UVE (2019 - Q4)

Good morning, ladies and gentlemen, and welcome to the UVE Fourth Quarter 2019 Earnings Conference Call. At this time, all participant lines are in listen-only-mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to Rob Luther, Vice President of Corporate Strategy and Investor Relations. Rob Luth

Thank you, and good morning, everyone. Welcome to our discussion on our fourth quarter 2019 earnings results which we reported yesterday. On the call with me today is Steve Donaghy, Chief Executive Officer; Jon Springer, President and Chief Risk 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, our earnings presentation and UVE's SEC filings, all of which are available on the Investor section of our website at universalinsuranceholdings.com and on the SECs website. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release.With that, Steve, I'll turn it over to you.

Thank you, Rob, and good morning, everyone. Thank you all for joining us today.We ended 2019 with total revenue of 14% to $939.4 million driven primarily by higher organic premium volume and retention due to our effective marketing strategy, agent relations, and customer service efforts and premium pricing flowing through the book and our investment portfolio performance, partially offset by increase in reinsurance cost.During 2019, we also returned a record $92.3 million to shareholders through share repurchases and dividends. Since taking over as CEO, in July of 2019, we have continued to respond to the well documented current Florida dynamics that have affected all industry participants.In spite of these challenges, we produced an annualized return on average equity of 9.2%. This annual result includes enhanced conservatism across many different fronts including the run up of claims prior to the effective date of new AOB legislation, the impact of a hardening reinsurance market and the overall influence of social inflation.As disclosed, we bolstered our prior and current year reserve position in addition to building conservatism into our subrogation expectations despite 2019 being our highest subrogation receivables collected in the company’s history.Our financial strength including a debt-to-equity ratio of only 2% along with filing for a 12.4% primary rate increase in Florida and our direct-to-consumer platform Clovered have positioned us for long-term sustainable bottom-line growth going forward into 2020 and beyond.As we noted on our press release, we believe the diligent work we have put forth the last several months in addition to having already secured over 75% of our reinsurance capacity for June 1, 2020 puts us in position to provide 2020 guidance of GAAP and non-GAAP adjusted earnings per share range between $2.80 and $3.10 and a return on average equity between 17% and 20% both of which assume no extraordinary weather events in 2020.So with that, let me turn it over to Frank to walk through our financial results. Frank?

Thank you, Steve, and good morning everyone.As a reminder, discussions today on adjusted operating income and adjusted EPS are on a non-GAAP basis and exclude effects from unrealized and realized gains and losses on investments and extraordinary reinstatement premiums and related commissions. Adjusted operating income also excludes interest expense.EPS for the quarter was a loss of $1.55 on a GAAP basis and a loss of $1.57 on a non-GAAP adjusted basis. For the year, we were profitable generating EPS of $1.36 on a GAAP basis and $1.18 on a non-GAAP adjusted basis.Turning to underwriting, direct premiums written grew by 12.5% in Q4, compared to the prior year led by the impact of rate increases in Florida and other states taking effect, as well as strong direct premium growth in the fourth quarter of 23.3% in states outside Florida.For the full year, direct premiums written were up 8.6% led by the rate increases taking effect and policy mix, as well as strong direct written premium growth of 27.6% in other states and a slightly improved policy retention.On the expense side, the combined ratio increased 31.7 points for the quarter to 142.9% and 16.6 points for the full year to 103.9%. The full year increases were driven primarily by nine loss ratio points from reduced claim settlement fees, as prior year’s catastrophe claims conclude, an 8.5% increase for current year core loss ratio strengthening, an increase of 2.7 points for the increase in weather in 2019, partially offset by 2.5 point decrease in prior year reserve developments which includes the impact of reducing anticipated subrogation recoveries.Turning to services. Total services revenue increased 20.5% to $14.7 million for the quarter, and a 11.5% to $55.6 million for the full year driven by commission revenue earned on reinsurance contracts placed by our intermediary Blue Atlantic and an increase in MGA policy fees and other revenue related to new and renewal policy volume.Moving on to investments. Net investment income decreased 0.3% for the quarter, but increased 23.9% for the year, primarily due to increased assets under management and asset mix shifting towards higher yielding investment-grade bonds during 2018 and 2019. These results were partially offset by a lower trend in yields on cash and short-term investments during the second half of 2019.In regards to capital deployment, as Steve mentioned, in 2019, we returned a record $92.3 million to shareholders through share repurchases and dividends. As far as guidance is concerned for 2020, we expect a GAAP and non-GAAP adjusted EPS range of between $2.80 and $3.10, assuming no extraordinary weather events in 2020 and return on average equity between 17% and 20%.The guidance assumes no extraordinary weather in 2020, and also assumes a flat equity market for GAAP EPS. If weather events exceed plan, we expect to see both the benefit from our claims adjusting business and increased loss costs.Let me now turn it over to Jon to walk through some additional specifics.

Thank you, Frank and good morning. I would like to start with some additional color on past cat events and talk briefly about our enhanced conservatism across many fronts including the run up of claims prior to the effective date of new AOB legislation and the reinsurance markets.On past cat events, we continued to make more progress on closing past catastrophe claims. I really can’t say enough good things about the effort of our in-house claims staff. Our claims staff has handled over 110,000 total catastrophe claims since the day Irma made landfall approximately 2.5 years ago.As of year-end, hurricanes Matthew and Florence, each had less than 15 open claims and are nearing the end. Hurricane Michael had approximately 250 open claims and we did increase the ultimate at year-end by $10 million from $350 million to $350 million. This was our first change in ultimate for Michael and represents just a 2.9% increase.On Hurricane Irma, we started the quarter with just under 2,000 claims remaining open and by year-end, that number was down to 800. We increased the ultimate to $1.4 billion at year-end. As a reminder, from a net exposure standpoint, at this point in the life cycle of Hurricane Irma, the vast majority of this increase in ultimate is covered by the Florida hurricane catastrophe fund.Turning now to our year-end loss bookings. In the fourth quarter, we set aside an additional $84.4 million for prior accident years by booking $43.7 million of prior year’s adverse development and reducing our prior year’s anticipated subrogation recoveries by $40.7 million.In addition, we strengthened the current accident year by a total of $41.4 million, which included $16.7 million allocated to current year weather events beyond plan and $24.7 million to further bolster our 2019 reserves, primarily related to the run-up of lawsuits filed on claims with an AOB prior to the effective date of the new legislation.As an unfortunate consequence to the new legislation, May, June and July were three of our largest months ever for lawsuits filed on claims with an AOB. Thankfully, we have seen a reduction in these types of lawsuits in the months following.As an update on reinsurance, for the most part, the 2019 hurricane season was a much needed year off forFlorida primary insurance companies’ policyholders and their reinsurance partners. We have begun the process of securing capacity for our June 1, 2020 renewal and with the Florida Hurricane catastrophe fund and multi-year capacity; we currently stand with over 75% of our desired catastrophe capacity already secured.It is still too early to speculate on the ultimate impact of the upcoming June 1st reinsurance renewals, but we are encouraged that our multiyear buying strategy and the recent rate filing will afford us stability in keeping our primary rates in sync with changes in reinsurance pricing.With that, I’ll turn it back to Rob.

Thanks, Jon. I'd like to ask the operator to now open the line for questions.

[Operator Instructions] Our first question comes from the line of Bill Broomall with Dowling. Your line is now open.

Great. Thank you. If I could just jump in to have couple items, starting with the cats, I think it was a total of $16.7 million for 2019. Can you just maybe break that apart for us what was Q4 related and what might have been from earlier in the year?

Yes. The $16.7 million is all IBNR, Bill and it's related really to all of the events, starting with those that happened earlier in the year and progressing on to the fourth quarter.

Okay. Got it. And when we – on the adverse development, is that really almost all related to – I guess, is it all in Florida and all related to the litigation trends, 100%. Is that the best way to think about it?

Well, I don’t know that I would say a 100%, but as we said in our opening remarks, that is a driver of it, definitely.

Okay. Okay. Got it. And then switching over to the subro change, so, if I remember correctly, that started in 2016 is when you might abate a more – a larger effort to address the subro issue. And the – I think in your prepared remarks, you mentioned that this quarter was the largest kind of recoveries that you’ve gotten under that program.Can you just help us think about with that background, how you sought about the change this quarter? There may be the process you went through to come to that number. And any background you might be able to give on the whole subro’s process in your assumptions would be great.

Yes. Thanks, Bill. This is Steve. As we look at the subrogation and we look at a go-forward platform for Universal, we assessed and discussed the conservative approach to our business on a go-forward basis. Since 2016, we built the underpinnings of a very dedicated group of people that pursue subrogation on behalf of Universal and have successfully recovered tremendous amounts of funds on behalf of the company and our individual insurers who receive their deductible back when we recover funds.In light of that, and also in light of the fact that a lot of shareholders would ask a lot of questions about the subrogation, how we retained – how we achieve the result, we felt that it was best at this time and the fact that our financial position is so strong that we could put the type of reserve adjustment into our subrogation business to make it as sound as possible on a go-forward basis.So, as we sit here across the entire company, we've never been in a position where all of our reserve development was IBNR for a go-forward basis. So we feel very comfortable as we look out at the business in the future to achieve the results that we've put in our estimate of return on equity et cetera. And then for a specific number in 2019, we took in over $20 million in subrogation for the - for all years.

Got it. Perfect. And do you – you probably look at it internally, but do you use an outside firm to also help you think through the assumptions?

I am sorry, you cut out there to think through the assumptions, did you say?

Yes, I guess, when you think about the subro, I know you probably have internal view, but do you – does Universal also use an outside firm to help look at to kind of analyze the process?

Yes, most definitely.

Okay.

The opportunity for subrogation is also reviewed by our third-party actuary every year.

Okay, perfect. And in the change, the $40 million, is that spread across – how does that work? Is it attached to different accident years?

Yes.

Okay. Was there one maybe or two years that might have been more a bigger change than others?

Yes. I think, yes, I think at a high level, I can say that 2017 is actually the – probably the driver followed closely by 2016 in terms of the years that were driving the number that we put out.

Great. Perfect. Thank you. And then maybe switching gears a little bit, I think I saw on the – your 10-K that the direct core loss ratio was 38.9% and I was just wondering within your guidance, are you – I still think it was last year if I remember correctly, you've changed your direct loss pick to 37%.Is that still kind of what we should be thinking about going forward? Or has there been any adjustment to that estimate?

Yes. Bill, you are very observant. We have increased that loss pick to 40%, again based on our view of the business and our intent on running the business as conservatively and well as we can. We thought 40 was the right number and gives us an ability to review that on a quarterly basis as we kind of go through our internal controls on a go-forward basis for reserves, subrogation, et cetera. So, 40% is the number.

Got it. Okay. And that’s what’s in the guidance. Okay. Perfect. Got it. And switching over to claims. Thank you very much for the Irma update on the claim count where were. I was just wondering from a macro level, do you have a view on what you think claims could look like for Irma in – going forward as we run-up into the three year statute on filing new claims?

Well, we forgot to bring our crystal ball in this morning, Bill, but hold, we send somebody else for it. Now, I think that other people have talked about this and we’ve reviewed our historical events and do anticipate that there could be an increase as we approach that statute of limitations. It remains to be seen how much of a run-up that will be. But that is definitely be a possibility.

Okay. Understood. And then, the – I think earlier in my comments, you talked about the strength of your capital position and being able to absorb some of these trends. I think it was related to the subrogation. But was there – did you have to put any capital - downstream any capital into the subs?

Yes, Bill, this is Frank Wilcox. We did fund an additional $30 million in the month of February, which under the rules of the State of Florida can be counted as of 12/31 if two things happen. First of all, you fund that amounts and it settles and you seek approval from the OIR before you file your financial statement.So we achieved both of those and we are able to count that as of 12/31 for UPCIC. That would not be a capital contribution for GAAP purposes until 2020. We are very strong at the holding company level. If you look at the register on only financial statements that are contained in the 10-K, you’ll see that we’ve got plenty in capital there.Should the need arise going forward, however we feel pretty confident the measures that we have taken put UPCIC in a better position going forward.

Got it. Perfect. Thank you. And then, the last…

The another thing I think is important to people to also understand is relative to us compared to other people in the space, you may have financed the M&A deals or other transactions. We have 2% in debt-to-equity on our balance sheet and we are pretty proud of that. And that’s attributable to our organic business growth model where we generate all of our business through – naturally through our agents’ network and we don’t have to grow through other means such as take outs from the state and/or M&A.

That’s a good point. I know, that’s a very good point. So, thank you for outlining that. And then my last one and then I will get off is, so you had a modest amount of reinstatement premiums in the quarter and I know in Q2 and Q3, you talked about the fact that you took some necessary action earlier in the year to help position yourselves for if we did see additional development on Irma claims, you kind of took some preventative actions ahead of a trend we are kind of seeing now.Is – can you just kind of update us on your thoughts on how those actions have worked in your favor? And kind of update us on – there is a little bit of reinstatement premium. So – like how should we think about that?Is that kind of these new claims that are reopening that might not have been covered under your previous action that you did to help control the costs? If you could give us any kind of thoughts around that would be helpful.

Yes. Sure, Bill, I think you are referring to the comments that we made that we did frontload the loss adjustment expenses on several claims including some flat fee deals, where we did need outside counsel. So, what we are seeing now is, we are nearing the end on Hurricane Irma. We are closing claims and really the only change is the indemnity portion – the loss adjustment portion change is minimal if at all.So that relates to the comment that we made in our opening remarks that the vast majority of this increase will go to our Florida hurricane cat fund coverage. We were a 90% buyer in 2017. In fact, we’ve been a 90% buyer every year. So we covered at the 90% level plus the reimbursement that we get from the Florida hurricane cat fund for loss adjustment expenses.So what you are seeing in terms of exposure to our open market is really just a minimal amount that’s trickling through and that’s what’s driving the small amount of reinstatement premium book.

And do you still feel comfortable with where you stand for the event going forward that the private market is in a good place that – if we do, like you said on kind of some run-up to the three year statute that there shouldn’t – it should be kind of captured in that private market there and then that, I am done. Thank you.

Yes. Well, thanks for the questions, Bill. It of course depends on what kind of a run-up we are talking about and we’ve spoken about this in previous quarters, if the situation does present itself where we will need to retain some of the losses beyond our open market coverage, it will be a relatively small percentage of the loss as the loss grows beyond the $1.4 billion that we’ve booked to-date.

And just so, I keep coming back and apologies, but just so I it's – because it's a 10% it’s really the 10% - I just so – I haven’t understanding what would you retain it would be the kind of the 10% that of the indemnity not covered by the FHCF, right? And then, any LAE above kind of that 5% multiple that FHCF provides? Is that the way to think about it?

Yes. Except that in a lot of these claims that were closing now, we’ve already incurred the LAE. So we would be reimbursed for 90 plus a 1.05 factor on that. So we’d be reimbursed from the Florida hurricane can fund for 94.5% and we would be responsible for that remaining 5.5% plus any small amount of LAE that may trickle through.

Perfect. Awesome. Thank you very much.

Thanks, Bill.

[Operator Instructions] I am showing no further questions in queue at this time. I would like to turn the call back to Mr. Donaghy for closing remarks.

In closing, I would like to thank our associates, consumers, agents and our stakeholders for their continued support of Universal. This concludes our call.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, you may now disconnect.