Earnings call: Universal Insurance reports Q4 results, eyes future growth

Universal Insurance Holdings (ticker: NYSE:) reported their fourth quarter earnings, highlighting a period of transformation and adaptation to new legislative changes. The company closed the quarter with double-digit adjusted returns on common equity and has already secured 90% of its 2024-2025 reinsurance tower.

Despite a decrease in adjusted diluted earnings per share from the prior year, the company saw an increase in core revenue, driven primarily by higher net premiums earned and investment income. The earnings call also discussed the impact of recent Florida legislation on claims trends and the company’s strategic positioning for future growth.

Key Takeaways

• Universal Insurance reports double-digit adjusted returns on common equity for the fourth quarter.
• Adjusted diluted earnings per share decreased to $0.43 from $0.72 in the prior year’s quarter.
• Core revenue increased by 12.1% year-over-year to $365.7 million.
• Direct premiums written grew by 4%, with a 0.6% increase in Florida and an 18.6% increase in other states.
• The net combined ratio rose to 103.7%, reflecting a higher net loss ratio and a lower net expense ratio.
• The company repurchased approximately 223,000 shares at an aggregate cost of $3.6 million.
• A regular quarterly cash dividend of $0.16 per share was declared, payable on March 15, 2024.

Company Outlook

• Universal Insurance anticipates continued rate increases, though not as high as previous years.
• Retention has improved, and the book of business is more stable following recent legislation.
• The company is focused on profitable growth, being selective about where business is sourced from within Florida.

Bearish Highlights

• Adjusted diluted earnings per share saw a decrease due to a higher net loss ratio and lower commission revenue.
• The net combined ratio increased due to a higher net loss ratio.

Bullish Highlights

• The company has successfully negotiated its reinsurance tower for 2024-2025, with 90% already secured.
• Positive claims trends are emerging due to legislative reforms, with reductions in total claims, represented claims, assigned claims, and daily claims.

Misses

• Despite overall growth, the company noted a lower policies in force which partially offset the growth from rate increases.

Q&A Highlights

• CEO Steve Donaghy expressed confidence in the company’s cautious approach to rate increases and reserve levels.
• The company has added “dry powder” to reserves for years predating the new legislation to ensure a strong balance sheet.
• Universal Insurance is now growing policies in Florida and other states, with a focus on profitability.
• There was no significant claims handling benefit booked in the quarter, and the current expectation for captive participation in the reinsurance tower remains consistent with previous years.

Universal Insurance Holdings appears to be positioning itself for a stable and profitable future backed by strategic planning and a conservative approach to its financials. The company’s focus on adapting to legislative changes and securing reinsurance early demonstrates a proactive stance in the face of industry challenges.

InvestingPro Insights

Universal Insurance Holdings (ticker: UVE) has demonstrated resilience and strategic foresight in its recent quarterly report. In light of this, several metrics and InvestingPro Tips can offer additional context to investors evaluating the company’s performance and potential:

InvestingPro Data:

• The company’s market capitalization stands at a solid $610.89 million, reflecting investor confidence in its business model and market presence.

• An attractive P/E ratio of 8.59 suggests that UVE’s stock might be undervalued compared to earnings, potentially offering a buying opportunity for value investors.

• Revenue growth over the last twelve months has been robust at 13.82%, indicating that the company is successfully expanding its top-line financials.

InvestingPro Tips:

• Analysts predict that UVE’s net income is expected to grow this year, aligning with the company’s optimistic outlook and strategic initiatives.

• Despite concerns over short-term obligations exceeding liquid assets, UVE has maintained dividend payments for 19 consecutive years, showcasing a commitment to shareholder returns.

Investors interested in a deeper dive into Universal Insurance Holdings can find additional InvestingPro Tips on the platform. With 11 more tips available, including insights on profitability and stock trends, there’s a wealth of information to help make informed decisions. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription for an even more comprehensive investment analysis.

Full transcript – Universal Insurance Holdings Inc (UVE) Q4 2023:

Operator: Good morning, ladies and gentlemen, and welcome to Universal’s Fourth Quarter 2023 Earnings Conference Call. As a reminder this conference call is being recorded. I would now like to turn the conference over to Arash Soleimani, Chief Strategy Officer. Please go ahead.

Arash Soleimani: Good morning. Thank you for joining us today. Welcome our quarterly earnings call. On the call with me today are Steve Donaghy, Chief Executive Officer and Frank Wilcox, Chief Financial Officer. Before we begin, please note today’s discussion may contain forward-looking statements and non-GAAP financial measures. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release and Universal’s SEC filing, all of which are available on the Investors section of our website at universalinsuranceholdings.com and on the SEC’s website. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release and can also be found on Universal’s website at universalinsuranceholdings.com. With that, I’ll turn the call over to Steve.

Steve Donaghy: Thanks Arash. Good morning, everyone. We closed out both the fourth quarter and full year with double-digit adjusted returns on common equity. And I believe that even stronger results are firmly in our future. 2023 was a transformative year for us and our significant efforts position us for meaningful success in the new legislative environment. We’ve added a buffer to our loss picks and bolstered reserves for years that predate the elimination of one-way attorney fees and assignment of benefits to what I view as the most conservative level in our history. Importantly, we did this because we wanted to place the past in the rearview mirror and shift our focus to the future. In 2023, we took yet another step towards the future by commuting Hurricane Irma, the largest and most significant storm in our history with the Florida Hurricane Catastrophe Fund. Now that we’re past the one-year anniversary date of the 2022 special legislative session, and all new and renewal policies are subject to the new legislation, the impact of the reforms is becoming clear. Claims trends across the board are improving, including reductions in total claims, represented claims, assigned claims and daily claims. Our first event 2024-2025 reinsurance tower is already 90% secured, and we’ve negotiated additional multi-year capacity for the future. Given our size, scale, independent agency and reinsurer relationships, and the recent steps we’ve taken, we are particularly well-positioned to succeed in the revamp Florida environment. I’ll turn it over to Frank to walk through our financial results. Frank?

Frank Wilcox: Thanks, Steve. Good morning. Adjusted diluted earnings per common share was $0.43, down from adjusted diluted earnings per common share of $0.72 from the prior year quarter. The decrease mostly stems from a higher net loss ratio and lower commission revenue, partially offset by a lower net expense ratio and higher net investment income. Core revenue of $365.7 million was up 12.1% year-over-year, with growth primarily stemming from higher net premiums earned and net investment income, partially offset by lower commission revenue. Direct premiums written were $432.6 million up 4% from the prior year quarter, including point 6% growth in Florida and 18.6% growth in other states. Overall growth reflects rate increases partially offset by lower policies in force. Direct premiums earned 482.1 million were up 3.9% year-over-year, reflecting rate driven premiums written growth over the last 12 months. Net premiums earned were 335.4 million, up 14.9% from the prior year quarter. The increase is primarily attributable to higher direct premiums earned and a lower seated premium ratio. The net combined ratio was 103.7% up 2.3 points compared to the prior year quarter. The increase reflects a higher net loss ratio and a lower net expense ratio. The 81.9% net loss ratio was up 5.6 points year-over-year, with the increase primarily attributable to a higher calendar loss pick. The 21.8% net expense ratio improved by 3.3 points year-over-year, primarily reflecting lower renewal commission rates paid to distribution partners. During the fourth quarter, the company repurchased approximately 223,000 shares at an aggregate cost of 3.6 million. The company’s current share repurchase authorization program has 4.1 million remaining. On February 8, 2024, the Board of Directors declared a regular quarterly cash dividend of $0.16 per share of common stock payable March 15, 2024. to shareholders of record as of the close of business on March 8, 2024. With that, I’d like to ask the operator to open the line for questions.

Operator: [Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler.

Paul Newsome: I was hoping you could maybe take a step back or maybe step forward and talk about the outlook for premium growth perspective. You’ve got a number of sort of cross currents in my mind with obviously rate still a positive effect. But I don’t know if at some point you expect to stop effectively shrinking in some areas to offset that rate. And other factors, obviously, the mix changes will affect premium growth. Can you kind of just talk about those major factors and how we should think of them as we’re thinking about the company over the next couple of years?

Steve Donaghy: Yes. Good morning, Paul. Thanks for the question. As we analyze and look at the successful legislation changes that went into effect at the end of ’22, that has an impact on a lot of things we analyze and we do. So in ’23, we had a premium indication of approximately 15%, and we implemented a 7.2% increase across our book. That’s had several positive impacts to Floridians and to the company in that our retention has improved and the book of business is more stable. As we look to the future, those rate increases are predicated on the prior 12 months experience. So we’ll take all those factors into account sometime around May and in future years as well and continue to make the best decisions possible for the company and our insurers and our agents. But I would, if you’re looking for an indication, I would say we’ll continue to take some rate. It won’t be the extremes we’ve taken in the past, like ’19 through ’22. But I think the indications are still positive. And hopefully, at some point in the future, we’ll see rate reductions flowing through the book as a result of what was passed in the end of ’22.

Paul Newsome: Are you at the point where you are growing on a PIF count or want to grow on a PIF count in both in and outside of Florida?

Steve Donaghy: Yes, Paul. As you saw in the release, we grew last year outside of Florida. And beginning in December, we began adding policies to our Florida book of business as well. So again, we are laser-focused on profitability and where the business is coming from, not all counties or territories in the state are behaving identically, so we are being very careful as we kind of head into the future in this new environment.

Paul Newsome: And then maybe turning to the Baxter (NYSE:) margin of conservatism and the loss pick. Could we kind of talk about the components of that? Obviously, you would expect it to go the other direction with the impact of tort reform, but there must have been some justification for that extra higher asset pick from other factors and maybe you could talk about those factors.

Steve Donaghy: Yes. I think, Paul, as I run the company and all the various influencers that affect our business, and in particular, the Florida book of business, we felt it was very prudent to be extremely cautious or cautious as we went through 2023 because the legislation didn’t affect all policies until the renewal point of each. And we wanted to make sure that we had enough dry powder to handle the business as well as be positioned going forward to be very secure as we look to begin to grow the business once again.

Frank Wilcox: Yes. And just to follow up on that, Paul. When you look at our reserves in multiple respects, whether or not it’s just absolute dollars on a net basis, whether it’s on an average for the claim counts, which by the way are lower than they’ve been quite some time, they’re higher than they’ve ever been or higher relative to our insured value. They’re higher relative to our premium in force. So we feel that our balance sheet is stronger going forward than it’s ever been.

Operator: Our next question comes from Nicolas Iacoviello with Dowling & Partners.

Nicolas Iacoviello: First question just was there any net adverse development in the quarter and if so, from what events?

Steve Donaghy: Yes, Nick. As we went through 2023, we had considerable redundancy into our loss pick. So after working with our actuaries, both internal and external, we decided to take a look at the claims and the files and add dry powder to any of those that were in place prior to the new legislation affecting that particular policy. Due to the redundancy and the way it resulted, we added 4 points to prior years. But again, primarily, that is dry powder that will be used as we kind of put them in the rearview mirror going forward. So all-in-all, it was 4 points of the loss pick that we took out of ’23 and spread across prior years.

Nicolas Iacoviello: Got it. Just curious as well, was there a claims handling benefit booked in the quarter?

Frank Wilcox: Yes. That was negligible for the quarter. I believe it was under $1 million.

Nicolas Iacoviello: Thanks. I was just curious on the comment in the press release on 90% of the first event tower being secured. Can you talk about maybe the current expectation for the captive utilization?

Steve Donaghy: Nick, can you repeat that last part of the question? I’m sorry.

Nicolas Iacoviello: No problem. Just like the current expectation for the captive participation in the ’24 and ’25 tower?

Steve Donaghy: Yes. Again, sitting at 90% accomplished for the first tower, Nick, we are very pleased with how our teams performed in the market. The reinsurer now is a year-round effort for myself and our reinsurance team, Matt Palmieri in particular. And we feel really good about where we’re at. I don’t think that we will change our philosophy on how we have used the captive in the past. We haven’t completed it at this point. And if the open market comes in at a competitive rate, we would consider that in lieu of. But as I sit here today, I think we would continue and it worked out very well for the company last year.

Frank Wilcox: It’s proven to be very effective.

Steve Donaghy: Yes.

Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Steve Donaghy, CEO, for closing remarks.

Steve Donaghy: Thank you. I’d like to thank all of our associates, our insurers, our agency force, our reinsurance partners, and our stakeholders for their continued support of Universal. Have a great day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

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