Q2 2021 Universal Insurance Holdings Inc Earnings Call

Thanks Stan.

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1 of the duty.

Good morning, ladies and gentlemen, and welcome to the U V E second quarter 2021 earnings conference call.

At this time all participant lines are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need the press Star then 1 on your telephone.

As a reminder, this conference call is being recorded I would now like to turn the conference over to Rob Luther Vice President of corporate strategy and Investor Relations. Please go ahead.

Thank you and good morning, everyone.

Welcome to our discussion on our second quarter 2021 earnings results, which were reported yesterday on the call with me today is 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.

The risks and uncertainties that could cause actual results to differ materially from those statements for more information. Please see the press release and UV ease of SEC filings all of which are available on the investors section of our website of Universal insurance Holdings Dot com and on the SEC's website, a reconciliation of non-GAAP financial measures.

Comparable GAAP measures is included in the quarterly press release with that Steve I'll turn it over to you.

Thanks, Rob.

And opening I would be remiss to not acknowledge how absolutely devastated we were to hear of the tragedy and our local community at the Champlain towers and Surfside, Florida.

The devastation of an event.

Is there is debt is immeasurable.

Our hearts and prayers go out to those affected by the condo collapsed.

Turning to our results for the quarter, we delivered solid second quarter results highlighted by 18, 7% annualized return on average equity.

While we are pleased with our second quarter.

Like dots there are a number of industry factors that we are relentlessly focused on over the near term.

First we applaud the Florida OA are working hand in hand with legislators to acknowledge the issues plaguing the state's residential homeowners insurance market in comparison to the rest of the country.

The result to bring about positive legislative change.

Which we are cautiously optimistic will help in curtailing some of the 1 way of attorney fee abuses that of impacted Florida. The past couple of years.

That being said the recent preliminary injunction, which blocks portions of the new law that.

It went into effect July 1 from being enforced.

Namely the mass solicitation from restoration companies leaves gaps in the bill.

We continue to address the social headwinds with significant primary rate increases exposure management and strengthening reserves.

Okay.

In addition to social inflation impacts material and labor costs are having an impact on replacement costs.

We expect that the supply chain backlog subside we.

We will see a normalization of some of these material costs, but are monitoring these factors and inflationary pressures closely.

And then at our utilizing primary rate pricing and operational measures to manage these risks.

While macro inflationary pressures are a headwind on replacement costs.

They also implied tailwind from increased economic activity. In addition to the potential for higher investment income rates of return.

On top of the previously mentioned factors reinsurance costs increased as expected and discussed in our reinsurance filing on May 28.

But were more moderate in comparison to prior years.

We continue to address these impacts to margins through primary rate increases and our exposure management.

Program.

We were pleased to not only see the vast majority of our core longstanding reinsurance partners offer increased capacity in 2021.

But also that we're able to attract new reinsurer capacity at the 6.1 renewal.

Lastly, looking ahead to Q3 is.

The weather Hurricane Elsa made landfall in Tyler County, Florida on July 7th.

We are closely monitoring this event as it is the first event since new Legislative reform was enacted and should have more history on it in the coming quarter.

We continue to be hyper focused on driving.

As it relate more primary rate into our portfolio across our entire geographic footprint.

Which is underpinned by a more strategic vision regarding desired new business exposure for the foreseeable future.

These 2 pillars of price and exposure discipline, coupled with the recent property insurance.

Diving inflation that went into effect in July of 'twenty, 'twenty, 1 and our biggest market Florida.

As well as a comprehensive reinsurance program in place for the <unk> 2021 hurricane season puts.

Puts us on solid footing to handle the continued challenges we face.

So with that let me turn it.

It over to Frank to walk through our financial results.

Thank you Steve.

As a reminder, discussions today on adjusted operating income and adjusted EPS are on a non-GAAP basis, and exclude effects from unrealized and realized gains and losses on investments.

An extraordinary reinstatement premiums.

Legislate commissions.

Adjusted operating income also excludes interest expense.

We ended the second quarter with total revenue up 10, 5% to $279.2 million driven primarily by rate increases of proved in 2020, earning through the book as policies renew.

And related increase in policies in force when compared to the prior year's quarter.

And commissions earn on ceded premiums.

Total revenue growth was partially offset by the impact of higher reinsurance costs, when compared to 2020 and the investment portfolio's performance.

EPS for the quarter was 70 cents on a GAAP basis.

And 65 on a non-GAAP adjusted basis.

These results were primarily impacted by an improvement in weather events when compared to the prior year's quarter.

And the benefit of of reduced share count partially offset.

Set by the impact of lost cost trends on prior and current accident years.

As to underwriting.

Direct premiums written were up 17% for the quarter led by direct premium growth of 19, 6% in Florida.

The combined ratio.

Improved 2.2 points for the quarter to 97, 3%.

The improvement was driven by a 1.6 point improvement in the net loss and LAE ratio from decreased weather events, partially offset by prior year's reserve development current year strength.

Strengthening and higher reinsurance cost impact on the ratio.

The expense ratio decreased 1 point on a direct premiums earned basis due to the continued focus on operating efficiencies, which was partially offset by the impact of increased reinsurance costs on the net ratio.

Resulting in a 60 basis point improvement in the next the net expense ratio for the quarter.

On our investment portfolio net investment income decreased by 53, 7% to $2.9 million for the quarter, primarily due to.

<unk> the lower yields on the reinvested portfolio. Following the sale of the majority of securities in the portfolio that were in an unrealized gain position in the third and fourth quarters of 2020.

As to capital deployment on July 19, 2021, the board of directors.

Efficiently or at a quarterly cash dividend of <unk> 16 cents per share of common stock, which is payable on August 9.2021 to shareholders of record as of the close of business on August 2nd 'twenty 'twenty 1.

As mentioned earlier in our release yesterday.

Declarer, maintaining our guidance for 2020.1.

We still expect a GAAP and non-GAAP adjusted EPS range of between $2.75, and $3 and a return on average equity of between 17 and 19%.

The guidance assumes.

We no extraordinary weather events in 2021, and also assumes a flat equity market for GAAP EPS.

If weather events exceed plan, we expect to see both the benefit from our claims adjusting business and increased loss costs with that I'd like to ask the operator to now.

Open the line for questions.

Thank you.

Ladies and gentlemen, as a reminder to ask the question you will need to press Star then 1 on your telephone.

Withdraw you question first the balance sheet.

Again, Thats star 1 to ask the question. Please standby, while we compile the Q&A roster.

Our first question comes from the line.

Of course on shrimp with Piper Sandler Your line is open.

Hi, good morning, guys.

Hey, good morning, so alright.

So we had the insurance reform Bill pass during the quarter.

Industry observers that I've been seeing saying it only gets about 40% there towards.

Towards the fact of a firm of reform as the Bill stands now how do you think that equates to the loss cost improvement.

For the Florida guys.

Yeah. That's a really good question, Tom we've been analyzing the legislation and going to work in setting up internal functions to handle many of the new aspects.

And as we indicated we're cautiously optimistic.

I think it would be presumptive of me or anyone to really start estimating the net effects of that.

At this point.

The first month of Zen roughly in July there is a whole lot of <unk>.

Issues and questions on the plane of XI.

Next of it relative to what they can file when they can file on how they can file. So we're trying to educate them as best weekend in the process. So I think it's early to tell again cautiously optimistic is probably the best Youll get from me as we sit here today.

Okay fair enough.

In regards to.

What other provisions of reform Bill would need them do you of any thoughts there and you.

Also at the same time trying to get at the.

Of the appetite for potential further reform down the line.

You know you guys are down there and you've got your fingers on the pulse.

Is there an understanding by the Florida citizens.

The Ns and legislators that this bill is not enough to prevent further rate increases.

Yeah.

Appreciate your thoughts there.

Yeah, Yeah, Tommy I think of us as a Florida and myself, we are all faced with rate increases that are necessary.

I certainly.

Understand the causes of the the increases in can reconcile all of them in my own mind on I think your average average floridian.

It was really faced with increases that they don't understand, especially if they haven't filed of.

Litigious claim of really benefited from.

The bad behaviors in the state so.

It's a challenge I think the legislature.

No in the department they took steps they took the steps they felt they could at this point.

And I think as they continue to see increases in rate.

Our own they're going to have to reconcile did they do enough and what else can they do and clearly the cause of <unk>.

Much of the pain is the.

The attorney fees.

Ben process to date.

We look forward to them, reducing but I don't expect the legislation to eliminate them in the future.

Okay.

And I know Youre still.

Parsing through the bill and trying to figure out how.

It affects the universal but would you generally agree that it's.

The bill is probably not enough to prevent.

Further rate increases throughout the state.

Tom We have I would tell you 1 of the benefits that I have not only do I have my own reinsurance team in house I also have a considerable litigation.

<unk> team in house and of claims team is second to none where we manage the majority of that business ourselves.

It would be a mistake for an attorney or anyone else to think we don't completely understand the legislation that was passed and how to deal with it we put it in place effectively.

Effectively July 1.

Various people, we moved from some departments to handle the notice of a 10 day litigation and we think theres going to be more bites at the Apple for us to close claims in a fair manner than there was in the past. So again, we're going to do everything we can and take advantage of every piece of the legislation.

And really just to help floridians to hopefully reduce rates in the future.

As a result of what occurs in the state and I don't think even if we can get to a flat rate that would be beneficial for the state.

Okay great.

I wanted to move to expenses it looks like the.

And we have the operating expense ratio dropped by almost a point in the half that's good to see you.

Can you give us more color there on how we should be thinking about the sustainability of those expense saves.

Yes, I think it reflects the good morning, Tom This is Frank I think it reflects a.

A few things I mean as you know.

We're taking rate increases of those.

Rate increases are earning through an increasing.

The direct earned premiums and even with pressures of the increase of reinsurance costs, we get some efficiencies there.

Pete.

As it relates to our behaviors.

Since <unk>.

COVID-19 unveiled.

The itself in the beginning of 2020, our spending patterns have been a little bit different in doing so.

We haven't incurred certain expenses as a result of working remotely, but we also identified a lot of ifs.

The efficiencies that we generated which will stick so I'd like to I'd like to think that we're going to have.

<unk> the efficiencies going forward.

Great and then just on the slight reserve development can you give us more detail there you know.

Particular accident years.

Is there particular catastrophe loss events that.

Drove the increase.

Continue yes, so we have.

Gross development on on several of the storms.

Including the Irma, we had development on Sally and Michael and very very little of development on Matthew.

And because of the way our reinsurance.

Programs are structured where we Havent allstate's program.

Graham and then on in other States program.

A lot of the net development was offset.

By a reduction in the original retention losses that we recorded for Michael and Sally So while we had growth.

Net was was negligible, we put up about 7.8 million.

For prior.

Accident.

Here's non cat.

And of course, the growth would be the same.

Gross and the net would be the same on that.

And then in regards to Irma.

Can you remind us how we should thinking of how we should think about the.

Reinsurance tower there.

And what was left.

We've got the lead north of 1.1 or 1.2 billion 2 billion capacity left on Irma, So there's plenty of capacity.

Alright, great.

I appreciate the answers.

You bet. Thanks, Tom.

Thank you.

Our next question comes from the line of Nick.

A cabela with Dowling and partners. Your line is open.

Good morning.

Good morning, Nick.

So I think I think Tom hit on kind of most of my questions, but maybe if you could just add some more color to the current in the year strengthening of what Youre seeing in terms of the air force more on the frequency or the severity side.

I assume.

There wasn't any development on Q1 weather events, but anything you can add on the current year would be would be great. Thanks.

Yes, so we chose to strengthen the current year.

Which we did in the first quarter by $3.5 million on the second quarter. It was about $4, 1 which equates to an additional 1% on our loss.

Thus pik.

We did so for a variety of reasons, including some increased activities that we saw coming in ahead of the legislation passing people when they see potential legislation that's going to close the doors on their activities you tend to get a little bit of a runoff there.

So we as of added measure.

<unk> of caution we put up additional flow.

Current year here.

Great. Thanks.

And I guess, just 1 more can you can you talk a little bit about.

Where you're at with your direct efforts with respect to Covid. Please thanks.

Yeah. Nick This is Steve we continue to grow the Clover book of business, we're approaching $40 million in written premiums.

Many of the agencies in Florida, where a predominant amount of of the business resides there.

Theres just not of lot of markets to place business. So, we pivoted and began cross selling to our existing customer.

So we're we're selling auto policies flood policies you name. It they are actively growing the book in light of the tough market and I think across other states. We continue to see penetration as the our knowledge base grows and our ability to quote multiple carriers at any 1 time so of the.

Business continues to grow we like the business that.

It's increasing in non risk bearing revenue, which we feel is a positive and the technology continues to be revamped and enhanced.

Quarter to quarter. So the team is doing well the processing and we're very proud of.

Of the business to date.

Great. Thanks, that's all I had.

Alright, Thanks, Nick.

Thank you.

At this time I would now like to turn the call back over to Steve for closing remark.

Thank you in closing I'd like to thank our associates consumers agents and our stakeholders for their continued support of universal.

Have a great day.

Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

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