Universal Insurance Holdings Inc

NYSE:UVE

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Universal’s First 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.

[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’ll turn the call over to Steve.

[Steve Donaghy, Chief Executive Officer]

Thanks Arash. Good morning everyone. It was a strong quarter, including a including a 23.9% annualized adjusted return on common equity and 23.4% adjusted diluted earnings per share growth year-on-year. There are multiple factors benefiting our business and I’m optimistic as I look towards the future.

The Florida legislature passed meaningful reforms at the December special session, which we believe will improve the long-term stability and profitability of our core business, while rate adequacy improves and higher fixed income yields boost the productivity of our investment portfolio.

Additionally, as we sit here today, we already have our core all states property catastrophe reinsurance tower for the 2023-2024 period, fully supported and secured, with no material changes to our historical reinsurance partners or our terms and conditions, while the costs are well within our budget parameters.

We are very pleased with the progress we have made in the current environment, which is a testament to the strength of our business model and our associates.

I'll turn it over to Frank to walk through our financial results. Frank.

[Frank Wilcox, Chief Financial Officer]

Thanks, Steve, and good morning. Adjusted diluted earnings per share was $0.79, up from $0.64 in the prior year quarter. The increase mostly stems from higher net premiums earned, net investment income and commission revenue, and lower net expense ratio partially offset by a higher net loss ratio.

Core revenue of $316.3 million was up 8.8% year-over-year with growth primarily stemming from higher net premiums earned, net investment income, and commission revenue. Direct premiums written were $410.1 million, up 3.4% from the prior year quarter, including 0.9% growth in Florida and 17.2% growth in other states.

Growth reflects rate increases partially offset by lower policies in force. Direct premiums earned were $455.4 million, up 9.8% from the prior year quarter, reflecting rate-driven direct premiums written growth over the last 12 months.

Net premiums earned were $282.2 million, up 4.9% from the prior year quarter. The increase is primarily attributable to higher direct premiums earned, partially offset by a higher seeded premium ratio. The net combined ratio was 100%, up 2.1 points compared to the prior year quarter. The increase reflects a higher net loss ratio, partially offset by a lower net expense ratio.

The 73.1% net loss ratio was up 4.3 points compared to the prior year quarter, with the increase primarily attributable to a higher attritional initial accident year loss pick and higher prior year reserve development as a percentage of net premiums earned, partially offset by lower weather losses as a percentage of net premiums earned.

The 26.9% net expense ratio improved by 2.2 points compared to the prior year quarter, primarily reflecting lower renewal commission rates paid to distribution partners. On April 12, 2023, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on May 19, 2023 to shareholders of record as of the close of business on May 12, 2023.

With that, I'd like to ask the operator to open the line for questions.

[Operator]

[Operator Instructions]. Our first question will come from the line of Paul Newsome from Piper Sandler. Your line is open.

[Paul Newsome, Piper Sandler]

Good morning. Congrats on the quarter. Thanks for the call. Just a couple of questions. First, on the reinsurance tower, good to hear it's been secured. When you say no changes in the terms and conditions, is that including that the inter-company reinsurance provided by the companies reinsurance operation? And I assume that we are talking about some increase in rate online, just not the retention most of the tower. Is that fair?

[Steve Donaghy, Chief Executive Officer]

Hey Paul, good morning and thanks for the question. Yeah, I think that is fair. I think year-over-year we will see 2023 have a very similar percentage of reinsurance costs to the company against premiums earned as we did in ‘22. And we're very fortunate to have it completed as you mentioned, and very fortunate to have the partners that we do in the reinsurance industry. And I don't see any changes to the retentions from an inter-company perspective as well. So, you kind of hit all of them there. Thank you.

[Paul Newsome, Piper Sandler]

Did you use the state's offer of reinsurance this time around?

[Steve Donaghy, Chief Executive Officer]

We did not use the WRAP program in 2022. We elected to use that this year. So, that's the program that we are utilizing and as you know, that's below the FHCF level. So we're very fortunate to have that instrument available to us and that is part of the equation.

[Paul Newsome, Piper Sandler]

Yeah. And then maybe turning to the Tort reform, which is obviously the big question. Any sort of early leads on what we're seeing really from a pure claim perspective on any changes? And if you could give us some thoughts on when you saw the surge in lawsuits in general in Florida, in front of the [inaudible]. Tort reform, not sure if that had any impact on your businesses at all, but just any thoughts on what you're actually seeing from a pure claim perspective during the quarter related to the Tort reform?

[Steve Donaghy, Chief Executive Officer]

Yeah, I believe Paul, again as we changed our terminology from cautiously optimistic to optimistic, I would say at the end of Q1 we feel very good about that statement from the end of 2022. We have seen considerable reductions in litigation, representations, etc. and we feel very optimistic about the future of the impact of that on our business.

I also would say that even some of the changes from prior legislative sessions, such as the NOI process are working well and our staff is executing against trying to get as many settlements as possible before anything would land in a litigious environment. So I think all-in-all, very favorable signs.

[Paul Newsome, Piper Sandler]

Do you have any thoughts about how that might work its way through the year in the financial results? Is it something we'll see quite quickly or is it – do you think it will be something that impacts the loss ratio over time?

[Steve Donaghy, Chief Executive Officer]

I think it's going to take some time for the legislation to earn in. As you know, many of the changes are substantive, so they'll take effect as policies renew and new business comes onboard. So it'll probably take some period of time as we look into the future for it to earn fully in. But I think there'll be some benefits on a go-forward basis obviously.

[Paul Newsome, Piper Sandler]

Great! Well, I’ll let some other folks to ask questions. I appreciate the help as always.

[Steve Donaghy, Chief Executive Officer]

Yeah, thanks Paul.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Nick Iacoviello from Dowling. Your line is open.

[Nick Iacoviello, Dowling]

Good morning. Thanks for taking my question. I just want to make sure I'm understanding you’re not seeing changes to the intercompany retention. Just so on a staff basis and a gap basis, do you expect the retentions to be similar as they were last year's program?

[Steve Donaghy, Chief Executive Officer]

Good morning, Nick. Yeah, we do. We looked at a lot of different options on various levels of what we were offered in the reinsurance market and we feel good about our capital position and our ability to handle similar retentions, both on the net retention, as well as the [inaudible] lease program that we incorporate.

[Nick Iacoviello, Dowling]

Got it. And just the cost being a similar percentage of earned, and I get we'll get more details with the 8-K as usual, but was there a meaningful difference in the amount of private market limit you purchased? And I get the wrap layer this year was not there last year, and I guess also I'm thinking in terms of the first and second event coverage. Is this comment that the program was secured, that relates to both of those? And if so, how does the prepaid reinstatements compare versus last year?

[Steve Donaghy, Chief Executive Officer]

Yeah. Nick, great question, and we will have a detailed 8-K as we have in prior years. We'll have a press release out separate, sometime in May, late May most likely, but we feel very good about the entire program across the board. So from a ceiling perspective, it'll be very close to where we were in 2022. As you know, policy count is down, so TIB is down a little bit, but it won't be a meaningful difference whatsoever. And I think your further questions about coverages and others, they'll be consistent with where we were last year.

So as we exit the reinsurance market for ‘23, we feel really good. The visits in Bermuda, the visits in London went very well and I think we were – again, we separated a little bit from some of our peers relative to ability to secure and that's always our goal, is to kind of stand tall and be different within the space. So that's what we're trying to do.

[Nick Iacoviello, Dowling]

Okay. I guess just if we could go elsewhere. I know last quarter you guys had mentioned you were reevaluating your view of weather above plan. So I'm just wondering if you had a determination there and just trying to look at your results like-for-like with the year ago quarter. Was there anything this quarter you would classify as weather above plan?

[Frank Wilcox, Chief Financial Officer]

Yeah, good morning Nick, this is Frank. So weather cooperated in the first quarter for us. So to answer your question, we are still evaluating how we're going to report weather going forward. That being said, under the old standard there were no weather events. So everything for the current accident year was contained within what our lost picks were.

[Nick Iacoviello, Dowling]

Got it, thanks. And last one, do you see any movement in your gross loss estimates for Ian or is it still around $1 billion?

[Steve Donaghy, Chief Executive Officer]

Yeah, it's still around $1 billion Nick and we're pretty confident that we don't expect it to move north.

[Nick Iacoviello, Dowling]

Okay, that's all. Thank you, guys.

[Steve Donaghy, Chief Executive Officer]

Great! Thanks Nick. Have a good day!

[Operator]

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to our speakers for any closing remarks.

[Steve Donaghy, Chief Executive Officer]

Yeah, I'd like to thank all of our associates, consumers, agents and our stakeholders for their continued support of Universal. I wish you all a great day.

[Operator]

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