Universal Insurance Holdings, Inc. Sets the Record Straight

The company was a penny stock in many different failed businesses before becoming a Florida property insurer

The company was reorganized in 1997 to focus on an opportunity to write personal residential (homeowners) insurance in the Florida market.  The company hired experienced insurance personnel and retained well-known, reputable vendors in the development of its insurance business.  Over the following 17 years, UVE has continually grown and enhanced its in-house capacity to service its insurance business.  The combined group now has nearly 400 employees and 70,000 square feet of operational offices.

The stock has risen 216x in the past decade, by far the best performing stock with $1+ billion market cap or more

Although the price of a stock can be influenced by many factors, the predominant reasons for the growth in UVE's stock over the last decade have been the growth in surplus in its insurance subsidiaries and the earnings from its insurance operations.  UVE's results have been achieved due to the hard work of nearly 400 employees who are committed to sound underwriting, prompt claims handling, and effective customer service.  The statutory surplus in UVE's primary insurance subsidiary, Universal Property & Casualty Insurance Company, has grown from $5 million as of 12/31/04 to $233 million as of 9/30/15. 

Florida is a very dangerous place to write property insurance because of the high value of properties combined with the hurricane risk – it has 27% of U.S. insured coastal property value and is the site of 7 of the 10 largest U.S. hurricanes

It is well-known in the residential property insurance industry that Florida makes up a significant portion of the United States' hurricane exposure.  This is why a company like UVE, which is dedicated to understanding coastal risks and writing personal residential insurance, is able to compete effectively in Florida and other markets.  UVE understands the Florida market.  UVE has in-house and contracted third party expertise in designing and purchasing reinsurance programs to protect against the risk of hurricanes.  Throughout its history, UVE's insurance subsidiaries have purchased more reinsurance than required under regulatory and rating agency guidelines, both in terms of the magnitude of a single large event that would be covered and the possibility of multiple events in a single season.

Three huge hurricanes hit Florida in 2004-05 – in the wake of those, national insurers exited the Florida market because risks were too great – in their place, state run insurer filled the void

This statement is partially correct, but also contains mistruths.  First, it was Hurricane Andrew in 1992, and not the storms of 2004-05, that primarily caused national multiline carriers to reassess the allocation of their capital between the Florida residential market and other insurance markets.  Second, after 2004-05 and continuing today, several large, prominent national insurance groups write significant residential insurance business in Florida.  It is patently incorrect to suggest that national insurers "exited" the Florida market when they have been, and remain, a significant part of the Florida property insurance market.  Finally, it is critical to point out that the short sellers are referring to events that took place a decade ago as if the 2004-05 hurricanes are somehow news today.  The fact is, UVE actually experienced the 2004-05 hurricanes and was there for its policyholders.  By having a strong reinsurance program and a dedicated claims team, UVE paid its insureds over $171M (11,819 claims) in 2004 and another $81M (12,055 claims) in 2005.

In 2011, Citizens customers were handed over to a bunch of small, thinly capitalized Florida insurers – the Florida market became the wild west

We are uncertain what any statement relating to recent assumptions from Citizens Property Insurance Corporation in 2011 has to do with UVE or its subsidiary insurers.  The UVE insurers did not assume any policies from Citizens in 2011, nor have they assumed any policies from Citizens since then.  In fact, other than one small transaction 17 years ago in 1998, the UVE companies have not taken any policies from any state-sponsored insurer.  The UVE companies produce their business organically, one policy at a time, with the assistance of local independent insurance agents servicing policyholders in the communities where they live and work.

Universal and its peers have gotten lucky, as there hasn't been a major hurricane in Florida in the past 10 years, which has resulted in low losses and low reinsurance pricing, which has led to explosive growth in Universal's reported earnings

All insurers operating in Florida, and especially those of us who live and work here, are pleased to have been "lucky" enough over the last ten years to have not seen significant storm activity.  However, it is important to keep important facts in mind.  First, any residential property insurer should expect to make more money in hurricane-free years than in years with hurricanes— this is obvious.  The key is that an insurer hopefully is adding to its surplus during the storm-free years so it is better positioned to handle future storms whenever they inevitably do occur.  This has been exactly the case with UVE.  Our primary insurance subsidiary ended 2005 with $5 million in surplus.  In its most recently filed financial statements (9/30/15), it reported more than $233 million in surplus.  The recent run of storm-free years therefore is benefitting our policyholders.

In addition, UVE experienced the hurricanes of 2004 and 2005.  We fully met our obligations to policyholders and were in a strong enough position to continue developing our business in the years that followed.  With that experience still in our memories, UVE prepares each year as if this will be the year that one or more hurricanes strike Florida.  Our reinsurance program exceeds regulatory and rating agency requirements for single and multiple events.  Our reinsurance program is "stress tested" by state insurance regulators and our rating agency.  We review and test our catastrophe response plan each year.  There might have been luck involved with Florida's weather over the last ten years, but our catastrophe preparedness relies on experience and planning.

Universal has grown its book of business rapidly, especially in the most hurricane prone areas of Palm, Broward and Dade counties, where Universal has 10.9% share

It is false and misleading to suggest that has been growing its business rapidly in Miami-Dade, Broward and Palm Beach Counties.  For example, a simple review shows that in 2010 about 31% of our Florida business was located in these counties.  This percentage remains about the same in 2015.  During this period, however, we have expanded into other states, and our writings in the other states have gradually reduced the percentage of our overall business that is located in Florida from more than 98% five years ago to approximately 85% today.

As with any residential insurer operating in Florida, continually monitoring our business and managing our exposures is an important discipline for UVE.  We license both of the most widely recognized hurricane catastrophe models (RMS and AIR) to assist it in analyzing our exposure to hurricane events both stochastically and deterministically.  We use this information to assist in negotiating and purchasing reinsurance covering not only our Florida policies but also our policies in the other states where we operate.

We estimate a Category 4 storm would blow the company up

This statement is patently false, irresponsible and defamatory.  UVE's reinsurance program exceeds regulatory requirements for both a single large event and for multiple events occurring in the same hurricane season.  Based on UVE's September 30, 2015 portfolio, no single hurricane event in recorded history is projected to cause losses exceeding the limits of our 2015 reinsurance program, regardless of the storm category.  Modeling performed using the RMS model, which has been declared accurate and reliable by the statutorily-created Florida Commission on Hurricane Loss Projection Methodology, shows that UVE's reinsurance program is sufficient to cover an event such as Category 5 Hurricane Andrew, Category 4 Great Fort Lauderdale Hurricane, or Category 3 Hurricane Wilma, among others.  In fact, given its current financial position and reinsurance program, UVE would remain profitable even if Florida were to face three storms in one season on the scale of Hurricane Andrew, which was one of the most destructive hurricanes in U.S. history.  Any suggestion to the contrary is incorrect and clearly must be intended to mislead.

Universal's stock (at 4x book before its recent decline; 2.9x book now) is overvalued relative to national insurers (1.1x book on average) and the other local insurers (2x book)

The value of UVE's stock relative to other investment opportunities is a subjective determination that each investor can, and should, make for himself or herself.  Without regard to how any particular investor perceives the value of UVE's stock, UVE and its employees have worked hard to build a strong insurance organization that has delivered favorable results not only for shareholders but also for policyholders.  UVE's primary insurance subsidiary has significantly increased its surplus through retained earnings.  At the same time, UVE has produced record results and has paid a consistent but growing dividend.  UVE also has repurchased a substantial number of shares, increasing earnings per share and reflecting management's view of the company's favorable position.

In 2013, Florida regulators found the Company was not honoring many of its underwritten claims, which culminated in fines

It is a gross overstatement and distortion of the facts to suggest that the company was not honoring many of its claims.  The regulatory review relating to this issue covered a 15-month period that began in 2011.  The regulator questioned the decisions UVE reached in 262 claims out of more than 25,000 claims handled by the company during the review period.

As was publicly reported in 2013, the company did not agree with some of the regulators' interpretations and the company provided its explanations to the regulators.  Ultimately, however, the company decided to settle the issue to avoid protracted proceedings.  The Company had, by time of the settlement, made operational changes to address the cited concerns.  Since then, the company has gone further to expand its in-house claims process functions. This has delivered demonstrable results, including increases in the efficiency and speed of the Company's claims handling and the processing of claims payments, which now represents a key competitive advantage.

Former CEO resigned due to Florida regulators review and fine

This is not correct.  UVE's founder and former Chief Executive Officer resigned on amicable terms to pursue other business and personal interest.  Mr. Meier had been with the organization since its inception.  Over its 18 years in the insurance business, UVE, like many other companies, has had changes at the senior executive level.

Universal runs a shoddy operation, denying claims at every opportunity and engaging in "reunderwriting", as demonstrated by a complaint rate 55% higher than its peers

These statements are false and reflect great distortions of facts.  It is irresponsible, and flat wrong, to suggest that UVE denies claims at every opportunity when it typically handles more than 20,000 insurance claims in a given year, paying tens of millions of dollars to policyholders.  This statement appears to be nothing more than a highly exaggerated, intentionally inflammatory reference to UVE's settlement of an issue raised in a regulatory examination several years ago affecting fewer than one percent of all claims.

By denying so many claims, Universal has much lower loss ratios (and hence higher profits) than its peers

This is nonsensical and shows a fundamental lack of understanding of the insurance business.  Simply put, an insurer's claims process seeks to pay meritorious claims as promptly and cost-effectively as possible while attempting to detect and review claims that are inflated, suspicious or fraudulent.  It is bad business, and actually detrimental to profits, to deny claims absent an established reason to do so.  An insurer's costs of administering a claim go up dramatically when an insured challenges a denial, especially if the claim ultimately is determined to have been covered.  It makes no sense to suggest that any insurer improves its loss ratios or increases profitability by denying any claims other than those that should be denied on the merits.

Universal lied to its regulators, claiming it was losing money or making much less than it was, in order to get big rate increases approved, but these days appear to be over as pricing has leveled off and peers warn of rate pressure

This statement is false, constitutes actionable defamation, and shows how little its source knows about the insurance business.  Any insurer's rate filings, including UVE's, are predicated on detailed financial data relating to several years of operations and experience.  A regulator reviewing a rate filing has the benefit of not only the data in the current filing, but also the data set forth in prior filings, competitor's data, and the regulators' own analyses.  The regulator performs its own calculations regarding the insurer's indicated rate needs, and the regulator will not approve an insurer's proposed rate changes if they are not reasonably aligned with the regulator's own analysis.

To further illustrate the ignorance underlying this statement, the source apparently does not understand several other aspects of rate analysis and ratemaking.  First, both the regulator and the insurer can benchmark an insurer's rates against those of competitors.  UVE's rates being within the range of competitors' rates undermines the source's suggestion.  In addition, the source fails to understand that throughout its history, UVE has filed proposed rates that have been less than its full actuarially indicated rates.  An insurer often will take competitive considerations into account, such as moderating the rate impact to consumers to avoid adverse impacts on customer retention.  It makes no sense to suggest that UVE somehow was trying to inflate its rate requests when UVE was making requests that were less than its indications.

Despite insuring 10% of Florida, the Company has a tiny litigation claims staff

UVE has over 160 full-time employees in its claims company, including 30 focused on litigation.

Former CEO traded gold ETF 278x in company account

The Florida Insurance Code contains specific, conservative requirements for an insurer's investments.  UVE's investment policies adhere to these guidelines.  In addition, anyone citing this issue as a basis for short selling UVE's stock is misleading the public.  In early 2013 when Mr. Downes became the company's CEO, UVE engaged Deutsche Bank to manage the company's investment portfolio.  UVE chose Deutsche Bank because it is one of the leading firms in the world managing insurer investment portfolios.

Universal is not rated by AM Best; it receives a D- from Weiss; it receives an A only from Demotech, a joke of a firm

This disparaging comment lacks merit.  According to the Fannie Mae Selling Guide, the ratings of only three firms may be considered in determining whether a property insurer's policy meets the requirements of the secondary mortgage market—  A.M. Best & Co., Standard & Poors, and Demotech, Inc.  While the source of this comment appears to have negative subjective feelings about Demotech, he misleads the public when he takes a position that is so out of step with Fannie Mae and the secondary mortgage market, which is where the ratings are most prominently used.

Universal consistently incurs losses higher than it reserves for, which inflates earnings and book value every year

This is wrong.  An insurer is required to have its reserves reviewed by an independent opining actuary once each year.  UVE's management chooses to have an independent reserve review twice each year.  UVE's independent actuarial firm is Towers Watson, which is one of the largest and most respected actuarial firms in the world.  The actuaries have concluded that the Company's carried reserves make a reasonable provision for losses and within their range of estimates.  The actuaries recently completed their most recent review, which included company data through June 30, 2015.

They are on their third CFO in five years

This statement shows a lack of awareness of the underlying facts on the part of the person making it.  UVE's initial Chief Financial Officer served since inception and provided many years of service.  He left for personal reasons in 2010.  The company retained him to provide financial analysis under a contract that is still in effect today.  His successor served until 2013, when he resigned for personal reasons (for which he has not re-entered the workforce).  He provided consulting services to the company as his duties were transitioned to our current CFO, and UVE maintains a good relationship with both former CFOs. In addition, under the direction of our current CFO, UVE has added personnel to complement the finance department that was already in place.

Deloitte and Touche resigned as Universal's auditors in 2002

Deloitte and Touche did not resign.  They were terminated following a proposed substantial fee increase demanded in the wake of Enron and other financial and accounting scandals.  Universal's financial statements are audited annually and reviewed quarterly by Plante Moran, independent auditors originally selected thirteen years ago because of their expertise in the insurance industry. 

Universal is audited by Plante & Moran, a joke of a firm; the median market cap of public companies it audits is $33 million

The company selected Blackman Kallick as its auditors in 2002 due to that firm's recognized expertise in the insurance industry.  Blackman Kallick was subsequently acquired by Plante Moran.  The company's audit committee, independent of management, evaluates the services and capabilities of the audit firm each year.

Also, while this statement disparaging Plante Moran is made without any facts to support it, UVE points out that in addition to its audit by Plante Moran, both of its insurance entities are subject to periodic financial examinations conducted by the Florida Office of Insurance Regulation.  The most recent examination for each insurance subsidiary was completed earlier this year for the five-year period ended December 31, 2013.  The regulatory examination concurred with the result of Plante Moran's audit and found no adjustments to surplus.

Universal's CEO, Sean Downes, earned $14.1 million in 2014, making him the 3^rd highest paid CEO of all public companies based in Florida

This total amount was largely driven by the increased value of stock awards in Mr. Downes' initial employment contract he received when assuming the CEO responsibilities in February 2013.

CEO was paid over 200k in claims (5.6% of total claim) after Hurricane Wilma, while other customers weren't paid on time

UVE paid a total of $81M arising from 12,055 claims in the 2005 catastrophes.  This included $72M from 10,672 claims caused by Hurricane Wilma.  Mr. Downes, who was the Chief Operating Officer at the time, had a policy with the company and his home was damaged during the hurricane.  His claim represented 0.28% of the claims the company paid due to Hurricane Wilma.

Sean Downes has been arrested

Mr. Downes has reviewed each of the incidents with the independent Directors, responded to their questions, explained the circumstances, some of which go back to youthful indiscretions, and fully satisfied the independent directors regarding his ability to lead the Company.  None of the incidents, they noted, implicate or speak to Mr. Downes' integrity, honesty, leadership, or ability to manage and grow the Company.