Q3 2020 Universal Insurance Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the U.P.E. <unk> third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation, there will be a question.
And answer session.
Good question during the session you'll need to press star one on your telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to Rob <unk>, Vice President of corporate strategy and Investor Relations.
Thank you and good morning, everyone welcome to our discussion on our third quarter 2020 earnings results, which were reported yesterday.
On the call with me today, Steve Donahue, Chief Executive Officer, Jon Springer, President and Chief Risk 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 you can use FCC filings all of which are available on the investor section of our website at Universal insurance Holdings Dot Com and on the Fccs website, 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.
We continue to see headwinds in the third quarter as we dealt with elevated industry wide, whether that's year to date, particularly in coastal states.
Our catastrophe response teams have directly engaged with our insurance to ensure they received the attention they deserve.
As previously announced we were affected by full retention events from Hurricanes <unk> and Sally in addition to other piece yet so that's year to date.
As the statute of limitations for Hurricane Hermine approached attending we experienced increased prior year companion claims as the window close.
This increase in claims let us to increase our reserves in years prior to 2020.
We feel good to have a hurricane or a month behind us.
The ability to strengthen reserves appropriately and proud of our employees for their contributions during these unprecedented times.
Our vertically integrated suite of capabilities continues to differentiate us in our home state.
Our primary rate increases continue to flow through our book as evidenced by our strong direct premiums written growth of 19.4% in the quarter.
We continue to selectively write new business.
Are quickly approaching 1.5 billion in premiums enforced.
And are optimistic about our prospects in the future. So.
So with that let me now turn it over to Frank to walk through our financial results Fred.
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 and extraordinary reinstatement premiums and related conditions.
Adjusted operating income also excludes interest expense.
EPS for the quarter was a loss of 10 cents on a GAAP basis, and a loss of one dollar and 43 cents on a non-GAAP adjusted EPS basis.
Year to date GAAP EPS was one dollar and 14 cents.
A negative eight cents on a non-GAAP adjusted EPS basis.
Despite elevated activity year to date, we produced an annualized year to date return on average equity of 10% with a book value per share that remain relatively flat since the end of 2019 at 50.
$15.15.
As the underwriting direct premiums written were up 19.4% for the quarter led by strong direct premium growth of 18.8% in states outside of Florida, and 19.6% in Florida.
The quarter's growth benefited from organic new business growth.
Primary rate increases continuing to flow through the book.
On the expense side, the combined ratio increased 36.9 points for the quarter to 134.7%.
The increase was primarily driven by previously announced increased weather events. In addition to prior year's reserve development and the continuation of accruing incremental reserves for current accident year loss costs.
In addition, higher reinsurance costs affected the base of the ratio.
These increases were partially offset by a benefit from our claims adjusting business.
A reduction in the expense ratio.
Turning to services total services revenue increased 14.9% to 17.1 million for the quarter driven by commission revenue earned on ceded premiums and an increase in policy fees.
On our investment portfolio net investment income decreased 40.1% to 4.6 million for the quarter, primarily due to lower yields on cash and fixed income investments during 2020, when compared to 2019.
Realized gains for the quarter was 53.8 million and resulted from taking advantage of increased market prices on our available for sale that investment portfolio.
We took the opportunity to monetize the increase in fair value of our investment portfolio as a means to enhance surplus for U.P.C. I see this.
This facilitates our growth strategy in a hardening primary rate market, while strengthening reserves cash.
Cash and cash equivalents increased 122.5% to 405.1 million when compared to the end of 2019 as a result of the actions taken to realized investment gains leading to higher investment cash flows.
As a result of the sales and reinvestment future portfolio investment income will reflect current market rates.
In regards to capital deployment during the third quarter the company repurchased approximately 534000 shares at an aggregate cost of 9.9 million.
Year to date, the company repurchased 1.4 million shares at an aggregate cost of 26.5 million.
On July six 2020, the board of directors declared a quarterly cash dividend of 16 cents per share of common stock, which was paid on August seven 2020 to shareholders of record as of the close of business on July 30, Onest 2020.
As mentioned in our release yesterday, we are updating our full year guidance to reflect increase topline revenue offset by elevated third quarter loss and loss adjustment expense.
We now expect a GAAP EPS range of $1.80 to $2.10 and.
Any non-GAAP adjusted EPS range of 55 cents to 85 cents, assuming no extraordinary weather events in the fourth quarter of 2020, and no realized or unrealized gains for the fourth quarter.
This would yield a return on average equity derived from GAAP measures of between 11.1% and 14.1% for the full year.
Let me now turn it over to John to walk through some additional specifics.
Thank you Frank and good morning, everyone. We continued to make significant progress in resolving the remaining open claims on prior year catastrophe events.
And as Steve noted, we reached the statute of limitations milestone for Hurricane Hermine claims we.
We did see over 2000, new aroma claims reported during the third quarter and we elected to book the aroma gross ultimate at 1.55 billion.
The modest brought up in claims filed in advance of the three year statute of limitation for filing neuroma claims that expired in the second week of September was expected but.
We were surprised and disappointed to see quite a number of non cat or my companion claims filed simultaneously.
This phenomenon contributed to a portion of our third quarter prior year adverse development we.
We will continue to monitor the effects of these late reported aroma and armour related claims going forward, but.
But we are extremely pleased with the diligence of our claims adjusting staff.
As of 930 Hurricane Michael had a little over 100 claims open as we start to approach. The end on this storm we did elect to book the Michael gross Ultimate at 386 million. This change does not impact our net loss position.
In regards to third quarter 2020 weather events.
As noted in our September 20, Threerd press release and again in our release last night, we did experience losses from two specific hurricane events during the third quarter Hurricanes Isa, Yes, and Sally.
Each of these events was booked at 930 expecting a full retention loss under its respective reinsurance program.
For Hurricane he say, yes that was 15 million pretax under our other states program.
For Hurricane Sally that was 43 million pretax under all states program.
Together. These two events resulted in a total net impact of approximately 58 million pretax approximately 44 million after tax with that I'll turn it back to Rob.
Thanks, John I'd like to ask the operator to now open the line for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and he'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Tom ship from Piper Sandler Your question. Please.
Hi, good morning, guys.
Morning, Scott.
Just had a just hoping to get more color on the.
The companion claims the non cat claims.
Can you give me an example of.
What type of claims those are and.
And just by that caught you guys by surprise just any more color on that would be greatly appreciated.
Yes, Thanks, Tom Thanks for the question.
Companion claim as as we're describing it is a claim filed site.
Simultaneously with a catastrophe claim so typically with the help of a public adjuster and or an attorney what we'll see is we'll see a hurricane or my catastrophe claims come in and again it at the same time on non cat claim for the same property and really the big the Guy.
All of the the policyholder or or the public adjuster attorney.
As I try to make every effort that their client has the opportunity to get paid on one or the other or both.
Of those claims.
It wasn't the concept is not new at all in fact, we've we've had over 10000 of these type of claims filed sense or my first made landfall over three years ago.
What was unexpected.
And maybe a little disappointing was that we did see.
Rather significant number filed again in the third quarter of 2020.
As we saw that that late push of a little over 2000 cat claims come in so obviously when these claims come in they're non cat.
They typically fall into an older accident years, so it would require us to two.
To bolster our reserves for those particular years.
Okay. So I just want to make sure I understand this correctly it sounds like from a perspective of three year statute limitations of.
Pass now that claim count for that really shouldn't go up and it's not really a classification issue that.
Has the potential to develop further.
No that's right.
Yes, you're correct.
Our goal really with everything that we've done here in the third quarter, Tom is to try to get our my cat claims and and aroma related non cat claims in the rearview mirror with what we've booked here from a gross cat perspective, as well as what we've done to bolster the older Your reserve.
Related to some of these companion claims.
We're really hoping to put our money behind us.
Great that's very helpful.
And then if we could talk about just capital strategies, you guys are holding on to more cash.
You're still buying back some shares in the company is reporting strong growth. So so how's the comfort level trending around capital adequacy I know you guys took.
Took the gains and some of the investment portfolio, but if organic growth opportunities continue to present themselves.
Good management and vision.
Avenues to support the growth taking advantage of low rates raising some capital is that a possibility.
Good morning.
Tom This is Frank Wilcox I appreciate the question.
Just as a reminder, about our business model and how we accumulate and deployed.
Capital in addition to the opportunity to accumulate capital insurance entity levels.
With our vertically integrated structure, we also had the capacity to accumulate capital outside.
That capital of course is used to return value to shareholders in the form of dividends.
Share buybacks and from time to time, if needed to support growth at U.P.C. I see.
Right now we're okay with capital.
If if need be to look elsewhere, certainly that capital raise would be to support growth.
Okay, Great and then.
Net investment income it was a bit lower than expected I, you know I understand yields are coming down and.
Moving on to cash more so.
But can we just discussed the decelerating net investment income and this is a good run rate, we should assume going forward.
Yeah, well the decrease in the interest rates had an impact first our cash equivalents and then our short term investments as those reprice regularly.
The book of fixed income long term fixed income securities as they mature as they were paid down before maturity, we're repricing into a lower interest rate markets. So those are currently contributing factors going forward I think you need to keep in mind. The fact that we monetize the unrealized gains and as unrealized gains basis.
We represented a feature collection of interest income so we accelerated the collection of that interest income and now as we.
We replace our investment portfolio majority has been replaced in the composition of the portfolio is very similar to what we had in the past, which is very conservative nature of course that served us in the past.
But as we continue to deploy the available cash we're expecting a yield of somewhere between 130 to 160 basis points, depending on the advisors that were working on.
Okay.
And then I just wanted to.
Touched on just a high level question here, obviously, the the Florida insurers in general are struggling right now.
Can you just discuss what you're seeing in the operating environment.
You know the potential and the opportunity to take further rate increases and how the regulator would respond to that.
And just in general what are your thoughts on the ability to get enough rate to to stabilize margins for the Florida peers.
Hey, Tom it's Steve Thanks for the question yes.
The Florida market as we've commented briefly it's hard and we.
We see a lot of competitors that are pulling pulling out of specific areas around the state.
Our.
Our our philosophical approach to rating has never been to rate to competition, but to rate adequacy. So we now find ourselves writing around the state in areas that traditionally we did not true.
Traditionally in areas, where you know friends of ours are as agents of ours that we knew well could not right because we were double or as much as triple the premium of some of our competitors. So as that as that is changed our ability to organically right and underwrite our own policies.
His considerable and we like the growth I think our reinsurance partners will like the growth because it is outside of Tri County, and as we continue to balance our portfolio, we feel as though that is a considerable opportunity for us going forward.
Mechanics in the state as we continue to aggressively handle our claims we are experimenting and continue to use products weve used for two or three years. Many.
Many insureds are more welcoming of our ability to adjust or adjudicate a claim remotely rather than having to send them in men.
Many of our field staff, we have tested for the virus regularly to prevent.
The spread and we notify our insureds that will be coming in that we've done that and that if they've had any exposure. Please let us know so we can do our best to adjudicate that claim remotely again, that's somewhat unique to universal and not all third parties adjusters in the state.
Demonstrate an ability to comply to our requirement. So we feel good about what we've built in the past to execute no.
If that Didnt answer any specific area of your question just let me know what I'd be happy to address them no I I think that Saddam but it brings up another question you know as you guys try to move away from Tri County.
I've been hearing some discussion that.
Some of the issues that are in Tri County, you know moving to other other counties throughout the state is is that something you guys have been seeing too how has that been trending.
Your guys' thoughts.
Yeah, we track that on a regular basis as you can imagine Tom and you know the infrastructure that we built to deal with Tri County should we experienced that we feel that we are strategically positioned to combat whatever comes at us in any other markets again that being said our radar.
We'll see is the key to our ability to operate around the state effectively and efficiently. So our our our lawyers are ready our.
Our specialist in claims are ready, but thus far we have not seen the increase in premium result in increase in litigation or P.A.'s et cetera around other markets in the state that there there we know they're there we know who they are and I like to think they know who we are and that we have the right tools to.
Combat and compete.
Should they decide to pursue a frivolous hurdles claims.
Okay, Great and then just lastly, I was hoping we can revisit the impacts from Cove it.
Were.
We're a lot farther into the pandemic now or are you guys seeing any.
Official impacts via direct distribution or.
Possibly lesson on Attritional losses, because homeowners work from home.
Todd It's a it's an interesting question, we get it right here weve not seen any.
Peaks or valleys in claim.
Claim development claim request, we have had people ask for.
Relief due to the pandemic, but our policies specifically do not cover that so.
We review the review the claims and it you know it's maybe three digits that we received in the last nine months. So it's not a huge amount, but we've not paid out at this point on any due to the policy language that we fortunately have across the board.
And yeah.
Are you seeing any impacts from.
A beneficial impact from just homeowners being at home is it.
Or is it just too early well I will tell you.
Yeah, I would tell you it's on the beneficial impact that you know from my office that I see are the tremendous associates that weve recruited to universal in the past and our ability to respond attend and operate as efficiently as possible in these times.
The technology that we have embraced for years within the claims Department has served us really well and the ability for a consumer to take their phone and take pictures of the claims that they submitted and help us get them to what their what they desire to get repair.
I've been pleased with you know the construction business you know, we don't participate in that but it does seem as though consumers are able to find people to work on their own and get back to normal and prevent further damage from effecting a claim.
That's been beneficial so I think across the board our associates are doing a great job clearly.
Clearly third party construction firms continue to assist our insureds and get people back to where they were and I think our ability to use technology for clean it within claims.
Has been really good in some of that is proprietary we have our own claims at that we developed in house and people can track their claims on their phone if they'd like and that's served us quite well.
Okay, Great I appreciate the answers guys.
Yeah. Thanks, Doug.
Thank you. Our next question comes from the line of Bill promo from Dowling and partners. Your question. Please.
Great. Thank you if I could just start in the past you've talked about.
Your direct loss pick and how you view that has there been any change on that front.
No no.
I'm sorry go ahead, Frank you go first.
I was simply going to say that it hasn't changed from what we previously announced.
Perfect.
It can you just help me reconcile the direct to net.
Adverse development, just trying to understand I think Michael will be a piece of it or more would be a piece, but is there anything else I'm just trying to get from that.
136 down to the 31.
For the three sorry.
No you're right or mind, Michael would be the largest contributors to that.
Okay.
Got it.
On the cash.
A cash component on your balance sheet I was just wondering how much of that cash is at the holding company.
Well, that's a disclosure that we do annually through our 10-K their financial statements at the end. It's it's not a number that we published medium term bill but last year.
The amount was between 80 and 90 million.
Got it that's yearend 29 team.
That's correct okay.
And just following up on when it.
Tom's comment is there any.
Average ratio that you think about writing at the sub level.
At.
Are we talking about debt.
Sorry, a underwriting leverage I apologize you a premium to surplus and how you think about.
Your writing it.
Is there something you're going to have theres. Several measures that we monitor we monitor gross written premium to surplus net written premium to surplus and of course RBC ratios and.
We do that in order to maintain regulatory standards, but also to support our ratings. So yes, we do constantly monitor this business.
And would you say, where you are right now is.
In the if you think about bands where do you think you stand right now in terms of <unk>.
<unk>, what you like to write out from a leverage.
Ratio well those those are annual figure. So we're looking at that in conjunction with our forecast for the rest of the year or we have had tremendous growth from opportunities in the state of Florida, and we recognize that we need surplus in order to support that growth and.
We have in the past infuse capital from the holding company down to the insurance entities and we stand ready to do the same as necessary.
Now did you downstream anything in Q3.
I'm sorry, what was the question.
In the you prepared remarks, I believe Frank you mentioned.
About the.
The surplus and did you downstream.
Any capital to.
And we do it yourself to support the growth.
We did we infused $44 million from the holding company.
And build it Bill this is Steven we still have the funds.
Funds at the parent we're very comfortable with where we sit from a capital perspective, and you know our ratios as we sit here today are better than they were at the end of 19 and in Q1. So generally so we feel good about where we're at and as Frank talked about the.
Focus on capital is constant and.
He's always running in share and where we're at and what we're doing and what we need to do and Fortunately. The company has been built in a manner that we can continue to do the necessary things and thus far have had no need to.
And our capital markets for additional assistance.
Great that both the converts.
Thats very helpful.
And I might have missed this john but what are the number of open or Mclean I know you had 2000, new ones, but I think at the end of Q2, you had about 450 and I was just wondering what.
The open claims where on Earth.
Open open Irma claim count as of 930 was 418.
That number sounds like it went down just a little bit obviously, we we made progress on the new claims that came in during the quarter.
Yes, Okay Yep Yep.
And the.
In the past Youve paid a special dividend.
I was just wondering when does.
When does the board meet to.
Review that or whats the process to when you think about.
The review the dividend.
Yeah, Bill that's it that's part of our ongoing capital management strategy that we employ in the investment Committee will meet.
We have a board meeting this week the investment committee met last week.
On some matters and have discussed it. So we're we're in regular discussion, we generally like to get us through the hurricane season as possible and.
Currently we sit in a position where the capital is there to deploy barring any unforeseen circumstance. So we again, it's it's part of our ongoing strategy, we feel good about it and the capital is there today and as we as we match rates through the next few weeks, we should be in a position to announce.
Great. Thank.
I think that's all I had thank you so much for all the answers.
Yeah. Thanks Bill.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Steven Donohue for any further remarks.
Yes. Thank you Jonathan in closing I would like to thank our associates consumers agents and stakeholders for their continued support of Universal and all those on the line. We wish you. The best in these unprecedented times and I look forward to speaking to you at the end of the year have a great day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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