UVE (2021 - Q2)

Good morning, ladies and gentlemen, and welcome to the UVE Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. . As a reminder, this conference call is being corded. I would now like to turn the conference over to Rob Luther, Vice President of Corporate Strategy and Investor Relations. Please go ahead. Rob Luth

Thank you, and good morning, everyone. Welcome to our discussion on our second quarter 2021 earnings results, which we reported yesterday. On the call with me today is Steve Donaghy, Chief Executive Officer; and Frank Wilcox, Chief Financial Officer.

Thanks, Rob. In opening, I would be remiss to not acknowledge how absolutely devastated we were to hear the tragedy in our local community at the Champlain Towers in Surfside, Florida. The devastation of an event like that is immeasurable. Our hearts and prayers go out to those affected by the condo collapse. Turning to our results for the quarter, we delivered solid second quarter results, highlighted by an 18.7% annualized return on average equity. While we are pleased with our second quarter results, there are a number of industry factors that we are relentlessly focused on over the near-term. First, we applaud the Florida OIR working hand in hand with legislators to acknowledge the issues plaguing the state's residential homeowners insurance market in comparison to the rest of the country and to bring about positive legislative change, which we are cautiously optimistic, will help in curtailing some of the one way attorney fee abuses that have impacted Florida in the past couple years. That being said, the recent preliminary injunction, which blocked portions of the new law that went into effect July 1st from being enforced, namely, the mass solicitation from restoration companies, leaves gaps in the bill. We continue to address the social headwinds with significant primary rate increases, exposure management and strengthening reserves. In addition to social inflation impacts, material and labor costs are having an impact on replacement costs. We expect that as supply chain backlogs subside, we will see a normalization of some of these material costs. But are monitoring these factors and inflationary pressures closely and are utilizing primary rate pricing and operational measures to manage these risks. While macro inflationary pressures are a headwind on replacement costs, they also imply tailwinds from increased economic activity in addition to the potential for higher investment income rates of return. On top of the previously mentioned factors, reinsurance costs increased as expected and discussed in our reinsurance filing on May 28th, but were more moderate in comparison to prior years. We continue to address these impacts to margins through primary rate increases and our exposure management program. We were pleased to not only see the vast majority of our core longstanding reinsurance partners offer increased capacity in 2021, but also that we're able to attract new reinsurer capacity at the 6-1 renewal.

Thank you, Steve. 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. We ended the second quarter with total revenue up 10.5% to $279.2 million driven primarily by rate increases approved in 2020, earning through the book as policies renew, an increase in policies in-force when compared to the prior year's quarter and commissions earned on ceded premiums. Total revenue growth was partially offset by the impact of higher reinsurance costs when compared to 2020 in the investment portfolio’s performance. EPS for the quarter was $0.70 on a GAAP basis and $0.65 on a non-GAAP adjusted basis. These results were primarily impacted by an improvement in weather events when compared to the prior year's quarter, and the benefit of a reduced share count partially offset by the impact of loss cost trends on prior and current accident years. As to underwriting, direct premiums written were up 17% for the quarter, led by direct premium growth of 19.6% in Florida. The combined ratio improved 2.2 points for the quarter to 97.3%. The improvement was driven by 1.6 point improvement in the net loss and LAE ratio from decreased weather events, partially offset by prior year’s reserve development, current year strengthening and higher reinsurance costs impact on the ratio. The expense ratio decreased 1 point on a direct premium earned basis due to the continued focus on operating efficiencies which was partially offset by the impact of increased reinsurance costs on the net ratio, resulting in a 60 basis point improvement in the net expense ratio for the quarter.

. Our first question comes from the likes of Tom Shimp with Piper Sandler.

So we had the insurance reform bill pass during the quarter with industry observers that I've been seeing, saying it only gets 40% there towards effective reform. As the bill stands now, how do you think that equates to loss cost improvement for the Florida guys?

So it's a really good question, Tom. We've been analyzing the legislation and going to work and setting up internal functions to handle many of the new aspects of it. And as we indicated, we're cautiously optimistic. I think, it would be presumptive of me or anyone's really start estimating the net effects of that at this point. The first month is in -- roughly in July, there's a whole lot of issues and questions on the plaintiff side, relative to what they can file, when they can file or how they can file. So we're trying to educate them as best we can in the process. So I think it's early to tell. Again, cautiously optimistic is probably the best you'll get from me as we sit here today.

In regards to what other provisions of reform bill would need, do you have any thoughts there? And also, at the same time trying to get at the appetite for potential further reform down the line? You guys are down there, and you've got your fingers on the pulse. Is there an understanding by the Florida citizens and legislators that this bill is not enough to prevent further rate increases? Appreciate your thoughts there.

Yes, Tom, I think as a Floridian myself, we are all faced with rate increases that are necessary. I certainly understand the causes of the increases and can reconcile them in my own mind, I think your average Floridian is really faced with increases that they don't understand, especially if they haven't filed a litigious claim or really benefited from the bad behaviors in the State. So, it's a challenge. I think the legislature, as you know, in the department, they took steps -- they took the steps they felt they could at this point. And I think as they continue to see increases in rate, like our own, they're going to have to reconcile, did they do enough? And what else can they do? And clearly, the cause of much of the pain is the attorney fees that have been processed to-date. We look forward to them reducing, but I don't expect the legislation to eliminate them in the future.

And I know you're still parsing through the bill and trying to figure out how it affects Universal. But would you generally agree that it's -- the bill is probably not enough to prevent further rate increases throughout the State?

Tom, we have -- I would say, one of the benefits that I have, not only do I have my own reinsurance team in-house, I also have a considerable litigation team in-house and a claims team, this is second to none, where we manage the majority of that business ourselves. It would be a mistake for an attorney or anyone else to think we don't completely understand the legislation that was passed, and how to deal with it. We put it in place, effectively, July 1st, and we've got various people we moved from some departments to handle the notice of 10-day litigation. And we think there's going to be more bites at the apple for us to close claims in a fair manner than there was in the past. So, again, we're going to do everything we can and take advantage of every piece of the legislation. And really just to help Floridians to hopefully reduce rates in the future as a result of what occurred in the State. And even if we can get to a flat rate, that would be beneficial for the State.

Wanted to move to expenses. It looks like the other operating expense ratio dropped by almost 1.5 point, that's good to see. Can you give us more color there and how we should be thinking about the sustainability of those expenses?

Yes, I think it reflects -- good morning, Tom, this is Frank. I think it reflects a few things. I mean, as you know, we're taking rate increases, those rate increases are earning through and increasing your direct earned premium and even with pressures of increase of reinsurance costs, we get some efficiencies there. As it relates to our behaviors, since COVID-19 unveiled itself in the beginning of 2020, our spending patterns have been a little bit different. And in doing so, we haven't incurred certain expenses as a result of working remotely but we also identified a lot of efficiencies that we generated, which will stick. So, I'd like to think that we're going to have continued efficiencies going forward.

And then just on the slight reserve development, can you give us more detail there, particular accident years and the particular catastrophe loss events that drove the increase?

Yes, so we have gross development on several of the storms, including Irma, we had development on Sally and Michael and very, very little development on Matthew. And because of the way our reinsurance programs are structured, where we have an all states program, and then an other states program, a lot of the net development was offset by a reduction in the original retention losses that we recorded for Michael and Sally. So while we had gross, net was negligible. We put up about 7.8 million for prior accident years non-CAT. And of course, the gross would be the same. Gross and the net would be the same on that.

And then in regards to Irma, can you remind us how we should think about the reinsurance tower there and what was left?

We've got I believe north of 1.1 billion or…

1.2 billion.

…1.2 billion capacity left on Irma. So there's plenty of capacity.

Our next question comes from the line of Nick Iacoviello with Dowling & Partners.

So I think Tom hit on kind of most of my questions, and maybe if you could just add some more color to the current year strengthening, what you are seeing in terms of the -- frequency or the severity side. And I assume there wasn't any development on Q1 weather events, but anything you could add on the current year would be great? Thanks.

Yes. So we chose to strengthen the current year, which we did in the first quarter by 3.5 million and the second quarter just about 4.1 million, which equates to an additional 1% on our last pick. We did so for a variety of reasons, including some increased activities that we saw coming in ahead of the legislation passing. People, when they see potential legislation that's going to close the doors on their activities, you tend to get a little bit of a runoff there. So we as an added measure of caution, we put up additional….

Great, thanks. And I guess just one more, can you talk a little bit about where you're at with your direct efforts with respect to Clovered, please? Thanks.

This is Steve. We continue to grow the Clovered book of business. We're approaching 40 million in written premium. Like many of the agencies in Florida where predominant amount of business resides, there's just not a lot of markets to place business. So we pivoted and began cross-selling to our existing customers. So we're selling auto policies, flood policies, you name it. They are actively growing the book in light of the tough market.

At this time, I will now like to turn the call back over to Steve for closing remarks.

Thank you. In closing, I'd like to thank our associates, consumers, agents and our stakeholders for their continued support of Universal. Have a great day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.