Universal Insurance - Q4 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Universal's fourth quarter 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. Please go ahead.

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, 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, risks, and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release and 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. We closed out both the fourth quarter and full year with double-digit adjusted returns on common equity, and I believe that even stronger results are firmly in our future. 2023 was a transformative year for us, and our significant efforts position us for meaningful success in the new legislative environment. We've added a buffer to our loss picks and bolstered reserves for years that predate elimination of one-way attorney fees and assignment of benefits to what I view as the most conservative level in our history. Importantly, we did this because we wanted to place the past in the rearview mirror and shift our focus to the future. In 2023, we took yet another step toward the future by commuting Hurricane Irma, the largest and most significant storm in our history, with the Florida Hurricane Catastrophe Fund.

Now that we're past the one-year anniversary date of the 2022 special legislative session and all new and renewal policies are subject to the new legislation, the impact of the reforms is becoming clear. Claims trends across the board are improving, including reductions in total claims, represented claims, assigned claims, and daily claims. Our first event, 2024, 2025 reinsurance tower, is already 90% secured, and we've negotiated additional multi-year capacity for the future. Given our size, scale, independent agency and reinsurer relationships, and the recent steps we've taken, we are particularly well-positioned to succeed in the revamped Florida environment. I'll turn it over to Frank to walk through our financial results. Frank.

Frank Wilcox (CFO)

Thanks, Steve. Good morning. Adjusted Diluted Earnings Per Common Share was $0.43, down from Adjusted Diluted Earnings Per Common Share of $0.72 in the prior year quarter. The decrease mostly stems from a higher Net Loss Ratio and lower commission revenue, partially offset by a lower Net Expense Ratio and higher Net Investment Income. Core revenue of $365.7 million was up 12.1% year-over-year, with growth primarily stemming from higher Net Premiums Earned and Net Investment Income, partially offset by lower commission revenue. Direct Premiums Written were $432.6 million, up 4% from the prior year quarter, including 0.6% growth in Florida and 18.6% growth in other states. Overall, growth reflects rate increases partially offset by lower policies in force. Direct Premiums Earned of $482.1 million were up 3.9% year-over-year, reflecting rate-driven premiums written growth over the last 12 months.

Net premiums earned were $335.4 million, up 14.9% 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 103.7%, up 2.3 points compared to the prior year quarter. The increase reflects a higher net loss ratio and a lower net expense ratio. The 81.9% net loss ratio was up 5.6 points year-over-year, with the increase primarily attributable to a higher calendar year loss pick. The 21.8% net expense ratio improved by 3.3 points year-over-year, primarily reflecting lower renewal commission rates paid to distribution partners. During the fourth quarter, the company repurchased approximately 223,000 shares at an aggregate cost of $3.6 million. The company's current share repurchase authorization program has 4.1 million remaining.

On February 8th, 2024, the board of directors declared a regular quarterly cash dividend of $0.16 per share of common stock payable March 15th, 2024, to shareholders of record as of the close of business on March 8th, 2024. With that, I'd like to ask the operator to open the line for questions.

Operator (participant)

To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Paul Newsome with Piper Sandler. Your line's now open.

Paul Newsome (Managing Director)

Good morning. Thanks for the call. I was hoping you could maybe take a step back or maybe a step forward and talk about the outlook for premium growth prospectively. You've got a number of sort of cross-currents in my mind with, obviously, rates still a positive effect, but I don't know if at some point you expect to stop effectively shrinking in some areas to offset that rate. And other factors, obviously, the mix changes well affects premium growth. Could you kind of just talk about those major factors and how we should think of them as we're thinking about the company over the next couple of years?

Steve Donaghy (CEO)

Yeah. Good morning, Paul, and thanks for the question. As we analyze and look at the successful legislation changes that went into effect at the end of 2022, that has an impact on a lot of things we analyze and we do. So in 2023, we had a premium indication of approximately 15%, and we implemented a 7.2% increase across our book. That's had several positive impacts to Floridians and to the company in that our retention has improved and the book of business is more stable. As we look to the future, those rate increases are predicated on the prior 12 months' experience. So we'll take all those factors into account sometime around May and in future years as well and continue to make the best decisions possible for the company and our insureds and our agents.

If you were looking for an indication, I would say we'll continue to take some rate. It won't be the extremes we've taken in the past, like 2019 through 2022. I think the indications are still positive. Hopefully, at some point in the future, we'll see rate reductions flowing through the book as a result of what was passed in the end of 2022.

Paul Newsome (Managing Director)

Are you at the point where you are growing on a PIF count or want to grow on a PIF count both in and outside of Florida?

Steve Donaghy (CEO)

Yeah, Paul, as you saw in the release, we grew last year outside of Florida. Beginning in December, we began adding policies to our Florida book of business as well. Again, we are laser-focused on profitability and where the business is coming from. Not all counties or territories in the state are behaving identically. We are being very careful as we kind of head into the future in this new environment.

Paul Newsome (Managing Director)

And then maybe turning to the extra margin of conservatism in the loss pick, could we kind of talk about the components of that? Obviously, you would expect it to go the other direction with the impact of tort reform, but there must have been some justification for that extra higher loss pick from other factors. Maybe you could talk about those factors.

Steve Donaghy (CEO)

Yeah. I think, Paul, as I run the company and all the various influencers that affect our business, and in particular the Florida book of business, we felt it was very prudent to be extremely cautious or cautious as we went through 2023 because the legislation didn't affect all policies until the renewal point of each. We wanted to make sure that we had enough dry powder to handle the business as well as be positioned going forward to be very secure as we look to begin to grow the business once again.

Frank Wilcox (CFO)

Yeah. And just to follow up on that, Paul, when you look at our reserves in multiple respects, whether or not it's just absolute dollars on a net basis, whether it's on an average for the claim counts, which, by the way, are lower than they've been quite some time, they're higher than they've ever been. They're higher relative to our insured value. They're higher relative to our premium in force. So we feel that our balance sheet's stronger going forward than it's ever been.

Paul Newsome (Managing Director)

Appreciate the help. I'll let some other folks ask questions, but thanks very much.

Steve Donaghy (CEO)

Thanks, Paul. Have a good day.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Nicolas Iacoviello with Dowling & Partners. Your line's now open.

Nicolas Iacoviello (Analyst)

Thanks, guys. First question just, was there any net adverse development in the quarter, and if so, from which events?

Steve Donaghy (CEO)

Yeah, Nick. As we went through 2023, we had considerable redundancy into our loss pick. So after working with our actuaries, both internal and external, we decided to take a look at the claims in the files and add dry powder to any of those that were in place prior to the new legislation affecting that particular policy. So due to the redundancy and the way it resulted, we added 4 points to prior years. But again, primarily, that is dry powder that will be used as we kind of put them in the rearview mirror going forward. So all in all, it was 4 points of the loss pick that we took out of 2023 and spread across prior years.

Nicolas Iacoviello (Analyst)

Got it. Just curious as well, was there a claims handling benefit booked in the quarter?

Frank Wilcox (CFO)

Yeah, that was negligible for the quarter. I believe it was under $1 million.

Nicolas Iacoviello (Analyst)

Thanks. I'm just curious. The comment in the press release on 90% of the first event tower being secured, can you talk about maybe the current expectation for the captive utilization?

Steve Donaghy (CEO)

Nick, can you repeat that last part of the question? I'm sorry.

Nicolas Iacoviello (Analyst)

No problem. Just the current expectation for the captive participation in the 2024 and 2025 tower.

Steve Donaghy (CEO)

Yeah. Again, sitting at 90% accomplished for the first tower, Nick, we are very pleased with how our teams performed in the market. The reinsurance now is a year-round effort for myself and our reinsurance team, Matt Palmieri in particular. We feel really good about where we're at. I don't think that we will change our philosophy on how we have used the captive in the past. We haven't completed it at this point. If the open market comes in at a competitive rate, we would consider that in lieu of. But as I sit here today, I think we would continue. It worked out very well for the company last year.

Frank Wilcox (CFO)

It's proven to be very effective.

Steve Donaghy (CEO)

Yeah.

Nicolas Iacoviello (Analyst)

Okay. That's all I had. Thanks, guys.

Steve Donaghy (CEO)

All right. Great. Thanks, Nick.

Operator (participant)

Thank you. This concludes the question and answer session. Oh, now I'd like to turn it back to Steve Donaghy, CEO, for closing remarks.

Steve Donaghy (CEO)

Thank you. I'd like to thank all of our associates, our insureds, our agency force, our reinsurance partners, and our stakeholders for their continued support of Universal. Have a great day.

Operator (participant)

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