Universal Insurance Holdings, Inc. Q2 FY2023 Earnings Call

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

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 on 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’ll turn the call over to Steve.

Thanks, Arash. Good morning, everyone. Results were solid, including a 25.3% annualized adjusted return on common equity and 85.1% adjusted diluted earnings per share growth year-over-year. While it’s still early days, we’re encouraged by favorable claims and litigation trends that are beginning to emerge as a result of recent legislative reforms and give us optimism as we look forward to 2024 and beyond. We continue to benefit from rate-driven premium growth and an improving spread of risk across our geographic footprint. I’m very proud of the reinsurance program we put together for the 2023, 2024 treaty year. Our program's terms, conditions and coverage are consistent with the prior year, but we reduced our consolidated retention and our ceded premium ratio. I’ll turn it over to Frank to walk through our financial results. Frank?

Thanks, Steve. Good morning. Adjusted diluted earnings per common share was $0.87, up from $0.47 in the prior year quarter. The increase mostly stems from higher underwriting income, net investment income and commission revenue. Core revenue of $337 million was up 11.7% year-over-year, with growth primarily stemming from higher net premiums earned, net investment income and commission revenue. Direct premiums written were $547.1 million, up 2.7% from the prior year quarter, including 0.8% growth in Florida and 13.6% growth in other states. Growth reflects rate increases, partially offset by lower policies in force. Direct premiums earned were $463.3 million, up 8.1% from the prior year quarter, reflecting rate-driven direct premiums written growth over the last 12 months. Net premiums earned were $303.3 million, up 9.5% from the prior year quarter. The increase is primarily attributable to higher direct premiums earned and a lower ceded premium ratio. The net combined ratio was 99.1%, down 1.8 points compared to the prior year quarter. The decrease reflects a lower net expense ratio, partially offset by a higher net loss ratio. The 73.8% net loss ratio was up 1.5 points compared to the prior year quarter, with the increase primarily attributable to higher unfavorable prior year reserve development, partially offset by a lower consolidated current accident year net loss ratio. The 25.3% net expense ratio improved by 3.3 points compared to the prior year quarter, primarily reflecting lower renewal commission rates paid to distribution partners. During the second quarter, the company repurchased approximately 396,000 shares at an aggregate cost of $6.1 million. The company currently has $20.1 million of share repurchase authorization remaining. On July 20, 2023, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on August 11, 2023, to shareholders of record as of the close of business on August 4, 2023. With that, I’d like to ask the operator to open the line for questions.

Thank you. Our first question comes from Paul Newsome with Piper Sandler. Your line is open.

Hi, good morning. Thanks for the call. Could you give us a little bit more details about the reserve development and obviously, a lot of interest in what’s going on in Florida and that surge in claims, the lawsuits that we saw around tort reform? And just more detail around that would be fantastic to better understand how – what the sources are and maybe how it is more specific to Universal or more broadly generated by Florida factors?

Paul, this is Steve Donaghy. Thanks for checking in with us. Yes, I’ll break down your question in two ways. First of all, regarding the prior year development, we have been working through the quarter in the normal course of business, multiple commutations with our reinsurance partners and the FHCF in the state of Florida. So that drove a majority of the 13.8 number. So that’s the explanation there. Regarding the litigation in AOB, we changed our tune from cautiously optimistic to optimistic a quarter or two ago, and we continue to see that favorability in our numbers. Litigation is down considerably. AOB is down even more greatly. One of the things that we don’t really talk a lot about is from the legislation passed in July of ‘21, we’ve seen an increase in notice of intent. And fortunately, due to our scale, we’ve got a great team of people that are tackling that particular area. So it gives us an opportunity to close claims, take care of our insured and keep the bad actors at bay. So, we are not upset with an increase in that particular area, and we’ve seen a benefit of eliminating litigation through that department. I’m glad to expand on any other areas that you’d like.

Curious if you’re seeing – there is a lot of news about litigation funding. I don’t know if it’s a factor of Florida broadly, but is that also having an impact in your area or are you seeing that of that nature?

We’ve seen the litigation funding out there. We talked to some plaintiffs who speak to us candidly. I think it is a market; it was certainly driving some behavior in Florida prior to the legislation passed at the end of last year. And again, I think there are markets for it, and it’s probably moving more out of Florida, at least from the P&C side than coming into it at this point.

And then finally, maybe we could step back a little bit. I mean, outside of the tort reform, you folks who obviously, like everybody else trying to raise rates rapidly. How do you think that process has gone in terms of getting rates relative to what the underlying claim cost is running at? And does that generate – could we see that in the next couple of quarters if included within the combined ratio? Or do you think that takes more time?

Again, it’s going to take another 12 to 14 months for the legislation to affect our entire book. Our optimism is driven by the legislation and how we’re seeing that impact our numbers. So even the numbers from Q1 to Q2, inbound litigation has decreased or continues to decrease, and we expect to see that trend throughout the year. That ultimately leads to a benefit. As you know, rates are driven by the prior 12 months. This year, the state of Florida has asked us to contemplate the future impacts of legislation in our rate-making. I think the state very appropriately allowed us to take rates, both on the normal basis and then also through the reinsurance increases that we experienced prior to this year. And then the third piece of rate is always inflation. As you know, inflation has been steady. We’ve seen some of our TIV numbers come under less duress in 2023. I think that’s a good indicator for the impact of insurance costs to Floridians going forward. So hopefully, there is benefit to all as we see commerce fees.

Thanks. Appreciate the help.

Yes. Thanks, Paul. Enjoy your weekend.

Thank you. We have a question from Nic Iacoviello with Dowling & Partners. Your line is open.

Hi, guys. Just first off, would there have been any weather above plan in the current quarter under the prior disclosure?

Hey, good morning, Nic. No, there is no weather above plan in Q2 outside of our loss pick. So, we’re – no.

Thanks. Was there any gross – or what was the gross prior year development number? And I guess, can we also just further comment on the multiple commutations with reinsurance partners? I guess, I don’t know how much you can talk about it, but I’m assuming that probably related to prior year coverage that you guys didn’t think would attach and commuting it probably helped some of the capacity trade forward. I’m just trying to think of that in terms of what the gross reserves have been doing.

Yes. We really don’t – from a go-forward basis, it’s more just looking at what is in the computation, how do we distribute that into the prior years, what is our responsibility, what are the reinsurers’ responsibilities going forward. Again, with the strength of the quarter, it didn’t affect overall performance, and I think it speaks well to our focus on reserves and also ensuring that our reinsurance partners are being adequately appreciated as we move forward as well.

Got it. This ties in with the prior year development. But I’m just thinking, right, because we’re a couple of months removed from the reform, right? I’m wondering, have you seen any change in the trend of, I guess, reopened claims from prior accident years, just in the context of attorneys maybe looking at older claims that wouldn’t be covered under the new reforms?

No. The trends are not adverse to what we’ve seen in the past. Again, the legislation is having the desired impact. As more and more of our book rolls under the new legislation of renewal, we receive that benefit. I think there was somewhat of a run-up maybe at the end of ‘22 or early in ‘23, but I think a lot of the people are looking to make a living elsewhere, fortunately. We really don’t see a driver of – as compared to the past in reopens and others. With our policies and claims handling, a reopened claim is handled expeditiously and we try and get the insured the best information they can should they find something when a contractor shows up. So it’s a normal course of business.

Got it. That’s all, thank you.

Thanks, I appreciate it.

Thank you. And there are no other questions in the queue. I’d like to turn the call back to Steve Donaghy for closing comments.

Thanks, Catherine. Appreciate it. I’d like to thank all of our associates, consumers, agents and our stakeholders. And in particular, our agents, we appreciate their assistance as we have continued to open up additional markets in Florida in the past 2 or 3 months, and we appreciate their continued support in particular, and for everyone in their continued support of Universal Insurance Holdings. Thanks very much, and have a great day.

This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.