Universal Insurance Holdings, Inc. Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen, and welcome to the UVE First Quarter 2021 Earnings Conference Call. I would now like to turn the conference over to Rob Luther, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to our discussion on our first quarter 2021 earnings results, which we reported yesterday. On the call with me today is 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.

Thank you, Rob, and good morning, everyone. Thank you for joining us today. We are off to a strong start to 2021, with solid first quarter results, including close to 12% top-line growth, margin expansion in excess of 200 basis points, and a total annualized return on average equity of 23.2%. We continue to make progress on our reinsurance program renewal and were oversubscribed on our first cat bond in March at rates below the low end of our initial range. We have now completed procurement of our first-event reinsurance program for UPCIC for the 2021 wind season, and we'll have additional details in May as we finalize the remaining pieces of our risk management strategies for our insurance company subsidiaries. In addition, we were encouraged earlier this month when the Florida Senate passed Bill 76, which would enable Floridians to have reliable access to property insurance. For a number of years, Florida has been a significant outlier compared to the rest of the country when it comes to litigated property claims, which has put significant pressure on the Florida property insurance marketplace. We have not been immune to these market dynamics. During the first quarter, we actively reduced our policies in force sequentially and reduced new and renewal policy counts in aggregate this quarter when compared to the first quarter of 2020. That being said, we continue to monitor closely the companion bill in the House, House Bill 305, which has differences from Senate Bill 76. We look forward to continuing to make positive strides throughout 2021 and should have additional details on our reinsurance program renewals in the next several weeks. So with that, let me now turn it over to Frank to walk through our financial results. Frank?

Thank you, Steve, and good morning, everyone. As a reminder, discussions today on adjusted operating income and adjusted EPS are on a non-GAAP basis and exclude effects from unrealized and realized gains and losses on investments and extraordinary reinstatement premiums and related commissions. Adjusted operating income also excludes interest expense. We ended the first quarter with total revenue up 11.7% to $262 million.

We have a question on the line from Mr. Tom Shimp with Piper Sandler.

Can you give me some more of your thoughts on the bills being brought to the state legislature? If insurers got the most favorable aspects of the bills being contemplated, how do you think about the potential benefit to your litigation trends?

Tom, that's a question that is burning throughout the state currently. And as you can imagine, there's tremendous change occurring. Senate Bill 76, which was passed by the Senate, was seen as quite favorable. There was a lot of good policy in the bill: a two-year limitation on supplemental reported claims on a catastrophe, policyholders required to provide written notice within 60 days prior to pursuing litigation; and language around attorney fees, which is really the symptom of the illness currently. I think we find ourselves now where the House is weighing in on those topics and additional topics. The House is contemplating those issues along with trying to assist citizens in becoming rate adequate. The session closes tomorrow. I would also say that I feel the Department has done a balanced job of trying to represent the industry and Floridians with several items that they've published to the House and to the Senate. So I think the information is there, the information is flowing. There are two strong sides: Floridians and the insurance industry on one side, and lawyers on the other. Hopefully, tomorrow, we'll get favorable legislation that will improve and enable carriers to begin writing and helping out Florida residents.

Staying on the insurance regulators. Last year, there were some headlines that the Department of Insurance was examining the fees between insurers and their corporate affiliates. Do we have an update on that, or should we still view that as ongoing discussions — typical regulatory review?

Yes. Tom, I think it's a misnomer to feel as though the Department of Insurance is not intimately aware — at least with Universal — of our relationship between subsidiaries and the parent, the fees that are charged, and how they relate to market. Sometimes that sounds like they don't do it, but they do — at least with us, they do a very good job of understanding the relationship. We have to file changes to the agreements between the subsidiaries and the parent if we have any changes. So there is language in the House bill that continues that oversight.

Yes. I would just add to that that there are multiple instances where they do evaluate and examine those fees. As Steve pointed out, they have every opportunity to review and object to the fee structure within the agreements, and we've not heard anything from them as to their dissatisfaction.

And then moving to policies in force, I was hoping you could talk about that a little bit more. Florida PIF went down, and I understand that comes out of the struggles in Florida in trying to shed some of those costly policies. But outside of Florida, that was also down too. Can you give me your updated thoughts on how you're thinking about growth outside of Florida?

On growth outside of Florida, we've taken numerous measures in the past several years to become more rate adequate. The reduction out of state is very nominal at this point. We see a lot of upside in the future because we've recently seen some competitors take rate in states where we do quite well. So we might have been a little ahead of the market, but we're in a good position. Our desire for rate adequacy is paramount to growth. We'd rather have slower growth and profits than the opposite. We also feel it's very important that as we share data with our reinsurance partners, they expect us to perform at the levels we submit to them. We're right in line with what we communicated to that market. It's important that you do what you say you're going to do, and that's a piece of the equation for 2021.

And then I was hoping we could talk about reserves — reserve development. It looked like on a net basis, it was favorable development, but on a gross basis there was some unfavorable development. Can we get more color on that? What were the moving parts?

Yes. This is Frank. 'Sally' developed by $92 million on a gross basis. But because of the way that our reinsurance programs operate and coordinate — and just as a reminder, we have a program for our Florida states, and then we have a completely separate program for other states — to the extent that the other states program exceeds the retention of $15 million on that, that would come back to reduce our losses. That's what we realized on a net basis for Sally.

Was there any other development from any other storms besides Sally?

Yes. There was no other development on a gross basis. With the losses that we see to the catastrophe fund, they are subject to estimates, and we re-estimated the amounts that would be under the contractual arrangements ceded to the catastrophe funds. That's a $3.8 million adjustment offsetting the $5 million, and there's your $1.2 million net favorable. That was on Irma, I'm sorry.

And then at the start of the second quarter, I think earlier this month, there was a weekend where the Panhandle and the rest of Florida had a line of severe storms that I saw in the headlines. Is there anything you can tell us regarding how you're thinking about losses from that? Is it material, or did the headlines make too much of it?

Tom, we track each event. There was a PCS event that was identified for that. We had under 500 claims called in, and we have under 100 open right now. So we feel we have that fairly well in hand. As you know, we have some room in our plan for weather each quarter. At this point, we don't see any reason to pull alarms, but we're tracking it closely. The claims team is all over it, and fortunately, we were able to handle a majority of those claims with internal associates, so our in-house adjusting continues to provide benefit to the parent in that regard.

In general, could we get a high-level update on how you're viewing your loss picks? You've been increasing them the past few years. Has there been any change as of late? Any trends in the past quarter or two that have made you rethink your loss picks? Any update there?

Tom, at the end of 2019 we implemented controls that benefited the company last year as we put monies up throughout the year when we saw the need in Q2, Q3 and Q4. As we went through those controls at the end of Q1 with Frank and our actuaries, we saw the benefit of the loss pick this year benefiting from the rate increases that are flowing through our book in Florida and other states. So the 40% in 2021 for our loss pick compared to the 40% in 2020 — the 40% in 2021 is a dynamically higher amount of money put up for reserves. We see it, and we feel good at the end of Q1. The weather cooperated, and we don't have a crystal ball, but if that trend continues, we feel very good about the rest of the year.

Lastly, you announced partnerships with Verisk and you have the direct business in Clovered. Could you give an update on how management views their progress and potential, and if there are any other strategic initiatives you're focusing on into 2021?

Yes. We continue to focus on our capital management. Frank and his team have done a good job of ensuring that we track the levers and understand our capital position and ensure that, just like 2020, the subsidiaries feed the parent in a fashion that we can take care of our insurance subsidiaries. Clovered, like the rest of the agency force in the state of Florida, is focused on growing their business in a non-home market. Citizens is really one of the few carriers open; they're not a preferred carrier to write with because it's not as easy as others, and the commission is pretty low for the right reasons. We find ourselves cross-selling quite a bit, so we're writing a lot more auto and umbrellas. The benefit to Clovered is they're behaving more and more like a true agency, so we feel good about that. They're approaching $40 million in written premium, so we're getting to a point where we may be able to segregate that business more deeply and track it at a P&L level and similar types of things so we can show that to you and others. We continue to invest in that business, and we feel good about it. From a growth perspective, we will continue to enter additional states either at Universal or American Platinum. We've been focusing on insurance-score products in other states, which is somewhat unique for us and in how we approach the future. There are a lot of very positive things occurring at the company. Our underwriting team, since there's less business coming in, has implemented additional tools to ensure we're looking at roofs more closely, reviewing the business on the books, and our agency force is highly focused on retention, which we feel very good about in light of the necessary increases that are flowing through our book currently. I can go on — there's a ton of stuff. That's the best part about the job, Tom, is working on the strategy and the new things the company is doing.

I appreciate the answers. And congrats on the strong first quarter.

Thanks, Tom. Appreciate your time.

Thank you.

I am showing no further questions. I will now turn the call back over to management for closing remarks.

In closing, I'd like to thank our associates, consumers, agents and our stakeholders for their continued support of Universal. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.