financial Condition—As of September 30, 2022 Compared to December 31, 2021 Financial condition saw significant changes, with total assets and liabilities increasing substantially due to Hurricane Ian-related reinsurance recoverable and unpaid losses, while stockholders' equity decreased Balance Sheet Changes (in thousands) | Balance Sheet Item (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Total Assets | $3,126,894 | $2,056,141 | $1,070,753 | | Total Liabilities | $2,866,257 | $1,626,439 | $1,239,818 | | Total Stockholders' Equity | $260,637 | $429,702 | $(169,065) | | Reinsurance recoverable | $935,810 | $185,589 | $750,221 | | Unpaid losses and LAE | $1,153,627 | $346,216 | $807,411 | | Prepaid reinsurance premiums | $452,230 | $240,993 | $211,237 | | Unearned premiums | $991,596 | $857,769 | $133,827 | - The increase in reinsurance recoverable and unpaid losses and LAE was primarily due to losses recorded for Hurricane Ian in Q3 2022[230][236] - Deferred income tax assets increased by $33.3 million to $49.7 million, mainly due to an increase in unrealized losses on investments[234] - Accumulated other comprehensive loss increased from $15.6 million at December 31, 2021, to $115.7 million at September 30, 2022, reflecting declines in the fair value of available-for-sale debt securities[15][241] Liquidity and Capital Resources The company maintains sufficient liquidity from operations and investments, with cash increasing due to Hurricane Ian cash calls, but capital resources decreased due to net loss and unrealized investment losses - Cash and cash equivalents increased by 22.7% to $307.4 million at September 30, 2022, largely due to cash calls to reinsurers for Hurricane Ian claim settlement liquidity[173][244] Capital Resources (in thousands) | Capital Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :---------------------------- | :----------- | :----------- | | Stockholders' equity | $260,637 | $429,702 | | Total long-term debt | $102,968 | $103,676 | | Total capital resources | $363,605 | $533,378 | | Debt-to-total capital ratio | 28.3% | 19.4% | | Debt-to-equity ratio | 39.5% | 24.1% | - The Insurance Entities did not have the capacity to pay ordinary dividends to the parent company as of September 30, 2022[247] - The company repurchased 806,324 shares of common stock for $9.8 million during the nine months ended September 30, 2022[263] - Quarterly cash dividends of $0.16 per common share were declared for Q1, Q2, and Q3 2022[265] Material Cash Requirements Material cash requirements include significant obligations for reinsurance payable, multi-year commitments, unpaid losses and LAE, and long-term debt, with a substantial portion due within 12 months Material Cash Requirements (in thousands) | Material Cash Requirements (in thousands) | Total | Next 12 Months | Beyond 12 Months | | :---------------------------------------- | :----------- | :------------- | :--------------- | | Reinsurance payable and multi-year commitments | $788,268 | $518,920 | $269,348 | | Unpaid losses and LAE, direct | $1,153,627 | $650,645 | $502,982 | | Long-term debt | $131,582 | $7,261 | $124,321 | | Total | $2,073,477 | $1,176,826 | $896,651 | - The amounts and timing of future loss and LAE payments are estimates and subject to inherent variability[266] Impact of Inflation and Changing Prices Inflation primarily impacts the company through interest rates and the cost of paying losses, with competitive and regulatory limitations potentially hindering full recovery of increased costs - Interest rates have a more significant impact on performance than general inflation levels due to the monetary nature of primary assets[267] - The company attempts to anticipate future inflation when establishing insurance rates, but competitive and regulatory reasons may limit rate increases[268] - Prolonged and increasing inflation could lead to higher incurred loss and LAE, materially affecting future liability requirements[268] Arrangements with Variable Interest Entities The company consolidates a Variable Interest Entity (VIE) in the normal course of business, as it is determined to be the primary beneficiary - The company consolidates a VIE because it is the primary beneficiary[269] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies and estimates during the period covered by this Quarterly Report on Form 10-Q - No material changes to critical accounting policies and estimates were reported in this quarterly period[269] Non-GAAP Financial Measures This section reconciles GAAP to non-GAAP measures like core revenue and adjusted operating income, used by management to evaluate underlying financial performance by excluding investment market fluctuations Non-GAAP Financial Metrics (in thousands) | Non-GAAP Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Core Revenue | $316,668 | $286,694 | $909,103 | $826,859 | | Adjusted operating income (loss) | $(87,749) | $25,933 | $(38,312) | $90,625 | | Adjusted net income (loss) available to common stockholders | $(69,369) | $19,751 | $(34,705) | $66,736 | Non-GAAP Equity and Book Value | Non-GAAP Metric | Sep 30, 2022 | Sep 30, 2021 | Dec 31, 2021 | | :---------------- | :----------- | :----------- | :----------- | | Adjusted common stockholders' equity | $376,202 | $501,573 | $445,170 | | Adjusted book value per common share | $12.33 | $16.09 | $14.26 | - Adjusted operating loss margin was 27.7% for the three months and 4.2% for the nine months ended September 30, 2022, compared to adjusted operating income margins of 9.0% and 11.0% respectively in the prior year periods[271] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses market risk from interest rate and equity price changes affecting investments, prioritizing capital preservation and liquidity, and provides sensitivity tables Interest Rate Risk The company's fixed income instruments are sensitive to interest rate changes, with fair values declining as rates rise, and tables show decreased fair value and increased book yield - The fair value of fixed-rate financial instruments generally declines when interest rates rise[279] Fixed Income Portfolio (in thousands) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------- | :-------------------------- | :-------------------------- | | Amortized cost | $1,150,524 | $1,061,192 | | Fair market value | $996,783 | $1,040,455 | | Coupon rate | 2.58% | 2.46% | | Book yield | 1.78% | 1.34% | - The average effective maturity for available-for-sale securities was 5.3 years at September 30, 2022, slightly down from 5.4 years at December 31, 2021[280] Equity Price Risk The investment portfolio is exposed to equity price risk from common stock and mutual funds, where a hypothetical 20% decrease would significantly reduce their fair value Equity Securities Fair Value (in thousands) | Equity Securities (in thousands) | Sep 30, 2022 Fair Value | Dec 31, 2021 Fair Value | | :------------------------------- | :---------------------- | :---------------------- | | Common stock | $19,746 | $3,683 | | Mutual funds and other | $62,641 | $43,651 | | Total equity securities | $82,387 | $47,334 | - A hypothetical 20% decrease in equity market prices would result in a $16.5 million decrease in fair value at September 30, 2022, and $9.5 million at December 31, 2021[283] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of September 30, 2022, concluding they were deemed effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were deemed effective as of September 30, 2022[285] - No material changes in internal control over financial reporting occurred during the reporting period[286] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, but management believes any resulting liabilities will not materially adversely affect financial condition or results of operations - Management believes that liabilities from legal proceedings will not materially adversely affect financial condition or results of operations[287] - Reasonably possible losses for legal proceedings are estimated to be immaterial[289] Item 1A. Risk Factors This section refers to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - Risk factors are consistent with those disclosed in the Annual Report on Form 10-K for December 31, 2021[290] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 203,244 shares of common stock for $11.87 per share during Q3 2022 under its November 2020 program, with approximately $8.0 million remaining available Share Repurchase Activity (in thousands, except shares) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------- | :------------------------------- | :--------------------------- | | 7/1/2022 - 7/31/2022 | — | $— | | 8/1/2022 - 8/31/2022 | 111,410 | $12.16 | | 9/1/2022 - 9/30/2022 | 91,834 | $11.53 | | Total | 203,244 | $11.87 | - As of September 30, 2022, the company had the ability to purchase up to approximately $8.0 million of common stock under the November 2022 Share Repurchase Program[295] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, officer certifications, and iXBRL financial statements - Exhibits include corporate governance documents, credit agreements, officer certifications, and iXBRL financial statements[296] Signatures The report was signed by Stephen J. Donaghy (CEO) and Gary Lloyd Ropiecki (Principal Accounting Officer) on behalf of Universal Insurance Holdings, Inc. on November 2, 2022 - The report was signed by Stephen J. Donaghy (CEO) and Gary Lloyd Ropiecki (Principal Accounting Officer) on November 2, 2022[301]