Universal Insurance Holdings Inc (UVE) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Universal Insurance Holdings, Inc. second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference Matt Palmieri, Senior Vice President. Sir, you may begin.

Thank you and good afternoon. Welcome to the second-quarter 2016 earnings conference call for Universal Insurance Holdings, Inc.

With me today are Sean Downes, Chairman and Chief Executive Officer; Jon Springer, our Director, President and Chief Risk Officer; and Frank Wilcox, Chief Financial Officer. Following Sean's opening remarks, Jon will provide an operational update and Frank will review financial results for the second quarter of 2016. The call will then be reopened for questions.

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 view of future events and are typically associated with the words such as believe, expect, anticipate and similar expressions.

We caution those listening including investors not to rely solely on forward-looking statements as they can imply risks and uncertainties, some of which cannot be predicted or quantified and future results can differ materially from our expectations. We encourage you to carefully consider the risks described in our SEC filings with the SEC which are available on the SEC's website or the SEC filing section of our website. We do not undertake any obligation to update or correct any forward-looking statements.

With that I'd like to turn the presentation over to Sean Downes. Sean?

Thank you, Matt, and thank you for joining us this afternoon. I'd like to begin by providing some highlights from the quarter and then take a moment to review our strategy and growth initiatives. John will then discuss our operational highlights and Frank will conclude by discussing our financial results.

As many of you saw in our press release we delivered another record quarter of strong financial performance. In the second quarter we achieved net income of $33.6 million, an increase of 36.2% over the same period last year, and diluted EPS of $0.94. Both net income and EPS were higher than any other quarter in the Company's history which we believe is a testament to our consistent operational execution, the merits of our growth strategy and the continued hard work and dedication by our more than 400 employees.

A key differentiator for Universal is our focus on organically-driven growth. This approach is supporting our continued expansion geographically as well as deepening our penetration of the Florida market.

With the recent addition of Alabama Universal is now operating in 13 states including Florida. In fact, thanks to our organic growth strategy and the initiatives we have in place we had seen a consistent increase in policy count and premium value in all states in which we operate over the past two years.

At Universal our uncompromising focus on providing high-quality customer service continues to drive our success. And we continue to invest in our business areas including agency relationships, underwriting, policy issuance, general administration and claims processing and settlement. We are always looking for ways to improve our customer experience and offer new, innovative solutions to simplify the process of purchasing homeowners insurance which we believe we have successfully accomplished with the launch of Universal Direct, our direct-to-consumer online platform for Universal Property & Casualty.

While we are still in the early stages of rolling out this exciting new product we are already making positive headway. In June we announced that Universal Direct wrote its first homeowners policy in Minnesota and in Alabama. We then announced recently that Universal Direct went live in South Carolina and in Indiana, bringing the total number of states in which it is available to five.

We intend to continue to build scale by adding additional states in the coming months. We are proud to announce that we have written in excess of 100 policies, thus proving that this platform works and is another avenue for us to write organic profitable business. We have many joint venture opportunities available to us as we continue to evaluate the power of Universal Direct and we are excited about the future for this new, unique platform.

Turning briefly to our reinsurance program, which Jon will discuss in more detail, as we announced in June we completed the 2016-2017 reinsurance programs for our subsidiaries UPCIC and APPCIC, a critical component of our broader risk management strategy. As we noted at the time, our main goal was to add additional conservatism to the UPCIC reinsurance program, which we believe we successfully achieved by reducing our retention for catastrophe losses involving states other than Florida to $5 million and securing over $100 million of additional multiyear catastrophe capacity. We believe that our current reinsurance program and our focus on continuously reviewing our reinsurance coverage has allowed us to capitalize on attractive reinsurance pricing and terms, retain 100% of our profitable business and effectively manage risk.

Turning now to our capital allocation strategy, we remain committed to paying an attractive dividend which we increased by $0.02 earlier this year. We also remain committed to delivering value to shareholders and in June our Board authorized a $20 million share repurchase program. We will continue to pursue our balanced capital allocation approach which includes dividends and share repurchases while maintaining the flexibility to execute on our strategic priorities and position the Company for sustainable, long-term growth.

Our long-term growth strategy remains disciplined and focused. We continue to see opportunities to drive further organic growth and we remain optimistic about Universal's long-term prospects as we look ahead toward the second half of the year and beyond.

With that let me turn the call over to Jon.

Thank you, Sean. I would like to comment further on two items you briefly mentioned: recent growth trends in UPCIC and the successful completion of its June 1, 2016 reinsurance program.

First regarding recent growth, as Sean mentioned we continue to see positive growth in each and every one of our active states. For 2Q 2016, from a pure policy count growth standpoint, our total portfolio experienced net growth of 17,000 policies, 8,500 of which came in Florida. Outside of Florida Georgia and North Carolina led the way, each experiencing net growth of 2,000 policies in the quarter.

It was also a strong quarter for Pennsylvania and Indiana with each growing net by more than 1,000 policies. It's important to remember that we continue with our strategy of adding business organically one policy at a time.

As of 6/30/2016, 13.7% of UPCIC's policies in force and 18.6% of its insured values now reside outside of the state of Florida. These diversification ratios have improved in the past three months from 12.8% of policies and 17.3% of insured value.

Lastly, as announced in early June, the UPCIC reinsurance program was completed with an effective date of June 1, 2016. The details were contained within the 8-K but I want to further highlight a few important features.

As Sean mentioned the overarching theme of this year's reinsurance placement was conservatism and we accomplished it in several different ways. First, was maintaining a $35 million catastrophe retention for Florida despite a nearly 9% year-over-year growth in Florida exposures. A $35 million pre-tax retention now represents less than 12% of UPCIC's current policyholder surplus versus 16.4% at this time last year.

Second, we increased the top of our vertical tower for a single Florida event to $2.4 billion. As of 6/30/2016 this represents coverage to nearly a 1 in 250 year event as modeled by RMS RiskLink version 15.

Third, we successfully added in a new underlying catastrophe program that covers all states other than Florida. The new retention for states outside of Florida is now just $5 million.

Fourth, to further insulate ourselves from a potential industry-wide increase in reinsurance pricing in 2017-2018 we added over $100 million of additional multiyear capacity into our program, bringing the total capacity with secured pricing for 2017-2018 to over $300 million. And lastly, all of these changes were accomplished while maintaining a consistent percent of projected premiums spent on catastrophe reinsurance.

With that I will now turn the discussion over to Frank Wilcox for our financial highlights.

Thank you, Jon. As Sean stated we achieved another record quarter with the highest net income and earnings per share in Company history.

Net income for the second quarter of 2016 totaled $33.6 million, an increase of 36.2% compared to $24.7 million in 2015. Diluted EPS for the second quarter was $0.94 which was also up 36.2% on the same quarter in 2015. Rate adequate organic growth combined with our decision to keep all our profits by eliminating the use of quota share reinsurance effective June 2015 were the primary drivers behind these results.

Earned premiums, total revenues, net income and diluted EPS were higher than any other quarter in the Company's history. We maintained our combined ratio in the low 70 percentile range with 73.4% for the second quarter of 2016 compared to 73% for the same quarter in 2015. The increase in net earned premiums of $43.6 million, or 38.6% for the second quarter compared to the same period in 2015, was the result of both an increase in direct earned premiums of $22 million driven purely from organic growth and a net decrease in ceded earned premiums of $21.5 million.

The net decrease in ceded earned premiums is comprised of the absence of ceded earned premiums to quota share reinsurance for the second quarter of 2016, partially offset by an increase in ceded earned premiums in catastrophe and excess of loss reinsurers due to an increase in exposures from organic growth. Net investment income for the quarter of $2.1 million was $935,000 greater than the second quarter of 2015. Cash flows generated from operations has fueled the growth in the investment portfolio which also reached an all-time high for the end of any quarter of $626.5 million as of June 30, 2016.

Total average investments were $574.2 million during the second quarter of 2016 compared to $454.4 million for the same period in 2015, an increase of 26.3%. We've increased yield by taking these new funds along with maturities and invested them in higher-yielding securities while maintaining high credit quality. We also took the opportunity to realize $576,000 in gains from the sale of securities in the second quarter of 2016 compared to $110,000 for the same period in 2015.

Commission revenue of $4.2 million for the quarter was up $736,000 as a result of overall changes in the structure of our reinsurance programs including the amount of premiums paid for reinsurance and the type of reinsurance contracts used in each program. Policy fees of $4.8 million for the quarter were up $401,000, or 9.2% year over year from an increase in the number of policies written during the second quarter of 2016 compared to the same period in 2015.

Losses and LAE were $60.1 million for the three months ended June 30, 2016 compared to $39.7 million during the same period in 2015. A large portion of the $20.4 million increase in net losses in LAE was driven by the absence of losses in LAE ceded to quota share reinsurance during the quarter resulting from the elimination of quota share in June 2015.

During the three months ended June 30, 2015 we ceded $10 million to quota share reinsurers, none in the current quarter. Our direct loss ratio for the second quarter of 2016 was 25.8% which is in line with indications in the most recent actuarial study performed at the end of 2015.

General and administrative expenses were $54.8 million for the second-quarter 2016 compared to $42.6 million for the same quarter in 2015, an increase of $12.2 million. The majority of the increase resulted from additional amortization of net deferred acquisition costs of $12.1 million, $7.1 million of which represents the absence of ceding commission from the elimination of quota share. The remaining increase in amortization of $5 million was driven by organic growth.

Our expense ratio, which is G&A as a percentage of net premiums for the second quarter of 2016 was 35% compared to 37.8% for the same period in 2015. The effective income tax rate decreased to 38.7% in the second quarter of 2016 compared to 40.1% for the same period in 2015. Our effective tax rate has been decreasing from reductions in the amount of nondeductible executive compensation, lower state income taxes as we diversify outside of Florida and economies of scale. Our balance sheet is strong and continues to grow with total assets reaching an all-time high of $1.1 billion, stockholders' equity reaching an all-time high of $351.4 million and book value per common share reaching an all-time high of $10.02 per share as of June 30, 2016.

At this point I'd like to turn the call back to the operator.

(Operator Instructions) [Kevin Flansbury], private investor.

Hi, gentlemen. Congratulations on a fantastic quarter.

I was wondering if you could help me out. Could you tell me if your Company had any exposure to the recent storm in Hawaii?

Yes, we do write business in Hawaii but luckily it was a hurricane that was downgraded to a tropical storm on the 23rd and the footprint of the storm really did not affect our portfolio at all. We've had two claims that have come in. Most of this was flash flooding, so we don't foresee is getting any more claims really attributed to Darby.

Well, thank you very much. I appreciate the information and again congratulations on a great quarter.

Arash Soleimani, KBW.

Hi, thanks and good afternoon. Just a few questions here.

First, can you just probably for Frank just a couple of numbers questions. What were direct premiums earned in the quarter?

Direct premiums earns were $226.819 million.

Thanks. And was there any prior-period development in the quarter on a GAAP basis?

We were flat for the quarter. We had some redundancy in older accident years that we pushed up to 2015 but they were offsetting.

Okay, thanks. Was the number you mentioned before for the direct loss ratio, I want to make sure I have that right, was it 25.8?

That's correct.

And do you have last year's number for comparison? 2Q 2015?

We do. 25.6%.

Thanks for those answers. So my next question -- so the rate online of your 2016-2017 reinsurance program, how does that compare to 2015-2016?

Thanks, this is Jon. We typically don't look at it as a rate online across the whole program because as I alluded to in my opening remarks one of the things that we did this year was to maintain $35 million retention within the program. So you can see some misleading results.

If what you're getting at is how did we do year over year in terms of pricing changes, we can tell you that from a risk-adjusted apples-to-apples basis, we feel we saved 8% year over year. To answer your question regarding the rate online, in 2015 our core cat tower the rate online was 11.1% and that same number for the core cat tower in 2016 was or is 10.7%. So you see some savings there but you can also appreciate that we've reinvested some of those savings into the additional conservatism I was talking about earlier.

Thanks. On a similar note, how should we expect the ceded premium ratio to trend over the next several quarters?

We would expect the ceded premium ratio to stabilize. It should continue in the low 30s, subject, of course, to the seasonality of our direct written premium.

As you know when you can look at historically, the second quarter is our largest quarter from a direct written premium standpoint. So the ceded ratio will end up being a little bit lower in the second quarter and then slightly higher in the other three quarters depending upon the seasonality of the business.

Thanks. And I know you touched on some of this in your prepared remarks but I just wanted to circle back on some of the key differences in coverage in your new reinsurance program versus your old.

So it sounds like the retention had stayed the same but you were able to secure more multiyear coverage and also reduce the retention for the states outside Florida. Are there any other I guess differences that you think would be helpful for investors to be aware of?

Yes, I think I touched on them and you reiterated that. Obviously the entire other states cat program is new, so we purchased $30 million, excess of $5 million buying that retention for any losses outside of Florida down to $5 million. It's probably worth mentioning, too, that the manner in which that program works is it effectively functions as a supplement to our core program, so our core program has a $35 million retention.

Any losses that we pick up outside of Florida in an event, say a single event that impacts Florida and some other states, this program would serve to reduce our retention. It would not be on top of, so it's not $35 million plus $5 million, it's $35 million minus whatever we could recover within the other states program. So we could be in a scenario if an event impacted Florida and say, Georgia and the Carolinas we could end up with a retention as low as $5 million for the entire event.

In addition, you touched on the multiyear. We purchased now $308 million of limit on a true multiyear basis and all of that is below the attachment of the Florida hurricane cat fund. So that secures the pricing of over 60% of the capacity that we buy below the Florida hurricane cat fund to give us some nice pricing stability in the event there is any sort of industry-wide pricing changes on reinsurance.

And then lastly, more vertical limit at the top. In buying up to $2.4 billion for a first Florida event that gets us to nearly the 1 in 250 year level. Definitely an expansion of the top end of the program, as well.

Okay, thanks for that thorough answer. And then in terms of, I know the retention is $35 million and we've got a couple million at I guess American Platinum, but in a 1 in 100 event scenario if you include reinstatements what would be 1 in 100 net retention be in that scenario?

Well, we buy reinstatement premium protection for all of the layers below the Florida hurricane cat fund. So our exposure to reinstatement would only be the portion involved alongside the Florida hurricane cat fund getting us up to 1 in 100 year event. I would estimate that exposure to be approximately $10 million.

Okay. And then just adding on to that, what would your net retention be when you take into account claims handling or brokerage income that you would be able to generate as well in that same 1 in 100 scenario?

That's an interesting question. Let me start by saying obviously in a 1 in 100 year event we're talking about $1.6 billion. That's a very large event.

Our claims operation would, of course, be extremely busy handling claims so revenues would be up, profits would be up. We've estimated that a storm that would take us to the enter point of the Florida hurricane cat fund, which is $540 million, would be roughly the break point where we would recoup enough through the claims operation and through Blue Atlantic to offset the retention. So I don't have a number exactly on a $1.6 billion event but I can tell you that $540 million is enough to replace the $35 million retention.

Okay that's great. Thanks. Moving on to a different topic, has the frequency or severity of AOB changed at all in the last few months?

It's been relatively flat. We've seen a slight reduction in Q2. We had 720 AOB claims in quarter one, 698 in quarter two.

But if you compare that to 2015 we had approximately 4,633 claims in that were AOB claims compared to these first two quarters. So it seems to be that the frequency is decreasing. The severity is down by, our closest numbers we've looked at, at about 4 points. So a slight decrease in severity and a decent decrease overall as far as frequency is concerned.

Okay, thanks. And does Fast Track, the new claims program you've put in place, does that seem to be helping in terms of combating AOB? And on top of that what percentage of your claims are going through Fast Track now?

Yes, it's really a total claims operation more than a Fast Track situation. We have our SIU division and our Fast Track team as well as our water extraction experts which I spoke about on our last-quarter call. Together right now those three groups really are handling between 70% and 74% of all of our claims that come in house.

Fast Track, when we say Fast Track that's a claim that gets noted as Fast Track when it's being handled within a five-day period and closed out. That's about 40% of that 70% number. So we have seen a definitive positive trend with our SIU division and our Fast Track division handling our AOB claims as well as all claims.

Okay, great. And do you still feel comfortable with your initial accident year 2015 loss pick being below accident year 2014's loss pick?

We do. Because as we stated previously a lot of these efficiencies that we put into place were midyear 2015.

So we're really starting to see all these different deficiencies work to gather to work in a positive manner as it relates to our loss ratio. It's still green, we understand that, but we think that moving forward these numbers are going to continue to improve.

Okay, great. And have you filed or received approval to meet to Citizens' new policy language regarding AOB? And if not when do you plan to do that?

Yes we have actually and it's already been approved. It's approved for new business starting on 8/1/2016 and 9/6/2016 for renewal business.

9/1/2016? Okay.

9/6/2016 for renewal, 8/1/2016 for new.

Okay, thank you. And in terms of the rating environment in Florida have you filed any rate changes there and is the indication up our down?

Yes, we have actually filed an aggregate 2.6 rate increase. We have received some questions from the department in normal due course of business. And we should get some finality on that within the next 30 days.

Okay, great. And it looks like you are still obviously growing well in Florida. Does the market there, do you still find it attractive?

Yes, we do. I think obviously you can look at our market share. I think there is plenty of good rate adequate business in Florida, so I think there is some upside and I think there is some room for us to grow definitely in Florida.

Great. Can you talk a little bit more about the Direct program, the traction you are getting there and your expectations for Direct?

Yes, we are pleasantly surprised. This initiative has really only been in place for three, four months. We've really started in Pennsylvania and then we added a few other states, Alabama, we added South Carolina recently and Indiana and Minnesota.

So obviously we think we've written in excess of 100 policies really with very limited marketing expense. We've been obviously using SEO, search engine optimization, to drive as much traffic as we can to our website. We think that over time that the acquisition cost could be significantly lower than what it is right now traditionally with our agents.

But as we've stated previously the difference between really what our marketing costs are and the traditional commission we're pulling that money together and giving the difference back to our agents who are specifically in a territory who are appointed with us and our meeting certain criteria. So we are really pleased by this process. We believe we are the first insurance Company to offer a policy where you can find coverage and pay for it in one transaction and we've gotten a lot of good results from it and good feedback, so we are definitely encouraged.

Okay, great. Lastly, how should we think about your loss and expense ratios relative to 2015 as we look forward?

Yes, this is Frank. I think the best way to look at those ratios would be to put a range on them. And notwithstanding any unforeseen events in the remainder of the year and excluding the $8.4 million severe weather events I'd be looking at a range of 25% to 27% in the direct loss ratio.

Including the $8.5 million severe weather losses that we had in the first quarter it would be 27% to 29%. And in your expense ratio I would look at that somewhere between 36% and 38%. Now just as a point of clarification -- pardon me?

Was that number you said on a net basis or Direct?

It's on a net basis, the expense ratio on a net basis 36 to 38.

Okay.

And just as a point of clarification I told you that the second quarter of 2015 was 25.6%. That was actually the full year. The second quarter of 2015 was 24.3% and as you recall in the fourth quarter we strengthened our reserves, so the full year was the 25.6%.

Okay, great. Thank you very much. And congrats on the quarter.

Samir Khare, Capital Returns Management.

Hi, good afternoon guys. Congratulations on the quarter.

I have some follow-ups on the Direct initiative. In the states you launched in, well, have you guys started your Direct initiative in Florida yet?

No, we have not. We anticipate launching Florida end of Q3, early Q4.

Okay, perfect. And just a follow-up on the AOB question that Arash asked.

You guys said you had 4,600 claims. Was that for the full year of 2015 or was that just the first two quarters of 2015?

No, that was for full 2015.

Okay, got it. Do you have the comparison for the first two quarters by chance?

Yes, give me one second. The first two quarters 720 quarter one, 698 quarter two.

Do you have that for 2015?

I don't have 2015 but I will get that for you.

And then you said there was a 4 point lower severity before. Is that 4 percentage points, 4 points on loss ratio, what is the measure there?

It's a 4% decrease in severity.

4% okay, perfect. When you guys look at potentially employing a buyback versus declaring a special dividend, can you tell me what goes into that decision process and how you guys use valuation in that decision?

You said buyback and what was the other one? I'm sorry.

Versus a potential special dividend.

Obviously it just comes down to really analyzing our capital, really where is our stock trading at an individual moment in time and figuring out what the best way is to deploy that capital. Obviously our Board is heavily involved in that as well as the management team but it's not an exact science. But I will tell you that the share price obviously has a direct correlation to it and that's how we look at it.

Okay. And then last year Q2 2015, that still had the quota share in effect. So the expense in that quarter would have benefited from the ceding commission, is that right?

Yes for two months of the three.

Okay. So then in fact this Q2 the expense ratio improvement is more pronounced I would say? And is there any -- go-ahead.

If you were to roll the expense ratios from last year to this year, last year we had 37.8% and the absence of the ceding commission added 3.2% to that. But we also had economies of scale and that brought it down by 4.1%. Then we also had last quarter we talked about some initiatives that the Company and its compensation committee has taken to address executive compensation.

In addition to attaching performance measures to certain restricted stock awards that were included in the 2013 agreements with the new agreements effective January 1, 2016 that replace restricted stock with performance stock units. Rather than having a fixed number of shares that are awarded at a future date which could have an impact on future earnings if the price goes up it's a fixed dollar amount.

So what is variable would be the number of shares. So that brought down the expense ratio in the second quarter by 1.9%. So that's how you get from the 37.8% down to the 35%.

That's great detail. Thank you. And then just on Fast Track, is there a benefit to the general and admin expense from these initiatives, as well?

I'm sorry. Repeat the question.

On the Fast Track initiative that you guys have going, is there also a benefit to the general and admin expense?

Well, the Fast Track is part of the claims group and those expenses are included in LAE. So that would not be reflected in your general and administrative expenses. So those are efficiencies that would ultimately flow through to the LAE ratio.

Okay. And as of now have you guys changed your current loss picks on the claims that are going through Fast Track?

No, we have not. As I stated earlier, obviously it's a little too green.

We see a lot the efficiencies in place, we see a lot of the improvements in place but we just don't feel like it makes a lot of sense right now to change that currently. And we will judge it as we continue going through for the rest of the year and take a look at it.

All right, great. Thank you very much.

[Vimal Gupta], private investor.

Hi, congratulations on a good quarter. I have got a couple of questions.

On Florida versus other states where you are placed, you have given percentages in numbers of policies in force insured value. Can you provide that percentage on the premium earned or on the total revenue that percentage how much you are earning it in Florida and how much is rest of states together?

Give us one second.

So premium is for our other states portfolio -- one second. $79 million, expressed as percentage in would be 8.6% of in force premium as of 6/30.

My second question -- yes?

I was just going to say obviously the cost of policies outside of the state of Florida is considerably lower.

That is (inaudible), thank you. My second question is on this investment income, could you give me some idea how much did UVE earn on its entire portfolio on the investment side? What was the total investment income contribution?

The contribution of what? I'm sorry.

No, how much UVE earned on its portfolio which is invested in fixed income, equities, everything taken together.

The investment income for the quarter was $2.1 million and the book yields on the fixed income portfolios is 1.47.

My last question is how much number of employees on June 30 working in UVE total headcount?

We have 426 employees.

Thank you on a good quarter. Congratulations. Thank you.

That does conclude our Q&A session today. I would now like to hand the call back over to Sean Downes, Chairman and Chief Executive Officer, for any closing remarks.

We are pleased with our performance in the second quarter. And I believe we have the right strategy in place to drive continued profitable growth and shareholder value creation. Our experienced and dedicated team, focused underwriting discipline, robust internal capabilities, superior claims operations and strong independent agent distribution network coupled with our new Universal Direct platform are all competitive advantages that we believe will allow us to capitalize on our future growth prospects.

In closing, I would like to thank our independent agents and our employees for their hard work and dedication as well as all of the shareholders, our Board of Directors and, of course, our management team. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program.

You may all disconnect. Have a great day everyone.