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Universal Insurance Holdings, Inc. (NYSE:UVE)

Q3 2013 Earnings Conference Call

November 4, 2013 5:00 PM ET

Executives

Sean P. Downes - Chairman, Chief Executive Officer and President

Jon W. Springer - Director, Executive Vice President and Chief Operating Officer

Frank C. Wilcox - Chief Financial Officer

Frank C. Wilcox

Hello, and welcome to the third quarter 2013 earnings presentation for Universal Insurance Holdings, Inc. I’m Frank Wilcox, the Chief Financial Officer, and making the presentation with me today are Sean Downes, Chairman, President and Chief Executive Officer, and Jon Springer, a director, Executive Vice President and Chief Operating Officer. Earlier today we filed our Form 10-Q with the Securities and Exchange Commission and issued our earnings release. To find copies of these documents, please visit the “SEC Filings” and “Press Releases” sections of our website at www.universalinsuranceholdings.com. Our SEC filings can also be found on the SEC’s website. An audio recording of this presentation will be available on the homepage of our website until December 4, 2013.

Before we begin, please note that this presentation may contain forward-looking statements about our business and financial results. Forward-looking statements reflect our current views regarding future events and are typically associated with the use of words such as "believe," "expect," "anticipate," and similar expressions. We caution those listening, including investors, not to rely on forward-looking statements. They imply risks and uncertainties, some of which cannot be predicted or quantified, and future results could differ materially from expectations. We encourage you to carefully consider the risks described in our filings with the SEC, available on the SEC’s website or the “SEC Filings” section of our website. We do not undertake any obligation to update or correct any forward-looking statements.

With that said, I would like to turn the presentation over to Sean Downes.

Sean P. Downes

Thank you Frank. I am pleased to make the first earnings presentation of Universal Insurance Holdings, Inc. I will provide some highlights of our quarter and first nine months of 2013. Jon will then discuss the quarter’s operational details, and then Frank will conclude by discussing our quarterly financial highlights.

It has been an exciting quarter and nine months at the Company. In February, we began our second generation of leadership. With the help of the board of directors, we assembled a management team of experienced, knowledgeable individuals, and it is an honor to work with all of them. Joining me on this leadership team are Jon as Chief Operating Officer, Frank as Chief Financial Officer, and Steve Donaghy as Chief Administrative Officer.

Also, in June, our shareholders voted to add two independent directors to our board, Scott Callahan and Darryl Lewis. Scott’s broad knowledge of the reinsurance industry has allowed him to provide valuable perspective to our board, particularly on matters related to the Company’s reinsurance program. Darryl’s legal experience and deep knowledge of the Florida business market make him a valuable member of our board, and I am pleased to be working with both men.

Next, I would like to discuss our third quarter and year-to-date results. We are pleased to report our best third-quarter operating results in the history of the company. These results reflect our continued dedication to our business model and our consistent attention to improving our overall rate adequacy. These factors contributed to net income of $14.4 million for the quarter and $43.4 million year-to-date, an improvement of $6.2 million and $17.5 million over last year’s third quarter and year-to-date period, respectively. We experienced higher net earned premiums during the quarter, and our revamped claims and legal departments contributed to a reduction in losses and loss adjustment expenses.

Our earnings per diluted share for the third quarter were $0.40, an increase of $0.20 over the third quarter 2012. Our third-quarter EPS benefited from lower outstanding shares related to the Company’s repurchase of nearly 7.3 million shares of common stock during the second and third quarters of 2013 at a discount to the then-current market price.

We maintained a strong cash position, ending the quarter with cash and cash equivalents of $137 million. We continue to generate capital in excess of what we need to support our business. We affirmed our policy of returning a portion of excess capital to our shareholders by declaring a $0.10 dividend during the quarter, $0.02 greater than the expected $0.08 quarterly dividend.

Our pricing analytics and modeling tools continue to give us confidence in the level of our new business and renewal pricing. We are seeing quality growth from regions in Florida that complement our current Florida portfolio, as well as growth in our newer states.

As we have previously discussed, we worked with our investment advisor, Deutsche Bank, during the second quarter of 2013 to reposition our investment portfolio. We are pleased with the transition and expect our repositioned investment portfolio to provide a stable stream of investment income in the future.

In summary, the first nine months have gone well. We returned a total of $9.6 million to our shareholders through cash dividends during the quarter, and our repurchase of nearly 7.3 million common shares in the second and third quarters underscores our confidence in our future.

Jon will now take us through the operational highlights and then Frank will discuss the quarter’s financial highlights.

Jon W. Springer

Thank you Sean. Let me highlight first the operations and results of our two insurance subsidiaries, Universal Property & Casualty Insurance Company, which we call “UPCIC,” and American Platinum Property and Casualty Insurance Company, which we call “APPCIC.” UPCIC is our primary insurance subsidiary that provides homeowners coverage in seven states, though primarily in Florida. APPCIC is our other insurance subsidiary that focuses on Florida homes valued in excess of $1 million. I also want to mention our 2013-2014 reinsurance program.

We believe that our third quarter results are indicative of the continuing improvement in the overall fundamentals of our insurance operations. For example, speaking specifically about UPCIC, we sought from regulators and obtained over the past five years regular rate adjustments in an attempt to achieve appropriate levels of underwriting return for the corresponding risk we assume from our Florida policyholders.

As expected, these rate adjustments, coupled with our decision not to renew certain policies identified by our internal profitability measure as providing inadequate premiums relative to projected risks and expenses, resulted in a reduction in the number of policyholders that UPCIC insures in Florida. Over the first nine months of 2013, UPCIC’s policy count dropped from 543,000 to 511,000. This reduction in UPCIC’s in-force policy count in Florida corresponds to a reduction of nearly $8 billion in insured values, which is a 6.7% reduction. This reduction in insured values has led to a 7.3% reduction in the modeled 1 in 100 year event based on catastrophe modeling performed using RMS® North Atlantic Hurricane Model RiskLink version 13.0. But, despite this reduction in exposure and modeled losses, UPCIC’s in-force premium in Florida has remained relatively flat during this period.

During the same period, we continued our growth and expansion in the six other states in which we write policies, adding over 10,000 new policies and nearly $9 million of additional in-force premium in those states.

Further, during the same period, APPCIC saw steady growth. Its policy count and in-force premium both increased by 21%. The in-force premium as of September 30, 2013 has grown to over $12 million.

In the second quarter, we completed the placement of our 2013-2014 reinsurance program, effective June 1, 2013. Although the terms of the individual contracts vary, the overall terms of the 2013-2014 reinsurance program are more favorable than the prior period. In addition, for the first time in the Company’s history, we were successful in securing two multi-year contracts which will provide an element of pricing certainty for a 24-month period. These multi-year contracts were placed at improved terms for two-thirds of the quota share capacity we purchase and for 65% of our first catastrophe excess layer. The multi-year contracts will also help reduce the effect of any upswing in reinsurance costs for the 2014-2015 reinsurance program that could be caused by a significant industry event.

Our third quarter results are the first to reflect fully the cost savings realized as a result of the June 1st reinsurance renewals, so I’ll now turn the discussion over to Frank Wilcox for our financial highlights.

Frank C. Wilcox

Thank you Jon. I’d like to take some time to provide a little more background around the financial results and their drivers.

As mentioned earlier, net income for the third quarter totaled $14.4 million, which compared to $8.3 million in 2012, is a 75% increase. For the first nine months of 2013, net income totaled $43.4 million compared to $25.9 million in 2012, a 68% increase. These results were fueled in large part by the improved underwriting results already discussed.

Sean also mentioned that EPS for the third quarter was $0.40, which is a $0.20, or 100% increase from the same quarter in 2012. EPS for the first nine months of 2013 was $1.13, which is a $0.49, or 77% increase compared to 2012. The repurchases of common shares contributed $0.06 and $0.10, respectively, to EPS for the three-month and nine-month periods in 2013. Accordingly, the comparative improvement in EPS for the third quarter and first nine months of 2013 are not indicative of future performance.

Net earned premiums increased $9.4 million, or 16%, for the third quarter and $37.4 million, or 23%, for the first nine months of 2013. The strategic rate increases and lower reinsurance costs effective with the 2013-2014 reinsurance program improved results for both the quarter and first nine months of 2013. In addition, a reduction in the quota share cession rate of 5%, which first became effective in June 2012, increased earned premium for the nine month period 2013 compared to 2012.

The insignificant amount of unrealized gains and losses flowing through the income statement during the quarter reflects the liquidation of our trading portfolio in March of this year and our purchase, since then, of a portfolio of investments available-for-sale comprised mostly of investment grade fixed maturities and large cap equities. Our fixed maturity securities as of September 30th had a fair value of $299 million compared to $4 million at the end of last year. The liquidation of the trading portfolio reduced the volatility flowing through the income statement and the types of investments we hold in our available-for-sale portfolio increased the amount of interest and dividends we earn. Net investment income increased by 78% and 225%, respectively, for the three and nine-month periods in 2013, in large part because of this restructuring of our investment strategy and portfolio.

Losses and loss adjustment expenses, which we call “LAE,” of $28.3 million for the quarter was $8.0 million lower than the third quarter of 2012. Losses and LAE of $80.0 million for the first nine months in 2013 was $11.9 million lower than the same period in 2012. The reduction in losses and LAE for both the three and nine months 2013 compared to 2012 was primarily the result of an improvement in the adjustments made in current accident years related to prior accident years. We also had better claims experience on the current accident year for the first nine months of 2013 compared to 2012.

We continue to generate strong cash flows with cash flows from operations for the first nine months of 2013 of $188 million compared to $145 million in 2012. The reduction in cash of $210 million since the end of last year was due in large part to the purchase of fixed maturities during 2013.

Overall our results for the quarter and the first nine months of 2013 reflect the strategic initiatives we have taken to improve quality of earnings and position ourselves for the future.

I’ll now turn it back to Sean for closing comments.

Sean P. Downes

In closing, I would like to thank all of the agents, policyholders and employees of UPCIC and APPCIC. I would also like to thank all of our directors and shareholders, as well as our management team for their loyalty and dedication to the Company. This concludes our presentation.

Question-and-Answer Session

[Q&A Not Covered for this Transcript]

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