Q4 2021 Universal Insurance Holdings Inc Earnings Call

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Good morning, ladies and gentlemen, and welcome to the UBS fourth quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.

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

Ask a question during the session you will need to press or one on your telephone.

For a quote for any further assistance. Please press star Zero 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 development and strategy and Investor Relations.

Thank you and good morning, everyone welcome to our discussion on our fourth 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.

<unk> 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 <unk> SEC filings all of which are available on the investors section of our website at Universal insurance Holdings Dot com and on the SEC's website, a reconciliation of <unk>.

non-GAAP financial measures to comparable GAAP measures is included in the press release with that Steve I'll turn it over to you. Thank.

Thank you Rob we ended the year with a record of approximately $1 $7 billion of premiums in force and a return on average equity of four 6%.

Despite the accelerated inflationary trends, we announced on February 10th.

Which resulted in the company increasing its reserves.

Additionally, Clover dotcom, our digital agency subsidiary surpassed $40 million in place premiums during 2021.

The lion's share of our approved rate filings for UPC IC in Florida over the past several quarters is now effective as of the fourth quarter of 2021.

We continue to sharpen our pencils on our 2022, Florida primary rate filing in the coming months and are hitting the ground running on our reinsurance renewal with over 77% of capacity on our first event Allstate's tower already secured.

We look forward to continuing to focus on resiliency through this cycle and are monitoring closely the actions and the Florida legislature in regards to several bills, including SB 17, 28, SP fortino, too and SB 186 amongst others.

So with that let me now turn it over to Frank to walk through our financial results Frank.

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 and extraordinary reinstatement premiums and related commissions.

Adjusted operating income also excludes interest expense.

We ended 2021 with total revenue up seven 2% to $292 7 million for the quarter and four 6% to $1 1 billion for the year driven primarily by growth in net premiums earned from primary rate increases, partially offset primarily <unk>.

The lower policies in force and lower realized gains on the investment portfolio and increased reinsurance costs.

EPS for the quarter was a loss of one dollar and 54 cents on a GAAP basis, a loss of $1.53 on a non-GAAP adjusted basis.

For the year, we generated EPS of <unk> 65 cents on a GAAP basis, and 61 cents on a non-GAAP adjusted basis.

Results for the quarter and the year benefited from continued primary rate increases earning in.

But we're predominantly impacted by strengthening of reserves due to inflationary trends and a reduction in realized gains on the investment portfolio when compared to the prior year period.

Moving on to underwriting.

Our direct premiums earned grew by 11, 5% to $417 8 million for the quarter and 14, 4% to $1 6 billion for the year led by primary rate increases in Florida and other states.

Policies in force declined four 2% as a result of continuing to shape our underwriting risks.

On the expense side, the combined ratio increased seven four points for the quarter to 131, 4% driven primarily by strengthening reserves for the full accident year 2021.

As a result of inflationary pressures and increased reinsurance cost impact on the ratio.

For the full year, the combined ratio improved eight one points to 105.5% as a result of primary rate increases whether events being more in line with plan.

Lower net prior year's adverse reserve development in 2021, when compared to 2020 and continued business expense management.

For the year the expense ratio improved 1.2 points on a direct premium earned basis due to business expense management, including a reduction in agent commissions.

Advertising and lower executive compensation as well as primary rate increase impact on the ratio.

Net investment income increased 37, 9% for the quarter, primarily due to higher levels of invested assets for the full year net investment income decreased 38, 5% as well as the significant decline in realized gains for the quarter and full year.

As explained previously the declines are the result of the sale and subsequent reinvestment at lower yields of a majority of securities in the portfolio that were in an unrealized gain position in the third and fourth quarters of 2020 to recognize the fair about fair value benefits in surplus.

Unrealized losses for the quarter and for the full year were driven by market fluctuations in invested assets, resulting in an unfavorable outcome for the quarter and full year.

In regards to capital deployment during 2021, the company repurchased approximately 117000 shares at an aggregate cost of $1.6 million.

For 2022 guidance, we expect a GAAP and non-GAAP adjusted EPS range of $1 80 to $2 20.

Assuming no extraordinary weather events in 2022.

And a return on average equity of between 12, 5% to 15%.

The guidance assumes no extraordinary weather events in 2022, 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.

Okay.

Okay.

As a reminder to ask a question you will need to press star one on your telephone.

Withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Tom Sham from Piper Sandler Your line is now open.

Hey, good morning, guys.

Good morning, Tom.

So we've got inflation of building materials and labor that doesn't seem to be slowing down.

What rate changes do you guys think you need in 2022 to get to rate adequacy and in addition to that maybe you can walk us through how we should be thinking about.

Cadence of the rate increases you've already gotten how that should earn in over the next year or so.

Yeah. Thanks, Tom Thus far we had a 14, 9% a file that was right and approved in May of 2021, and then we had an additional 3% and change our reinsurance special filing.

In Q4, those are both active and will be flowing through the book in 2022.

Should we see that as a considerable enhancement in our in our effort to become a rate adequate.

The state of Florida in particular, we also had additional rate that we took in several other states across the country in the high double digits.

As well so we're doing everything we can across the portfolio to increase our position.

I think from a from a inflation perspective, as we stated in our press release on February 10.

We are taking the necessary steps to ensure.

We have the appropriate reserves going forward along with the right.

The right efforts to continue to focus on what we need as you know right is about a 12 month delay so our actuaries and actuarial firm or looking at what has transpired.

Since our rate request in 2021, and we are focused on that and we'll probably file additional rate.

In May of 2022, so we don't we don't see we don't see any signs that it will not be another considerable rate increase in the state of Florida. The market is quite hard as Youre aware.

Okay great.

So you guys have been increasingly conservative with your loss picks maybe you can remind us the history of your underlying loss assumptions. The past few years and maybe some thoughts on how we should be thinking about those underlying assumptions that are embedded in your guidance for 'twenty two.

Yes, I think if you look back four or five years' time.

Our rates were in the our loss picks were in the thirties.

Last year in 2021, we went out at a 42% rate and we felt good about it because of all the additional premium and we expected as you know we are cautiously optimistic on SB 76, and we've seen some benefits from that legislation.

We did increase our loss pick in 2021 two points during the year and then the additional.

Inflationary changes at the end of the year. So as we go into 2022, our loss pick will be in the mid Forty's again.

And we see the added premium at the top line growing considerably so in an effort to become adequate.

A healthy organization. We think these are the right things to be doing in 2022.

Okay great.

No.

Thinking about the pet count it looks like you had an acceleration of decline in Florida Pip.

Not anything new for Florida writers, but does seem to be accelerating for universe. So Jim maybe you could just give us your thoughts on how youre thinking about Florida in regards to.

Policy count for the next year.

Yes, we expect we are still open and in multiple territories.

Territories in counties across the state of Florida, where we feel we are at rate adequacy Tri County, and other areas, we are reducing our pits and <unk>.

<unk>, which which again achieved a very good spread of business for us which in the past we struggled to do so.

I think from a balance perspective, we feel good about it and we are closed in markets, where we have a bad experience and continue to take rate in those markets.

So I think from a Florida perspective, Youll see us maybe at three 4% drop in 2022, but again the premium that we're taking will continue to increase the top line as we like to call that positive premium within our organization. So that we see the increase in premium in spite of a reduction of <unk>.

<unk> and policy count.

Okay.

Moving to the expense ratio.

That was down sharply.

You talked about some of that in the prepared remarks.

Just decreasing general expenses, but some of that also a function of variable comp.

So any.

Any thoughts on how we should think about the sustainable expense ratio going forward.

Hey, good morning, Tom.

Yes, you are correct. Both in 2000 22021, there was a pullback on the variable compensation, particularly executive compensation.

Also.

Experienced lower spend while we worked remotely.

Do you expect some of that to resume in 2022.

Kind of looking at a range of.

Of expense ratio somewhere in 30% to 33% going forward.

The consideration the possibility for inflation.

Having an influence there it's much slower inflation is much slower to affect G&A, because two thirds of that.

That spend is acquisition cost related which is based upon a fixed contracts or fixed statutory rates and then out of the remaining two.

Two thirds of the remaining is employee related costs. So that's also much slower to be impacted by inflation. Then you have third parties, who are immediately passing those costs onto you.

Okay.

So I noticed total insured value in Florida was up about five 5% year over year, I know Pip count is down but.

Florida real estate values are up well into the double digits. So.

Could you walk us through the drivers of the.

The net five 5% increase year over year.

Yes, Tom the data that we subscribe to and are in our the way we model.

The price the policies, we havent inflation guard factor in there as well which of course is impacted when you have people at the fed talking about inflation, no longer being transitory and being permanent or stagnant so to say those those.

Those items affect how we issue a policy renewal and if the policy renewal goes up by 40 or 50 Grand.

A dollar for dollar translation into premium, but there is certainly an impact to the premium that we charge. In addition to the rate increases as we pass that along to the consumers does that makes sense.

Yes, yes.

And then lastly, I was hoping we could just go to the insurance reform discussion. So it seems like Theres a growing.

Political will to pass something more meaningful than what's been past.

Previously, even though like you said it has positive impacts but.

What are your thoughts there you guys are.

Close to it.

So really appreciate your thoughts there.

Is this the year, where we finally get the.

Reform, that's really necessary to right the ship in Florida.

Yeah, It's a good question Tommy.

We constantly have conversations with our attorneys and others.

While a happy.

Thus far the ideas that seem to have been discussed the most of this year are not comprehensive solutions that address the root cause of the deterioration in our market. We've written about this in the 10-K, it's been widely discussed elsewhere.

Concerns in the Florida market trace back to an imbalance.

Of incentives that have led to a proliferation of represented in litigated claims.

To make significant strides in alleviating the current market conditions.

We have to address this situation, we haven't seen anything in the current situation that would do that and we still have at the end.

We still have two weeks left in the in the legislation period, and we're hopeful that something can happen, but we're not overly optimistic at this point.

Okay. That's all I had thank you for your answers.

Alright, Thanks have a good day.

You too thanks.

Thank you at this time I am showing no further questions I would like to turn the call back over to Steve Donaghy, Chief Executive Officer for closing remarks.

In closing I would like to thank all of our associates consumers Our agency force and our stakeholders for their continued support of Universal I wish you all a great weekend. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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