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UVE > SEC Filings for UVE > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for UNIVERSAL INSURANCE HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNIVERSAL INSURANCE HOLDINGS, INC.


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to "we," "us," "our," and "Company" refer to Universal Insurance Holdings, Inc. and its subsidiaries. You should read the following discussion together with our condensed consolidated financial statements ("Financial Statements") and the related notes thereto included in Part I, Item 1 "Financial Statements." Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.

Forward-Looking Statements

In addition to historical information, the following discussion may contain "forward-looking statements" within the meaning of the Private Securities Reform Litigation Act of 1995. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties, some of which are beyond our control


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and cannot be predicted or quantified. Certain statements made in this report reflect management's expectations regarding future events, and the words "expect," "estimate," "anticipate," "believe," "intend," "project," "plan" and similar expressions and variations thereof, speak only as of the date the statement was made and are intended to identify forward-looking statements. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, plans, as well as assumptions relating to the foregoing. Future results could differ materially from those in the following discussion and those described in forward-looking statements as a result of the risks set forth below as well as those set forth in our Annual Report on Form 10-K for the year ended December 31, 2012.

Risk Factors Summary

Risks Relating to the Property-Casualty Business

• As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events

• Unanticipated increases in the severity or frequency of claims may adversely affect our profitability and financial condition

• Actual claims incurred may exceed current reserves established for claims and may adversely affect our operating results and financial condition

• Predicting claim expense relating to environmental liabilities is inherently uncertain and may have a material adverse effect on our operating results and financial condition

• The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations

• Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business

• Regulation limiting rate increases and requiring us to participate in loss sharing may decrease our profitability

• The potential benefits of implementing our profitability model may not be fully realized

• Our financial condition and operating results and the financial condition and operating results of the Insurance Entities may be adversely affected by the cyclical nature of the property and casualty business

• Renewed weakness in the Florida real estate market could adversely affect our loss results

Risks Relating to Investments

• We have periodically experienced, and may experience further reductions in returns or losses on our investments especially during periods of heightened volatility, which could have a material adverse effect on our results of operations or financial condition

• We are subject to market risk which may adversely impact investment income

• Concentration of our investment portfolio in any particular segment of the economy may have adverse effects on our operating results and financial condition

• Our overall financial performance is dependent in part on the returns on our investment portfolio, which may have a material adverse effect on our financial condition or results of operations or cause such results to be volatile

Risks Relating to the Insurance Industry

• Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive

• Difficult conditions in the economy generally could adversely affect our business and operating results

• There can be no assurance that actions of the U.S. federal government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets and stimulating the economy will achieve the intended effect

• We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth

• Our insurance subsidiaries are subject to examination by state insurance departments

• Reinsurance subjects us to the credit risk of our reinsurers and may not be adequate to protect us against losses arising from ceded risks, which could have a material adverse effect on our operating results and financial condition

• The continued threat of terrorism and ongoing military actions may adversely affect the level of claim losses we incur and the value of our investment portfolio


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• A downgrade in our Financial Stability Ratingฎ may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition

• Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms

• Changing climate conditions may adversely affect our financial condition, profitability or cash flows

• Loss of key executives could affect our operations

Overview

Universal Insurance Holdings, Inc. ("UIH"), with its wholly-owned subsidiaries, is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through our wholly-owned subsidiaries, including Universal Property & Casualty Insurance Company ("UPCIC") and American Platinum Property and Casualty Insurance Company ("APPCIC"), collectively referred to as the "Insurance Entities", we are principally engaged in the property and casualty insurance business offered primarily through a network of independent agents. Our primary product is homeowners insurance currently offered in seven states. Total policies-in-force as of March 31, 2013 and December 31, 2012 were 562 thousand and 567 thousand, respectively.

The following table provides the percentage of concentrations with respect to the Insurance Entities' nationwide policies-in-force as of the periods presented:

                                                As of                   As of
                                            March 31, 2013        December 31, 2012

 Percentage of Policies-In-Force:
 In Florida                                              95 %                     96 %
 With wind coverage                                      98 %                     98 %
 With wind coverage in South Florida (1)                 28 %                     28 %

(1) South Florida is comprised of Miami-Dade, Broward and Palm Beach counties.

Risk from catastrophic losses is managed through the use of reinsurance agreements.

We generate revenues primarily from the collection of premiums and the investment of funds in excess of those retained for claims-paying obligations and insurance operations. Other significant sources of revenue include commissions collected from reinsurers and policy fees collected from policy holders through our affiliated managing general agent.

Recent Developments

On February 7, 2013, we announced that UPCIC received approval from the OIR for premium rate increases for its homeowners and dwelling fire programs within Florida. The premium rate increases average approximately 14.1% statewide for its homeowners program and 14.5% for its dwelling fire program. The effective dates for the homeowners program rate increase were January 18, 2013, for new business and March 9, 2013, for renewal business. The effective dates for the dwelling fire program rate increase were January 14, 2013, for new business and March 3, 2013, for renewal business.

Effective February 22, 2013, Bradley I. Meier resigned as Chairman, President and Chief Executive Officer of UIH to pursue opportunities outside the residential homeowners insurance industry and Norman M. Meier resigned as Director and Secretary. Also effective February 22, 2013, Sean P. Downes became the President and Chief Executive Officer of UIH, Jon W. Springer became the Senior Vice President, and Chief Operating Officer of UIH, and Stephen J. Donaghy became Secretary and Chief Administrative Officer of UIH.


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On March 29, 2013, UIH entered into a revolving loan agreement and related revolving note with Deutsche Bank Trust Company Americas ("Deutsche Bank"). See Liquidity and Capital Resources for information regarding the agreement and related revolving note.

On April 1, 2013, we entered into a repurchase agreement with Bradley I. Meier, our former Chairman, President and Chief Executive Officer and a principal stockholder of UIH, to repurchase an aggregate of 4 million shares of our common stock owned by Mr. Meier. The initial repurchase of 2 million of Mr. Meier's shares occurred on April 1, 2013 for a repurchase price of $4.02 per share, representing a discount from the then-current market price of our common stock. We have agreed to repurchase, and Mr. Meier has agreed to sell, an additional 2 million of Mr. Meier's shares on or before June 1, 2013 for the same repurchase price. Mr. Meier also granted UIH a right of first refusal on any future sale or transfer of shares of our common stock to a third party for value through December 31, 2014.

Investment Portfolio

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, in March 2013 our Investment Committee authorized management to engage an investment advisor specializing in the insurance industry to manage our investment portfolio. We now seek to maintain an investment portfolio which we expect will provide a stable stream of investment income and reduce the effects of market volatility. We expect that the majority of the portfolio will be available for sale with changes in fair value reflected in stockholders' equity with the exception of any other than temporary impairments which are reflected in earnings. In the first quarter of 2013, we liquidated one hundred percent of the equity securities that were held in our trading portfolio resulting in net losses of $8.2 million. See Note 3 - Investments of the accompanying notes to Financial Statements for the composition of our portfolio as of March 31, 2013.

Impact of Accounting Pronouncement on Comparability of Results

We prospectively adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts effective January 1, 2012. The overall impact under the new guidance, which was adopted on January 1, 2012, was a reduction in earnings of $2.7 million ($1.7 million after tax or $0.04 per diluted share). The $2.7 million pre-tax reduction in earnings during the three months ended March 31, 2012, includes an acceleration of capitalized costs existing as of December 31, 2011, which would have been amortized to earnings within a twelve-month period, and the immediate recognition of costs which otherwise would have been deferred, partially offset by a lesser amount of amortization expense due to the reduction in capitalized costs. The new guidance does not result in incremental charges to earnings, but rather affects the timing of the recognition of those charges in the income statement.

Wind Mitigation Discounts

The insurance premiums charged by the Insurance Entities are subject to various statutory and regulatory requirements. Among these, the Insurance Entities must offer wind mitigation discounts in accordance with a program mandated by the Florida Legislature and implemented by the OIR. The level of wind mitigation discounts mandated by the Florida Legislature to be effective June 1, 2007 for new business and August 1, 2007 for renewal business have had a significant negative effect on our premium.

The Insurance Entities fully experience the effect of rate or discount changes more than 12 months after implementation because insurance policies renew throughout the year. Although the Insurance Entities may seek to offset the impact of wind mitigation credits through subsequent rate increase filings with the OIR, there is no assurance that the OIR and the Insurance Entities will agree on the amount of rate change that is needed. In addition, any adjustments to the Insurance Entities' rates similarly take more than 12 months to be fully integrated into its business.


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The following table reflects the effect of wind mitigation credits received by UPCIC's policy holders (in thousands):

                                Reduction of in-force premium (only policies including wind  coverage)
                Percentage of
               UPCIC's policy
              holders receiving                                             In-force              Percentage reduction of
Date               credits                    Total credits                  premium                 in-force premium
6/1/2007                     1.9 %         $             6,285         $           487,866                             1.3 %
12/31/2007                  11.8 %         $            31,952         $           500,136                             6.0 %
3/31/2008                   16.9 %         $            52,398         $           501,523                             9.5 %
6/30/2008                   21.3 %         $            74,186         $           508,412                            12.7 %
9/30/2008                   27.3 %         $            97,802         $           515,560                            16.0 %
12/31/2008                  31.1 %         $           123,525         $           514,011                            19.4 %
3/31/2009                   36.3 %         $           158,230         $           530,030                            23.0 %
6/30/2009                   40.4 %         $           188,053         $           544,646                            25.7 %
9/30/2009                   43.0 %         $           210,292         $           554,379                            27.5 %
12/31/2009                  45.2 %         $           219,974         $           556,557                            28.3 %
3/31/2010                   47.8 %         $           235,718         $           569,870                            29.3 %
6/30/2010                   50.9 %         $           281,386         $           620,277                            31.2 %
9/30/2010                   52.4 %         $           291,306         $           634,285                            31.5 %
12/31/2010                  54.2 %         $           309,858         $           648,408                            32.3 %
3/31/2011                   55.8 %         $           325,511         $           660,303                            33.0 %
6/30/2011                   56.4 %         $           322,640         $           673,951                            32.4 %
9/30/2011                   57.1 %         $           324,313         $           691,031                            31.9 %
12/31/2011                  57.7 %         $           324,679         $           702,905                            31.6 %
3/31/2012                   57.9 %         $           321,016         $           716,117                            31.0 %
6/30/2012                   58.0 %         $           319,639         $           722,917                            30.7 %
9/30/2012                   58.2 %         $           329,871         $           740,265                            30.8 %
12/31/2012                  58.6 %         $           334,028         $           744,435                            31.0 %
3/31/2013                   58.6 %         $           340,778         $           751,546                            31.2 %

The following table reflects the effect of wind mitigation credits received by APPCIC's policy holders (in thousands):

                                                               Reduction of in-force premium (only policies including wind  coverage)
                                            Percentage of
                                           APPCIC's policy
                                          holders receiving                                                In-force                 Percentage reduction of
Date                                           credits                     Total credits                   premium                     in-force premium
12/31/2011                                              96.0 %           $              636           $              554                                53.4 %
3/31/2012                                               89.4 %           $            2,270           $            2,047                                52.6 %
6/30/2012                                               90.5 %           $            6,167           $            5,139                                54.5 %
9/30/2012                                               94.0 %           $           12,419           $            8,827                                58.5 %
12/31/2012                                              97.0 %           $           16,059           $            9,874                                61.9 %
3/31/2013                                               97.3 %           $           20,156           $           12,091                                62.5 %


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The following table reflects the combined effect of wind mitigation credits received by our Insurance Entities' policy holders (in thousands):

                                 Reduction of in-force premium (only policies including wind  coverage)
                 Percentage of
              Insurance Entities'
                policy holders                                                In-force              Percentage reduction of
Date           receiving credits                Total credits                  premium                 in-force premium
6/1/2007                       1.9 %         $             6,285         $           487,866                             1.3 %
12/31/2007                    11.8 %         $            31,952         $           500,136                             6.0 %
3/31/2008                     16.9 %         $            52,398         $           501,523                             9.5 %
6/30/2008                     21.3 %         $            74,186         $           508,412                            12.7 %
9/30/2008                     27.3 %         $            97,802         $           515,560                            16.0 %
12/31/2008                    31.1 %         $           123,525         $           514,011                            19.4 %
3/31/2009                     36.3 %         $           158,230         $           530,030                            23.0 %
6/30/2009                     40.4 %         $           188,053         $           544,646                            25.7 %
9/30/2009                     43.0 %         $           210,292         $           554,379                            27.5 %
12/31/2009                    45.2 %         $           219,974         $           556,557                            28.3 %
3/31/2010                     47.8 %         $           235,718         $           569,870                            29.3 %
6/30/2010                     50.9 %         $           281,386         $           620,277                            31.2 %
9/30/2010                     52.4 %         $           291,306         $           634,285                            31.5 %
12/31/2010                    54.2 %         $           309,858         $           648,408                            32.3 %
3/31/2011                     55.8 %         $           325,511         $           660,303                            33.0 %
6/30/2011                     56.4 %         $           322,640         $           673,951                            32.4 %
9/30/2011                     57.1 %         $           324,313         $           691,031                            31.9 %
12/31/2011                    57.7 %         $           325,315         $           703,459                            31.6 %
3/31/2012                     57.9 %         $           323,286         $           718,164                            31.0 %
6/30/2012                     58.0 %         $           325,806         $           728,056                            30.9 %
9/30/2012                     58.3 %         $           342,290         $           749,092                            31.4 %
12/31/2012                    58.6 %         $           350,087         $           754,309                            31.7 %
3/31/2013                     58.7 %         $           360,934         $           763,637                            32.1 %


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Results of Operations - Three Months Ended March 31, 2013, Compared to Three Months Ended March 31, 2012

Net income increased by $2.1 million reflecting a significant increase in net earned premiums, partially offset by net losses incurred as we liquidated the trading portfolio and an increase general and administrative expenses.

The following table summarizes changes in each component of our Statement of Income for the three months ended March 31, 2013, compared to the same period in 2012 (in thousands):

                                           Three Months Ended March 31,                   Change
                                              2013                2012               $              %
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written                  $      204,139        $   190,003       $  14,136            7.4 %
Ceded premiums written                         (141,317 )         (163,434 )        22,117          -13.5 %

Net premiums written                             62,822             26,569          36,253          136.4 %
Change in net unearned premium                    2,587             22,071         (19,484 )        -88.3 %

Premiums earned, net                             65,409             48,640          16,769           34.5 %
Net investment income (expense)                      12                (36 )            48             NM
Net realized gains (losses) on
investments                                     (16,037 )           (7,449 )        (8,588 )        115.3 %
Net change in unrealized gains
(losses) on investments                           7,874              9,187          (1,313 )        -14.3 %
Net foreign currency gains (losses)
on investments                                       -                  23             (23 )       -100.0 %
Commission revenue                                4,986              4,541             445            9.8 %
Policy fees                                       3,687              3,901            (214 )         -5.5 %
Other revenue                                     1,524              1,440              84            5.8 %

Total premiums earned and other
revenues                                         67,455             60,247           7,208           12.0 %

OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses              26,483             26,174             309            1.2 %
General and administrative expenses              21,210             17,844           3,366           18.9 %

Total operating costs and expenses               47,693             44,018           3,675            8.3 %

INCOME BEFORE INCOME TAXES                       19,762             16,229           3,533           21.8 %
Income taxes, current                             3,947                774           3,173          409.9 %
Income taxes, deferred                            3,856              5,582          (1,726 )        -30.9 %

Income taxes, net                                 7,803              6,356           1,447           22.8 %

NET INCOME                               $       11,959        $     9,873       $   2,086           21.1 %


Change in net unrealized losses on
available for sale investments, net
of tax                                               -                  -               -             0.0 %

NET INCOME AND COMPREHENSIVE INCOME      $       11,959        $     9,873       $   2,086           21.1 %

NM - Not meaningful.

The following discussion provides comparative information for significant changes to the components of net income and comprehensive income in the table above.

Net earned premiums were $65.4 million for the three months ended March 31, 2013, compared to $48.6 million for the three months ended March 31, 2012. The increase in net earned premiums of $16.8 million, or 34.5%, reflects an increase in direct earned premiums of $15.4 million and a decrease in ceded earned premiums of $1.4 million. The increase in direct earned premiums is due primarily to rate increases over the past 24 months. These rate increases, along with strategic initiatives we have undertaken to manage our exposure, such as the decision not to renew certain policies we believe had inadequate premiums relative to projected risks and expenses, have resulted in a moderate reduction in the number of policies-in-force even as direct written premiums have increased. The benefit from the rate increases continued to be partially offset by wind mitigation credits within the state of Florida. The decrease in ceded earned premiums of $1.4 million is attributable to a reduction in the quota share cession rate from 50% for the 2011-2012 reinsurance program to 45% for the 2012-2013 reinsurance program.


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Net realized losses on investments of $16.0 million were recorded during the three months ended March 31, 2013 compared to $7.4 million of realized losses recorded during the same period in the prior year. The realized losses recorded during the three months ended March 31, 2013 reflect the underlying market conditions as we liquidated one hundred percent of the equity securities held in our trading portfolio through March 31, 2013. The realized losses recorded during the three months ended March 31, 2012 resulted primarily from the sale of equity securities held in the trading portfolio.

Net changes in unrealized gains on investments of $7.9 million were recorded during the three months ended March 31, 2013 compared to net changes in unrealized gains $9.2 million recorded during the same period in the prior year. The majority of the net change in unrealized gains on investments for the three . . .

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