Q2 2020 Universal Insurance Holdings Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to use the ease second quarter.
2020 earnings conference call at this time participant lines are in listen only mode. After speaker presentation or be a question and answer session to ask a question. During the session. You wanted to press star one on your telephone.
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With their vice President of corporate strategy and Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone welcome to our discussion on our second quarter 2020 earnings results, which were reported yesterday on the call with me today, Steve Donahey, Chief Executive Officer, Jon Springer, President and Chief Risk Officer.
Sure and Frank Wilcox Chief Financial Officer before we begin. Please note today's discussions 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 our earnings press.
Plantation and Youve, either SEC filings all of which are available on the Investor section of our web site at Universal Insurance Holdings Dot Com and on the Fccs Web site, a reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release with that Steve I'll turn it over to you.
Thank you Rob and good morning, everyone. Thank you for joining us today.
Yesterday, we reported solid second quarter results underpinned by strong topline growth as a result of pockets at attractive pricing and volume.
Resulting in an annualized return on average equity in the first half of 2020.
15.5%.
In addition, we continue to enter new states as an agent serving independent third party carriers with our digital insurance agency Clover.
We launched Clover, just over a year ago and continue to add partners and expand its offerings to consumers, while enhancing the overall digital experience.
Clover and continues to be an attractive growth operating.
Trinity for us with approximately 40% premium growth from the year ago quarter to its total book of business, while growing none.
Risk bearing business by over 200% in the same time period.
The shift to online policy acquisition continues to grow in part due to a very desirable refinance new home market.
Clover represents universal property and casualties fastest growing agency across nearly 10000 independent agents.
So we're off to a solid start to the first half of the year overall, including the successful completion of our reinsurance renewal on time and on budget, we're taking a more measured approach to guidance as a result of previously announced historically above average weather events in the second quarter.
Our liquidity and ability to drive growth remains strong and we continue to execute for our consumers and stakeholders.
So that let me now turn it over to Frank to walk through our financial results frame.
Thank you, Steve and good morning, everyone.
As a reminder, discussions today on adjusted operating income and adjusted EPS on a non-GAAP basis, and exclude effects from unrealized and realized gains and losses on investments extraordinary reinstatement premiums and related commissions.
Adjusted operating income also excludes interest expense.
EPS for the quarter was 62 cents on a GAAP basis, and 52 cents on a non-GAAP adjusted EPS basis.
Dollar 23, and $1.32 for the first half of 2020, respectively.
Direct premiums written were up 13.1% for the quarter led by strong direct premium growth of 14.5% in states outside of Florida.
And 12.8% in Florida.
For the first half of 2020 direct premiums written were also up double digits led by 16.5% in states outside Florida.
And 13.8% in Florida in.
In both cases growth was led by increased volume.
Rate increases becoming effective in a series of states along with slightly improve retention contributing to premium growth.
On the expense side, the combined ratio increased 12.6 points for the quarter to 99.5%.
And 9.8 points for the first half of 20, 20% to 96.8%.
The increases were driven primarily by the previously announced increase weather events in the second quarter.
The higher core loss ratio and the impact of higher reinsurance costs on the combined ratio, partially offset by a reduction in the expense ratio.
Turning to services total services revenue increased 16.8% to 16.1 million for the quarter and 20.9% to 31.5 million for the first half of 2020, driven primarily by commission revenue earned on ceded premiums.
On our investment portfolio.
Net investment income decreased 16.6%.
<unk> point 2 million for the quarter and 16.3% to $13 million for the first half of 2020.
Merrily due to lower yields on cash and short term investments during the first half of 2020, when compared to the first half of 2019.
The prior year also included onetime income benefits from a special dividend received.
And one time reduction and investment expenses.
Also to know we had an increase in our cash and cash equivalents position by 82.2% when compared to the end of 2019.
As a result of taking a defensive posture as covert 19 impacts continue to be felt across the global economy.
In regards to capital deployment during the second quarter accompany repurchased approximately 572000 shares at an aggregate cost of 10 million.
For the first half of 2020.
The company repurchased approximately 884000 shares at an aggregate cost of 16.6 million.
The company's current share repurchase authorization program has 11.7 million remaining as of June Thirtyth 2020.
And runs through December 30, Onest 2021.
On July 620, 20, the board of directors declared a quarterly cash dividend of 16 cents per share payable on August seven 2020 to shareholders of record as is the close of business on July 30, Onest 2020.
As mentioned in our release yesterday, we are updating our full year guidance to reflect the previously announced historically above average second quarter weather events.
We now expect a GAAP EPS range from $2.31 to $2.61.
In a non-GAAP adjusted EPS range of $2.40 to $2.70, assuming no extraordinary weather in the latter half of 2020 and no realized or unrealized gains for the second half of 2020.
This will yield a return on average equity derived from GAAP measures between 13.5% and 16.5% for the full year.
Let me now turning over to John to walk through some additional specifics.
Thank you Frank and good morning, everyone.
I will start with some additional color on prior year catastrophe events, then I'll touch on our experience to date with the second quarter 2020 weather events and ill conclude with a few comments on our reinsurance program effective June onest.
Prior year catastrophe events, we continue to make significant progress and resolving the remaining open claims and of course handling the newly reported claims as quickly as possible.
As of 630 Hurricanes Matthew in Florence, each were in the single digit open claims and continued to be very near the end.
Hurricane Michael had a little over 100 claims open.
And as we start to approach the end on this storm, we did elect to book a modest 9.5 million dollar increase in growth ultimate as of 630.
This change does not impact our net loss position.
On Hurricane aroma. Despite the fact that 1800, new claims will reported during the second quarter, we still successfully reduced the remaining open claim count.
As of 630, the open aroma count stood at just over 450.
We are preparing for the three year statute of limitation for filing new Irma claims to pass in early September.
So we can make a final push on closing this event.
There was no change to the ultimate as of 630.
In regards to second quarter 2020 weather event.
As noted in our July 10th press release, similar to most other insurance carriers, we experienced a high frequency of weather losses in the second quarter of 2020.
We were directly impacted by 14 different second quarter, PCF event, which led us to book, an additional 17 million of net pre tax loss beyond our original further loss plan as of 630.
As a reinsurance update following our normal practice, we disseminated the results of our program in our press release and 8-K on May 29.
With an effective date of June 1st.
A few highlights worth mentioning.
We secured more open market catastrophe coverage than at any other point in Universal's history.
Top level of you PCIA sees reinsurance tower provides coverage to one in 300 year level.
The final estimated cost was inline with our original guidance at approximately 34.6% of estimated director in premium for the 12 month Treaty period.
This compares to 33.3% at this time last year, reflecting a 4.1% increase year over year.
Given the state of the reinsurance market and the industry's recent loss experience, we view the pricing levels as reasonable for this treaty period.
With that I'd like to turn it back to Rob.
Thanks, John I'd like to ask the operator, well now open the line for questions.
Thank you and as a reminder to ask a question you want me to press Star one on your telephone delay draw. Your question press the pound cake. Please stand by early composite can a roster.
And our first question will come from Ryan Tom ship from Piper Sandler you may begin.
Hi, good morning, guys.
I was hoping you guys could talk about the increase in cash levels.
What's your thought process behind the increase in and what would you guys need to see in the environment to start investing that cash.
Yes, good morning, Thomas' Frank I appreciate the question.
Heading into this pandemic there are lot of unknowns for an awful lot of people and the markets.
We're in turmoil as we evidenced with the reduction in fair value that we reported as of March 30, Onest, which obviously recovered when you look at the balance sheet has is 630, but in an abundance of caution in not knowing.
Back then how our policyholders, we're going to ultimately behave with number one the demand a premium and then number two there with all their ability to pay the premium.
That being said we are very pleased with the performance we see very.
Strong topline growth and we're collecting that premium so we don't have liquidity issue, but as I mentioned in an abundance of caution we directed our investment advisors that upon either maturity or early pay down of our fixed income securities to hold the cash until the accumulated X amount.
They did that they accumulated those amounts by the end of May they are now taking amounts that mature or paid down early and reinvesting and between now and I mean right. Now obviously, we have a resurgence down here in Florida, we're keeping our eyes on that eyes and ears open we remain cautiously.
Optimistic, but we want to be careful.
Okay great.
And then I believe you guys said that.
There was 1800, new claims for hurricane earlier in the quarter.
Could you guys just provide some color in regards to.
How thats, how thats coming in versus your expectations and especially in regards to the IB in our that you guys booked in the first quarter as it is coming in better than you expected worse than you expected.
Yes, Thanks, Tom the the 1800 just by comparison compares to.
Yes. It was about 2000 in the first quarter of 2020, and roughly 1800 in the fourth quarter of 19. So it's very consistent with what has been coming in we have not yet seen any type of ramp up as we as we start heading toward that statute of limitations.
Unfortunately, we've also not seen any tail off of new reported it stayed fairly steady.
Fairly steady.
Okay great.
And then just generally I was hoping we could talk about growth.
Okay.
The moving pieces behind it the rate increases that you guys have been taking.
What's going on with retention is that actually coming in a bit better than you guys thought it would given given the rate increases.
Hey, Good morning. This is Steve we have we had three rate increases in Q2, Minnesota, North Carolina in Florida, as you're aware of.
And I would say the response is a little bit different by state.
In Florida, where there is not the market is quite hard our retention is very good and the other states. It's maintained the retention levels. We previously previously were at.
In light of the the rate.
The rate increase.
And our goal is really focus on the rate adequacy of our business across the portfolio more than the growth or as much as the growth I should say so.
It's a delicate balance, but we're quite pleased with Q twos results and how that sets the table going forward.
And that just that sets up my next question what are your thoughts on further rate increases will that be in Florida. The other states I mean.
Given the reinsurance price increases and.
The weather losses that seem to be plaguing, Florida. The last few years outside of just hurricanes.
Are you guys thinking that you might need to take further rate increases.
Oh, Thanks, Tom This is John.
We're constantly evaluating the need for rates, whether be inside or outside of Florida.
We do not typically do off cycle rate increases.
Meaning that in terms of Florida or any of our other states. We look at the rate need on an annual basis. So Steve just alluded to we just started charging a rate increase on our homeowners book in Florida. During the second quarter. So we will not be seeking an off cycle rate increase their based upon what.
Transpired with the reinsurance buying this year.
We will be evaluating it again as that as the calendar rolls into 2021.
Alright, Great and then lastly, someone would you just talk about the.
The weather losses.
Beyond plan.
For the past few quarters I think since one Q 18, you guys have reported weather events.
Other losses beyond plan.
Is there is there something that you guys. Thanks. It has changed in the weather patterns in the states are writing business or is it just that you're adding new entering new geographies and and is that making you guys change your view on.
Your plan for weather losses, and how you price for that.
Yes, we have definitely changed their plan each year, we've increased it and the changing geography does impact to that as we tend to pick up more of your your day to day sort of weekend type storms outside of Florida and the various other states that we're in.
We did increase the amount that we internally allocate towards weather losses. This year. However, as I mentioned in my opening remarks, and I think you've seen from pretty much every property carrier publicly traded the second quarter was was a difficult quarter just in terms of the frequency of BCS.
Events.
The largest driver for us Tom in that PCGS 2020.
It was was it rather significant industry event I believe pcls has it at a little over 2.5 billion.
So that's the type of event that is that is beyond plan. In addition to the frequency and that's when we will will advise that we need to set aside more losses.
Alright, great. That's that's all I had a congrats on the quarter.
Thanks, Tom Thank you.
And our next question will come from the line.
Bill Bromo from ballot Dowling and partners may begin.
Great. Thank you.
If I could just start with a question for John I was just wondering so the reinsurance program than non sort of retention is that structure similar to prior years on how that would work.
Air playing with your sort of attention.
Yes, it's structured Nick exactly the same manner, where the other states program as we often referred to it is a supplemental program.
In addition to our core all states program.
Perfect Okay.
And then I was just what on hold.
You gave CBS will helpful comments last quarter and I was just wondering if your view on covert has changed.
Based on what we've seen in Q2 and that I thought you might have on.
Okay.
Frequency versed severity of claims.
You have more people working from home so they might recognize.
Maybe some water damage, but you also people on home maybe using their air conditioner more frequently so I.
That is just wondering how you think about that severity versus frequency of claims.
Do they build as Steve.
As we look at the coded.
And the pandemic in the environment that we all live and currently we see no change from a coverage perspective.
Relative to the pandemic, we certainly.
Have adjusted our business and our organization and are tracking of various things that you would expect to recognize the unique times that we live in and our insurance when they may call. It asked for questions are made some assistance in delaying a payment et cetera, but again as Frank alluded to earlier, we've not seen any impact to catch.
Cash flow, which we we're very fortunate to.
To be in that situation relative to.
Frequency and severity.
Frequency from the from the weather, we certainly have seen and we've talked about.
There's a lot of conjecture about your question as to relative to the claims environment.
One side would say well, there's a lot more people in the house. So there could be a lot more bad things happening another side would say well there's more people at the house, so something bad happens people see it sooner and respond to it.
Overall metric perspective, we've not seen a spike or a great downside into the frequency of claims as we sit today so.
We watch it constantly as you could imagine, but we haven't seen any effect at this point.
From people being at home.
Great and.
And then last quarter you also talked about the virtual inspection process I was wondering.
That process is here to stay even.
Posts.
And we kind of return to normal.
I was wondering.
Based on your experience has the outcome of those claims that were done virtually versus maybe pre colgate.
Have you seen any difference in the outcome.
Yes, Bill we've been experimenting with.
Remote inspections for the last two and a half years and as you can imagine we have a room full of claims adjusters, who don't look anything like me and are quite young and very computer savvy. So we are fortunate that had that experience I would say the biggest change is more that the the insured.
Slash homeowner has more of an interest in trying to cooperate with our staff and conduct the inspection remotely.
Avoid all the obvious interactions and different things so.
If that market stays and I would say, yes that will continue to grow but.
We have developed internal technology as you know we like to do.
To support the effort.
We feel really good about how our position we see it sticking around for the foreseeable future. We we do not see again a reduction in the overall assessment of the claim we're not doing remote claims to reduce the amount of money. We paid to the ensured we are we're doing it really to facilitate the health and wellbeing of our staff.
And that of.
That of the insured overtime, you could see some kind of a head count impacts to the number of adjusters, because we can clearly perform more work remotely than weekend by putting feeding the putting somebody in a vehicle and having them get out and do the inspection the traditional manner and I I would also think did in the event of a.
Some kind of an event, we would be positioned well to try and get to as many insurance remotely, which which we did an arena.
Contract.
At the same time, so I think it's it's something we continue to focus on learn and move with the market, but we feel pretty good about how we're positioned to manage it.
Great.
Thank you for that.
Just going to that slide that you put out last night I was just wondering can you help me reconcile.
Under on the underwriting slide but.
The difference between that gross prior year development of 11.6 million and the net prior year development of.
Point 5 million.
Well I think the the biggest difference there would be that approximately nine and a half million of that prior year development on a gross basis was related to hurricane Michael and the higher night and a half is seeded and recoverable from reinsurance so as zero impact on the.
Net.
Got it okay perfect.
And whereas the storm in the water right now and I was just wondering what point do you kind of slow your new writings in Florida. When there is warm in the water to square.
Hi reference.
Yes, Bill we have a process internally with.
Myself, and John and our head of underwriting, Mike Polasky, where we track the storms along with our catastrophe teams and as we see it approaching we determine when to close various markets and in the past you know we have we have been very.
Fortunate to have done that at the right time. So we were on the phones. The yesterday at about 430 talking about it and we're going to talk about it when we get off of this call and again at the close of business to determine when we feel the appropriate time to close various markets as if it's a fluid situation as the wind is as you can imagine.
Yes, okay.
And then last one and then I'll be done on the thermal lost gross loss of 1.45 billion.
Please in Q1 and didn't change how much of that is.
Hi beat our.
Flat.
As of.
630.
Bill, let us let us get back to yet.
Offline with that number so we can give you the right number as of 630.
Okay perfect. Thank you very much appropriately.
Thank you and I don't see any further questions on my end.
Great and clothing I'd like to thank all of our associated consumers agents and our stakeholders for their continued support of universal and as an organization. We wish everyone. That's on this call and associated with our company.
Safe and well being during these very unique times, so with that will conclude the call and thanks very much for your time.
Ladies and gentlemen distances today's conference call. Thank you for participating you may now disconnect.
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