Universal Insurance Holdings(UVE) - 2022 Q1 - Quarterly Report

Filing Information This section details the Form 10-Q filing for Universal Insurance Holdings, Inc., an accelerated filer, including its common stock listing and outstanding shares Form 10-Q Details This section identifies the filing as a Quarterly Report on Form 10-Q for the period ended March 31, 2022, for Universal Insurance Holdings, Inc., a Delaware corporation - The document is a Quarterly Report (Form 10-Q) for the period ended March 31, 2022[2] - The registrant is Universal Insurance Holdings, Inc., a Delaware corporation[2] Registrant Information and Securities Universal Insurance Holdings, Inc. is an accelerated filer with its common stock traded on the New York Stock Exchange under the symbol UVE, with 30,945,861 shares outstanding as of April 26, 2022 - The company is classified as an 'Accelerated filer'[4] - Common Stock, $0.01 Par Value, is traded on the New York Stock Exchange under the symbol UVE[3] Common Stock Outstanding | Date | Shares Outstanding | | :------------ | :----------------- | | April 26, 2022 | 30,945,861 | Report of Independent Registered Public Accounting Firm This section presents the independent auditor's review of the interim condensed consolidated financial statements, confirming their conformity with U.S. GAAP Results of Review of Interim Condensed Consolidated Financial Statements Plante & Moran, PLLC reviewed the interim condensed consolidated financial statements for Universal Insurance Holdings, Inc. for the three-month periods ended March 31, 2022 and 2021, finding no material modifications needed for conformity with U.S. GAAP - The independent registered public accounting firm, Plante & Moran, PLLC, found no material modifications needed for the interim financial statements to conform with U.S. GAAP[8] - The consolidated balance sheet as of December 31, 2021, was deemed fairly stated in all material respects[9] PART I – FINANCIAL INFORMATION This part contains the unaudited condensed consolidated financial statements and management's discussion and analysis of the company's financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, stockholders' equity statements, and cash flow statements, along with detailed notes explaining the company's financial position and performance for the periods presented Condensed Consolidated Balance Sheets The company's total assets decreased by 15% from $2,056.1 million at December 31, 2021, to $1,749.0 million at March 31, 2022, primarily due to decreases in available-for-sale debt securities, cash and cash equivalents, and reinsurance-related assets, with total liabilities also decreasing by 16.8% Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | Change (%) | | :------------------------- | :------------- | :---------------- | :--------- | :--------- | | Total assets | $1,748,955 | $2,056,141 | $(307,186) | -14.9% | | Total liabilities | $1,352,614 | $1,626,439 | $(273,825) | -16.8% | | Total stockholders' equity | $396,341 | $429,702 | $(33,361) | -7.8% | - Available-for-sale debt securities decreased from $1,040,455 thousand to $1,014,677 thousand[15] - Cash and cash equivalents decreased from $250,508 thousand to $165,398 thousand[15] Condensed Consolidated Statements of Income Net income decreased by 33.6% to $17.5 million for the three months ended March 31, 2022, compared to $26.4 million in the prior year, driven by increased losses and loss adjustment expenses and interest expense Condensed Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | Change ($) | Change (%) | | :---------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Premiums earned, net | $269,064 | $243,305 | $25,759 | 10.6% | | Net investment income | $4,042 | $2,986 | $1,056 | 35.4% | | Total premiums earned and other revenues | $287,482 | $262,757 | $24,725 | 9.4% | | Losses and loss adjustment expenses | $185,106 | $143,963 | $41,143 | 28.6% | | General and administrative expenses | $78,297 | $82,423 | $(4,126) | -5.0% | | Total operating costs and expenses | $263,403 | $226,386 | $37,017 | 16.4% | | Interest and amortization of debt issuance costs | $1,608 | $20 | $1,588 | 7940.0% | | Income (loss) before income taxes | $22,471 | $36,351 | $(13,880) | -38.2% | | Income tax expense (benefit) | $4,934 | $9,943 | $(5,009) | -50.4% | | Net income (loss) | $17,537 | $26,408 | $(8,871) | -33.6% | | Basic earnings (loss) per common share | $0.56 | $0.85 | $(0.29) | -34.1% | | Diluted earnings (loss) per common share | $0.56 | $0.84 | $(0.28) | -33.3% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income shifted from a gain of $9.5 million in Q1 2021 to a loss of $25.4 million in Q1 2022, primarily due to a significant increase in other comprehensive loss from unrealized losses on available-for-sale securities Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | Change ($) | | :--------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net income (loss) | $17,537 | $26,408 | $(8,871) | | Other comprehensive income (loss), net of taxes | $(42,910) | $(16,910) | $(26,000) | | Comprehensive income (loss) | $(25,373) | $9,498 | $(34,871) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased by 7.8% to $396.3 million at March 31, 2022, mainly due to a substantial other comprehensive loss and treasury stock purchases, partially offset by net income Stockholders' Equity Changes (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | | :----------------------------------- | :------------- | :---------------- | :--------- | | Total stockholders' equity | $396,341 | $429,702 | $(33,361) | | Accumulated other comprehensive income (loss), net of taxes | $(58,478) | $(15,568) | $(42,910) | | Retained earnings | $576,243 | $563,713 | $12,530 | - Purchases of treasury stock amounted to $3,879 thousand during the three months ended March 31, 2022[19] - Declaration of dividends totaled $5,007 thousand for the three months ended March 31, 2022[19] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $27.1 million for Q1 2022, a significant shift from $61.3 million provided in the prior year, leading to an $85.1 million decrease in cash and cash equivalents Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $(27,081) | $61,265 | | Net cash provided by (used in) investing activities | $(48,442) | $(131,398) | | Net cash provided by (used in) financing activities | $(9,587) | $(6,194) | | Net increase (decrease) during the period | $(85,110) | $(76,327) | | Balance, beginning of period | $253,143 | $179,871 | | Balance, end of period | $168,033 | $103,544 | - Purchases of available-for-sale debt securities decreased significantly from $178,828 thousand in Q1 2021 to $57,163 thousand in Q1 2022[25] - Purchase of treasury stock increased from $245 thousand in Q1 2021 to $3,879 thousand in Q1 2022[25] Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's operations, accounting policies, investments, reinsurance, insurance operations, liabilities, debt, equity, income taxes, earnings per share, comprehensive income, commitments, fair value measurements, variable interest entities, and subsequent events 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 residential homeowners' insurance in Florida being its main product, and financial statements prepared under U.S. GAAP - The Company is a vertically integrated insurance holding company, primarily offering residential homeowners' insurance in 19 states, with Florida comprising the majority of policies[28] - Primary revenue sources include premiums, investment returns, brokerage commissions from reinsurers, and policy fees[29] - Financial statements are prepared under SEC rules for interim information and U.S. GAAP, with significant estimates in liabilities for unpaid losses and loss adjustment expenses[30][33] 2. Significant Accounting Policies This note refers to the significant accounting policies detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, indicating no new material changes for the interim period - Significant Accounting Policies are consistent with those reported in the Annual Report on Form 10-K for the year ended December 31, 2021[34] 3. Investments The company's total invested assets decreased slightly to $1,085.6 million at March 31, 2022, with available-for-sale debt securities experiencing a significant increase in gross unrealized losses due to rising interest rates Available-for-Sale Debt Securities (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | | :------------------------- | :------------- | :---------------- | :--------- | | Amortized Cost | $1,092,438 | $1,061,192 | $31,246 | | Gross Unrealized Gains | $149 | $1,129 | $(980) | | Gross Unrealized Losses | $(77,338) | $(21,377) | $(55,961) | | Fair Value | $1,014,677 | $1,040,455 | $(25,778) | Net Investment Income (in thousands) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | Change ($) | Change (%) | | :---------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total investment income | $4,752 | $3,699 | $1,053 | 28.5% | | Investment expenses | $(710) | $(713) | $3 | -0.4% | | Net investment income | $4,042 | $2,986 | $1,056 | 35.4% | - Unrealized losses on available-for-sale debt securities are primarily due to changes in interest rates, with issuers maintaining high credit quality[36] - A net unrealized loss of $3,396 thousand on equity securities was recognized during the three months ended March 31, 2022, compared to $494 thousand in the prior year[17][44] 4. Reinsurance The Company uses reinsurance to mitigate catastrophic loss risk, with reinsurance recoverable decreasing significantly to $104.7 million at March 31, 2022, and ceded premium earned increasing by 10% year-over-year - The Company manages catastrophic loss risk through reinsurance agreements, primarily catastrophe excess of loss reinsurance[46] Reinsurance Impact on Income Statement (in thousands) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | Change ($) | Change (%) | | :---------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Direct premiums written | $396,481 | $365,314 | $31,167 | 8.5% | | Ceded premium earned | $(145,539) | $(132,301) | $(13,238) | 10.0% | | Net premiums earned | $269,064 | $243,305 | $25,759 | 10.6% | | Ceded losses and LAE | $(10,049) | $(93,335) | $83,286 | -89.2% | Reinsurance Recoverable (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | Change (%) | | :------------------------- | :------------- | :---------------- | :--------- | :--------- | | Prepaid reinsurance premiums | $109,401 | $240,993 | $(131,592) | -54.6% | | Reinsurance recoverable | $104,660 | $185,589 | $(80,929) | -43.6% | 5. Insurance Operations Deferred Policy Acquisition Costs (DPAC) decreased to $103.6 million at March 31, 2022, due to amortization, and both UPCIC and APPCIC exceeded minimum statutory capital requirements despite dividend restrictions Deferred Policy Acquisition Costs (DPAC) (in thousands) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | | :--------------------- | :-------------------------- | :-------------------------- | | DPAC, beginning of period | $108,822 | $110,614 | | Capitalized Costs | $49,199 | $54,722 | | Amortization of DPAC | $(54,399) | $(54,143) | | DPAC, end of period | $103,622 | $111,193 | - UPCIC and APPCIC are unable to pay ordinary dividends in 2022 due to Florida Insurance Code restrictions[51] Statutory Capital and Surplus (in thousands) | Entity | March 31, 2022 | December 31, 2021 | | :----- | :------------- | :---------------- | | UPCIC | $389,248 | $378,750 | | APPCIC | $18,539 | $16,104 | - Both Insurance Entities exceeded the minimum statutory capitalization requirement of $15.0 million or ten percent of total liabilities[52][54] 6. Liability for Unpaid Losses and Loss Adjustment Expenses The liability for unpaid losses and LAE decreased to $244.5 million at March 31, 2022, with the quarter seeing $0.7 million in net unfavorable prior years' reserve development, primarily from Hurricanes Irma and Matthew Change in Liability for Unpaid Losses and LAE (in thousands) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period | $346,216 | $322,465 | | Total incurred | $185,106 | $143,963 | | Total paid | $236,383 | $149,797 | | Balance at end of period | $244,482 | $315,780 | - Net unfavorable prior years' reserve development of $0.7 million in Q1 2022, primarily due to increases in ultimate losses for Hurricanes Irma and Matthew[56] - Net favorable prior years' reserve development of $1.2 million in Q1 2021, mainly from increased ceded reserves for Hurricane Sally[57] 7. Long-term Debt Total long-term debt, net, was $103.4 million at March 31, 2022, consisting of a surplus note and $100 million in 5.625% Senior Unsecured Notes due 2026, with the company in compliance with all debt covenants Long-term Debt (in thousands) | Debt Type | March 31, 2022 | December 31, 2021 | | :---------------------------- | :------------- | :---------------- | | Surplus note | $6,618 | $6,985 | | 5.625% Senior unsecured notes | $100,000 | $100,000 | | Total principal amount | $106,618 | $106,985 | | Less: unamortized debt issuance costs | $(3,234) | $(3,309) | | Total long-term debt, net | $103,384 | $103,676 | - The Company issued $100 million of 5.625% Senior Unsecured Notes due 2026 in November 2021[60] - An unsecured revolving credit facility of $35.0 million with JPMorgan Chase Bank, N.A. was undrawn as of March 31, 2022[64][65] - Interest and amortization of debt issuance costs increased significantly to $1,608 thousand in Q1 2022 from $20 thousand in Q1 2021 due to the new senior unsecured notes[66] 8. Stockholders' Equity The Company repurchased 320,528 shares of common stock for $3.9 million during Q1 2022 under a $20 million share repurchase program authorized through November 2022 Common Stock Repurchases (in thousands, except shares and per share data) | Date Authorized | Expiration Date | Dollar Amount Authorized | Total Number of Shares Repurchased (Q1 2022) | Aggregate Purchase Price (Q1 2022) | Average Price Per Share (Q1 2022) | | :-------------- | :-------------- | :----------------------- | :------------------------------------------- | :--------------------------------- | :-------------------------------- | | Nov 3, 2020 | Nov 3, 2022 | $20,000 | 320,528 | $3,879 | $12.10 | 9. Income Taxes Income tax expense decreased to $4.9 million for Q1 2022 from $9.9 million in Q1 2021, resulting in a lower effective tax rate of 22.0%, influenced by a lower ratio of permanent items to pre-tax income and higher discrete tax benefits Income Tax Expense and Effective Tax Rate (in thousands) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | | :----------------- | :-------------------------- | :-------------------------- | | Income tax expense | $4,934 | $9,943 | | Effective tax rate | 22.0% | 27.4% | - The estimated annual ETR for 2022 is 25.8%, reduced to 22.0% for the quarter due to discrete items, including a higher Florida corporate income tax rate[72] - Management concluded that a valuation allowance on deferred tax assets is not required, expecting full utilization[73] 10. Earnings Per Share Diluted EPS decreased to $0.56 for Q1 2022 from $0.84 in Q1 2021, reflecting a decline in net income available to common stockholders despite a slight decrease in weighted average diluted common shares outstanding Earnings Per Share Reconciliation (in thousands, except per share data) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | | :---------------------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $17,537 | $26,408 | | Income (loss) available to common stockholders | $17,534 | $26,405 | | Weighted average common shares outstanding - Basic | 31,147 | 31,208 | | Weighted average common shares outstanding - Diluted | 31,227 | 31,277 | | Basic earnings (loss) per common share | $0.56 | $0.85 | | Diluted earnings (loss) per common share | $0.56 | $0.84 | 11. Other Comprehensive Income (Loss) Other comprehensive loss, net of taxes, significantly increased to $42.9 million in Q1 2022 from $16.9 million in Q1 2021, primarily driven by substantial unrealized holding losses on available-for-sale debt securities Components of Other Comprehensive Income (Loss) (in thousands) | Metric | 3 Months Ended Mar 31, 2022 (After-tax) | 3 Months Ended Mar 31, 2021 (After-tax) | | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Unrealized holding gains (losses) arising during the period | $(43,109) | $(17,064) | | Less: Reclassification adjustments for (gains) losses realized in net income (loss) | $199 | $154 | | Other comprehensive income (loss) | $(42,910) | $(16,910) | 12. Commitments and Contingencies The Company has multi-year reinsurance contract commitments totaling $80.2 million in 2022, $152.7 million in 2023, and $58.1 million in 2024, with legal proceedings not expected to materially adversely affect financial condition Multi-Year Reinsurance Contract Commitments (in millions) | Year | Amount Payable | | :--- | :------------- | | 2022 | $80.2 | | 2023 | $152.7 | | 2024 | $58.1 | - Management believes that liabilities from legal matters will not have a material adverse effect on the Company's financial condition or results of operations[81] - Reasonably possible losses for legal proceedings are estimated to be immaterial[83] 13. Fair Value Measurements The Company classifies assets measured at fair value into a three-level hierarchy, with most available-for-sale debt securities as Level 2 and equity securities as Level 1, and long-term debt also disclosed at fair value - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable market-based inputs), and Level 3 (unobservable inputs)[91] Assets Accounted for at Fair Value (in thousands) | Asset Type | March 31, 2022 (Total Fair Value) | December 31, 2021 (Total Fair Value) | | :-------------------------------- | :-------------------------------- | :----------------------------------- | | Available-For-Sale Debt Securities | $1,014,677 | $1,040,455 | | Equity Securities | $65,126 | $47,334 | | Total | $1,079,803 | $1,087,789 | - Available-for-sale debt securities are primarily classified as Level 2, while equity securities (common stock and mutual funds) are Level 1[92] 14. Variable Interest Entities The Company consolidated Isosceles Insurance Ltd. as a Variable Interest Entity (VIE) due to being the primary beneficiary, though this reinsurance arrangement was terminated effective December 1, 2021 - The Company consolidated a Variable Interest Entity (VIE), Isosceles Insurance Ltd. acting in respect of "Separate Account UVE-01", as it was deemed the primary beneficiary[96] - The reinsurance arrangement with the VIE was terminated effective December 1, 2021[97] 15. Subsequent Events The Company declared a quarterly cash dividend of $0.16 per common share on April 20, 2022, and the Exchange Offer for Senior Unsecured Notes closed on April 28, 2022, satisfying registration requirements - A quarterly cash dividend of $0.16 per common share was declared on April 20, 2022[100] - The Exchange Offer for the Senior Unsecured Notes closed on April 28, 2022, fulfilling the Registration Rights Agreements[100] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and operating results, highlighting key trends in the Florida insurance market, the impact of COVID-19, and detailed analysis of revenues, expenses, and financial position, along with liquidity, capital resources, and market risks Cautionary Note Regarding Forward-Looking Statements This section warns that the report contains forward-looking statements based on estimates and assumptions, subject to uncertainties and risks, and actual results could differ materially due to various factors - Forward-looking statements are based on estimates and assumptions, subject to uncertainty, and actual results may differ materially[102] - Key risks include unanticipated increases in claims, failure of risk mitigation strategies, reliance on models, reinsurance availability, and regulatory changes[103] Overview Universal Insurance Holdings, Inc. is a vertically integrated property and casualty insurer focused on Florida homeowners' insurance, operating in a 'hard market' characterized by escalating rates, tightening underwriting, and increased claims costs - The Company is a vertically integrated holding company offering property and casualty insurance, primarily residential homeowners' insurance in 19 states, with a focus on Florida[104] - The Florida personal lines homeowners' market is characterized as a 'hard market' with escalating premium rates, reduced coverages, and tightening underwriting standards[106] - Inflated costs for losses and LAE in Florida are driven by an industry around claim solicitation, filing, and litigation, exacerbated by litigation financing and a one-way right of attorneys' fees against insurers[107] Florida Trends Florida's insurance market faces significant challenges from 'social inflation,' increased litigation, and rising costs of building materials and labor, leading to higher claim costs, with legislative reforms' effectiveness still uncertain - Florida's market is experiencing increased frequency and severity of personal residential claims due to active solicitation, inflated claim amounts, and increased demands for attorneys' fees[107] - The 2021 Florida legislation introduced pre-suit notice requirements and reduced claim filing periods, but its impact on litigation and market conditions is still being evaluated[108][109] - The Company has implemented initiatives like 'Fast Track' claims processing, increased subrogation emphasis, and expanded in-house legal staff to mitigate adverse market trends[111] Impact of COVID-19 The COVID-19 pandemic has not directly materially impacted the Company's business, but it has indirectly contributed to inflationary pressures on claims costs due to supply chain and labor constraints, with the ultimate long-term impact remaining uncertain - No direct material impact from COVID-19 on business, financial position, or liquidity since March 2020[113] - Indirectly, inflationary pressures from supply chain and labor constraints due to the pandemic have affected claims costs and other expenses[113] Key Performance Indicators This section defines key performance indicators used by management to understand business trends, including Book Value Per Common Share, Combined Ratio, Core Loss Ratio, Debt-to-Equity Ratio, Direct Premiums Written, Expense Ratio, Loss and LAE Ratio, Monthly Weighted Average Renewal Retention Rate, Premiums Earned, Policies in Force, Premium in Force, Return on Average Equity, Total Insured Value, Unearned Premiums, and Weather events - Key performance indicators include Book Value Per Common Share, Combined Ratio, Core Loss Ratio, Debt-to-Equity Ratio, Direct Premiums Written (DPW), Expense Ratio, Loss and LAE Ratio, Monthly Weighted Average Renewal Retention Rate, Premiums Earned (Net), Policies in Force, Premium in Force, Return on Average Equity (ROAE), Total Insured Value, Unearned Premiums, and Weather events[117][118][119][120][121][122][123][124][125][126][127][128][129][130][131][132][133] Reinsurance The Company's reinsurance strategy aims to protect its balance sheet from catastrophic events, meeting regulatory and rating agency requirements, with the 2021-2022 programs for UPCIC and APPCIC providing extensive coverage at a projected cost of $584 million - Reinsurance programs for UPCIC and APPCIC meet Florida Office of Insurance Regulation (FLOIR) and Demotech, Inc. requirements for financial stability[135] - UPCIC's 2021-2022 reinsurance program includes a first event All States retention of $45 million and protection extending to $3.364 billion[138] - The total cost of the 2021-2022 reinsurance programs for UPCIC and APPCIC is projected to be $584 million, representing approximately 35% of estimated direct premium earned[144] UPCIC's 2021-2022 Reinsurance Program UPCIC's 2021-2022 reinsurance program features a $45 million first event All States retention, with coverage extending to $3.364 billion, including full reinstatement options and specific frequency protection, with the FHCF providing an estimated $1.963 billion in coverage - First event All States retention for UPCIC is $45 million, with reinsurance protection extending to $3.364 billion[138] - The program includes full reinstatement available on $1.06 billion of non-FHCF first event catastrophe coverage for guaranteed second event coverage[138] - The FHCF layer is estimated to provide approximately $1.963 billion of coverage for UPCIC[138] APPCIC's 2021-2022 Reinsurance Program APPCIC's 2021-2022 reinsurance program has a $2.5 million first event All States retention, with its tower extending to $38 million, and includes extensive multiple line excess per risk reinsurance and an estimated $18.4 million in FHCF coverage - First event All States retention for APPCIC is $2.5 million, with the tower extending to $38 million[145] - APPCIC purchases multiple line excess per risk reinsurance, providing coverage of $8.5 million in excess of $0.5 million for property losses[145] - The FHCF layer is estimated to provide approximately $18.4 million of coverage for APPCIC[145] Results of Operations and Analysis of Financial Condition The Company reported a 33.6% decrease in net income for Q1 2022, primarily due to higher losses and LAE and increased interest expense, despite growth in net premiums earned, with total assets and stockholders' equity also declining Highlights for the quarter ended March 31, 2022 Key highlights for Q1 2022 include increasing written and earned premiums, a rise in net investment income, and lower expense ratios, offset by higher losses and LAE and unrealized investment losses - Approved rate filings are increasing written and earned premiums[148] - Net investment income increased, but rising interest rates led to unrealized losses on investments[148] - Losses and LAE, net, were higher due to increased accrual rates for current accident year reserves[148] - Expense management efforts lowered the expense ratio[148] Results of Operations — Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Net income declined by 33.6% to $17.5 million, and diluted EPS decreased to $0.56, with net premiums earned growing by 10.6%, but the net loss and LAE ratio increased to 68.8% and the combined ratio rose to 97.9% Key Financial Performance Metrics (in thousands, except per share data) | Metric | 3 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2021 | Change ($) | Change (%) | | :---------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net income (loss) | $17,537 | $26,408 | $(8,871) | -33.6% | | Diluted earnings (loss) per common share | $0.56 | $0.84 | $(0.28) | -33.3% | | Premiums earned, net | $269,064 | $243,305 | $25,759 | 10.6% | | Net loss and LAE ratio | 68.8% | 59.2% | 9.6 pp | 16.2% | | Combined ratio | 97.9% | 93.1% | 4.8 pp | 5.2% | - Direct premiums written increased by 8.5% to $396.5 million, driven by rate increases in Florida and other states[151][152] - General and administrative expenses decreased by 5.0% to $78.3 million, primarily due to reduced commission rates and lower employee benefits[171][173] Analysis of Financial Condition—As of March 31, 2022 Compared to December 31, 2021 Total invested assets slightly decreased to $1,085.6 million, with significant decreases in prepaid reinsurance premiums and reinsurance recoverable, while unpaid losses and LAE decreased by $101.7 million and total stockholders' equity declined by $33.7 million Key Balance Sheet Changes (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | | :------------------------- | :------------- | :---------------- | :--------- | | Total invested assets | $1,085,648 | $1,093,680 | $(8,032) | | Prepaid reinsurance premiums | $109,401 | $240,993 | $(131,592) | | Reinsurance recoverable | $104,660 | $185,589 | $(80,929) | | Unpaid losses and LAE | $244,482 | $346,216 | $(101,734) | | Deferred income tax asset, net | $40,072 | $16,331 | $23,741 | | Total stockholders' equity | $396,341 | $429,702 | $(33,361) | - The decrease in cash and cash equivalents was driven by cash flows used in operating, investing, and financing activities[193] Liquidity and Capital Resources The Company's liquidity is supported by operating cash flows and a conservative investment portfolio, with cash and cash equivalents decreasing to $165.4 million, while total capital resources decreased to $499.7 million, and the company maintains compliance with debt covenants - Cash flows from operations are expected to be sufficient to meet short and long-term obligations[192] Liquidity and Capital Resources (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $165,398 | $250,508 | | Total capital resources | $499,725 | $533,378 | | Debt-to-total capital ratio | 20.7% | 19.4% | | Debt-to-equity ratio | 26.1% | 24.1% | - The Company maintains a conservative, well-diversified investment portfolio with an average credit rating of A+ for capital preservation and liquidity[205] Liquidity The Company's liquidity is primarily derived from operating cash flows, with cash and cash equivalents decreasing to $165.4 million, and it has access to an undrawn $35 million revolving loan, despite dividend restrictions from insurance entities - Cash and cash equivalents, excluding restricted cash, decreased to $165.4 million at March 31, 2022, from $250.5 million at December 31, 2021[193] - Insurance Entities did not have the capacity to pay ordinary dividends as of March 31, 2022, due to regulatory restrictions[196] - The Company has an undrawn $35.0 million unsecured revolving credit facility[197][202] Capital Resources Total capital resources decreased to $499.7 million, with the debt-to-total capital ratio increasing to 20.7%, and the Company's long-term debt includes a surplus note and $100 million in senior unsecured notes, with all covenants in compliance Capital Resources and Ratios (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------- | :------------- | :---------------- | | Stockholders' equity | $396,341 | $429,702 | | Total long-term debt | $103,384 | $103,676 | | Total capital resources | $499,725 | $533,378 | | Debt-to-total capital ratio | 20.7% | 19.4% | | Debt-to-equity ratio | 26.1% | 24.1% | - The Company was in compliance with all financial covenants for its surplus note and senior unsecured notes as of March 31, 2022[201][203] - The investment portfolio is predominantly fixed income securities with an average credit rating of A+, focusing on capital preservation and liquidity[205] Impact of the COVID-19 Pandemic The COVID-19 pandemic continues to pose a risk to financial markets, but the Company believes its measures and inherent liquidity will allow it to meet obligations, while monitoring credit quality and economic impacts - The COVID-19 pandemic presents uncertainty to financial markets, with ongoing monitoring of credit quality and economic impacts[206] - The Company believes its measures and inherent liquidity will allow it to meet short- and long-term obligations[206] Looking Forward The Company continues to monitor financial metrics and potential long-term impacts of the COVID-19 pandemic, including emerging risks and economic changes related to inflation, employment, and recession, while maintaining its operational and financial stability - The Company continues to monitor financial metrics and the broader economic impacts of the COVID-19 pandemic, including potential long-term effects on operations and financial condition[207] - Significant uncertainties exist regarding inflation, employment, and recession as the Federal Reserve addresses economic concerns[207] Common Stock Repurchases During Q1 2022, the Company repurchased 320,528 shares of common stock for $3.9 million under a $20 million program authorized through November 2022, funded by cash from operations - The Company repurchased 320,528 shares of common stock for $3.9 million during the three months ended March 31, 2022[209] - The repurchases were part of a $20 million share repurchase program authorized through November 3, 2022, funded by cash from operations[208][209] Off-Balance Sheet Arrangements The Company has no material off-balance sheet arrangements, except for multi-year reinsurance contract commitments for future years, which will be recorded at the commencement of their coverage periods - The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on its financial condition, results of operations, liquidity, or capital resources[210] - Multi-year reinsurance contract commitments for future years will be recorded at the commencement of the coverage period[210] Cash Dividends The Company declared a quarterly cash dividend of $0.16 per common share on February 10, 2022, payable on March 17, 2022 Cash Dividend Declared in Q1 2022 | Dividend Declared Date | Shareholders Record Date | Dividend Payable Date | Cash Dividend Per Common Share Amount | | :--------------------- | :----------------------- | :-------------------- | :------------------------------------ | | February 10, 2022 | March 10, 2022 | March 17, 2022 | $0.16 | Material Cash Requirements The Company's total material cash requirements amount to $683.1 million, with $238.0 million due in the next 12 months, including significant obligations for reinsurance payable, unpaid losses and LAE, and long-term debt Material Cash Requirements (in thousands) | Category | Total | Next 12 Months | Beyond 12 Months | | :-------------------------------------- | :--------- | :------------- | :--------------- | | Reinsurance payable and multi-year commitments | $303,658 | $92,893 | $210,765 | | Unpaid losses and LAE, direct | $244,482 | $137,888 | $106,594 | | Long-term debt | $134,981 | $7,188 | $127,793 | | Total material cash requirements | $683,121 | $237,969 | $445,152 | - The amounts and timing of future loss and LAE payments are estimates and subject to inherent variability[212] Impact of Inflation and Changing Prices Inflation primarily impacts the Company through interest rates, affecting investment performance, and through increased costs for losses and LAE, with limitations on anticipating inflation in rate setting due to competitive and regulatory reasons - Interest rates have a more significant impact on performance than general inflation levels, as primary assets are monetary[213] - Inflation affects the cost of paying losses and LAE, and the Company attempts to anticipate this when establishing rate levels, but may be limited by competitive and regulatory factors[214] Arrangements with Variable Interest Entities The Company consolidated a Variable Interest Entity (VIE) for a reinsurance captive arrangement, having been identified as the primary beneficiary, with further details provided in Note 14 - The Company consolidated a Variable Interest Entity (VIE) due to a reinsurance captive arrangement, as it was determined to be the primary beneficiary[215] 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 report, as previously disclosed in its Annual Report on Form 10-K for December 31, 2021 - No material changes to Critical Accounting Policies and Estimates during the period[215] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from its investment portfolio, primarily interest rate risk on fixed-income securities and equity price risk on common stock and mutual funds, with primary objectives of capital preservation and liquidity - Market risk arises from potential adverse changes in the fair market value of available-for-sale debt securities, equity securities, and investment real estate[216] - Primary investment objectives are capital preservation and adequate liquidity for claims, with a secondary objective of total rate of return emphasizing investment income[218] Interest Rate Risk The Company's fixed-income financial instruments are sensitive to interest rate changes, with rising rates generally leading to a decline in fair value, and the portfolio's effective maturity was 5.4 years as of March 31, 2022 - Interest rate risk is the sensitivity of fixed-rate financial instruments' fair market value to changes in interest rates[219] - The effective maturity of available-for-sale debt securities was 5.4 years at both March 31, 2022, and December 31, 2021[220] Equity Price Risk Equity price risk affects the fair value of common stock and mutual funds in the investment portfolio, with a hypothetical 20% decrease in market prices resulting in a $13.0 million decrease in fair value at March 31, 2022 Equity Securities Subject to Price Risk (in thousands) | Equity Securities | March 31, 2022 (Fair Value) | December 31, 2021 (Fair Value) | | :---------------- | :-------------------------- | :----------------------------- | | Common stock | $4,617 | $3,683 | | Mutual funds | $60,509 | $43,651 | | Total | $65,126 | $47,334 | - A hypothetical 20% decrease in equity security market prices would result in a $13.0 million decrease in fair value at March 31, 2022[221] Item 4. Controls and Procedures The Company's management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting during the period - Disclosure controls and procedures were effective as of March 31, 2022[223] - No material changes in internal control over financial reporting occurred during the period[224] PART II – OTHER INFORMATION This part includes information on legal proceedings, risk factors, unregistered sales of equity securities, exhibits, and signatures for the Form 10-Q Item 1. Legal Proceedings The Company is involved in various legal proceedings, but management believes any resulting liabilities will not have a material adverse effect on its financial condition or results of operations, with reasonably possible losses estimated to be immaterial - The Company is subject to lawsuits and legal proceedings related to policy claims and ordinary business operations[225] - Management believes that liabilities from these legal matters will not materially adversely affect the Company's financial condition or results of operations[225] - Reasonably possible losses for legal proceedings are estimated to be immaterial[227] 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, indicating no new material risk factors for the interim period - Risk factors are consistent with those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[228] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During March 2022, the Company repurchased 320,528 shares of its common stock for $3.9 million under the November 2022 Share Repurchase Program, with approximately $13.9 million remaining available Common Stock Purchases (Q1 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------- | :------------------------------- | :--------------------------- | | 3/1/2022 - 3/31/2022 | 320,528 | $12.07 | - As of March 31, 2022, approximately $13.9 million remained available under the November 2022 Share Repurchase Program[233] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, employment agreements, certifications, and financial statements in iXBRL format - Exhibits include Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Employment Agreements, and Certifications of CEO and Principal Accounting Officer[235] - Financial statements are provided in iXBRL (Inline eXtensible Business Reporting Language) format[235] Signatures The report is signed by Stephen J. Donaghy, CEO, and Gary Lloyd Ropiecki, Principal Accounting Officer, on May 2, 2022, certifying its submission - The report is signed by Stephen J. Donaghy, Chief Executive Officer and Principal Executive Officer, and Gary Lloyd Ropiecki, Principal Accounting Officer[240] - The signing date for the report is May 2, 2022[240]