Universal Insurance Holdings, Inc. Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen. And welcome to the Universal’s First Quarter 2022 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.

Good morning. Thank you for joining us today. Welcome to 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 filings, 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 will turn the call over to Steve.

Thank you, Arash. Good morning, everyone. We reported a 16.9% annualized return on equity, despite the challenging external environment, which is a testament to the strength and resilience of our business. Direct premiums written were up 8.5% from the prior year quarter, significantly outpacing a 6.1% policies-in-force decline, as meaningful rate increases benefited premium volumes. We are laser-focused on improving underwriting profitability, as we prioritize combined ratio improvement over top-line growth. In addition to raising rates across Florida and our broader footprint, we’ve reduced exposure to less profitable geographies, tightened underwriting criteria, renegotiated commission rates with our agency partners, and exercised prudent expense management. Lastly, rising yields are benefiting our investment income results and should continue to serve as a tailwind moving forward. Given our strong capital position, the profitability of our business, and the steps we continue to take to improve results, we believe we stand out favorably as reinsurers increasingly differentiate among seasons in the current market. Our team has been hard at work over the last several months meeting face-to-face with our reinsurance partners around the globe, securing our desired capacity for the June 1, 2022 renewal. We recently released our firm order terms to the global reinsurance market for the capacity needed for our all states first event catastrophe reinsurance tower. With the capacity already locked in via the Florida Hurricane Catastrophe Fund and various multi-year deals that will continue into 2022, including the catastrophe bond we issued in 2021, we already have over 85% of our core all states first event catastrophe reinsurance tower secured. We are pleased with the progress we’ve made, especially given the current environment. I’ll turn it over to Frank to walk through our financial results.

Thanks, Steve. Good morning. Adjusted EPS was $0.64, down from $0.84 in the prior year quarter, with the decline mostly attributable to a higher net combined ratio, partially offset by higher revenues and a lower effective tax rate. Total revenue of $287.5 million was up 9.4% year-over-year, with growth primarily stemming from higher direct premiums earned, commission revenues, and net investment income, partially offset by higher unrealized losses on equity securities. Direct premiums written of $396.5 million were up 8.5% from the prior year quarter, including 8.9% growth in Florida and 6.4% growth in other states. Direct premiums earned of $414.6 million were up 10.4% year-over-year. Rate was the main driver of premium growth, particularly given the policies-in-force decline that Steve mentioned in his remarks. The net combined ratio was 97.9%, up 4.8 points compared to the prior year quarter. The increase reflects a higher net loss ratio, partially offset by a lower net expense ratio. The 68.8% net loss ratio was up 9.6 points year-over-year, with the increase mostly attributable to a higher initial accident year attritional loss pick associated with the current Florida claims environment. The 29.1% net expense ratio improved by 4.8 points year-over-year, reflecting lower renewal commission rates, lower employee compensation and benefits, and economies of scale. During the first quarter, the company repurchased approximately 321,000 shares at an aggregate cost of $3.9 million. The company’s current share repurchase authorization program has $13.9 million remaining as of March 31, 2022, and runs through November 3, 2022. On April 20, 2022, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock payable on May 20, 2022, to shareholders of record as of the close of business on May 13, 2022. As mentioned in our earnings release yesterday, we are maintaining our guidance for 2022, including a GAAP and non-GAAP adjusted EPS range of $1.80 to $2.20, and a return on average equity of 12.5% to 15%. The guidance assumes no extraordinary weather events in 2022. It also assumes a flat equity market for GAAP EPS. If weather events exceed plans, we expect to see both a benefit from our claims adjusting business and increased loss costs. With that, I’d like to ask the Operator to open the line for questions.

Thank you. We have a question from the line of Paul Newsome with Piper Sandler. Please go ahead.

Good morning. I apologize I have to jump on and off the call here earlier. But I wanted to get your thoughts just genuinely about all of this potential Tort Reform that seems to be talking about in Florida. There was some sort of announcement about the potential of the state legislature coming back, and I guess, how do you sort of think about that emerging and are you more or less confident that we might actually get something meaningful in the future?

Hey, Paul. Good morning. We commend the Governor for taking action and calling the special session late this month. I think it puts a spotlight on the issues facing Floridians from a cost and coverage perspective. We’re hopeful that the legislators take the opportunity to seriously discuss the topics that were covered in the last session and new ideas that are being generated currently. We don’t have a crystal ball, but we feel as though they recognize some of the issues and are hopeful that their constituents get some relief in the future as a result of their actions.

We'll keep our fingers crossed. One of the key questions I have about the Florida market, particularly regarding Universal, is the concern that the overall rate need is significantly higher than what citizens can sustain each year. This could create a situation where competitors, including citizenship, appear more appealing because they may be undervalued if inflation increases. How do you respond in this kind of environment? Eventually, the rate need must be addressed by all, but what strategies do you have during periods when the industry isn't able to secure sufficient rates, especially when some entities have substantial needs that enhance their competitive pricing?

Yeah. Paul, from our perspective, we are focused on rate adequacy and really the profitability from an underwriting perspective on our insurance carrier. As we strive for rate adequacy, we look at the market. We understand what’s taking place from a competitive nature, and there have been years where the market has been soft. We’ve looked at our rates and tried to do the right thing in spite of many carriers being less expensive. But we really have to stick to our knitting and ensure that our rates are adequate to generate sustainable profitability going forward. The citizens’ question is a unique one. They were originally the insurer of last resort, and as they become competitively priced, it does bode some issues for them and the marketplace. Should events occur for Floridians from a cost perspective. I think the legislature did some things in the last session to assist citizens to take more rate than they traditionally had. They’ve got a runway to increase rates. It used to be locked at 10% and that will be increased to 15% over the next several years. That might be something that’s discussed in the special session too, because they have to be careful with the growth in citizens, because it’s meaningful right now.

Great. Thanks. I’ll let some other folks ask questions, but always appreciate the help.

Yeah. Thanks, Paul. Have a great day.

Thank you. Your next question comes from Nick Iacoviello with Dowling & Partners. Please go ahead.

Hi. Good morning, guys.

Good morning.

Good morning, Nick.

I’m not sure how much further you want to talk on the legislative session, but maybe just your updated thoughts on SB76 and anything tangible you’re seeing from that. And I don’t know if you wanted to on the upcoming special session, maybe what you guys are most interested in seeing passed would be helpful? Thanks.

Yeah. Thanks, Nick. The SB76, our cautious optimism for that continues. Clearly, there were some pillars within that legislation that eliminate the window for hurricanes and various events to two years instead of three years. I think what we’ve seen is the notice of intent to litigate. We’ve seen some benefits from that, in that the plaintiff side needs to generate details in order to file a suit, and we use that as an opportunity to pursue closure on files where possible. We have a team of people dedicated to that process. I think the plaintiff side was slow to respond to it, but they are now following the rules a little bit better, and I think that will have some impact on case glide as we go forward. Relative to the special session, clearly, and I believe the Governor has commented, when you write 7% or 8% of the P&C business in the country and you have 80% of the litigated suits in that same state, something’s not right. They’re talking about a lot of important things, and really the legal fees and the way that it's structured would be the primary area I would suggest them to focus on. They’re not calling me right now, but we’re trying to get as much help as we can. Aside from that, I know they have the best intentions, so hopefully, they focus on the points they have, and we’ll see what comes out of it.

Great. Thanks. Then just given the close to $4 million of repurchases this quarter, maybe you just take some time and update us on how you’re viewing capital management as it relates to a level of growth going forward?

Yeah. I mean, we’re pretty strong as it relates to capital. We still have the vast majority of the proceeds that we raised through the $100 million note issuance. We have infused some capital into the insurance entities and we continue to monitor their needs. That is the primary objective right now is to ensure that the insurance companies are adequately capitalized in order to continue to provide the opportunities to the entire holding company system. Share buybacks right now are hard not to look at and think it’s a great opportunity. To the extent that we believe that we have some excess, we take advantage of that.

Okay. Thanks. This is just a last question on the expense ratio. You guys had previously discussed that maybe coming back up to 30% to 33% range, still look to be below that this quarter? Two, are you still thinking about the expense ratio in that range? Are you seeing some more efficiencies or some things more permanent post-COVID?

Yeah. That was prior to our reaching the decision to reduce the commission rate on renewals. That plus, going into the fourth quarter, there still being a lot of unknowns about inflation, we kind of thought that we ought to give ourselves a little bit of a wide berth there. I think what you’re seeing this quarter is probably more indicative for the rest of the year versus the guidance that we gave at the fourth quarter call.

Great. Thanks. That’s all I have.

All right. Thanks, Nick. Appreciate the call.

Thank you. And I’m not showing any further questions in the queue. I will turn the call back to Stephen Donaghy for his final remarks.

Thanks, Carmel. I would like to thank our associates, consumers, agents, and our stakeholders for their continued support of Universal. Thanks for your attendance and have a great day.

And with that, ladies and gentlemen, we conclude the program. Thank you for participating. You may now disconnect.