Universal Insurance Holdings Inc

NYSE:UVE

Earnings Call Analysis

A Transformative Year with a Conservative Approach

The year 2023 marked a significant transition for the company, culminating in double-digit adjusted returns on common equity, a promising sign for the future. The firm underwent transformational changes aligning with new legislative reforms, reinforcing their financial stability by implementing conservative measures such as the bolstering of reserves—regarded as the most conservative in company history.

Reforms Lead to Improved Claim Trends

Notable are the positive impacts following legislative reforms, with the company reporting an overall improvement in claims trends, including reductions in total, represented, assigned, and daily claims. As a result, the first event of the 2024-2025 reinsurance tower is already 90% secured, and additional multiyear capacity has been negotiated to strengthen the future position.

Growth Amidst Strategic Adjustments

Direct premiums written saw a 4% uplift from the previous year, with a 0.6% increase in Florida and a strong 18.6% growth in other states. Direct premiums earned also rose by 3.9%. The growth in premiums, rate-driven and countered somewhat by lower policies in force, indicates a strategic rebalancing of the portfolio towards more profitable areas and improved retention, contributing to a more stable and sustainable business moving forward.

Financial Performance: Challenges and Strengths

A higher net loss ratio led to a decrease in adjusted diluted earnings per common share to $0.43 from $0.72 in the prior year quarter. However, this was partially offset by a lower net expense ratio, higher net investment income, and a 12.1% increase in core revenue year-over-year. Despite the challenges, the net combined ratio increase to 103.7% reflects a strategy focused on future growth and stability, including a planned cautious approach incorporating a margin of conservatism into loss picks.

Shareholder Returns and Company Buyback

The commitment to shareholder returns remained steadfast, as evidenced by the Board's declaration of a quarterly cash dividend of $0.16 per share and the repurchase of approximately 223,000 shares during the fourth quarter. The share repurchase program's remaining authorization stands at $4.1 million, signaling confidence in the company's value proposition.

Conservatism in Forecasting to Pave Growth

In light of the phased impact of new legislation, prudence dictated the company's approach in reserve handling to ensure sufficient 'dry powder' for future business handling and growth. This deliberate conservatism is fundamental to the company's strategy for expanding the business in a secure and controlled manner.

Earnings Call Transcript 2023-Q4

[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, executive]

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.

[Stephen Donaghy, executive]

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 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 toward 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 1-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 multiyear 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 revamped Florida environment. I'll turn it over to Frank to walk through our financial results. Frank?

[Frank Wilcox, executive]

Thanks, Steve. Good morning. Adjusted diluted earnings per common share was $0.43, down from adjusted diluted earnings per common share of $0.72 in 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 0.6% 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 of $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 ceded 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 year 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.

[Jon Paul Newsome, analyst]

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?

[Stephen Donaghy, executive]

Yes. 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.

[Jon Paul Newsome, analyst]

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?

[Stephen Donaghy, executive]

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.

[Jon Paul Newsome, analyst]

And then maybe turning to the extra 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.

[Stephen Donaghy, executive]

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, executive]

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 Nic Iacoviello with Dowling & Partners.

[Nicolas Iacoviello, analyst]

First question, just was there any net adverse development in the quarter and if so, from which events?

[Stephen Donaghy, executive]

Yes, Nic. 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.

So we added -- 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, analyst]

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

[Frank Wilcox, executive]

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

[Nicolas Iacoviello, analyst]

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?

[Stephen Donaghy, executive]

Nic, can you repeat that last part of the question? I'm sorry.

[Nicolas Iacoviello, analyst]

No problem. Just like the current expectation for the captive participation in the '24 and '25 tower?

[Stephen Donaghy, executive]

Yes. We -- again, sitting at 90% accomplished for the first tower, Nic, we are very pleased with how our teams performed in the market. The reinsurance 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.

[Matthew Palmieri, executive]

It's proven to be very effective.

[Stephen Donaghy, executive]

Yes.

[Operator]

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

[Stephen Donaghy, executive]

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.