Note 15.
per share of common stock payable August 9, 2024, to shareholders of record on August 2, 2024.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Company” refer to Universal Insurance Holdings, Inc. (“UVE”) and its wholly-owned subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements (“Financial Statements”) and the related notes thereto included in “Part I, Item 1—Financial Statements,” and our audited condensed consolidated financial statements and the related notes thereto included in “Part II, Item 8—Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, 2023. Operating results for any one quarter are not necessarily indicative of results to be expected for any quarter or for the year.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These forward-looking statements may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets,” and other words with similar meanings. These statements may address, among other things, our strategy for growth, catastrophe exposure and other risk management, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is set forth below, which are a summary of those in the section titled “Risk Factors” (Part I, Item 1A) of our Annual Report on Form 10-K for the year ended December 31, 2023. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
Risks and uncertainties that may affect, or have affected, our financial condition and operating results include, but are not limited to, the following:
•As a property and casualty insurer, we may face significant losses, and our financial results may vary from period to period, due to exposure to catastrophic events and severe weather conditions, the frequency and severity of which could be affected by climate change.
•Because we conduct the majority of our business in Florida, our financial results are affected by the regulatory, economic, and weather conditions in Florida.
•Actual claims incurred have exceeded, and in the future may exceed, reserves established for claims, adversely affecting our operating results and financial condition.
•If we fail to adequately price the risks we underwrite, or if emerging trends outpace our ability to adjust prices timely, or if we lose desirable exposures to competitors by overpricing our risks, we may experience underwriting losses depleting surplus at the Insurance Entities and capital at the holding company.
•Unanticipated increases in the severity or frequency of claims adversely affect our profitability 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.
•Pandemics, including COVID-19 and other outbreaks of disease, could impact our business, financial results, and growth.
•Because we rely on independent insurance agents, the loss of these independent agent relationships and the business they control or our ability to attract new independent agents could have an adverse impact on our business.
•We rely on models as a tool to evaluate risk, and those models are inherently uncertain and may not accurately predict existing or future losses.
•Reinsurance may be unavailable in the future at reasonable levels and prices or on reasonable terms, which may limit our ability to write new business or to adequately mitigate our exposure to loss.
•Reinsurance subjects us to the credit risk of our reinsurers, which could have a material adverse effect on our operating results and financial condition.
•Our financial condition and operating results are subject to the cyclical nature of the property and casualty insurance business.
•We have entered new markets and expect that we will continue to do so, but there can be no assurance that our diversification and growth strategy will be effective.
•Our success depends, in part, on our ability to attract and retain talented employees, and the loss of any one of our key personnel could adversely impact our operations.
•We could be adversely affected if our controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.
•The failure of our claims professionals to effectively manage claims could adversely affect our insurance business and financial results.
•Litigation or regulatory actions could result in material settlements, judgments, fines, or penalties and consequently have a material adverse impact on our financial condition and reputation.
•Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry.
•A downgrade in our financial strength or stability ratings may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.
•Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation.
•We may not be able to effectively implement or adapt to changes in technology, particularly with respect to artificial intelligence, which may result in interruptions to our business or even in a competitive disadvantage.
•Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we write or changes in laws and/or potential regulatory approaches relating to them could have a material adverse effect on our financial condition or our results of operations.
•We are subject to market risk, which may adversely affect investment income.
•Our overall financial performance depends in part on the returns on our investment portfolio.
•We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability.
•UVE is a holding company and, consequently, its cash flow is dependent on dividends and other permissible payments from its subsidiaries.
•Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability.
•The amount of statutory capital and surplus that each of the Insurance Entities has and the amount of statutory capital and surplus it must hold vary and are sensitive to a number of factors outside of our control, including market conditions and the regulatory environment and rules.
•To service our debt, we will require a significant amount of cash. Our ability to generate cash depends on many factors.
•Our indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations under the Notes.
OVERVIEW
We are a vertically integrated holding company offering property and casualty insurance and value-added insurance services. In addition, we generate revenue from our investment portfolio, reinsurance brokerage services, the receipt of managing general agency fees from policy holders and from other sources of revenue (collectively “Other Revenue Sources”). We develop, market and underwrite insurance products for consumers predominantly in the personal residential homeowners’ line of business and perform substantially all insurance-related services for our insurance entities, including risk management, claims management, and distribution. Our insurance entities, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC” and together with UPCIC, the “Insurance Entities”), offer insurance products through both an appointed independent agent network and our online distribution channels across 18 states with Florida representing 79.7% of our direct premiums written for the three months ended June 30, 2024, and with licenses to write insurance in two additional states. We seek to produce an underwriting profit (defined as earned premium-net minus losses, loss adjustment expense (“LAE”), policy acquisition costs and other operating costs) over the long term, along with growing our Other Revenue Sources.
The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations. This MD&A should be read in conjunction with our Financial Statements and accompanying Notes appearing elsewhere in this Report (the “Notes”). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and “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 ended December 31, 2023. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed above under “—Cautionary Note Regarding Forward-Looking Statements.”
Trends and Geographical Distribution
Florida Trends
We seek to achieve long-term rate adequacy and earnings for the Insurance Entities while managing our risks through market cycles and looking to take advantage of what we believe to be market opportunities. The Florida personal lines homeowners’ market in recent years has operated under distressed conditions wherein insurance companies’ major costs items, such as losses, LAE and reinsurance, have significantly increased and have led to insurance companies’ striving to recover or mitigate these costs through rate and underwriting action. As a result, personal residential insurance premiums have been escalating, insurers have been reducing coverages, and underwriting standards have tightened as most admitted market insurers have been closely monitoring insurance rates and managing coverage capacity. Due to these conditions and factors more generally affecting the U.S. and global reinsurance markets, reinsurance capacity in recent years has also been subject to increases in pricing and less favorable terms. These market forces have combined to decrease insurance availability among admitted insurers, and consequently increase the policy count of Citizens. Although Citizens was created to be the “market of last resort” or residual property insurance market in Florida, its rate increases are limited by law, resulting in its policies typically being priced lower than admitted market policies. This causes Citizens, for many policy types and areas of Florida, to become viewed as a desirable alternative to the admitted market.
After several prior efforts at legal reforms that had limited effect, in December 2022 the Florida Legislature enacted substantial law changes intended to mitigate rising claims costs and further premium increases while also enhancing service standards for the benefit of policyholders. These laws have required insurers, including the Insurance Entities, to implement faster claims-response standards, increased penalties for non-compliance, enhanced regulatory oversight of insurers’ financial conditions and holding company systems, and added other consumer protections. The reforms also sought to curtail certain claimants’ abusive claims practices against insurance carriers, which have contributed substantially to the Florida market’s recent problems of escalating claim costs and decreased availability. Among the reforms, the Florida Legislature eliminated policyholders’ former one-way statutory right to attorneys’ fees reimbursement and eliminated the ability of policyholders to assign their insurance benefits to third parties. The Florida Legislature also reduced the post-loss time period for submitting claims to one year as contrasted with prior laws permitting claims to be reported two years or even three years after loss events, which led to extended solicitations of claims by contractors, public adjusters, and attorneys and created challenges for insurers in evaluating the cause and amount of the late-reported claims.
The most significant statutory reforms took effect for policies issued after December 16, 2022. Claims under policies written before this date might benefit from procedural changes made by the legislature but in many cases remain subject to substantive laws previously in effect. Remaining pre-reform claims typically reflect disproportionately high incidences of represented and litigated claims. As a result, losses and LAE associated with these claims remain high, exceeding historical patterns in Florida and in other states. Although the Insurance Entities’ number of remaining claims subject to pre-reform laws continues to decline, it will be several years before all of these claims are settled or brought to an adjudicated conclusion. We are optimistic that the legislative reforms will gradually improve the Florida claims environment as the number of claims associated with the pre-reform era continues to decline and more of the Insurance Entities’ claims benefit from the reforms.
We seek to achieve rate adequacy for the Insurance Entities, recognizing the effects of the recent Florida claims environment on losses, LAE and expenses, while also taking into account potential benefits associated with the reforms. We have continued to experience elevated costs for losses and LAE in the Florida market, where an industry has developed around the solicitation of personal residential claims. Some areas of Florida such as Miami-Dade, Broward and Palm Beach Counties continue to experience disproportionately high incidences of represented and litigated claims as compared to other areas of the state and other
jurisdictions. These dynamics are compounded by the litigation financing industry and other types of third-party financing, which in some cases fund the solicitation and litigation of claims. In addition, inflation, as seen in the cost of labor and materials, remains a contributing factor in elevated costs associated with the settlement of claims. These conditions and the resulting increases in losses and LAE are chief contributing factors for the rate increases in this market. In addition, over the past five years, even as we have increased our estimates of expected losses each year, we have recorded adverse claim development on prior years’ loss reserves and further strengthened current year losses during the year to address the increasing impact that Florida’s market disruptions had on claim cost trends.
The Company has taken a series of steps over time to mitigate the financial impact of these negative trends in the Florida market. We also have closely monitored rate levels, especially in the Florida market, and have submitted rate filings based upon evolving data. However, because rate filings rely upon past loss and expense data and take time to develop, file and implement, we can experience significant delays between identifying needed rate adjustments, filing the associated rate changes, and ultimately collecting and earning the resulting increased premiums. This is particularly the case in an era of rising costs such as the recent Florida market. Similarly, the Company evaluates and periodically adjusts its policy forms in response to market factors and competitive considerations. While policy form changes can be beneficial in the Company’s risk management initiatives, like with rate adjustments, we can experience delays between identifying desired changes, filing and gaining regulatory approval of the changes, and implementing the new forms.
The Company also updates its claims-handling procedures over time in response to market trends. The Company has adopted initiatives to adjust and pay straightforward, meritorious claims as promptly as possible to mitigate the adverse impacts that can be seen with claims that remain open for longer periods. The Company also has increasingly used video and other technology to facilitate reviews of damaged property and improve efficiency in the claims process. In addition, we develop in-house expertise, often in the form of dedicated internal units, to respond to certain types of claims such as water damage claims, represented claims, and large-loss claims. The Company additionally has established significant in-house legal services to address the high volume of litigated or represented claims as cost-effectively as possible, as well as a subrogation unit that seeks to mitigate losses for the benefit of policyholders and the Company when damages are caused by third parties. The full impact of the law changes and our operational initiatives on the claims settlement process and associated costs is unknown and still unfolding. We will continue to monitor these impacts and market conditions on recording and reporting of claims costs, rate levels, and competitive conditions.
Summary of Recent Rate Changes
In April 2023, UPCIC submitted and received approval for a rate decrease of 1.4% for Homeowners’, and a rate decrease of 1.6% for Dwelling Fire in the State of Florida, effective July 15, 2023, for new and renewal business. This filing resulted from UPCIC’s statutorily required participation in Florida’s Reinsurance to Assist Policyholders Program (“RAP”). This program is unrelated to the FHCF and allowed insurers to access a layer of reinsurance coverage below the FHCF industry retention at no cost to the insurer. In exchange the Insurance Entities adopted a corresponding one-year rate reduction. The RAP program expired with the reinsurance contract year ending May 31, 2024. Accordingly, the rate decrease that was temporarily implemented in response to the RAP coverage expired one year from its effective date, on July 15, 2024.
In July 2023, UPCIC filed a 7.5% rate increase on Florida personal residential homeowners’ line of business, effective July 17, 2023, for new business and November 4, 2023, for renewal business. Additionally, in October 2023, UPCIC filed a 4.1% rate increase on Florida personal dwelling-fire lines of business, effective January 15, 2024, for both new and renewal business. Both of these rate increases were implemented under use and file rating laws and subsequently received regulatory approval.
For 2024, the following rate changes for UPCIC have been approved by regulators in states other than Florida:
•Georgia: +14.8% effective November 21, 2023, for new business, and January 10, 2024, for renewal business
•South Carolina: +7.8% effective January 16, 2024, for new business, and March 6, 2024, for renewal business
•Alabama: +14.3% effective March 13, 2024, for new business, and May 2, 2024, for renewal business
•Indiana: +8.0% effective March 22, 2024, for new business, and May 11, 2024, for renewal business
•Minnesota: +14.9% effective April 19, 2024, for new business, and May 20, 2024, for renewal business
•Massachusetts: +11.9% effective April 8, 2024, for new business, and May 28, 2024, for renewal business
The following rate filings are pending approval by state regulators:
•Maryland: +13.3% effective June 17, 2024 for new business, and August 6, 2024, for renewal business
•New York: +14.7% effective March 11, 2024, for new business, and April 30, 2024, for renewal business
•Pennsylvania: +3.0% effective June 1, 2024, for new business, and July 21, 2024, for renewal business
The pending New York and Maryland rate filings are use and file rates, but prior approval for forms, so the effect in their cases is prior approval.
KEY PERFORMANCE INDICATORS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these indicators are helpful in understanding the underlying trends in the Company’s businesses. Some of these indicators are reported on a quarterly basis and others on an annual basis. Please also refer to “Part II, Item 8—Note 2 (Summary of Significant Accounting Policies)” of our Annual Report on Form 10-K for the year ended December 31, 2023 for definitions of certain other terms we use when describing our financial results.
These indicators may not be comparable to other performance measures used by the Company’s competitors and should only be evaluated together with our condensed consolidated financial statements and accompanying notes.
In addition to our key performance indicators and other financial measures presented in accordance with United States Generally Accepted Accounting Principles (“GAAP”), management also uses certain non-GAAP financial measures to evaluate the Company's financial performance and the overall growth in value generated for the Company’s common shareholders. Management believes that non-GAAP financial measures, which may be defined differently by other companies, help to explain the Company’s results to investors in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. The non-GAAP measures should not be viewed as a substitute for those determined in accordance with GAAP. The calculation of these key financial measures including the reconciliation of non-GAAP measures to the nearest GAAP measure are found below under “―Non-GAAP Financial Measures.”
Definitions of Key Performance Indicators and GAAP and Non-GAAP Measures
Adjusted book value per common share ― is a non-GAAP measure that is calculated as adjusted common stockholders’ equity divided by common shares outstanding at the end of the period. Management believes this metric is meaningful, as it allows investors to evaluate underlying book value growth by excluding the impact of unrealized gains and losses due to interest rate volatility.
Adjusted common stockholders' equity ― is a non-GAAP measure that is calculated as GAAP common stockholders' equity less accumulated other comprehensive income (loss). Management believes this metric is meaningful, as it allows investors to evaluate underlying growth in stockholders’ equity by excluding the impact of unrealized gains and losses due to interest rate volatility.
Adjusted net income (loss) attributable to common stockholders ― is a non-GAAP measure that is calculated as GAAP net income (loss) attributable to common stockholders, less net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Adjusted operating income (loss) ― is a non-GAAP measure that is calculated as GAAP operating income (loss), less net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Adjusted operating income (loss) margin ― is a non-GAAP measure that is computed as adjusted operating income (loss) divided by core revenue. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Adjusted return on common equity (Adjusted “ROCE”) ― is a non-GAAP measure that is calculated as actual or annualized adjusted net income attributable to common stockholders divided by average adjusted common stockholders' equity, with the denominator excluding current period income statement net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Book Value Per Common Share ― total stockholders’ equity, adjusted for preferred stock liquidation, divided by the number of common shares outstanding as of a reporting period. Book value per common share is the excess of assets over liabilities at a reporting period attributed to each share of common stock. Changes in book value per common share informs shareholders of
retained equity in the Company on a per share basis, which may assist in understanding market value trends for the Company’s stock.
Combined Ratio ― the combined ratio is a measure of underwriting profitability for a reporting period and is calculated by dividing total operating costs and expenses (which is made up of losses and LAE and general and administrative expenses) by premiums earned, net, which is net of ceded premium earned. Changes to the combined ratio over time provide management with an understanding of costs to operate its business in relation to net premiums it is earning and the impact of rate, underwriting and other business management actions on underwriting profitability. A combined ratio below 100% indicates an underwriting profit; a combined ratio above 100% indicates an underwriting loss.
Core Loss Ratio ― a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses and LAE, excluding current accident year weather events beyond those expected, to premiums earned. Core loss ratio is an important measure identifying profitability trends of premiums in force. Core losses consists of losses and LAE excluding current accident year weather events beyond those expected and prior years’ reserve development. The financial benefit from the management of claims, including claim fees ceded to reinsurers, is recorded in the condensed consolidated financial statements as a reduction to core losses. The core loss ratio can be measured on a direct basis, using direct earned premiums, or on a net basis, using premiums earned, net (i.e., direct premiums earned less ceded premiums earned).
Core revenue ― is a non-GAAP measure that is calculated as total GAAP revenue, less net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. Management believes this metric is meaningful, as it allows investors to evaluate underlying revenue trends and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Debt-to-Equity Ratio ― long-term debt divided by stockholders’ equity. This ratio helps management measure the amount of financing leverage in place in relation to equity and allows investors to evaluate future leverage capacity.
Debt-to-Total Capital Ratio ― long-term debt divided by the sum of total stockholders’ equity and long-term debt (often referred to as total capital resources). This ratio helps management measure the amount of financing leverage in place (long-term debt) in relation to total capital resources and allows investors to evaluate future leverage capacity.
Diluted adjusted earnings per common share ― is a non-GAAP measure, which is calculated as adjusted net income available to common stockholders divided by weighted average diluted common shares outstanding. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Direct Premiums Written (“DPW”) ― reflects the total value of policies issued during a period before considering premiums ceded to reinsurers. Direct premiums written, comprised of renewal premiums, endorsements, and new business, is initially recorded as unearned premium in the balance sheet, which is then earned pro-rata over the next year or remaining policy term. Direct premiums written reflect current trends in the Company’s sale of property and casualty insurance products and amounts that will be recognized as earned premiums in the future.
DPW (Florida) ― includes only DPW in the state of Florida. This measure allows management to analyze growth in our primary market and is also a measure of business concentration risk.
Expense Ratio (Including Policy Acquisition Cost Ratio and Other Operating Cost Ratio) ― calculated as general and administrative expenses as a percentage of premiums earned, net. General and administrative expenses are comprised of policy acquisition costs and other operating costs, which includes such items as underwriting costs, facilities, and corporate overhead. The expense ratio, including the sub-expense ratios of policy acquisition cost ratio and other operating cost ratio, are indicators to management of the Company’s cost efficiency in acquiring and servicing its business and the impact of expense items to overall profitability.
Losses and Loss Adjustment Expense Ratio or Loss and LAE Ratio ― a measure of the cost of claims and claim settlement expenses incurred in a reporting period as a percentage of premiums earned in that same reporting period. Losses and LAE incurred in a reporting period includes both amounts related to the current accident year and prior accident years, if any, referred to as development. Ultimate losses and LAE are based on actuarial estimates with changes in those estimates recognized in the period the estimates are revised. Losses and LAE consist of claim costs arising from claims occurring and settling in the current period, an estimate of claim costs for reported but unpaid claims, an estimate of unpaid claim costs for incurred-but-not-reported claims and an estimate of claim settlement expenses associated with reported and unreported claims which occurred during the reporting period. The loss and LAE ratio can be measured on a direct basis, which includes losses and LAE divided by direct earned premiums, or on a net basis, which includes losses and LAE divided by premiums earned, net (i.e., direct premium earned less ceded premium earned). The net loss and LAE ratio is a measure of underwriting profitability after giving consideration to the effect of reinsurance. Trends in the net loss and LAE ratio are an indication to management of current and future profitability.
Monthly Weighted Average Renewal Retention Rate ― measures the monthly average of policyholders that renew their policies over the period of a calendar year. This measure allows management to assess customer retention.
Premiums Earned, Net ― the pro-rata portion of current and previously written premiums that the Company recognizes as earned premium during the reporting period, net of ceded premium earned. Ceded premiums are premiums paid or payable by the
Company for reinsurance protection. Written premiums are considered earned and are recognized pro-rata over the policy coverage period. Premiums earned, net is a measure that allows management to identify revenue trends.
Policies in Force ― represents the number of active policies with coverage in effect as of the end of the reporting period. The change in the number of policies in force is a growth measure and provides management with an indication of progress toward achieving strategic objectives. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Premium in Force ― is the amount of the annual direct written premiums previously recorded by the Company for policies which are still active as of the reporting date. This measure assists management in measuring the level of insured exposure and progress toward meeting revenue goals for the current year, and provides an indication of business available for renewal in the next twelve months. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Return on Average Common Equity (“ROCE”) ― calculated as actual net income (loss) attributable to common stockholders divided by average common stockholders' equity. ROCE is a capital profitability measure of how efficiently management creates profits.
Total Insured Value ― represents the amount of insurance limits available on a policy for a single loss based on all policies active as of the reporting date. This measure assists management in measuring the level of insured exposure.
Unearned Premiums ― represents the portion of direct premiums corresponding to the time period remaining on an insurance policy and available for future earning by the Company. Trends in unearned premiums generally indicate expansion, if growing, or contraction, if declining, which are important indicators to management. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Weather events ― an estimate of losses and LAE from weather events occurring during the current accident year that exceed initial estimates of expected weather events when establishing the core loss ratio for each accident year. This metric informs management of factors impacting overall current year profitability.
REINSURANCE
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events. Developing and implementing our reinsurance strategy to adequately protect our policyholders, balance sheet, and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been our key strategic priority. To limit the Insurance Entities’ potential exposure to catastrophic events, we purchase significant reinsurance from third-party reinsurers and the FHCF. The FLOIR requires the Insurance Entities, like all residential property insurance companies doing business in Florida, to have a certain amount of capital and reinsurance coverage to cover losses upon the occurrence of a single catastrophic event and a series of catastrophic events occurring in the same hurricane season. The Insurance Entities’ 2024-2025 catastrophe reinsurance program meets the FLOIR’s requirements, which are based on, among other things, successfully demonstrating cohesive and comprehensive reinsurance coverages that protect the policyholders of our Insurance Entities under a series of stress test catastrophe loss scenarios. Similarly, the Insurance Entities’ 2024-2025 catastrophe reinsurance programs meet the stress test and review requirements of Demotech, Inc., for maintaining Financial Stability Ratings® of A (Exceptional) and of Kroll for maintaining insurer financial strength ratings of “A-”.
We believe the Insurance Entities’ retentions under the jointly shared reinsurance program is appropriate and structured to protect policyholders and the Insurance Entities’ capital structure. We test the sufficiency of the catastrophe reinsurance coverage by subjecting the Insurance Entities’ personal residential exposures to scenario testing using third-party catastrophe models. These models combine simulations of the natural occurrence patterns and characteristics of hurricanes, tornadoes, earthquakes, and other catastrophes with information on property values, construction types, and occupancy classes. These models’ outputs provide information concerning the potential for simulated large losses, which enables the Insurance Entities to limit the financial impact from catastrophic events. Refer to the risk factors disclosed in “Part I, Item 1A—Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for details of specific risks attributable to catastrophic losses and reinsurance.
Effective June 1, 2024, the Insurance Entities entered into multiple reinsurance agreements comprising our 2024-2025 reinsurance program. See “Item 1—Note 4 (Reinsurance).”
Insurance Entities 2024-2025 All States Reinsurance Program (“All States”)
•First event All States combined retention of $45 million.
•All States first event tower extends to $2.404 billion with no co-participation in any of the layers, no limitation on loss adjustment expenses and no accelerated deposit premiums.
•Assuming a first event completely exhausts the $2.404 billion tower, the second event exhaustion point would be $1.134 billion.
•Full reinstatement is available on the combined $1.023 billion of the All States first-event catastrophe coverage for a guaranteed second-event coverage. For all layers purchased between $111 million and the projected attachment point of
the FHCF layer, to the extent that all of our coverage or a portion thereof is exhausted in a first catastrophic event and reinstatement premium is due, we have purchased enough reinstatement premium protection coverage ("RPP") to fund the reinstatement premiums due on the reinstatement of these coverages. Losses exceeding the RPP limit would be subject to reinstatement premiums.
•Universal Insurance Holdings, Inc. (“UIH”) established the first event layer of $66 million in excess of $45 million in a captive insurance arrangement. See “Item 1—Note 14 (Variable Interest Entities).”
•Additionally, a second event private market excess of loss coverage of $66 million in excess of $45 million succeeds the captive in the event of a loss from a second event, resulting in a $66 million reduction in retention on a consolidated basis for a second event.
•Specific third and fourth event private market excess of loss coverage of $86 million in excess of $25 million provides frequency protection for multiple events during the treaty period, an incremental $20 million reduction in retention for a third and fourth event.
•For the FHCF Reimbursement Contracts effective June 1, 2024, the Insurance Entities have continued the election at the 90% coverage level. We estimate the total mandatory FHCF coverage will provide approximately $1.251 billion of coverage for UPCIC, and $19.4 million for APPCIC which complements and inures to the benefit of the All States coverage secured from private market reinsurers and discussed above.
•To further insulate future years, the Insurance Entities have secured certain multi-treaty treaties, providing $240 million of capacity that extends portions of the catastrophe coverage to include the 2025-2026 treaty year.
Reinsurers
The table below provides the A.M. Best and S&P financial strength ratings for each of the largest rated third-party reinsurers in the Insurance Entities’ 2024-2025 reinsurance program:
| | | | | | | | | | | | | | |
| Reinsurer | | A.M. Best | | S&P |
| Florida Hurricane Catastrophe Fund (1) | | N/A | | N/A |
| Various Lloyd’s of London Syndicates | | A | | AA- |
| Munich Reinsurance America Inc. | | A+ | | AA- |
| DaVinci Reinsurance Ltd. | | A | | A+ |
| Renaissance Reinsurance Ltd. | | A+ | | A+ |
| Chubb Tempest Reinsurance Ltd. | | A++ | | AA |
| Markel Bermuda Ltd. | | A | | A |
(1)No rating is available, because the fund is not rated.
The catastrophe reinsurance program for the Insurance Entities, covering the period of June 1, 2024 to May 31, 2025, as described above, is projected to cost $676 million, prior to any potential reinstatement premiums due, and represents approximately 33.0% of projected direct premium earned for the 12-month treaty period.
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Highlights for the quarter ended June 30, 2024
•Written premium increased 5.7% for the second quarter of 2024 totaling $578.3 million. Year to date written premium increased 7% totaling $1.024 billion for the six months ended June 30, 2024.
•Rate filings and automatic policy inflation adjustments to policy insured values are increasing written and earned premium as the new rates and property insured values take effect on policy renewals and new business, and earn prospectively over the policy period. There were 833,433 policies-in-force as of the end of June which represents an increase of 23,748 or 2.9% compared to June 30, 2023. Quarter to date policies-in-force increased by 13,355 or 1.63% and year to date, policies-in-force increased by 23,501 policies or 2.9%.
•Net investment income increased to $14.7 million, or 29.9% in the second quarter of 2024 compared to $11.3 million in the second quarter of 2023.
•The combined ratio was 95.9% for the second quarter of 2024, an improvement of 3.2 percentage points compared to the second quarter of 2023.
•Declared dividends per common share of $0.16 on April 10, 2024, payable on May 17, 2024.
•In the quarter ended June 30, 2024, the Company repurchased 274,320 shares, at an average share price of $19.47, for a total of $5.3 million. As of June 30, 2024, $14.7 million remains available under this program, which runs until March 11, 2026.
•Universal's Insurance Entities completed their 2024-2025 reinsurance program, in which the total costs for reinsurance as a percentage of direct earned premium increased to 33.0%, compared to approximately 31.8% in the previous contract period.
•Demotech reaffirmed its A rating for UPCIC and APPCIC on April 3, 2024.
•On May 31, 2024, the Company entered into a committed and unsecured $50.0 million revolving credit line with JP Morgan Chase Bank, N.A. This agreement succeeds the previous $40.0 million revolving credit line with J.P. Morgan Chase, N.A., entered into on June 30, 2023.
Second quarter of fiscal 2024 results of operations comparisons are to second quarter of fiscal 2023 (unless otherwise specified).
Results of Operations — Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Net income was $35.4 million for the three months ended June 30, 2024, compared to net income of $28.6 million for the same period in 2023. Benefiting the quarter were increases in premiums earned, net, an increase in net investment income and an increase in policy fees and other revenue, partially offset by an increase in operating costs and expenses, and a decrease in commission revenue. Direct premium earned and premiums earned, net were up 5.9% and 13.7%, respectively compared to direct premium earned and premiums earned in the second quarter of 2023, due to premium in force growth in 16 states in which we are licensed and writing during the past 12 months as a result of rate increases implemented during past years, in addition to an increase in policies in force in 12 states. Premiums earned, net, were also favorably impacted by a decrease in reinsurance expenses for the 2023-2024 contract year primarily due to the Insurance Entities’ mandatory participation in Florida’s RAP program, which allowed insurers to access a layer of reinsurance coverage below the FHCF industry retention at no cost to the insurers. The lower reinsurance costs, effective June 1 2023, through May 31, 2024, had a favorable effect on financial ratios which are based on net earned premium. For the quarter ended June 30, 2024, the net loss ratio declined to 70.6% from 73.8% for the same period in 2023 primarily due to an increase in premiums earned, net, a decrease in adverse prior year reserve development, partially offset by a higher loss pick for the current accident year. See Reinsurance section below for further information. As a result of the above and as further explained below, the combined ratio for the three months ended June 30, 2024 was 95.9% compared to 99.1% for the three months ended June 30, 2023. See “Overview—Trends and Geographical Distribution—Florida Trends” regarding our response to the Florida market.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Change |
| | 2024 | | 2023 | | $ | | % |
| REVENUES | | | | | | | |
| Direct premiums written | $ | 578,267 | | | $ | 547,126 | | | $ | 31,141 | | | 5.7 | % |
| Change in unearned premium | (87,618) | | | (83,802) | | | (3,816) | | | 4.6 | % |
| Direct premium earned | 490,649 | | | 463,324 | | | 27,325 | | | 5.9 | % |
| Ceded premium earned | (145,691) | | | (160,050) | | | 14,359 | | | (9.0) | % |
| Premiums earned, net | 344,958 | | | 303,274 | | | 41,684 | | | 13.7 | % |
| Net investment income | 14,660 | | | 11,282 | | | 3,378 | | | 29.9 | % |
| Net realized gains (losses) on investments | (311) | | | 882 | | | (1,193) | | | NM |
Net change in unrealized gains (losses) on investments | 1,355 | | | 1,731 | | | (376) | | | (21.7) | % |
| Commission revenue | 11,679 | | | 14,986 | | | (3,307) | | | (22.1) | % |
| Policy fees | 5,576 | | | 5,384 | | | 192 | | | 3.6 | % |
| Other revenue | 2,297 | | | 2,031 | | | 266 | | | 13.1 | % |
| Total revenues | 380,214 | | | 339,570 | | | 40,644 | | | 12.0 | % |
| OPERATING COSTS AND EXPENSES | | | | | | | |
| Losses and loss adjustment expenses | 243,572 | | | 223,727 | | | 19,845 | | | 8.9 | % |
| General and administrative expenses | 87,114 | | | 76,675 | | | 10,439 | | | 13.6 | % |
| Total operating costs and expenses | 330,686 | | | 300,402 | | | 30,284 | | | 10.1 | % |
| Interest and amortization of debt issuance costs | 1,623 | | | 1,629 | | | (6) | | | (0.4) | % |
| | | |
|
General and administrative expenses increased by $10.4 million, which was the result of an increase in policy acquisition costs of $4.6 million and an increase in other operating costs of $5.8 million. The total general and administrative expense ratio was 25.3% for the three months ended June 30, 2024 and 2023. See Reinsurance section above for further information.
•The increase in policy acquisition costs of $4.6 million was primarily driven by commissions as a result of increases in premium volume in Florida and other states. New and renewal policies written in the second quarter of 2024 increased by 6.3% year over year.
•The increase in other operating costs was largely driven by employee related expenses including stock-based compensation, and employee benefits and welfare. The other operating cost ratio was 8.9% for the three months ended June 30, 2024, compared to 8.1% for the same period in 2023.
As a result of the trends discussed above for losses and LAE and general and administrative expenses, the combined ratio for the second quarter ended June 30, 2024 was 95.9% compared to 99.1% for the same period in 2023.
Interest and Amortization of Debt Issuance Costs
Interest and amortization of debt issuance costs was $1.6 million for both quarters ended June 30, 2024 and 2023.
Income Tax Expense (Benefit)
Income tax expense was $12.5 million for the quarter ended June 30, 2024, compared to an income tax expense of $9.0 million for the quarter ended June 30, 2023. Our effective tax rate (“ETR”) increased to 26.1% for the quarter ended June 30, 2024, as compared to 23.9% for the quarter ended June 30, 2023. See “Item 1—Note 9 (Income Taxes)” for a table of items reconciling statutory rates to the effective rate for three months ended 2024 and 2023.
Comprehensive Income (Loss)
Other comprehensive income, net of taxes for the quarter ended June 30, 2024 was $1.0 million compared to other comprehensive loss of $5.9 million for the same period in 2023, reflecting after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio and reclassifications out of accumulated other comprehensive income for available-for-sale debt securities sold. The improvement in the second quarter of 2024 reflects favorable relative shifts in market prices during 2024 compared to 2023. During 2024, maturing securities and investment returns were reinvested at market rates, reducing unrealized losses on maturing securities. The maturity of the remaining securities in an unrealized loss position has also reduced during the year. Over time, unrealized losses on securities in an unrealized loss position lessens as the remaining maturity shortens and securities approach their maturity or par value. See discussion above and “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income (loss), net of taxes for these periods.
Non-GAAP
Adjusted operating income (loss) represents GAAP operating income (loss), excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. Adjusted operating income was $48.5 million for the three months ended June 30, 2024 compared to adjusted operating income of $36.6 million for the same period in 2023.
Adjusted operating income (loss) margin represents adjusted operating income (loss) divided by core revenue. Adjusted operating income margin was 12.8% for the three months ended June 30, 2024 compared to adjusted operating loss margin of 10.8% for the same period in 2023.
Adjusted net income (loss) attributable to common stockholders represents GAAP net income (loss) attributable to common stockholders, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax. Adjusted net income attributable to common stockholders was $34.6 million for the three months ended June 30, 2024 compared to adjusted net income attributable to common stockholders of $26.6 million for the same period in 2023.
Diluted adjusted earnings (loss) per common share represents adjusted net income (loss) available to common stockholders divided by weighted average diluted common shares outstanding. Diluted adjusted income per common share was $1.18 for the three months ended June 30, 2024 compared to diluted adjusted earnings per common share of $0.87 for the same period in 2023.
All comparisons for the six months ended June 30, 2024 results of operations are to the corresponding prior year period (unless otherwise specified).
Results of Operations — Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Net income was $69.1 million for the six months ended June 30, 2024, compared to net income of $52.7 million for the same period in 2023. Benefiting 2024 were increases in premiums earned, net, an increase in net investment income, and an increase in policy fees and other revenue, partially offset by an increase in operating costs and expenses, and a decrease in commission revenue. Direct premium earned and premiums earned, net were up 5.9% and 16.0%, respectively compared to direct premium earned and premiums earned, net in the same period in 2023, due to premium in force growth in 17 states in which we are licensed and writing during the past 12 months as a result of rate increases implemented during past years, in addition to an increase in policies in force in 13 states. For six months ended June 30, 2024, the net loss ratio declined to 71.2% from 73.4% for the same period in 2023 primarily due to an increase in premiums earned, net, a decrease in adverse prior year reserve development, partially offset by a higher direct loss ratio for the current accident year. See Reinsurance section below for further information. As a result of the above and as further explained below, the combined ratio for the six months ended June 30, 2024 was 95.7% compared to 99.5% for the six months ended June 30, 2023. See “Overview—Trends and Geographical Distribution—Florida Trends” regarding our response to the Florida market.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, | | Change |
| 2024 | | 2023 | | $ | | % |
| REVENUES | | | | | | | |
| Direct premiums written | $ | 1,024,446 | | | $ | 957,228 | | | $ | 67,218 | | | 7.0 | % |
| Change in unearned premium | (51,725) | | | (38,536) | | | (13,189) | | | 34.2 | % |
| Direct premium earned | 972,721 | | | 918,692 | | | 54,029 | | | 5.9 | % |
| Ceded premium earned | (293,738) | | | (333,194) | | | 39,456 | | | (11.8) | % |
| Premiums earned, net | 678,983 | | | 585,498 | | | 93,485 | | | 16.0 | % |
| Net investment income | 28,183 | | | 21,980 | | | 6,203 | | | 28.2 | % |
| Net realized gains (losses) on investments | (388) | | | 94 | | | (482) | | | NM |
Net change in unrealized gains (losses) on investments | 4,461 | | | 2,688 | | | 1,773 | | | 66.0 | % |
| Commission revenue | 22,712 | | | 32,268 | | | (9,556) | | | (29.6) | % |
| Policy fees | 9,981 | | | 9,551 | | | 430 | | | 4.5 | % |
| Other revenue | 4,241 | | | 3,999 | | | 242 | | | 6.1 | % |
| Total revenues | 748,173 | | | 656,078 | | | 92,095 | | | 14.0 | % |
| OPERATING COSTS AND EXPENSES | | | | | | | |
| Losses and loss adjustment expenses | 483,759 | | | 429,881 | | | 53,878 | | | 12.5 | % |
| General and administrative expenses | 165,780 | | | 152,602 | | | 13,178 | | | 8.6 | % |
| Total operating costs and expenses | 649,539 | | | 582,483 | | | 67,056 | | | 11.5 | % |
| Interest and amortization of debt issuance costs | 3,245 | | | 3,265 | | | (20) | | | (0.6) | % |
| INCOME (LOSS) BEFORE INCOME TAXES | 95,389 | | | 70,330 | | | 25,059 | | | 35.6 | % |
| Income tax expense (benefit) | 26,316 | | | 17,591 | | | 8,725 | | | 49.6 | % |
| NET INCOME (LOSS) | $ | 69,073 | | | $ | 52,739 | | | $ | 16,334 | | | 31.0 | % |
| Other comprehensive income (loss), net of taxes | (1,546) | | | 7,925 | | | (9,471) | | | NM |
| COMPREHENSIVE INCOME (LOSS) | $ | 67,527 | | | $ | 60,664 | | | $ | 6,863 | | | 11.3 | % |
| DILUTED EARNINGS (LOSS) PER SHARE DATA: | | | | | | | |
| Diluted earnings (loss) per common share | $ | 2.35 | | | $ | 1.72 | | | $ | 0.63 | | | 36.6 | % |
| Weighted average diluted common shares outstanding | 29,369 | | | 30,633 | | | (1,264) | | | (4.1) | % |
| | | | | | | |
NM – Not Meaningful | | | | | | | |
Premium Revenues
Direct premiums written increased by $67.2 million, or 7.0%, for the six months ended June 30, 2024, driven by premium growth within our Florida business of $21.5 million, or 2.7%, and premium growth in our other states business of $45.7 million, or 28.1%, as compared to the prior year. Rate increases approved in 2023 and 2024 for Florida and for certain other states and policy inflation adjustments were the principal driver of higher written premiums, in addition to an increase in policies in force in 12 states. In total, policies in force increased 23,501, or 2.9%, from 809,932 at December 31, 2023 to 833,433 at June 30, 2024. A summary of the recent rate increases which are driving increases in written premium is discussed above under “Overview—Trends and Geographical Distribution—Florida Trends.”
Rate changes are applied on new business submissions at policy inception and on renewals from the effective date of their renewal, and then are earned subsequently over the policy period. The recent rate and inflation increases in Florida are in response to rising claim costs in recent years driven by higher costs of material and labor associated with claims, the cost of weather events, the rising cost of catastrophe and other reinsurance protecting policyholders and, more importantly, the prevalence of represented and litigated claims in Florida. Due to the time associated with analyzing data, preparing, and submitting rate filings, implementing new rate levels and earning the corresponding premiums, the Insurance Entities’ rate adjustments typically lag behind their experience by months or even years. In addition, the Insurance Entities’ policies provide for coverage limits to be adjusted at renewal which adjust insured value coverage limits for the impact of changes in inflation occurring since the prior renewal. This is based on third-party industry data sources that monitor inflation factors such as changes in costs for residential building materials and labor.
Management continues to manage policy counts and exposures intended to control the growth of exposures relating to new business. Rate increases continue to take effect, and new business underwriting rules are reviewed and updated as needed in the states we underwrite in. This year we saw an increase in policies in force of 23,501, or 2.9% during 2024 from 809,932 at December 31, 2023 to 833,433 at June 30, 2024. Direct premiums written continue to increase across the majority of states in which we conduct business. We actively wrote policies in 18 states during the first six months of 2024. In addition, we are authorized to do business in Tennessee and Wisconsin. In 2023, UPCIC filed with its regulators in Hawaii to withdraw from the state, with the withdrawal and nonrenewal of policies expected to be completed by the end of 2024. Compared to June 30, 2023, at June 30, 2024, policies in force increased by 23,748 policies, or 2.9%; premium in force increased $120.7 million, or 6.4%; and total insured value increased $19.2 billion, or 6.0%, compared to June 30, 2023.
Direct premium earned increased by $54.0 million, or 5.9%, for the six months ended June 30, 2024, reflecting the earning of premiums written over the past 12 months, including the benefit of rate changes due to primary rate filings, filings to cover increased reinsurance costs as well as policy premium adjustments due to increases in insured values caused by inflation.
Reinsurance
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents premiums paid to reinsurers for this protection and is a cost which reduces net written and net earned premiums. In total, ceded premium earned decreased $39.5 million, or 11.8%, for the six months ended June 30, 2024 as compared to the same period of the prior year. The decrease in reinsurance costs reflects several factors, including the Insurance Entities’ mandatory participation in the RAP program for the 2023/2024 reinsurance program, which allowed insurers to access a layer of reinsurance coverage below the FHCF industry retention at no cost to the insurer. In exchange, the Insurance Entities adopted a 1.4% one-year rate reduction. Also benefiting reinsurance costs in the first six months of 2024 was the absence of reinstatement premiums. In September 2022, reinstatement premiums totaling $24.6 million were written, and were earned prospectively through May 31, 2023, increasing reinsurance costs in the same quarter of the prior year. Reinsurance costs, as a percentage of direct premium earned, decreased in the six months of 2024 to 30.2% in 2024 as compared to 36.3% during the same period in 2023. The lower reinsurance costs have a favorable effect on financial ratios that are based on net earned premium. Reinsurance costs associated with each year’s reinsurance program are earned over the annual policy period which typically runs from June 1st to May 31st. See the discussion above for the Insurance Entities’ 2024-2025 reinsurance programs and “Item 1— Note 4 (Reinsurance).”
Investment Results
Net investment income was $28.2 million for the six months ended June 30, 2024, compared to $22.0 million for the same period in 2023, an increase of $6.2 million, or 28.2%. Invested cash balances, along with liquidity generated by our investment portfolio from maturities, principal repayments, and interest payments received, were invested in higher rates, resulting in an increase in investment returns on our portfolio and cash balances.
We look to optimize our investment portfolio on a rolling basis, which, from time-to-time, results in portfolio shaping opportunities. During the six months ended June 30, 2024, sales of available-for-sale debt securities and sales of equity securities resulted in net realized losses of $0.4 million, compared to net realized gains of $94 thousand during the six months ended June 30, 2023
There was a $4.5 million net unrealized gain on investments during the six months ended June 30, 2024, largely driven by our portfolio optimization efforts in the public equity markets, coupled with the overall domestic equity market appreciation tailwind during 2024, compared to a $2.7 million net unrealized gain on investments during the six months ended June 30, 2023.
See “Analysis of Financial Condition” for details on changes in total invested assets balances during 2024.
Commissions, Policy Fees and Other Revenue
Commission revenue is comprised principally of brokerage commissions we earn from traditional open market third-party reinsurers, which excludes reinsurance provided by the FHCF and RAP as well as catastrophe bond participants. Commission revenue is earned pro-rata over the reinsurance policy period which runs from June 1st to May 31st of the following year. For the six months ended June 30, 2024, commission revenue was $22.7 million, compared to $32.3 million for the six months ended June 30, 2023. The decrease in commission revenue of $9.6 million, or 29.6%, for the six months ended June 30, 2024 was primarily due to commissions on reinstatement premiums attributable to Hurricane Ian which were higher during the six months ended June 30, 2023 than the same period in 2024.
Policy fees for the six months ended June 30, 2024 were $10.0 million compared to $9.6 million for the same period in 2023. The increase of $0.4 million, or 4.5%, was the result of an increase in the combined total number of policies written during the six months ended June 30, 2024 compared to the same period in 2023 in states in which we are permitted to charge this fee.
Other revenue, representing revenue from policy installment fees, premium financing, and other miscellaneous income, was $4.2 million for the six months ended June 30, 2024 compared to $4.0 million for the same period in 2023.
Non-GAAP
Core revenue, representing total GAAP revenue, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, was $744.1 million for the six months ended June 30, 2024 compared to $653.3 million for the same period in 2023.
Operating Costs and Expenses
Losses and Loss Adjustment Expense
Losses and LAE experience over the past several years including both 2024 and 2023, reflects an adverse litigation environment as well as other market conditions in Florida that the Florida Legislature has attempted to address through the passage of legislation spanning several years, with the most significant changes made during a special session held in December 2022. See “Overview—Trends and Geographical Distribution—Florida Trends.”
Losses and LAE, net of reinsurance recoveries was $483.8 million for the six months ended June 30, 2024, resulting in a net loss ratio of 71.2%, compared to $429.9 million, and 73.4%, respectively, for the six months ended June 30, 2023. For the six months ended June 30, 2024, the decline in the net loss ratio was primarily due to an increase in direct earned premium driven by rate increases and reduced reinsurance costs, and the absence of net prior year development for the six months ended June 30, 2024 as compared to the same period last year. This was partially offset by a higher loss pick selected for 2024 compared to 2023 and a lower financial benefit from adjusting claims.
In recent years, we have strengthened reserves and increased our ratio for estimated losses as a result of adverse development due to Florida homeowners’, tenants’, and condominium owners’ coverages arising from non-weather and weather events. Similar to other carriers operating in the Florida homeowner’s marketplace, we have experienced deterioration in water and hurricane claims due to an unfavorable claims environment characterized by increases in policyholder demands related to roof repairs and significant attorney representation. One of management’s objectives is to strengthen reserves on those prior period claims, when needed, which do not benefit from the new legislation signed in late 2022 that eliminated the one-way attorneys’ fee statute and assignments of benefits, established a one-year reporting period for claims, and made other reforms intended to improve the Florida market.
During the six months ended June 30, 2024, management did not find the need to strengthen prior year net reserves resulting in zero prior year net development, compared to $17.1 million for the same period in 2023, or 2.9 net loss ratio points. We continue to see favorable claim trends on Florida losses that occurred subsequent to the effective date of the reform legislation (December 16, 2022). However, claims under policies that pre-date the reforms have greater uncertainty, and as such those claims in the aggregate have the potential to experience adverse development, as claims have settled above previously estimated amounts.
We believe the legislation passed in late 2022 represents a positive step towards reducing claim costs in Florida and management is optimistic about its eventual benefits. However, the full transition to these new laws will take many years. Many of the reforms apply only prospectively and provide only marginal benefit for claims filed on policies issued prior to the new laws’ effective date. The transition to the new laws therefore involves first renewing policies during the year following the effective date, such that the policies, and subsequent claims under those policies, are governed by the new requirements. As for prior policy periods, with respect to some aspects of the reforms, insurers must continue to adjust claims under the prior laws that were subject to abuse while awaiting the expiration of claim reporting periods and statute of limitations periods applicable to those policies. Therefore, it will be several years until the abusive claim practices permitted under the prior laws, including those resulting from requiring insurance companies to pay claimants’ litigation costs, are fully extinguished and the full benefit of the legislation can be realized.
Net losses and LAE also reflects savings from activities performed by affiliates within our holding company system on behalf of our Insurance Entities and our reinsurers when losses and LAE are ceded under our reinsurance contracts. When claims are adjusted by our claims team and files are handled by our legal group in this litigious environment in Florida, there are synergies achieved by having these two functions within the same consolidated group that could not be achieved through third parties. This synergistic relationship results in more efficient handling and coordination of claims including represented claims handled by our legal group. By choosing not to outsource these activities in most instances, we also save money for the consolidated group by
generating a potential financial benefit outside of the Insurance Entities that serves to reduce LAE at the consolidated level (contra LAE), particularly following catastrophes. During 2024 these claims-related activities generated a financial benefit of $0.3 million compared to a financial benefit of $30.8 million during six months ended June 30, 2023.
General and Administrative Expenses
For the six months ended June 30, 2024, general and administrative expenses were $165.8 million compared to $152.6 million during the same period in 2023, as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, | | Change |
| 2024 | | 2023 | | $ | | % |
| $ | | Ratio | | $ | | Ratio | | | | |
| Premiums earned, net | $ | 678,983 | | | | | $ | 585,498 | | | | | $ | 93,485 | | | 16.0 | % |
| General and administrative expenses: | | | | | | | | | | | |
| Policy acquisition costs | 111,435 | | | 16.4 | % | | 103,697 | | | 17.7 | % | | 7,738 | | | 7.5 | % |
| Other operating costs | 54,345 | | | 8.1 | % | | 48,905 | | | 8.4 | % | | 5,440 | | | 11.1 | % |
| | | | | | | |
| Total general and administrative expenses | $ | 165,780 | | | 24.5 | % | | $ | 152,602 | | | 26.1 | % | | $ | 13,178 | | | 8.6 | % |
| | | | | | | | | | | |
General and administrative expenses increased by $13.2 million, which was the result of an increase in policy acquisition costs of $7.7 million and an increase in other operating costs of $5.4 million. The total general and administrative expense ratio was 24.5% for the six months ended June 30, 2024 compared to 26.1% for the six months ended June 30, 2023. See Reinsurance section above for further information.
•The increase in policy acquisition costs of $7.7 million was primarily driven by commissions as a result of increases in premium volume in Florida and other states. New and renewal policies written in the first six months of 2024 increased by 6.4% year over year.
•The increase in other operating costs was largely driven by employee related expenses including stock-based compensation, and employee benefits and welfare. The other operating cost ratio was 8.1% for the six months ended June 30, 2024, compared to 8.4% for the same period in 2023 due to economies of scale as the premium base increases from rate increases as well as the lower cost of reinsurance.
As a result of the trends discussed above for losses and LAE and general and administrative expenses, the combined ratio for the six months ended June 30, 2024 was 95.7% compared to 99.5% for the same period in 2023.
Interest and Amortization of Debt Issuance Costs
Interest and amortization of debt issuance costs was $3.3 million for both six months ended June 30, 2024 and 2023.
Income Tax Expense (Benefit)
Income tax expense was $26.3 million for the six months ended June 30, 2024, compared to an income tax expense of $17.6 million for the six months ended June 30, 2023. Our effective tax rate (“ETR”) increased to 27.6% for the six months ended June 30, 2024, as compared to 25.0% for the six months ended June 30, 2023. See “Item 1—Note 9 (Income Taxes)” for a table of items reconciling statutory rates to the effective rate for six months ended 2024 and 2023.
Comprehensive Income (Loss)
Other comprehensive loss, net of taxes for the six months ended June 30, 2024 was $1.5 million compared to other comprehensive income of $7.9 million for the same period in 2023, reflecting after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio and reclassifications out of accumulated other comprehensive income for available-for-sale debt securities sold. The deterioration in 2024 reflects relative shifts in market prices during 2024 compared to 2023. During 2024, maturing securities and investment returns were reinvested at market rates, reducing unrealized losses on maturing securities. The maturity of the remaining securities in an unrealized loss position has also reduced during the year. Over time, unrealized losses on securities in an unrealized loss position lessens as the remaining maturity shortens and securities approach their maturity or par value. See discussion above and “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income (loss), net of taxes for these periods.
Non-GAAP
Adjusted operating income (loss) represents GAAP operating income (loss), excluding net realized gains (losses) on investment and net changes in unrealized gains (losses) on investments. Adjusted operating loss was $94.6 million for the six months ended June 30, 2024 compared to adjusted operating income of $70.8 million for the same period in 2023.
Adjusted operating income (loss) margin represents adjusted operating income (loss) divided by core revenue. Adjusted operating loss was 12.7% for the six months ended June 30, 2024 compared to adjusted operating income of 10.8% for the same period in 2023.
Adjusted net income (loss) attributable to common stockholders represents GAAP net income (loss) attributable to common stockholders, excluding net realized gains (losses) on investment and net changes in unrealized gains (losses) on investments, net of tax. Adjusted net loss attributable to common stockholders was $66.0 million for the six months ended June 30, 2024 compared to adjusted net income attributable to common stockholders of $50.6 million for the same period in 2023.
Diluted adjusted earnings (loss) per common share represents adjusted net income (loss) available to common stockholders divided by weighted average diluted common shares outstanding. Diluted adjusted loss per common share was $2.25 for the six months ended June 30, 2024 compared to diluted adjusted earnings per share of $1.65 for the same period in 2023.
Analysis of Financial Condition—As of June 30, 2024 Compared to December 31, 2023
We believe that the cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. We invest amounts considered to be in excess of current working capital requirements.
The following table summarizes, by type, the carrying values of investments as of the dates presented (in thousands):
| | | | | | | | | | | |
| | As of |
| June 30, | | December 31, |
| Type of Investment | 2024 | | 2023 |
| Available-for-sale debt securities | $ | 1,215,630 | | | $ | 1,064,330 | |
|
| Equity securities | 75,834 | | | 80,495 | |
Other investments, at fair value | 10,434 | | | 10,434 | |
| Investment real estate, net | 5,523 | | | 5,525 | |
| Total | $ | 1,307,421 | | | $ | 1,160,784 | |
Total invested assets were $1.31 billion as of June 30, 2024 compared to $1.16 billion as of December 31, 2023. The increase is primarily attributable to unrealized gains on our equity portfolio, and increases in net investment income, partially offset by pricing weakness in our fixed income portfolio during the first quarter, which began to reverse course during the second quarter. Cash and cash equivalents were $283.3 at June 30, 2024 compared to $397.3 million at December 31, 2023, a decrease of 28.7%. See below “—Analysis of Financial Condition” for more information. Cash and cash equivalents are invested short-term until needed to settle loss and LAE payments, reinsurance premium payments, and operating cash needs, or until they are deployed by our investment advisors.
See “Item 1—Condensed Consolidated Statements of Cash Flows” and “Item 1—Note 3 (Investments)” for explanations on changes in investments.
Prepaid reinsurance premiums represent the portion of unearned ceded written premium that will be earned pro-rata over the coverage period of our reinsurance program, which runs from June 1st to May 31st of the following year. The increase of $339.4 million to $575.6 million as of June 30, 2024 was primarily due to reinsurance costs relating to the placement of our 2024-2025 catastrophe reinsurance program on June 1, 2024, less amortization of ceded written premium for the reinsurance costs earned since the beginning of the new program. See “Part I— Item 2— “Reinsurance Program” regarding the Company’s reinsurance placement and participation in the Florida RAP program.
Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE, and other expenses that are expected to be recovered from reinsurers. The decrease of $88.2 million to $130.9 million as of June 30, 2024 was primarily due to the settlement and collection of amounts recoverable from reinsurers relating to various ceded events.
Premiums receivable, net represents amounts receivable from policyholders. The increase in premiums receivable, net of $10.1 million to $87.2 million as of June 30, 2024 is consistent with premium trends including seasonality and consumer payment behaviors.
Deferred policy acquisition costs (“DPAC”) increased by $7.2 million to $117.1 million as of June 30, 2024, and is consistent with written premium trends and changes in commissions paid to agents. See “Item 1—Note 5 (Insurance Operations)” for a roll-forward in the balance of our DPAC.
Deferred income taxes represent the estimated tax asset or tax liability caused by temporary differences between the tax return basis of certain assets and liabilities and amounts recorded in the financial statements. During the six months ended June 30, 2024, deferred income tax assets decreased by $18.5 million to $24.7 million, primarily due to an increase in prepaid reinsurance premiums. Deferred income taxes reverse in future years as the temporary differences between book and tax reverse.
Other assets represent groups of accounts that are listed separately that do not fit into existing captions. During the six months ended June 30, 2024, other assets increased by $6.2 million to $28.8 million, primarily due to the purchase of miscellaneous invested assets during the first half of 2024.
See “Item 1—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a roll-forward in the balance of our unpaid losses and LAE. Unpaid losses and LAE decreased by $165.5 million to $344.6 million as of June 30, 2024. Overall, unpaid losses and LAE decreased, as a result of payment of current and prior year claims including the settlement of Hurricane Ian claims during 2024.
Unearned premiums represent the portion of direct premiums written that will be earned pro-rata in the future. The increase of $51.7 million from December 31, 2023 to $1.04 billion as of June 30, 2024 reflects the seasonality of our business during the year.
Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $24.7 million from December 31, 2023 to $73.4 million as of June 30, 2024 reflects customer payment behavior and the payment behavior of mortgage escrow service providers as well as premium trends.
We exclude net negative cash balances, if any, from cash and cash equivalents that we have with any single financial institution based on aggregating the book balance of all accounts at the institution which have the right of offset. If the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Consolidated Balance Sheet to book overdraft. These amounts represent outstanding checks or drafts not yet presented to the financial institution in excess of amounts on deposit at the financial institutions. We maintain a short-term cash investment strategy sweep to maximize investment returns on cash balances. Funds from these sweep accounts are used to meet obligations under outstanding checks and drafts and transferred to the respective financial institutions upon presentment. There were none as of June 30, 2024 compared to $14.6 million as of December 31, 2023. The decrease of $14.6 million is the result of increased cash balances available for offset as of June 30, 2024 compared to December 31, 2023. See “—Liquidity and Capital Resources” for more information.
Reinsurance payable, net, represents the unpaid reinsurance premium installments owed to reinsurers, unpaid reinstatement premiums due to reinsurers, and cash advances received from reinsurers, if any. On June 1st of each year, we renew our core catastrophe reinsurance program and record the estimated annual cost of our reinsurance program. These estimated annual costs are increased or decreased during the year based on premium adjustments or as a result of new placements during the year. The annual cost initially increases reinsurance payable, which is then reduced as installment payments are made over the policy period of the reinsurance, which typically runs from June 1st to May 31st. The balance increased by $457.1 million to $649.0 million as of June 30, 2024 as a result of timing of the above items and decline in costs of reinsurance expense for the current treaty period in 2023 and 2024, as well as the reduction in cash advances received in 2022 after Hurricane Ian which have been utilized during the claim settlement process in 2023 and 2024 of Ian claims and those associated with other weather events. See “—Liquidity and Capital Resources” for more information about timing of reinsurance premium installment payments.
Income taxes payable/recoverable represents the amounts due to/from taxing jurisdictions within one year. An income tax payable arises when income tax liabilities exceed tax payments, and an income tax recoverable occurs when tax payments exceed income tax liabilities. As of June 30, 2024, the income tax recoverable is $5.5 million, compared to a balance payable of $5.9 million as of December 31, 2023.
Other liabilities and accrued expenses decreased by $43.3 million to $47.3 million as of June 30, 2024, primarily driven by a decrease in amounts payable for securities resulting from trades executed that had settled after year end.
See “—Liquidity and Capital Resources” for more information about the changes in additional paid-in capital during 2024.
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 been sufficient and we expect them to be sufficient to meet our current and long term liquidity requirements.
The balance of cash and cash equivalents, excluding restricted cash, as of June 30, 2024 was $283.3 million, compared to $397.3 million at December 31, 2023. See “Item 1—Condensed Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between June 30, 2024 and December 31, 2023. This decrease is largely attributable to the investment of excess cash into long term investments. Our cash investment strategy at times includes cash investments where the right of offset against other bank accounts does not exist. A book overdraft occurs when aggregating the book balance of all accounts at a financial institution for accounts which have the right of offset, and if the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Consolidated Balance Sheet to book overdraft. Cash and cash equivalents balances are available to settle book overdrafts, and to pay reinsurance premiums, expenses and claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs from June 1st to May 31st of the following year. The FHCF reimbursement premiums are paid in three installments on August 1st, October 1st and December 1st, and third-party reinsurance premiums are generally paid in four installments on July 1st, October 1st, January 1st and April 1st, resulting in significant payments at those times. See “Item 1—Note 12 (Commitments and Contingencies)” and additional discussion below under the caption “—Material Cash Requirements” for more information.
The balance of restricted cash and cash equivalents as of June 30, 2024 and December 31, 2023 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business. In addition amounts on deposit to support our captive insurance are restricted. Restricted cash and cash equivalents increased by $66.0 million to $68.6 million as of June 30, 2024 as a result of collateral held by a reinsurance captive arrangement with one of the Insurance Entities reported as a Variable Interest Entities (“VIE”) in the condensed consolidated financial statements. See “Item 1—Note 14 (Variable Interest Entities)” for more information.
Liquidity is required at the holding company for us to cover the payment of holding company general operating expenses, provide for contingencies if needed, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of our tax obligations to taxing authorities, settlement of taxes between subsidiaries in accordance with our tax sharing agreement, capital contributions to subsidiaries or surplus note contributions to the Insurance Entities, if needed, and interest and principal payments
on outstanding debt obligations of the holding company. Effective in 2021 for UPCIC and 2022 for APPCIC, the holding company has put in place an ongoing surplus note arrangement with the Insurance Entities, which has been approved by FLOIR as the Insurance Entities’ domestic regulator. Surplus notes are unsecured debt issued by the Insurance Entities that are subordinated to all claims by policyholders and creditors, with interest and principal payments on the surplus notes to the holding company being made only upon the FLOIR’s express approval. Surplus notes are considered bonds in function and payout structure, but are accounted for as equity in the statutory reporting of the Insurance Entities. The holding company has outstanding with the Insurance Entities $164.8 million in surplus notes and accrued interest as of June 30, 2024. Under the terms of the surplus notes, interest accrues at a variable rate which resets annually (currently 10.70% for 2024). The declaration and payment of future dividends to our shareholders, and any future repurchases of our common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. New regulations or changes to existing regulations or their interpretations imposed on the Company and its affiliates may also impact the availability, amount and timing of future dividend payments to the parent. Principal sources of liquidity for the holding company include dividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for general agency, inspections and claims adjusting services. Dividends are also paid from income earned from brokerage commissions paid by third party reinsurers earned on reinsurance contracts placed by our wholly-owned subsidiary, Blue Atlantic Reinsurance Corporation, and policy fees charged to policyholders. We also maintain high quality investments in our portfolio as a source of liquidity along with ongoing interest and dividend income from those investments.
The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the FLOIR is subject to restrictions as referenced below and in “Item 1—Note 5 (Insurance Operations).” Dividends from the Insurance Entities can only be paid from accumulated unassigned funds derived from net operating profits and net realized capital gains. Subject to such accumulated unassigned funds, the maximum dividend that may be paid by the Insurance Entities to Protection Solutions, Inc. (“PSI”, formerly known as Universal Insurance Holding Company of Florida), without prior approval (an “ordinary dividend”) is further limited to the lesser of statutory net income from operations of the preceding calendar year or statutory unassigned surplus as of the preceding year end. During the six months ended June 30, 2024 and the year ended December 31, 2023, the Insurance Entities did not pay dividends to PSI. As of June 30, 2024 and December 31, 2023, the Insurance Entities did not have the capacity to pay ordinary dividends.
On November 23, 2021, we issued $100 million of 5.625% Senior Unsecured Notes due 2026. We used the net proceeds to support the Insurance Entities’ statutory capital requirements and for general corporate purposes. If necessary, the Company also has amounts available under our unsecured revolving loan as discussed in “Item 1—Note 7 (Long-term debt).”
Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses (offset by recovery of any reimbursement amounts under our reinsurance agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premium and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of premiums earned, net, interest and dividend income from the investment portfolio, the collection of reinsurance recoverable and financing fees.
Our insurance operations provide liquidity as premiums are generally received months or even years before potential losses are paid under the policies written. In the event of catastrophic events, many of our reinsurance agreements provide for “cash advance” whereby reinsurers advance or prepay amounts to us, thereby providing liquidity, which we utilize in the claim settlement process. In addition, the Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale. The average credit rating on our available-for-sale securities was A+ as of June 30, 2024 and December 31, 2023. Credit ratings are a measure of collection risk on invested assets. Credit ratings are provided by third party nationally recognized rating agencies and are periodically updated. Management establishes guidelines for minimum credit rating and overall credit rating for all investments. The duration of our available-for-sale securities was 3.4 years at June 30, 2024 compared to 3.7 years at December 31, 2023. Duration is a measure of a bond’s sensitivity to interest rate changes and is used by management to limit the potential impact of longer-term investments.
The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs and retentions before our reinsurance protection commences. Also, the Insurance Entities are responsible for all other losses that otherwise may not be covered by the reinsurance programs and any amounts arising in the event of a reinsurer default. Losses or a default by reinsurers may have a material adverse effect on either of the Insurance Entities or on our business, financial condition, results of operations and liquidity. See “Item 1—Note 4 (Reinsurance)” for more information.
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. The following table provides our stockholders’ equity, total long-term debt, total capital resources, debt-to-total capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands):
| | | | | | | | | | | |
| | As of |
| June 30, | | December 31, |
| 2024 | | 2023 |
| Stockholders’ equity | $ | 393,237 | | | $ | 341,297 | |
| Total long-term debt | 101,625 | | | 102,006 | |
| Total capital resources | $ | 494,862 | | | $ | 443,303 | |
| | | |
| Debt-to-total capital ratio | 20.5 | % | | 23.0 | % |
| Debt-to-equity ratio | 25.8 | % | | 29.9 | % |
|
Capital resources, net increased by $51.6 million for the six months ended June 30, 2024, reflecting a net increase in total stockholders’ equity, partially offset by a decline in long-term debt. The change in stockholders’ equity was the result of our net income in the six months ended June 30, 2024 offset by treasury share purchases and dividends to shareholders. See the consolidated statement of stockholders’ equity and “Item 1—Note 8 (Stockholders’ Equity)” for an explanation of changes in treasury stock. The reduction during 2024 in long-term debt was primarily the result of principal payments on long-term debt of $0.7 million offset by amortization of debt issuance costs of $0.2 million on our 5.625% Senior Unsecured Notes due 2026. See “—Liquidity and Capital Resources” for more information.
Additional paid-in-capital increased by $3.7 million primarily from increases in share-based compensation of $2.2 million for the year ended June 30, 2024.
The debt-to-total capital ratio is total long-term debt divided by total capital resources, whereas the debt-to-equity ratio is total long-term debt divided by stockholders’ equity. These ratios help management measure the amount of financing leverage in place in relation to equity and future leverage capacity.
Adjusted common stockholders’ equity, representing GAAP common stockholders' equity, excluding accumulated other comprehensive income (loss), was $468.9 million as of June 30, 2024 and $415.4 million as of December 31, 2023.
Adjusted book value per common share, representing adjusted common stockholders’ equity divided by outstanding common shares at the end of the reporting period, was $16.44 as of June 30, 2024 and $14.34 as of December 31, 2023.
Adjusted return on common equity representing actual or annualized adjusted net income (loss) attributable to common stockholders divided by average adjusted common stockholders' equity, with the denominator excluding current period income statement after-tax net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, was 30.5% as of June 30, 2024 and 14.7% as of December 31, 2023.
Revolving Loan
As discussed in “Item 1—Note 7 (Long-term Debt),” the Company entered into a committed and unsecured $50.0 million revolving credit line with JP Morgan Chase Bank N.A. This agreement succeeded the previous $40.0 million revolving credit line with J.P. Morgan Chase, N.A. As of June 30, 2024, the Company has not borrowed any amount under this revolving loan. The Company must pay an annual commitment of 0.50% of the unused portion of the commitment. Borrowings mature on May 30, 2025, 364 days after the inception date and carries an interest rate of prime rate plus a margin of 2% on borrowings. The credit line is subject to annual renewals. The credit line contains customary financial and other covenants, with which the Company is in compliance.
Long-term Debt
In November 2021, we issued and sold $100 million of 5.625% Senior Unsecured Notes due 2026 (the “Notes”) to certain institutional accredited investors and qualified institutional buyers. The Notes mature on November 30, 2026, at which time the entire $100.0 million of principal is due and payable. At any time on or after November 30, 2023, the Company may redeem all or part of the Notes. See “Item 1—Note 7 (Long-term debt)” for additional details. As of June 30, 2024, we were in compliance with all applicable covenants.
We will also continue to evaluate opportunities to access the debt capital markets to raise additional capital. We anticipate any proceeds would be used for general corporate purposes, including investing in the capital and surplus of the Insurance Entities.
In addition to the funds typically generated from our operations, we maintain a prudent investment portfolio, mainly consisting of high-grade fixed income securities. Our primary goal is to safeguard capital and ensure sufficient liquidity for potential claims and other financial requirements. The portfolio also aims to achieve a comprehensive return, with a focus on investment income. Our
operations have historically produced a steady flow of funds, contributing to the growth of our cash and investments. We have never needed to sell off investments to support our operations or finance activities.
In 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term, with quarterly payments of interest based on the 10-year Constant Maturity Treasury Index. As of June 30, 2024, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC is not subject to increases in interest rates. See “Item 1—Note 7 (Long-term debt)” for additional details. At June 30, 2024, UPCIC was in compliance with the terms of the surplus note and with each of the loan’s covenants as implemented by rules promulgated by the SBA. Total adjusted capital and surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.
Looking Forward
We continue to monitor a range of financial metrics related to our business. Although we have not experienced material adverse impacts on our business or liquidity, conditions are subject to change depending on the extent of the economic outcomes, and the pace and extent of an economic recovery. See “Overview—Trends and Geographical Distribution—Florida Trends” regarding our response to the Florida market.
Common Stock Repurchases
We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock, and general market conditions. We will fund the share repurchase program with cash from operations. During 2024, there were two authorized repurchase plans in effect:
•On June 12, 2023, our Board of Directors authorized the repurchase of up to $20.0 million of our common stock through June 10, 2025 (“The June 2025 Share Repurchase Program”) pursuant to which we repurchased 1,320,675 shares of our common stock at an aggregate cost of approximately $20.0 million. As of June 30, 2024, we have repurchased all authorized common stock under the June 2025 Share Repurchase Program.
•On March 11, 2024, our Board of Directors authorized the repurchase of up to $20.0 million of our common stock through March 11, 2026 (“The March 2026 Share Repurchase Program”) pursuant to which we repurchased 274,608 shares of our common stock at an aggregate cost of approximately $5.3 million. As of June 30, 2024, we have the ability to purchase up to approximately $14.7 million of our common stock under the March 2026 Share Repurchase Program.
In total, during the quarter ended June 30, 2024, we repurchased an aggregate of 274,320 shares of our common stock in the open market at an aggregate purchase price of $5.3 million. See “Part II—Item 2—Unregistered Sales of Equity Securities and Use of Proceeds” for share repurchase activity during the three months ended June 30, 2024.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for multi-year reinsurance contract commitments for future years that will be recorded at the commencement of the coverage period. See “Item 1—Note 12 (Commitments and Contingencies)” for more information.
Cash Dividends
The following table summarizes the dividends declared and paid by the Company during the six months ended June 30, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | Dividend
Declared Date | | Shareholders
Record Date | | Dividend
Payable Date | | Cash Dividend
Per Common Share Amount |
| First Quarter | | February 8, 2024 | | March 8, 2024 | | March 15, 2024 | | $ | 0.16 | |
Second Quarter | | April 10, 2024 | | May 10, 2024 | | May 17, 2024 | | $ | 0.16 | |
| | | | |
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| | | | |
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MATERIAL CASH REQUIREMENTS
The following table represents our material cash requirements for which cash flows are fixed or determinable as of June 30, 2024 (in thousands):
| | | | | | | | | | | | | | | | | |
| Total | | Next 12 Months | | Beyond 12 Months |
| Reinsurance payable and multi-year commitments (1) | $ | 903,567 | | | $ | 648,961 | | | $ | 254,606 | |
| Unpaid losses and LAE, direct (2) | 344,648 | | | 193,925 | | | 150,723 | |
| Long-term debt (3) | 117,530 | | | 7,201 | | | 110,329 | |
| Total material cash requirements | $ | 1,365,745 | | | $ | 850,087 | | | $ | 515,658 | |
(1)The amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Item 1—Note 12 (Commitments and Contingencies).”
(2)There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred through June 30, 2024. Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from our reinsurance program. See “Item 1—Note 4 (Reinsurance)” and “—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses).”
(3)Long-term debt consists of a Surplus note and 5.625% Senior unsecured notes. See “Item 1—Note 7 (Long-term debt).”
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements, prepared under GAAP, report historical dollar values and do not adjust for inflation. Our performance is influenced by both interest rates and inflation. We try to anticipate inflation when setting insurance premiums, but there are competitive and regulatory limits. Interest rates impact our investment portfolio's market value and return rate. Significant and prolonged inflation could materially affect our future liabilities related to loss and LAE.
ARRANGEMENTS WITH VARIABLE INTEREST ENTITIES
We entered into a reinsurance captive arrangement with a VIE in the normal course of business, and consolidated the VIE since we are the primary beneficiary.
For a further discussion of our involvement with the VIE, see “Item 1—Note 14 (Variable Interest Entities).”
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 ended December 31, 2023.
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures presented in accordance with GAAP. For more information regarding our key performance indicators, please refer to the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Indicators.”
The following table presents the reconciliation of GAAP revenue to core revenue, which is a non-GAAP measure (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| GAAP revenue | $ | 380,214 | | | $ | 339,570 | | | $ | 748,173 | | | 656,078 | |
| less: Net realized gains (losses) on investments | (311) | | | 882 | | | (388) | | | 94 | |
less: Net change in unrealized gains (losses) on investments | 1,355 | | | 1,731 | | | 4,461 | | | 2,688 | |
| Core Revenue | $ | 379,170 | | | $ | 336,957 | | | $ | 744,100 | | | $ | 653,296 | |
| | | | | | | |
The following table presents the reconciliation of GAAP operating income (loss) to adjusted operating income (loss), which is a non-GAAP measure (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| GAAP income (loss) before income tax expense (benefit) | $ | 47,905 | | | $ | 37,539 | | | $ | 95,389 | | | $ | 70,330 | |
| add: Interest and amortization of debt issuance costs | 1,623 | | | 1,629 | | | 3,245 | | | 3,265 | |
| GAAP operating income (loss) | 49,528 | | | 39,168 | | | 98,634 | | | 73,595 | |
| less: Net realized gains (losses) on investments | (311) | | | 882 | | | (388) | | | 94 | |
less: Net changes in unrealized gains (losses) on investments | 1,355 | | | 1,731 | | | 4,461 | | | 2,688 | |
| Adjusted operating income (loss) | $ | 48,484 | | | $ | 36,555 | | | $ | 94,561 | | | $ | 70,813 | |
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The following table presents the reconciliation of GAAP operating income (loss) margin to adjusted operating income (loss) margin, which is a non-GAAP measure (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| GAAP operating income (loss) | $ | 49,528 | | | $ | 39,168 | | | $ | 98,634 | | | $ | 73,595 | |
| GAAP revenue | 380,214 | | | 339,570 | | | 748,173 | | | 656,078 | |
| GAAP operating income (loss) margin | 13.0 | % | | 11.5 | % | | 13.2 | % | | 11.2 | % |
| Adjusted operating income (loss) | 48,484 | | | 36,555 | | | 94,561 | | | 70,813 | |
| Core revenue | 379,170 | | | 336,957 | | | 744,100 | | | 653,296 | |
| Adjusted operating income (loss) margin | 12.8 | % | | 10.8 | % | | 12.7 | % | | 10.8 | % |
The following table presents the reconciliation of GAAP net income (loss) available to common stockholders to adjusted net income (loss) available to common stockholders, which is a non-GAAP measure (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| GAAP net income (loss) | $ | 35,416 | | | $ | 28,566 | | | $ | 69,073 | | | $ | 52,739 | |
| less: Preferred dividends | 2 | | | 2 | | | 5 | | | 5 | |
| GAAP net income (loss) available to common stockholders | 35,414 | | | 28,564 | | | 69,068 | | | 52,734 | |
| less: Net realized gains (losses) on investments | (311) | | | 882 | | | (388) | | | 94 | |
less: Net changes in unrealized gains (losses) on investments | 1,355 | | | 1,731 | | | 4,461 | | | 2,688 | |
| | | |
| add: Income tax effect on above adjustments | 257 | | | 643 | | | 1,002 | | | 684 | |
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| 341,297 | |
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| 415,369 | |
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| 11.78 | |
| 14.34 | |
The following table presents the reconciliation of GAAP ROCE to adjusted ROCE, which is a non-GAAP measure (in thousands):
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| Three Months Ended
June 30, | | Six Months Ended
June 30, | | Year Ended December 31, |
| 2024 | | 2023 | | 2024 | | 2023 | | 2023 |
| Actual or annualized net income (loss) available to common stockholders | $ | 141,656 | | | $ | 114,256 | | | $ | 138,136 | | | $ | 105,468 | | | $ | 66,813 | |
| Average common stockholders' equity | 378,851 | | | 328,139 | | | 367,167 | | | 311,184 | | | 314,497 | |
| ROCE | 37.4 | % | | 34.8 | % | | 37.6 | % | | 33.9 | % | | 21.2 | % |
| Actual or annualized adjusted net income (loss) available to common stockholders | $ | 138,508 | | | $ | 106,376 | | | $ | 131,994 | | | $ | 101,272 | | | $ | 58,657 | |
| Actual or adjusted average common stockholders' equity (1) | 454,673 | | | 420,078 | | | 440,577 | | | 409,955 | | | 399,396 | |
| Adjusted ROCE | 30.5 | % | | 25.3 | % | | 30.0 | % | | 24.7 | % | | 14.7 | % |
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(1) | Adjusted average common stockholders’ equity excludes current period after-tax net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential for economic losses due to adverse changes in fair market value of available-for-sale debt securities, equity securities (“Financial Instruments”) and investment real estate. We carry all of our Financial Instruments at fair market value and investment real estate at net book value in our statement of financial condition. Our investment portfolio as of June 30, 2024 is comprised of available-for-sale debt securities and equity securities, carried at fair market value, which expose us to changing market conditions, specifically interest rates and equity price changes.
The primary objectives of the investment portfolio are the preservation of capital and providing adequate liquidity for potential claim payments and other cash needs. The portfolio’s secondary investment objective is to provide a total rate of return with an emphasis on investment income. None of our investments in risk-sensitive Financial Instruments were entered into for trading purposes.
See “Item 1—Note 3 (Investments)” for more information about our Financial Instruments.
Interest Rate Risk
Interest rate risk is the sensitivity of the fair market value of a fixed rate Financial Instrument to changes in interest rates. Generally, when interest rates rise, the fair value of our fixed rate Financial Instruments declines.
The following tables provide information about our fixed income Financial Instruments as of June 30, 2024 compared to December 31, 2023, which are sensitive to changes in interest rates. The tables present the expected cash flows of Financial Instruments based on years to effective maturity using amortized cost compared to fair market value and the related book yield compared to coupon yield (dollars in thousands):
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| June 30, 2024 |
| 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Other | | Total |
| Amortized cost | $ | 110,996 | | | $ | 230,262 | | | $ | 241,133 | | | $ | 169,438 | | | $ | 104,974 | | | $ | 456,114 | | | $ | 3,502 | | | $ | 1,316,419 | |
| Fair market value | $ | 109,281 | | | $ | 220,899 | | | $ | 227,822 | | | $ | 160,224 | | | $ | 98,123 | | | $ | 395,965 | | | $ | 3,316 | | | $ | 1,215,630 | |
| Coupon rate | 3.15 | % | | 2.92 | % | | 2.95 | % | | 3.06 | % | | 3.99 | % | | 3.27 | % | | 4.63 | % | | 3.17 | % |
| Book yield | 2.80 | % | | 2.50 | % | | 2.73 | % | | 3.23 | % | | 3.46 | % | | 2.85 | % | | 1.23 | % | | 2.85 | % |
* Years to effective maturity - 4.3 years | | | | | | | | | | | | |
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| December 31, 2023 |
| 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Other | | Total |
| Amortized cost | $ | 92,428 | | | $ | 160,575 | | | $ | 185,761 | | | $ | 166,111 | | | $ | 103,731 | | | $ | 450,811 | | | $ | 3,502 | | | $ | 1,162,919 | |
| Fair market value | $ | 91,247 | | | $ | 153,712 | | | $ | 173,781 | | | $ | 153,506 | | | $ | 97,304 | | | $ | 391,765 | | | $ | 3,015 | | | $ | 1,064,330 | |
| Coupon rate | 2.77 | % | | 2.96 | % | | 2.73 | % | | 2.71 | % | | 3.41 | % | | 3.02 | % | | 4.22 | % | | 2.94 | % |
| Book yield | 2.34 | % | | 2.16 | % | | 2.01 | % | | 2.11 | % | | 2.94 | % | | 2.49 | % | | 1.38 | % | | 2.34 | % |
| * Years to effective maturity - 4.6 years | | | | | | | | | | | | |
All securities, except those with perpetual maturities, were categorized in the tables above utilizing years to effective maturity. Effective maturity takes into consideration all forms of potential prepayment, such as call features or prepayment schedules, which shorten the lifespan of contractual maturity dates.
Equity Price Risk
Equity price risk is the potential for loss in fair value of Financial Instruments in common stock and mutual funds and other from adverse changes in the prices of those Financial Instruments.
The following table provides information about the Financial Instruments in our investment portfolio subject to price risk as of the dates presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
| | Fair Value | | Percent | | Fair Value | | Percent |
| Equity Securities: | | | | | | | |
| Common stock | $ | 14,118 | | | 18.6 | % | | $ | 15,438 | | | 19.2 | % |
| Mutual funds and other | 61,716 | | | 81.4 | % | | 65,057 | | | 80.8 | % |
| Total equity securities | $ | 75,834 | | | 100.0 | % | | $ | 80,495 | | | 100.0 | % |
A hypothetical decrease of 20% in the market prices of each of the equity securities held at June 30, 2024 and December 31, 2023 would have resulted in a decrease of $15.2 million and $16.1 million, respectively, in the fair value of those securities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of June 30, 2024, to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s (“SEC”) rules and forms and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Lawsuits and other legal proceedings are filed against the Company from time to time. These legal matters typically include civil and administrative or regulatory considerations for which the Company obtains internal or third-party legal or other assistance to provide guidance, and when applicable, to represent and protect the Company’s interest.
Many of these legal proceedings involve disputes as to coverage or the scope and amount of damage arising from direct claims or recoveries from ceded claims under contracts or policies that the Company underwrites. The Company establishes reserves for its anticipated claims obligations net of expected reinsurance. From time to time, the Company is also involved in various other legal proceedings unrelated to claims disputes. The Company contests liability and/or the amount of damages as it considers appropriate according to the facts and circumstances of each matter.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal matters when those matters present loss contingencies that are both probable and estimable.
Legal proceedings are subject to many factors that cannot be predicted with certainty, and the Company may be exposed to losses in excess of any amounts accrued. The Company currently estimates that the reasonably possible losses for legal proceedings, whether in excess of a related accrued liability, including reserves, or where there is no accrued liability, and for which the Company is able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. These estimates of possible loss do not represent our maximum loss exposure, and actual results may vary significantly from current estimates.
Item 1A. Risk Factors
Please refer to the risk factors previously disclosed in “Part I, Item 1A—Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below presents purchases of our common stock during the three months ended June 30, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Total Number of | | Maximum Number |
| | | | | | Shares Purchased | | of Shares That |
| | | | | | As Part of | | May Yet be |
| | | | | | Publicly | | Purchased Under |
| | Total Number of | | Average Price | | Announced | | the Plans or |
| | Shares Purchased | | Paid per Share (1) | | Plans or Programs | | Programs (2) |
4/1/2024 - 4/30/2024 | | 83,210 | | | $ | 19.59 | | | 83,210 | | | — | |
5/1/2024 - 5/31/2024 | | 121,737 | | | $ | 19.90 | | | 121,737 | | | — | |
6/1/2024 - 6/30/2024 | | 69,373 | | | $ | 18.49 | | | 69,373 | | | 781,043 | |
| Total | | 274,320 | | | $ | 19.45 | | | 274,320 | | | 781,043 | |
(1)The average price paid per share does not reflect brokerage commissions paid to acquire shares in open market transactions.
(2)Number of shares was calculated based on a closing price at June 28, 2024 of $18.76 per share.
We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock and general market conditions. We will fund the share repurchase program with cash from operations.
On March 11, 2024, our Board of Directors authorized the repurchase of up to $20.0 million of our common stock through March 11, 2026 (“The March 2026 Share Repurchase Program”) pursuant to which we have repurchased 274,608 shares of our common stock at an aggregate cost of approximately $5.3 million from program inception through June 30, 2024. As of June 30, 2024, we have the ability to purchase up to approximately $14.7 million of our common stock under the March 2026 Share Repurchase Program.
Item 5. Other Information
During the quarter ended June 30, 2024, no director or Section 16 officer or any Rule 10b5-1 plans or non-Rule 10b5-1 trading arrangements.
Item 6. Exhibits
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| Exhibit No. | | Exhibit |
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| † Indicates management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | | UNIVERSAL INSURANCE HOLDINGS, INC. |
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| Date: July 30, 2024 | | /s/ Stephen J. Donaghy |
| | | Stephen J. Donaghy, Chief Executive Officer |
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| Date: July 30, 2024 | | /s/ Gary Lloyd Ropiecki |
| | | Gary Lloyd Ropiecki, Principal Accounting Officer |
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