UNIVERSAL INSURANCE HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q) – Marketscreener.com

Cautionary Note Regarding Forward-Looking Statements
Risks and uncertainties that may affect, or have affected, our financial condition and operating results include, but are not limited to, the following:
•Changing climate conditions may adversely affect our financial condition, profitability or cash flows.
•Because we conduct the majority of our business in Florida, our financial results depend on the regulatory, economic and weather conditions in Florida.
•Unanticipated increases in the severity or frequency of claims adversely affect our profitability and financial condition.
•The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations.
•Pandemics, including COVID-19 and other outbreaks of disease, could impact our business, financial results, and growth.
•We rely on models as a tool to evaluate risk, and those models are inherently uncertain and may not accurately predict existing or future losses.
•Reinsurance subjects us to the credit risk of our reinsurers, which could have a material adverse effect on our operating results and financial condition.
•Our financial condition and operating results are subject to the cyclical nature of the property and casualty insurance business.
•We could be adversely affected if our controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.
•The failure of our claims professionals to effectively manage claims could adversely affect our insurance business and financial results.
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•Litigation or regulatory actions could result in material settlements, judgments, fines or penalties and consequently have a material adverse impact on our financial condition and reputation.
•Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry.
•Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation.
•We may not be able to effectively implement or adapt to changes in technology, which may result in interruptions to our business or a competitive disadvantage.
•Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we write or changes in laws and/or potential regulatory approaches relating to them could have a material adverse effect on our financial condition or our results of operations.
•We are subject to market risk, which may adversely affect investment income.
•Our overall financial performance depends in part on the returns on our investment portfolio.
•We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability.
•UVE is a holding company and, consequently, its cash flow is dependent on dividends and other permissible payments from its subsidiaries.
•Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability.
•To service our debt, we will require a significant amount of cash. Our ability to generate cash depends on many factors.
•Our indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations under the Notes.
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Trends
Florida Trends
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Summary of Recent Rate Increases and Cost of Living Adjustments
In addition, in November 2022, UPCIC filed a 3.7% rate increase on Florida personal residential homeowners’ line of business, effective February 15, 2023, for new business and April 1, 2023, for renewals.
Changing Climate Conditions
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KEY PERFORMANCE INDICATORS
Definitions of Key Performance Indicators and GAAP and Non-GAAP Measures
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Debt-to-Equity Ratio – long-term debt divided by stockholders’ equity. This ratio helps management measure the amount of financing leverage in place in relation to equity and allows investors to evaluate future leverage capacity.
Debt-to-Total Capital Ratio – long-term debt divided by the sum of total stockholders’ equity and long-term debt (often referred to as total capital resources). This ratio helps management measure the amount of financing leverage in place (long-term debt) in relation to total capital resources and allows investors to evaluate future leverage capacity.
DPW (Florida) – includes only DPW in the state of Florida. This measure allows management to analyze growth in our primary market and is also a measure of business concentration risk.
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next twelve months. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Return on Average Common Equity (“ROCE”) – calculated as actual net income (loss) attributable to common stockholders divided by average common stockholders’ equity. ROCE is a capital profitability measure of how efficiently management creates profits.
REINSURANCE
Effective June 1, 2022, the Insurance Entities entered into multiple reinsurance agreements comprising our 2022-2023 reinsurance program. See “Item 1-Note 4 (Reinsurance).”
UPCIC’s 2022-2023 Reinsurance Program
•First event All States retention of $45 million.
•All States first event tower extends to $3.012 billion with no co-participation in any of the layers, no limitation on loss adjustment expenses for the non-catastrophe bond Cosaint Re Pte. Ltd. traditional reinsurance and no accelerated deposit premiums.
•Assuming a first event completely exhausts the $3.012 billion tower, the second event exhaustion point would be $1.183 billion.
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•For the FHCF Reimbursement Contracts effective June 1, 2022, UPCIC has continued the election of the 90% coverage level. We estimate the total mandatory FHCF layer will provide approximately $1.679 billion of coverage for UPCIC, which inures to the benefit of the open market coverage secured from private reinsurers and Cosaint Re Pte. Ltd.
Reinsurers
The table below provides the A.M. Best and S&P financial strength ratings for each of the largest rated third-party reinsurers in UPCIC’s 2022-2023 reinsurance program:
(1)No rating is available, because the fund is not rated.
APPCIC’s 2022-2023 Reinsurance Program
•First event All States retention of $3.5 million.
•All States first event tower of $50.5 million with no co-participation in any of the layers, no limitation on loss adjustment expenses and no accelerated deposit premiums.
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The table below provides the A.M. Best and S&P financial strength ratings for each of the largest rated third-party reinsurers in APPCIC’s 2022-2023 reinsurance program:
Florida Hurricane Catastrophe Fund (1) N/A N/A
(1)No rating is available, because the fund is not rated.
The cost of the 2022-2023 reinsurance programs for UPCIC and APPCIC is projected to be $696 million, prior to any potential reinstatement premiums due and represents approximately 37.6% of estimated direct premium earned for the 12-month treaty period for UPCIC and APPCIC.
Commutations
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RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Highlights for the quarter ended March 31, 2023
•Net investment income increased as maturing capital is redeployed into higher interest rates.
•The Company continued to return shareholder value with quarterly dividends.
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First quarter of fiscal 2023 results of operations comparisons are to first quarter of fiscal 2022 (unless otherwise specified).
Results of Operations – Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
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Direct premium earned increased by $40.8 million, or 9.8%, for the quarter ended March 31, 2023, reflecting the earning of premiums written over the past 12 months, including the benefit of rate changes due to primary rate filings, filings to cover increased reinsurance costs as well as policy premium adjustments due to increases in insured values caused by inflation.
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Other revenue, representing revenue from policy installment fees, premium financing and other miscellaneous income, was $2.0 million for the three months ended March 31, 2023 compared to $1.8 million for the same period in 2022.
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Core revenue, representing total GAAP revenue, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) of equity securities, was $316.3 million for the three months ended March 31, 2023 compared to $290.8 million for the same period in 2022.
Operating Costs and Expenses
Losses and Loss Adjustment Expenses
Losses and LAE, net of reinsurance recoveries was $206.2 million for three months ended March 31, 2023, resulting in a net loss ratio of 73.1%, compared to $185.1 million, and 68.8%, respectively for three months ended March 31, 2022.
General and Administrative Expenses
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Interest and Amortization of Debt Issuance Costs
Income Tax Expense/(Benefit)
Other Comprehensive Income (Loss)
Non-GAAP
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Analysis of Financial Condition-As of March 31, 2023 Compared to December 31, 2022
The following table summarizes, by type, the carrying values of investments as of the dates presented (in thousands):
Available-for-sale debt securities $ 1,026,555 $ 1,014,626
See “Item 1-Condensed Consolidated Statements of Cash Flows” and “Item 1-Note 3 (Investments)” for explanations on changes in investments.
Premiums receivable, net represents amounts receivable from policyholders. The decrease in premiums receivable, net of $4.7 million to $64.8 million as of March 31, 2023 is consistent with premium trends including seasonality and consumer behaviors.
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Other liabilities and accrued expenses increased by $4.2 million to $63.0 million as of March 31, 2023, primarily driven from increases in accrued taxes, licenses and fees when compared to December 31, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
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Book value is total stockholders’ equity, adjusted for preferred stock liquidation, divided by the number of common shares outstanding as of a reporting period. Book value per common share is the excess of assets over liabilities at a reporting period attributed to each share of common stock.
ROCE is calculated by actual net income (loss) attributable to common stockholders divided by average common stockholders’ equity. ROCE is a capital profitability measure of how efficiently management creates profits.
Non-GAAP
Surplus Note
Long-term Debt
Revolving Loan
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Common Stock Repurchases
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for multi-year reinsurance contract commitments for future years that will be recorded at the commencement of the coverage period. See “Item 1-Note 12 (Commitments and Contingencies)” for more information.
Cash Dividends
The following table summarizes the dividends declared and paid by the Company during the three months ended March 31, 2023:
The following table represents our material cash requirements for which cash flows are fixed or determinable as of March 31, 2023 (in thousands):
689,955 $ 715,317
(1)The amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Item 1-Note 12 (Commitments and Contingencies).”
(3)Long-term debt consists of a Surplus note and 5.625% Senior unsecured notes. See “Item 1-Note 7 (Long-term debt).”
IMPACT OF INFLATION AND CHANGING PRICES
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ARRANGEMENTS WITH VARIABLE INTEREST ENTITIES
We entered into a reinsurance captive arrangement with a VIE in the normal course of business, and consolidated the VIE since we are the primary beneficiary.
For a further discussion of our involvement with the VIE, see “Item 1-Note 14 (Variable Interest Entities).”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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The following table presents the reconciliation of GAAP revenue to core revenue, which is a non-GAAP measure (in thousands):
less: Net changes in unrealized gains (losses) of equity securities
34,258 $ 27,417
Adjusted operating income (loss) margin 10.8 % 9.4 %
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The following table presents the reconciliation of GAAP net income (loss) available to common stockholders to adjusted net income (loss) available to common stockholders, which is a non-GAAP measure (in thousands):
less: Net changes in unrealized gains (losses) of equity securities
Adjusted net income (loss) available to common stockholders $ 24,043 $ 20,049
0.79 $ 0.64
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The following table presents the reconciliation of GAAP ROCE to adjusted ROCE, which is a non-GAAP measure (in thousands):
Actual or annualized net income (loss) available to common stockholders
Actual or adjusted average common
Adjusted average common stockholders’ equity excludes current period after-tax net * realized gains (losses) on
investments and net changes in unrealized gains (losses) of equity securities.
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