Universal Insurance Holdings, Inc. (NYSEMKT:UVE)
Q2 2014 Results Earnings Conference Call
August 6, 2014; 05:00 p.m. ET
Sean Downes - Chairman, President & Chief Executive Officer
Frank Wilcox - Chief Financial Officer
Jon Springer - Director, Executive Vice President & Chief Operating Officer
Hello and welcome to the second quarter 2014 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, 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 September 8, 2014.
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 the future results could differ materially from our expectations.
We encourage you to carefully consider the risks described in our filings with the SEC, available on the SEC’s website or our 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.
Thank you, Frank. I’d like to start by providing some highlights from the quarter. Jon will then discuss the quarter’s operational highlights and then Frank will conclude by discussing our financial results for the quarter and half year period.
I am pleased to report another quarter of solid operational and financial performance. We delivered robust top line growth, achieving the highest quarterly revenue in the company history and diluted EPS of $0.49, an 11% increase year-over-year.
Highlighting our commitment to delivering increasing shareholder value, we completed approximately $5 million in open market share repurchases through June 30, 2014. On June 16, 2014 our Board of Directors authorized $10 million of additional open market share repurchases through August 1, 2015. Of that, we have purchased $498,000 through June 30, 2014 and have continued to repurchase since.
Our second quarter results demonstrate the merits of our strategy to drive profitable and sustainable growth. A key element of our strategy is maintaining a prudent and disciplined approach to underwriting. Based on our results we are confident that our approach is working.
As of the end of the second quarter we have largely competed our control exposure reduction of under performing business in Florida. Further, the reduction in costs that we secured for our 2014, 2015 reinsurance program have allowed us to write more high quality, rate adequate business, and as a result we are seeing increasing momentum in direct premiums written in the current quarter.
In fact, during the second quarter we saw an increase in both new and renewal policy submissions in Florida compared to the same quarter in 2013. These factors contributed to the increase in both policy count and total insured property value in Florida since the previous quarter.
We also continued to make good progress on our geographic diversification strategy outside of Florida. As we announced in April, we submitted applications to expand into Pennsylvania and are currently working with the relevant regulatory authorities in that state as they review our application.
In addition, we announced in June that we received approval to and wrote our first homeowners insurance policy in Delaware. As of June 30, 2014, we are currently licensed and operating in eight states, with three additional states in the pipeline.
As we noted in our earning press release, policy count for new business outside of Florida increased by approximately 40% year-over-year, demonstrating that our proven business model is also delivering results in newer markets. Jon will discuss our reinsurance program in more detail. However I would like to touch briefly on two key points.
The first, which I mentioned earlier, is the fact that our prudent and disciplined underwriting approach has resulted in a reduction in costs for our 2014, 2015 reinsurance program. And second, we have reduced our reinsurance quota share by 15%, meaning that we are retaining a higher portion of the business. In short, we believe in our businesses and have positioned the company to reap a greater share of the potential upside opportunity.
In summary, we are very pleased with our performance and we believe we are well positioned to drive continued organic growth. We will maintain our disciplined approach, while at the same time investing in the necessary personnel, systems and processes to ensure that we are delivering the highest level of service to our customers.
And finally, we intend to continue to deploy our capital through our share repurchase program to drive shareholder returns.
With that, I will turn it over to Jon to walk us through the operational highlights. Jon.
Thank you, Sean. Let me comment on a few operational highlights for our two insurance subsidiaries, Universal Property and Casualty Insurance Company or UPCIC and American Platinum Property and Casualty Insurance Company or APPCIC.
UPCIC is our primary insurance subsidiary that provides homeowners coverage in eight states. APPCIC is our second insurance subsidiary that focuses on Florida homes valued in excess of $1 million.
First regarding UPCIC, the geographic expansion of UPCIC’s portfolio continues to progress as planned. As Sean mentioned, we are pleased to have written our first policy in the State of Delaware this past quarter.
We also have applications pending for Certificates of Authority in Indiana, Minnesota and Pennsylvania. These applications are under review by the respective insurance departments. Overall, consistent steady growth during the quarter lead to a 9.2% growth in UPCIC’s exposures outside of Florida.
Also as Sean alluded to, during the second quarter we reached a point in our Florida Exposure Review, where our exposures began to grow again with UPCIC delivering an increase of nearly 2% in Florida exposures. We’ve been pleased with the thorough exposure review and the resulting changes to our overall book of business. We believe the timing of this review contributed to a reduction in reinsurance costs in our most recent reinsurance program.
The UPCIC reinsurance program effective June 1, 2014 contains the most comprehensive coverage at the lowest cost as a percentage of retained earned premium in recent company history. The program reduced UPCIC’s pretax liability to $21 million for the first, second and third catastrophic events under its Florida program, with coverage up to $1.774 billion.
UPCIC also retains a pretax liability of $21 million for the first and second catastrophic events under its program in Delaware, Georgia, Maryland, Massachusetts, North Carolina and South Carolina, with coverage up to $125 million, and a $7 million pretax liability under its program in Hawaii with coverage up to $30 million.
As Sean mentioned, we are also pleased to be retaining more of our business by reducing our quota share session percentage from 45% down to 30%. We believe in our business and our current financial strength has afforded us the opportunity to retain more of it.
Turning to APPCIC. We continue to focus on penetrating the market of Florida homes valued over $1 million. On July 7, 2014 we received Florida OIR approval to our most recent rate filing. This filing was for an overall 3.5% rate increase, however it also strategically reduced rates in certain areas in an effort to stimulate growth and geographic diversification within the State of Florida.
The APPCIC reinsurance program effective June 1, 2014 was also completed with improvements similar to those accomplished by UPCIC. APPCIC now retains a pretax liability of $2.5 million for the first and second catastrophic events, with coverage up to $40.8 million.
With that, I’ll now turn the discussion over to Frank Wilcox for our financial highlights.
Thank you, Jon. I’d like to provide a little more detail around the financial results and their drivers.
Net income for the second quarter totaled $17.1 million, an increase of 0.6% compared to $17 million in 2013. This reflects an increase in net earned premiums and income generated from our investment portfolio, offset by a decrease in commission revenue and increases in operating expenses.
Diluted EPS for the second quarter was $0.49, which is a $0.05 or 11% increase from the same quarter in 2013. Net earned premiums increased by $6.5 million or 9.7% for the quarter compared to the same period in 2013, reflecting a decrease in direct earned premiums of $5.2 million, offset by a decrease in ceded earned premiums of $11.7 million.
Commission revenue of $3.7 million for the quarter was down by $1.6 million or 30.4% as a result of both a decrease in the cost of certain reinsurance contracts and differences in the structure of our reinsurance programs.
Net realized gains of $4 million were generated during the second quarter of 2014 from sales of investments from our portfolio of securities available for sale. We took the opportunity in the second quarter of 2014 to realize gains ahead of a potential market correction in the equity markets.
Our investment portfolio of securities available for sales was comprised of approximately $323 million of fixed maturities and $12.4 million of equity securities as of June 30, 2014. Net investment income increased by $275,000 for the second quarter of 2014 compared to the same period in 2013, reflecting a change in the composition of the investment portfolio, including a shift in cash and cash equivalents to fixed income securities.
Losses and loss adjustment expenses at $27.7 million for the quarter were $2.5 million or 9.8% higher than the second quarter of 2013, driven by a decrease in the amount of loss and LAE ceded to reinsurers under our quota share reinsurance contracts effective with the 2014, 2015 reinsurance program.
General and administrative expenses were $28.9 million for the second quarter of 2014, compared to $22.9 million for the same quarter in 2013. The increase of $6 million is primarily due to an increase of $3.2 million in the amortization of deferred acquisition costs, resulting mostly from changes with the 2014, 2015 reinsurance program, including a reducing in the rate of ceded premium from 45% to 30% in our quota share contracts.
Now, let me turn briefly to our results for the first six months of the year. Net income increased by $1.7 million or 5.8% for the six months of 2014 compared to the same period in 2013. This reflects an increase in net premiums earned, the absence of trading losses generated in the first quarter of 2013 and an increase in net investment income partially offset by a decrease in commissions and an increase in operating expenses. Diluted earnings per share for the first six months of 2014 increased by $0.14 or 19.2% compared to the same period in 2013.
Turning to our balance sheet, we ended the quarter with cash and cash equivalents of $201.4 million. At June 30, 2014 stockholders equity was $178.1 million compared to $175.6 million at December 31, 2013, reflecting an increase in retained earnings of $23.7 million and share repurchases of $20.2 million.
In closing, we believe our results for the quarter reflect the strategic initiatives, underwriting discipline and investments we have made to improve our long term financial position.
I’ll now turn it back to Sean for closing comments.
In summary, it was a strong quarter for Universal. Our results demonstrate the meaningful progress made against our strategic and operational initiatives and we believe we are well positioned to drive additional growth and shareholder value.
Before I conclude, as always, I would like to thank all of the agents, policyholders and our employees. 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.
Thank you for taking the time to join us today. This concludes our presentation.
[No Q&A session for this event]
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