UNIVERSAL INSURANCE HOLDINGS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Edgar Online, Inc. |
Unless the context otherwise requires, all references to "we," "us," "our," and "Company" refer toUniversal Insurance Holdings, Inc. and its subsidiaries. You should read the following discussion together with our unaudited condensed consolidated 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. The words "expect," "estimate," "anticipate," "believe,"
24
--------------------------------------------------------------------------------
Table of Contents
"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. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties. 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. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. 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.
Risk Factors Summary
We operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control. Certain statements made in this report that reflect management's expectations regarding future events are forward-looking in nature and, accordingly are subject to risks and uncertainties. These forward-looking statements are only current expectations about future events. Actual results could differ materially from those set forth in or implied by any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, risk factors set forth in filings with theSecurities and Exchange Commission , including our annual and quarterly reports. The following is a summary of uncertainties which were disclosed in greater detail in "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2011 :
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 • Continued weakness in theFlorida 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 portfolios in any particular segment of
the economy may have adverse effects on our operating results and financial condition • Our overall financial performance is significantly dependent on the
returns on our investment portfolio, which may have a material adverse
effect on our results of operations or cause such results to be volatile
Risks Relating to the Insurance Industry and Other Factors
• 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 25
--------------------------------------------------------------------------------
Table of Contents
• 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 • 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
• A downgrade in our Financial Stability Rating® 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 company performing all aspects of insurance underwriting, distribution and claims. Through our wholly-owned subsidiaries, includingUniversal Property & Casualty Insurance Company ("UPCIC") andAmerican 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 five states, includingFlorida , which represented 97% of the 574 thousand policies-in-force as ofJune 30, 2012 , and 98% of the 593 thousand policies-in-force as ofDecember 31, 2011 . As for the geographic distribution of business withinFlorida as ofJune 30, 2012 , andDecember 31, 2011 , 29% and 32%, respectively, of the policies-in-force are inMiami-Dade ,Broward andPalm 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.
2012 Developments
OnJanuary 11, 2012 , we announced that UPCIC received OIR approval for premium rate increases for its homeowners and Dwelling Fire programs withinFlorida . The premium rate increases are expected to average approximately 14.9% statewide for its homeowners program and 8.8% statewide for its dwelling fire program. The effective dates for both of the premium rate increases areJanuary 9, 2012 for new business andFebruary 28, 2012 for renewal business. UPCIC made a forms filing immediately after the rate filing to segregate sinkhole coverage and to include updated policy language as a result of the property insurance bill which became law inMay 2011 (Senate Bill 408). The OIR approved the forms filing with effective dates ofApril 1, 2012 for new business andMay 21, 2012 for renewals. With the approval of this forms filing, sinkhole coverage will be removed from certain base homeowners policies and the coverage will be offered via endorsement for an additional surcharge, and a mandatory 10% deductible, to those policyholders that meet the proposed eligibility standards. Revised inspection and eligibility requirements will not be imposed upon existing policyholders who elect to continue sinkhole coverage at their policy renewal. Form changes for sinkhole coverage on dwelling fire policies, which are similar in nature to those filed for homeowners policies, were approved by the OIR with effective dates ofMay 1, 2012 for new business andJune 8, 2012 for renewal business. Coverage for catastrophic ground cover collapse will remain a covered peril under all standard policy forms. 26
--------------------------------------------------------------------------------
Table of Contents
On
OnApril 23, 2012 , we declared a dividend of <money>$0.08 per share on our outstanding common stock paid onJuly 9, 2012 , to shareholders of record at the close of business onJune 26, 2012 . We expect to declare additional quarterly dividends in the same amount to shareholders of record in the third and fourth quarters of 2012. Declaration and payment of future dividends is subject to the discretion of UIH's board of directors and will be dependent on future earnings, cash flows, financial requirements and other factors. OnJune 26, 2012 ,Demotech, Inc. affirmed UPCIC's Financial Stability Rating ® of A. A Financial Stability Rating® of A is the third highest of six possible rating levels. According toDemotech, Inc. , A ratings are assigned to insurers that have "…exceptional ability to maintain liquidity of invested assets, quality reinsurance, acceptable financial leverage and realistic pricing while simultaneously establishing loss and loss adjustment expense reserves at reasonable levels." The rating of UPCIC is subject to at least annual review by, and may be revised upward or downward or revoked at the sole discretion ofDemotech, Inc.
On
OnAugust 1, 2012 , we announced that UPCIC bound its first homeowners insurance policy inMassachusetts . The expansion marks the sixth state where UPCIC writes homeowners insurance.
Impact of new accounting pronouncement
We prospectively adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts effectiveJanuary 1, 2012 . The overall impact under the new guidance, which was adopted onJanuary 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 endedMarch 31, 2012 , includes an acceleration of capitalized costs existing as ofDecember 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.
2012-2013 Reinsurance Program
Effective
REINSURANCE GENERALLY
In the normal course of business, we limit the maximum net loss that can arise from large risks, risks in concentrated areas of exposure and catastrophes, such as hurricanes or other similar loss occurrences, by reinsuring certain levels of risk in various areas of exposure with other insurers or reinsurers through our reinsurance agreements. Our intention is to limit our exposure and the exposure of the Insurance Entities, thereby protecting stockholders' equity and the Insurance Entities' capital and surplus, even in the event of catastrophic occurrences, through reinsurance agreements. Without these reinsurance agreements, the Insurance Entities would be more substantially exposed to catastrophic losses with a greater likelihood that those losses could exceed their statutory capital and surplus. Any such catastrophic event, or multiple catastrophes, could have a material adverse effect on the Insurance Entities' solvency and our results of operations, financial condition and liquidity. Below is a description of our 2012-2013 reinsurance program. Although the terms of the individual contracts vary, we believe the overall terms of the 2012-2013 reinsurance program are more favorable than the 2011-2012 reinsurance program as reinsurance pricing remained largely the same as the prior year contracts while direct earned premium is expected to increase as a result of the previously approved and expected future rate increases. We also reduced the percentage of premiums ceded by UPCIC to its quota share reinsurer to 45% under the reinsurance program which 27
--------------------------------------------------------------------------------
Table of Contents
became effectiveJune 1, 2012 , from 50% under the prior year quota share contract effectiveJune 1, 2011 throughMay 31, 2012 . Our intent is to increase profitability over the contract term by ceding 5% less premium to our quota share reinsurer. This reduction of cession rate also decreases the amount of losses and loss adjustment expenses that may be ceded by UPCIC and effectively increases the amount of risk we retain. The reduction of cession rate also reduces the amount of ceding commissions earned from our quota share reinsurer during the contract term. We also eliminated the loss corridor and the cap on losses and loss adjustment expenses in the quota share contract effectiveJune 1, 2012 .
The Insurance Entities are responsible for insured losses related to catastrophic events in excess of coverage provided by their reinsurance programs. The Insurance Entities also remain responsible for insured losses notwithstanding the failure of any reinsurer to make payments otherwise due to the Insurance Entities. The Insurance Entities' inability to satisfy valid insurance claims resulting from catastrophic events could have a material adverse effect on our results of operations, financial condition and liquidity.
UPCIC REINSURANCE PROGRAM
EffectiveJune 1, 2012 , UPCIC entered into a quota share reinsurance contract withOdyssey Reinsurance Company . Under the quota share contract, throughMay 31, 2013 , UPCIC cedes 45% of its gross written premiums, losses and loss adjustment expenses for policies with coverage for wind risk with a ceding commission equal to 25% of ceded gross written premiums. In addition, the quota share contract has a limitation for any one occurrence not to exceed$75 million (of which UPCIC's net liability on the first$75 million of losses in a first event scenario is$24.75 million , in a second event scenario is$27.5 million and in a third event scenario is$16.5 million ) and a limitation from losses arising out of events that are assigned a catastrophe serial number by the Property Claims Services ("PCS") office not to exceed$180 million . The contract limits the amount of premium which can be deducted for inuring reinsurance to the lesser of actual costs or 32% of gross earned premium, excluding reinstatement premiums, or the lesser of actual costs or 32% of gross earned premium plus a maximum additional of$135.978 million including reinstatement premiums, if any. EffectiveJune 1, 2012 throughMay 31, 2013 , UPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, UPCIC obtained coverage of$1.4 million in excess of$600 thousand ultimate net loss for each risk and each property loss, and$1 million in excess of$300 thousand for each casualty loss. The contract has a limitation for any one occurrence not to exceed$1.4 million and a$7 million aggregate limit that applies to the term of the contract. EffectiveJune 1, 2012 throughMay 31, 2013 , UPCIC entered into a property per risk excess contract covering ex-wind only policies. Under the property per risk excess contract, UPCIC obtained coverage of$350 thousand in excess of$250 thousand for each property loss. The contract has a limitation for any one occurrence not to exceed$1.05 million and a$1.75 million aggregate limit that applies to the term of the contract. EffectiveJune 1, 2012 throughMay 31, 2013 , under an underlying excess catastrophe contract, UPCIC obtained catastrophe coverage of 45% of$75 million in excess of$75 million and 55% of$105 million in excess of$45 million covering certain loss occurrences including hurricanes. UPCIC entered into this contract with a segregated account, Segregated Account T25 -Universal Insurance Holdings ofWhite Rock Insurance (SAC) Ltd. ("T25"), which is owned by UIH and was established by a third-party reinsurer underBermuda law. Under this T25 agreement, T25 retains a maximum, pre-tax liability of$91.5 million for the first catastrophic event up to$1.683 billion of losses. UPCIC is required to make premium installment payments aggregating$72.981 million to T25, subject to the terms of the agreement. Through capital contributions made to T25 by UIH, T25 contributes an amount equal to its liability for losses, net of UPCIC's required premium payments and expenses thereon, to a trust account as collateral. The trust account is funded with the required collateral and invested in a cash reserve fund. The amounts held in the cash reserve fund are included in restricted cash and cash equivalents in our Condensed Consolidated Balance Sheets. The collateral is available to be used to pay any claims that may arise from the occurrence of covered events. The collateral is required to be held in trust for the benefit of UPCIC until the occurrence of a covered event or expiration or termination of the agreement between T25 and UPCIC. UIH has no requirement to fund T25 in the event losses exceed the amount of collateral held in trust. UIH has secured the obligations of the segregated account by contributing the amount of the segregated account's liability for losses net of UPCIC's required premium payments, to a trust account for the currentJune 1, 2012 toMay 31, 2013 contract period. In the event of a loss under the terms of this contract, the capital contributed by UIH would be used to pay claims and would have an adverse effect on stockholders' equity and cash resources. 28
--------------------------------------------------------------------------------
Table of Contents
The agreements between T25 and the Insurance Entities are a cost-effective alternative to reinsurance that the Insurance Entities would otherwise purchase from third-party reinsurers. While we retain the risk that otherwise would be transferred to third party reinsurers, these agreements provide benefits to the Insurance Entities in "no-loss" years that cannot be replicated in the open reinsurance market. These benefits include the return to the Insurance Entities of a substantial portion of the earned reinsurance premiums under the contract. All the related intercompany transactions with respect to these agreements are eliminated in consolidation. EffectiveJune 1, 2012 throughMay 31, 2013 , under excess catastrophe contracts, UPCIC obtained catastrophe coverage of$541.2 million in excess of$150 million covering certain loss occurrences including hurricanes. The coverage of$541.2 million in excess of$150 million has a second full limit available to UPCIC; additional premium is calculated pro rata as to amount and 100% as to time, as applicable. EffectiveJune 1, 2012 throughMay 31, 2013 , UPCIC purchased reinstatement premium protection which reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first$371.2 million (part of$541.2 million ) in excess of$150 million . EffectiveJune 1, 2012 throughMay 31, 2013 , UPCIC also obtained subsequent catastrophe event excess of loss reinsurance to cover certain levels of UPCIC's net retention through three catastrophe events including hurricanes. Specifically, UPCIC obtained catastrophe coverage for a second event of 45% of$75 million excess of$75 million in excess of$75 million otherwise recoverable and 55% of$100 million excess of$50 million in excess of$100 million otherwise recoverable. UPCIC also obtained catastrophe coverage for a third event of$120 million excess of$30 million in excess of$240 million otherwise recoverable. EffectiveJune 1, 2012 throughJune 1, 2013 , under an excess catastrophe contract specifically covering risks located inGeorgia ,North Carolina andSouth Carolina , UPCIC obtained catastrophe coverage of 55% of$20 million in excess of$30 million and 55% of$25 million in excess of$50 million covering certain loss occurrences including hurricanes. Both layers of coverage have a second full limit available to UPCIC; additional premium is calculated pro rata as to amount and 100% as to time, as applicable. The cost of UPCIC's excess catastrophe contracts specifically covering risks inGeorgia ,North Carolina andSouth Carolina is$2.296 million .
UPCIC also obtained coverage from the
The total cost of UPCIC's multiple line excess and property per risk reinsurance program, effectiveJune 1, 2012 throughMay 31, 2013 , is$4.35 million , of which UPCIC's cost is$2.618 million , and the quota share reinsurer's cost is the remaining$1.733 million . The total cost of UPCIC's underlying excess catastrophe contract is$72.981 million . The total cost of UPCIC's private catastrophe reinsurance program, effectiveJune 1, 2012 throughMay 31, 2013 , is$135.978 million , of which UPCIC's cost is 55%, or$74.788 million , and the quota share reinsurer's cost is the remaining 45%. In addition, UPCIC purchases reinstatement premium protection as described above, the cost of which is$24.042 million . The total cost of the subsequent catastrophe event excess of loss reinsurance is$26.306 million , of which UPCIC's cost is$16.418 million , and the quota share reinsurer's cost is the remaining$9.889 million . The estimated premium that UPCIC plans to cede to the FHCF for the 2012 hurricane season is$76.706 million of which UPCIC's cost is 55%, or$40.636 , and the quota share reinsurer's cost is the remaining 45%. The largest private participants in UPCIC's reinsurance program include leading reinsurance companies such as Odyssey Re, Everest Re, Renaissance Re and Lloyd's ofLondon syndicates. With the implementation of our 2012-2013 reinsurance program atJune 1, 2012 , we retain a maximum pre-tax net liability of$127.47 million for the first catastrophic event up to$1.683 billion of losses relating to the UPCIC Florida program, and a maximum pre-tax net liability of$18.796 million for the first catastrophic event up to$75 million of losses relating to the UPCIC other states' program. Separately from the Insurance Entities' reinsurance programs, UIH protected its own interests against diminution in value due to catastrophe events by purchasing$80 million in coverage via a catastrophe risk-linked transaction contract, effectiveJune 1, 2012 throughDecember 31, 2012 . The contract provides for recovery by UIH in the event of the exhaustion of UPCIC's catastrophe coverage. The total cost to UIH of the risk-linked transaction contract is$10.960 million . 29
--------------------------------------------------------------------------------
Table of Contents
APPCIC REINSURANCE PROGRAM
EffectiveJune 1, 2012 throughMay 31, 2013 , under an excess catastrophe contract, APPCIC obtained catastrophe coverage of$5 million in excess of$1 million covering certain loss occurrences including hurricanes. The coverage of$5 million in excess of$1 million has a second full limit available to APPCIC; additional premium is calculated pro rata as to amount and 100% as to time, as applicable. The total cost of APPCIC's private catastrophe reinsurance program effectiveJune 1, 2012 throughMay 31, 2013 is$1.063 million .
APPCIC also obtained coverage from the FHCF. The approximate coverage is estimated to be for 90% of
EffectiveOctober 1, 2011 throughMay 31, 2012 , APPCIC had entered into a multiple line excess per risk contract with various reinsurers. EffectiveJune 1, 2012 , APPCIC elected to extend the multiple line excess per risk contract throughJune 30, 2012 . Under this multiple line excess per risk contract, APPCIC had coverage of$8.4 million in excess of$600 thousand ultimate net loss for each risk and each property loss, and$1 million in excess of$300 thousand for each casualty loss. A$21 million aggregate limit applied to the term of the contract. EffectiveJuly 1, 2012 throughMay 31, 2013 , APPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, UPCIC obtained three layers of coverage. The first layer provides coverage of$700 thousand in excess of$300 thousand</money> ultimate net loss for each risk and each property loss, and $1 million in excess of$300 thousand for each casualty loss. The first layer has a limitation for any one property loss occurrence not to exceed$1.4 million and a$3.5 million aggregate limit that applies to the term of the contract. The first layer also has a limitation for any one liability loss occurrence not to exceed$1 million and a$2 million aggregate limit that applies to the term of the contract. The second layer provides coverage of$2 million in excess of$1 million ultimate net loss for each risk and each property loss. The second layer has a limitation for any one property loss occurrence not to exceed$2 million and a$6 million aggregate limit that applies to the term of the contract. The third layer provides coverage of$6 million in excess of$3 million ultimate net loss for each risk and each property loss. The third layer has a limitation for any one property loss occurrence not to exceed$6 million and a$12 million aggregate limit that applies to the term of the contract.
The total cost of the APPCIC multiple line excess reinsurance program effective
The largest private participants in APPCIC's reinsurance program include leading reinsurance companies such as Odyssey Re, Hannover Ruck, Amlin Bermuda and Lloyd's of
With the implementation of our 2012-2013 reinsurance program at
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 theFlorida Legislature and implemented by the OIR. The level of wind mitigation discounts mandated by theFlorida Legislature to be effectiveJune 1, 2007 for new business andAugust 1, 2007 for renewal business have had a significant negative effect on our premium. 30
--------------------------------------------------------------------------------
Table of Contents
The following table reflects the effect of wind mitigation credits received by our policy holders (in thousands):
Reduction of in-force
premium (only policies including wind coverage)
Percentage of Insurance Entities policyholders 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 % The Insurance Entities fully experience the impact 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. 31
--------------------------------------------------------------------------------
Table of Contents
Results of Operations - Three Months Ended
The following table summarizes changes in each component of our Statement of Income for the three months endedJune 30, 2012 , compared to the same period in 2011 (in thousands): Three Months Ended June 30, Change 2012 2011 $ % PREMIUMS EARNED AND OTHER REVENUES Direct premiums written $ 222,568 $ 213,479 $ 9,089 4.3 % Ceded premiums written (102,433 ) (145,798
) 43,365 -29.7 %
Net premiums written 120,135 67,681 52,454 77.5 % Change in net unearned premium (64,441 ) (18,157
) (46,284 ) 254.9 %
Premiums earned, net 55,694 49,524 6,170 12.5 % Net investment income (expense) (16 ) (21 ) 5 -23.8 % Net realized gains (losses) on investments (1,705 ) 2,960 (4,665 ) NM Net unrealized gains (losses) on investments (5,788 ) (9,640 ) 3,852 -40.0 % Commission revenue 6,131 4,941 1,190 24.1 % Policy fees 4,072 4,402 (330 ) -7.5 % Other revenue 1,540 1,506 34 2.3 % Total premiums earned and other revenues 59,928 53,672
6,256 11.7 %
OPERATING COSTS AND EXPENSES Losses and loss adjustment expenses 29,437 25,852 3,585 13.9 % General and administrative expenses 17,499 14,699
2,800 19.0 %
Total operating costs and expenses 46,936 40,551
6,385 15.7 %
INCOME BEFORE INCOME TAXES 12,992 13,121 (129 ) -1.0 % Income taxes, current 9,086 9,622 (536 ) -5.6 % Income taxes, deferred (3,871 ) (4,050 ) 179 -4.4 % Income taxes, net 5,215 5,572 (357 ) -6.4 % NET INCOME $ 7,777 $ 7,549 $ 228 3.0 % NM - Not meaningful. Net income remained relatively flat increasing by$228 thousand , or 3%. Increases in earned premium and commission revenue were largely offset by weaker performance in the investment trading portfolio and increases in operating costs and expenses. The increase in net earned premiums of$6.2 million , or 12.5%, reflects an increase in direct earned premium of$16.5 million partially offset by an increase in ceded earned premium of$10.3 million . The increase in direct earned premium is due primarily to rate increases over the past 24 months, the most recent of which were in January and February of 2012. These rate increases, along with strategic initiatives we have undertaken to manage our exposure such as the decision not to renew certain policies, 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 ofFlorida . The increase in ceded earned premium of$10.3 million is also attributable to rate increases over the past 24 months and also includes$1.8 million in the 2012 period relating to an underlying property catastrophe excess of loss reinsurance contract with an unaffiliated third-party reinsurer that did not exist during the 2011 period. 32
--------------------------------------------------------------------------------
Table of Contents
Net realized losses on investments of$1.7 million recorded during the three months endedJune 30, 2012 reflect loss in value of investments sold during the period. The majority of net realized losses recorded during the three months endedJune 30, 2012 were in the metals and mining sector. We hold debt and equity securities, derivatives and other investments in our trading portfolio. All unrealized gains and losses on investments in our trading portfolio are reflected in earnings. Unrealized gains and losses reflect the change in value during the period for investments held in our trading portfolio, including the reversal of unrealized gains and losses recorded when investments are sold. We recorded$5.8 million of net unrealized losses during the three months endedJune 30, 2012 . The majority of the unrealized losses in the trading portfolio as ofJune 30, 2012 are in the metals and mining sector. Equity securities in the metals and mining sector represent approximately 54% of the fair value of investments held in the trading portfolio as ofJune 30, 2012 . Commission revenue is comprised principally of brokerage commission we earn from reinsurers based upon premiums earned by the reinsurers at agreed upon brokerage rates. The increase in commission revenue of$1.2 million reflects an increase in ceded earned premium and a change in terms for the reinsurance contract periods that were in effect during the three months endedJune 30, 2012 as compared to the same period in 2011. Policy fees are comprised primarily of the managing general agent's policy fee income from insurance policies. The decrease of$330 thousand reflects a reduction in the number of policies written and renewed primarily due to the rate increases that have taken effect, which has caused some attrition.
The increase in net losses and loss adjustment expenses of
The net loss and LAE ratios, or net losses and loss adjustment expenses as a percentage of net earned premiums, were 52.9% and 52.2% during the three-month periods endedJune 30, 2012 and 2011, respectively, and were comprised of the following components (in thousands): Three months ended June 30, 2012 Direct Ceded Net Loss and loss adjustment expenses $ 56,533 27,096 $ 29,437 Premiums earned $ 186,656 130,962 $ 55,694 Loss & LAE ratios 30.3 % 20.7 % 52.9 % Three months ended June 30, 2011 Direct Ceded Net Loss and loss adjustment expenses $ 53,360 $ 27,508 $ 25,852 Premiums earned $ 170,134 $ 120,610 $ 49,524 Loss & LAE ratios 31.4 % 22.8 % 52.2 % The increase in net loss and LAE ratio reflects an increase in net losses and loss adjustment expenses proportionately larger than the increase in premiums earned. The increase in general and administrative expenses of$2.8 million was due primarily to factors related to net deferred policy acquisition costs. The reduction in the amount of ceding commissions received from quota share reinsurers under the 2012-2013 Reinsurance Program effectively increased the amount of net deferred policy acquisition costs and related amortization. In addition, the company is charging certain costs directly to earnings that were previously capitalized under the superseded FASB guidance which governed how we accounted for deferred policy acquisition costs untilJanuary 1, 2012 . 33
--------------------------------------------------------------------------------
Table of Contents
Income taxes decreased by$357 thousand , or 6.4% primarily as a result of a decrease in pre-tax income. The effective tax rate decreased to 40.1% for the three months endedJune 30, 2012 from 42.5 % for the same period in the prior year primarily as a result of estimated penalties and interest recorded in the second quarter of 2011 from the underpayment of federal and state income taxes. We limited our payments of estimated income taxes during 2011 due to the uncertainty of potential losses during the current hurricane season and the effect of those potential losses on pre-tax earnings and our ultimate income tax liability for the year.
Results of Operations - Six Months Ended
The following table summarizes changes in each component of our Statement of Income for the six months endedJune 30, 2012 compared to the same period in 2011 (in thousands): Six Months Ended June 30, Change 2012 2011 $ % PREMIUMS EARNED AND OTHER REVENUES Direct premiums written $ 412,571 $ 386,654 $ 25,917 6.7 % Ceded premiums written (265,867 ) (269,689 ) 3,822 -1.4 % Net premiums written 146,704 116,965 29,739 25.4 % Change in net unearned premium (42,370 ) (19,437
) (22,933 ) 118.0 %
Premiums earned, net 104,334 97,528 6,806 7.0 % Net investment income (expense) (52 ) 236 (288 ) NM Net realized gains (losses) on investments (9,154 ) 6,612 (15,766 ) NM Net unrealized gains (losses) on investments 3,399 (7,052 ) 10,451 NM Net foreign currency gains (losses) on investments 23 71 (48 ) -67.6 % Commission revenue 10,672 9,121 1,551 17.0 % Policy fees 7,973 8,575 (602 ) -7.0 % Other revenue 2,980 2,914 66 2.3 % Total premiums earned and other revenues 120,175 118,005 2,170 1.8 % OPERATING COSTS AND EXPENSES Losses and loss adjustment expenses 55,611 52,037 3,574 6.9 % General and administrative expenses 35,343 29,771
5,572 18.7 %
Total operating costs and expenses 90,954 81,808
9,146 11.2 %
INCOME BEFORE INCOME TAXES 29,221 36,197 (6,976 ) -19.3 % Income taxes, current 9,860 18,359 (8,499 ) -46.3 % Income taxes, deferred 1,711 (3,609 ) 5,320 NM Income taxes, net 11,571 14,750 (3,179 ) -21.6 % NET INCOME $ 17,650 $ 21,447 $ (3,797 ) -17.7 %
NM - Not meaningful.
Net income decreased by$3.8 million , or 17.7%, primarily as a result of weaker performance in the investment trading portfolio and increases in operating costs and expenses, partially offset by increases in earned premium and commission revenue. 34
--------------------------------------------------------------------------------
Table of Contents
The increase in net earned premiums of$6.8 million , or 7.0%, reflects an increase in direct earned premium of$30.7 million partially offset by an increase in ceded earned premium of$23.9 million . The increase in direct earned premium is due primarily to rate increases over the past 24 months, the most recent of which were in January and February of 2012. These rate increases, along with strategic initiatives we have undertaken to manage our exposure such as the decision not to renew certain policies, 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 ofFlorida . The increase in ceded earned premium of$23.9 million is also attributable to rate increases over the past 24 months and also includes$4.4 million in the 2012 period relating to an underlying property catastrophe excess of loss reinsurance contract with an unaffiliated third-party reinsurer that did not exist during the 2011 period. Net investment expenses for the six months endedJune 30, 2012 , compared to net investment income for the same period in the prior year, reflects a reduction in the amount of interest earning securities held in the investment portfolio and non-recurring charges for investment accounting services as we convert to a new investment accounting service provider. Net realized losses on investments of$9.2 million recorded during the six months endedJune 30, 2012 reflect loss in value of investments sold during the period. The majority of realized losses recorded during the six months endedJune 30, 2012 were in the metals and mining sector. We hold debt and equity securities, derivatives and other investments in our trading portfolio. All unrealized gains and losses on investments in our trading portfolio are reflected in earnings. Unrealized gains and losses reflect the change in value during the period for investments held in our trading portfolio, including the reversal of unrealized gains and losses recorded when investments are sold. We recorded$3.4 million of net unrealized gains during the six months endedJune 30, 2012 . The majority of the unrealized losses in the trading portfolio as ofJune 30, 2012 are in the metals and mining sector. Equity securities in the metals and mining sector represent approximately 54% of the fair value of investments held in the trading portfolio as ofJune 30, 2012 . Commission revenue is comprised principally of brokerage commission we earn from reinsurers. The increase in commission revenue of$1.6 million is due to an increase in ceded earned premium for the reinsurance contract periods that were in effect during the six months endedJune 30, 2012 as compared to the same period in 2011. Policy fees are comprised primarily of the managing general agent's policy fee income from insurance policies. The decrease of$602 thousand reflects a reduction in the number of policies written and renewed primarily due to the rate increases that have taken effect, which has caused some attrition.
The increase in net losses and loss adjustment expenses of
35
--------------------------------------------------------------------------------
Table of Contents
The net loss and LAE ratios, or net losses and loss adjustment expenses as a percentage of net earned premiums, were 53.3% and 53.4% during the six-month periods endedJune 30, 2012 and 2011, respectively, and were comprised of the following components (in thousands): Six months ended June 30, 2012 Direct Ceded Net Loss and loss adjustment expenses $ 109,140 $ 53,529 $ 55,611 Premiums earned $ 365,460 $ 261,126 $ 104,334 Loss & LAE ratios 29.9 % 20.5 % 53.3 % Six months ended June 30, 2011 Direct Ceded Net Loss and loss adjustment expenses $ 106,491 $ 54,454 $ 52,037 Premiums earned $ 334,721 $ 237,193 $ 97,528 Loss & LAE ratios 31.8 % 23.0 % 53.4 %
The net loss and LAE ratio remained relatively flat reflecting a proportionate increase in both net earned premiums and net losses and loss adjustment expenses.
The increase in general and administrative expenses of$5.6 million was due primarily to factors related to net deferred policy acquisition costs. The reduction in the amount of ceding commissions received from quota share reinsurers under the 2012-2013 Reinsurance Program effectively increased the amount of net deferred policy acquisition costs and related amortization. In addition, the company is charging certain costs directly to earnings that were previously capitalized under the superseded FASB guidance which governed how we accounted for deferred policy acquisition costs untilJanuary 1, 2012 . Income taxes decreased by$3.2 million , or 21.6% primarily as a result of a decrease in pre-tax income. The effective tax rate decreased to 39.6% for the six months endedJune 30, 2012 from 40.7% for the same period in the prior year primarily as a result of estimated penalties and interest recorded in the second quarter of 2011 from the underpayment of federal and state income taxes. We limited our payments of estimated income taxes during 2011 due to the uncertainty of potential losses during the current hurricane season and the effect of those potential losses on pre-tax earnings and our ultimate income tax liability for the year.
Analysis of Financial Condition - As of
We believe that premiums will be sufficient to meet our working capital requirements for at least the next twelve months.
Our policy is to invest amounts considered to be in excess of current working capital requirements. We have a receivable of$594 thousand atJune 30, 2012 for securities sold that had not yet settled compared to$9.7 million atDecember 31, 2011 , and a payable for securities purchased that had not yet settled of$1.2 million as ofJune 30, 2012 compared to$1.1 million atDecember 31, 2011 . 36
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes, by type, the carrying values of investments (in thousands): Type of Investment As of June 30, 2012 As of December 31, 2011 Cash and cash equivalents $ 356,325 $ 229,685 Restricted cash and cash equivalents 74,274 78,312 Debt securities 3,913 3,801 Equity securities 81,713 95,345 Non-hedging derivative asset 31 123 Non-hedging derivative (liability) (174 ) - Other investments 344 371 Total Investments $ 516,426 $ 407,637 Reinsurance recoverables represent amounts due from reinsurers for ceded loss and LAE. The increase in reinsurance recoverables of$29.8 million to$115.5 million reflects unsettled recoverables subsequent to the change in third party quota-share reinsurers as described in the 2012-2013 Reinsurance Program discussion. Reinsurance receivable, net, represents inuring premiums receivable, net of ceded premiums payable with our quota share reinsurer. The increase of$70.5 million to$125.7 million during the six months endedJune 30, 2012 was due to the absence of reinsurance payables available for offset given the change in third party quota-share reinsurers. Premiums receivable represent amounts due from policyholders. The increase of$10.5 million to$56.4 million during the six months endedJune 30, 2012 was due to growth in, and timing of, direct written premiums. The increase in Property and Equipment of$1.8 million to$8.9 million reflects the cost of constructing a new office building which was placed into service at the end ofMarch 2012 .
See Note 5, Insurance Operations, in our Notes to Condensed Consolidated Financial Statements for a roll-forward in the balance of our deferred policy acquisition costs.
See Note 9, Income Taxes, in our Notes to Condensed Consolidated Financial Statements for a schedule of deferred income taxes as of
See Note 5, Insurance Operations, in our Notes to Condensed Consolidated Financial Statements, for a roll-forward in the balance of our unpaid losses and LAE.
Unearned premiums represent the portion of written premiums that will be earned pro rata in the future. The increase of$47.1 million to$407 million during the six months endedJune 30, 2012 was due to growth in, and timing of, direct written premiums. Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of$6.2 million to$25.6 million reflects a trend for an increase in the volume of policies with advance payments in June, relative to December.
Reinsurance payable, net, represents our liability to reinsurers for ceded written premiums, net of ceding commissions receivable. The increase of
37
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of a company's ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have generally been sufficient to meet our liquidity requirements and we expect that in the future funds from operations will continue to meet such requirements. The balance of cash and cash equivalents as ofJune 30, 2012 was$356.3 million compared to$229.7 million atDecember 31, 2011 . See our Condensed Consolidated Statements of Cash Flows for a reconciliation of the balance of cash and cash equivalents betweenJune 30, 2012 andDecember 31, 2011 . Most of this amount is available to pay claims in the event of a catastrophic event pending reimbursement amounts recoverable under reinsurance agreements. The source of liquidity for possible claim payments consists of the collection of net premiums, after deductions for expenses, reinsurance recoverables and short-term loans. The balance of restricted cash and cash equivalents as ofJune 30, 2012 was$74.3 million . Restricted cash as ofJune 30, 2012 is mostly comprised of cash equivalents on deposit with regulatory agencies in the various states in which our Insurance Entities do business. The Company's liquidity requirements primarily include potential payments of catastrophe losses, the payment of dividends to shareholders, and interest and principal payments on debt obligations. The declaration and payment of future dividends to shareholders will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints. Our insurance operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies sold. Historically, cash receipts from operations, consisting of insurance premiums, commissions, policy fees and investment income, have provided more than sufficient funds to pay loss claims and operating expenses. We maintain substantial investments in highly liquid, marketable securities. Liquidity can also be generated by funds received upon the sale of marketable securities in our investment portfolio. The Insurance Entities are responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by the Insurance Entities' reinsurance programs and for losses that otherwise are not covered by the reinsurance programs, which could have a material adverse effect on either the Insurance Entities' or our business, financial condition, results of operations and liquidity (see 2012-2013 Reinsurance Program above for a discussion of the 2012-2013 reinsurance program).
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. AtJune 30, 2012 , we had total capital of$182.7 million , comprised of stockholders' equity of$161.7 million and total debt of$21 million . Our debt-to-total-capital ratio and debt-to-equity ratio were 11.5% and 13%, respectively, atJune 30, 2012 . AtDecember 31, 2011 , we had total capital of$171.7 million , comprised of stockholders' equity of$150 million and total debt of$21.7 million . Our debt-to-total-capital ratio and debt-to-equity ratio were 12.6% and 14.5%, respectively, atDecember 31, 2011 .
At
Cash Dividends
On
OnApril 23, 2012 , we declared a dividend of$0.08 per share on our outstanding common stock paid onJuly 9, 2012 , to the shareholders of record at the close of business onJune 26, 2012 . We expect to declare additional quarterly dividends in the same amount to shareholders of record in the third and fourth quarters of 2012. Declaration and payment of future dividends is subject to the discretion of UIH's board of directors and will be dependent on future earnings, cash flows, financial requirements and other factors. 38
--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of business, to the contractual obligations specified in the table of contractual obligations included in Part 1, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2011 .
Critical Accounting Policies and Estimates
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2011 .
Accounting Pronouncements Issued and Not Yet Adopted
InDecember 2011 , theFinancial Accounting Standards Board updated its guidance to the Balance Sheet Topic 210 of the FASB Accounting Standards Codification. The objective of this updated guidance requires entities that have financial and derivative instruments that are offset to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity's financial position. This guidance is to be applied for annual reporting periods beginning on or afterJanuary 1, 2013 , and interim periods within those annual periods. Disclosure is required retrospectively for all comparative periods presented. The additional disclosures required by the updated guidance will not have an impact on our operating results, cash flows or financial position.
Related Parties
See Note 8, Related Party Transactions, in our Notes to Condensed Consolidated Financial Statements for information about related parties.
Wordcount: | 8563 |
PRIMERICA, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News