Universal Insurance - Q3 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Universal's Q3 2023 earnings conference call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Arash Soleimani, Chief Strategy Officer.

Arash Soleimani (Chief Strategy Officer)

Good morning. Thank you for joining us today. Welcome to our quarterly earnings call. On the call with me today are Steve Donaghy, CEO, and Frank Wilcox, CFO. 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 on Universal's SEC filings, all of which are available on the investor section of our website at universalinsuranceholdings.com and on the SEC's website. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release and can also be found on Universal's website at universalinsuranceholdings.com. With that, I'll turn the call over to Steve.

Steve Donaghy (CEO)

Thanks, Arash. Good morning, everyone. The Q3 benefited from strong and improving underlying trends, and I'm optimistic as I look forward. During the quarter, Hurricane Idalia made Florida landfall, and as always, we were there immediately to assist our policyholders in their time of need. The storm's severity appears considerably smaller than initially anticipated and is comfortably absorbed within our retention. We continue to enhance our best-in-class claims infrastructure, which together with our reinsurance capabilities, serves to differentiate us from our peers. As we look forward, we are more confident in the Florida market, which is our largest geography, and have started to slowly increase new business in additional territories. In the Q3, we completed the commutation of Hurricane Irma with the Florida Hurricane Catastrophe Fund, among partial commutations with private reinsurers for other storms as well.

We're pleased to have these transactions behind us, and as we look ahead, we expect future storms to be more predictable and efficient, given the benefits of recent legislation. I'll turn it over to Frank to walk through our financial results. Frank?

Frank Wilcox (CFO)

Thanks, Steve. Good morning. Adjusted loss per common share was $0.16, compared to an adjusted loss per common share of $2.27 in the prior year quarter. The improvement mostly stems from higher underwriting income and net investment income. Core revenue of $361.8 million was up 14.2% year-over-year, with growth primarily stemming from higher net premiums earned in net investment income. Direct premiums written were $532 million, up 6.3% from the prior year quarter, including 4.4% growth in Florida and 14.7% growth in other states. Overall growth reflects rate increases, partially offset by lower policies in force.

Direct premiums earned were $474.3 million, up 4.8% from the prior year quarter, reflecting rate-driven, direct premiums written growth over the last twelve months. Net premiums earned were $331 million, up 13.9% from the prior year quarter. The increase is primarily attributable to higher direct premiums earned and a lower ceded premium ratio. The net combined ratio was 110.7%, down 28.5 points compared to the prior year quarter. The decrease reflects lower net loss and expense ratios. The 87% net loss ratio was down 26.7 points compared to the prior year quarter, with the decrease attributable to a lower consolidated current accident year net loss ratio, primarily stemming from lower weather-related losses.

The 23.7% net expense ratio improved by 1.8 points compared to the prior year quarter, primarily reflecting lower renewal commission rates paid to distribution partners. During the Q3, the company repurchased approximately 894,000 shares at an aggregate cost of $12.3 million. The company currently has $7.8 million of share repurchase authorization remaining. On July 20, 2023, the board of directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on August 11, 2023, to shareholders of record as of the close of business on August 4, 2023. With that said, I'd like to ask the operator to open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you do have a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw the question, simply press star one one again. One moment for our first question, please. It comes from the line Nick Iacoviello with Dowling & Partners. Please proceed.

Nick Iacoviello (Equity Research Analyst)

Good morning, guys. Just first off, what were the net losses from Idalia in the quarter?

Steve Donaghy (CEO)

Hey, Nick. Good morning. Yeah, we set Idalia up at a $45 million loss at this point, which is well within the company's net retention, and we do not expect to hit our excess loss coverage above $45.

Nick Iacoviello (Equity Research Analyst)

Got it. And would that be the only—that $45 million, would that be what you classify as weather above plan or are there other events that, that you saw as well?

Steve Donaghy (CEO)

There were other events in the quarter, and, you know, none of them were of a magnitude that we would have reported separately, but, you know, consolidated, they were probably in the area of, like, another $10 million-$15 million.

Nick Iacoviello (Equity Research Analyst)

Got it. And then just, you made a comment on the commutations. I guess, could you quantify the gross and net prior year development incurred in the quarter, and how much of that related to these commutations?

Steve Donaghy (CEO)

Yeah, sure, Nick, great question. You know, we knew that we were going to be commuting Irma and other storms in Q3 of this year, just based on the schedule laid out by the state of Florida. So at the end of 2022, we created an accrual at Alder, which, of course, is our organization that handles all our adjusting and benefits directly from that adjusting. So we created an accrual that we took into account, and as we logically got to the run-up of the commutation, particularly on Irma, we released that accrual to kind of reimburse UPCIC for the funds in that commutation. And as you are aware, Nick, in 2017, the LAE reimbursement by the state was 5%.

And as you know, you know, reimbursement for LAE is typically in the area of, you know, 15%-25% on average. So we knew we had some funds we were going to need. We put up a certain amount for the commutation of Irma, which is around $15 million, and about another $2.8-2.7 million for Sally. So those were the total that would have hit had we not been prepared for them, through the accrual at the end of 2022.

Nick Iacoviello (Equity Research Analyst)

Okay. And sorry, just making sure I'm understanding that. So on a fully consolidated basis, excuse me, so what was the net adverse development from that, right? Because that's just between subsidiary and claims adjustment.

Frank Wilcox (CFO)

Yeah. So at the end of last year, as Steve pointed out, we put up an accrual at Alder in anticipation of participating in the ultimate outcome of these commutations. So as UPCIC reports the prior development in the current year, it will receive a refund from Alder, which in effect will replenish reserves from which those payments could be made.

Nick Iacoviello (Equity Research Analyst)

Okay. Got it. All right. I guess I just had one more, more macro, I guess, and specific to Hurricane Ian, right? It seems like the reinsurers and the, the cat modeling firms are still, still holding on to the $50 billion industry loss figure. But, I mean, it looks like ground up losses from the primaries are implying a lower amount than that. I'm wondering what you guys have seen in terms of claims development, and if you have a, a similar, similar view in, in losses trending lower than that, that $50 billion at the industry level.

Steve Donaghy (CEO)

You know, Nick, there's so much involved in the industry level that I'm going to leave that to those experts. You know, we pegged Ian at a $1 billion event, and through the development thus far and the benefits of the timing, we're sticking with the $1 billion estimate that we released at the time of the hurricane. And we feel good about that number as we sit here, even taking into account IBNR and other things in the future.

Nick Iacoviello (Equity Research Analyst)

All right. That's all I had. Thank you.

Frank Wilcox (CFO)

Thank you.

Steve Donaghy (CEO)

Great. Thanks, Nick.

Operator (participant)

One moment for our next question, please. It comes from the line of Paul Newsome with Piper Sandler. Please proceed.

Paul Newsome (Managing Director and Senior Research Analyst)

Good, good morning. Sorry, I got myself a little confused here, but could you talk a little bit more about the reserve impacts in the quarter? You know, positive, negative, let me start with there, just to get it straight in my head.

Frank Wilcox (CFO)

Yeah. So the biggest difference year-over-year, when you look at the net ratio, which was, I think, 113.7 for the three months ended 2022 versus 87% this year. The biggest difference would be the difference between the impact from Ian last year, which on a consolidated basis was $111 million versus the $45 million. So the net loss ratio changed by 26 points. That difference in the impact from the storms was about 25 points of that. And then, you know, comparatively speaking, prior development of the 17.7 that Steve highlighted compares to 2.7 last year, so that's $15 million. And then, of course, Alder continues to adjust claims for the Ian storm.

They generated profits of about $18.7 million versus $5 million. So that's a little bit of an offset there. But when you, when you kind of flush that away, the biggest impact would be the difference in the storms year-over-year.

Paul Newsome (Managing Director and Senior Research Analyst)

Right. So, you know, are we looking at, you know, sort of ex CAT, ex reserve development improvements? Or, you know, if we adjust all that, and, you know, maybe talking about prospectively from that perspective as well?

Frank Wilcox (CFO)

Well, right now, I mean, we see a lot of favorable trends from an operational standpoint. Number of claims coming in, number of represented claims, litigated claims.

Steve Donaghy (CEO)

... the benefit of which, which will manifest in the future, you know, and that's all coming from the favorable legislation. But as we stand here today, we're being conservative in our current accident year loss pick. So when you're looking at the larger of the two insurance entities, we're booking to a higher pick this year so far for the first nine months than we were, first nine months of last year.

Paul Newsome (Managing Director and Senior Research Analyst)

You know, could we maybe explore that a little bit more, why the loss pick is up, not down? You're pushing through an enormous amount of rate. You've had, obviously, I guess there's some peg of claims inflation in there. But then, I guess there's no benefit from potential tort reform in that peg as well. Is that kind of the way to think about it? Or, is there something more to be thought of there?

Steve Donaghy (CEO)

Well, I think, Paul, we need to look at it from a conservative perspective, and as we've talked about, the legislation still has not impacted our entire book of business. So as that flows through the book of business, and as we look to the future, you know, we see a lot of very positive developments that I believe that I think will be reflected in future years. And, you know, again, when we look into the future, we look at potential rate reductions in Florida as a result of the legislation. We see a lot of positive impacts, and as you know, you know, the repurchase decision in the quarter reflects our optimism as we look forward as a result of a whole lot of things impacting our business.

Paul Newsome (Managing Director and Senior Research Analyst)

I think that's very fair. I guess the actual question is, why have a higher peg if you're pushing for, you know, I think it's like 20%-ish price increases? That would imply that the underlying claims inflation is even higher than that 20%. Is that just an overly simplified way to look at it, or, you know, putting aside the impact of tort reform?

Steve Donaghy (CEO)

Well, I think, you know, again, the rate reductions are always run 12 months in arrears, right? So this year, we had a rate indication, which was almost double the rate that we took, which reflected our optimism from the legislative changes going into the future. So we put that aside, and then I think we build conservatism into our reserves, to ensure that we have plenty of funds, moving forward to adjudicate our business and, and keep the company in the most healthy position in the future.

Paul Newsome (Managing Director and Senior Research Analyst)

Appreciate the help as always, guys. Thank you.

Steve Donaghy (CEO)

Yeah, thanks, Paul.

Operator (participant)

Thank you. I don't see any further questions in the queue. I will turn the call back to Stephen Donaghy for final comments.

Steve Donaghy (CEO)

Thank you, Carmen. Appreciate it. I'd like to thank all of our associates, consumers, our agency force, and our stakeholders for their continued support of Universal. Have a great weekend.

Operator (participant)

With that, we thank you for your participation, and you may now disconnect.