Universal Insurance Holdings Inc. (UVE, Financial) is a holding company offering property and casualty insurance and value-added insurance services in the U.S. The company develops, markets and writes insurance products for consumers predominantly in the personal residential homeowners lines of business, such as homeowners insurance, renters insurance and condo unit owners insurance. It sells insurance products through both appointed independent agents and through direct online distribution channels in the U.S. across 19 states, primarily Florida, which represents about 80% of the company’s premiums. The company has over 10% market share in the Florida market.
The company has a solid five-year track record with a return on equity averaging 18.5% and a compound annual growth rate in book value of 8.9%. The company employs over 10,000 sales agents to distribute its products. The biggest risk for the company is the vast majority of its policies are located in hurricane-prone regions. Therefore, a major storm could cause significant underwriting losses.
Financial results
The company reported its 2021 financial and operating results on Feb. 24. For the year, revenue increased 4.6% and operating income increased 17.3%. Earnings per share were only 65 cents due to large operating losses in the fourth quarter as a result of poor underwriting results. In addition, on the expense side, the combined ratio increased 7.4 points for the fourth quarter, driven primarily by strengthening reserves ($80 million) for the full accident year 2021 as a result of inflationary pressures and increased reinsurance costs.
Service revenue, which includes commission income and policy fees, increased 10% in 2021. The increases were driven by commission revenue earned on ceded premiums, partially offset by a decrease in policies fees due to a decrease in transaction volumes.
2022 guidance was also provided with GAAP and non-GAAP adjusted earnings per share in a range of $1.80 to $2.20 (assuming no extraordinary weather events occur). The annualized return on average equity is estimated to be in the range of 12.5% to 15%.
Balance sheet
The company has a strong balance sheet with $1.1 billion in insurance investments and another $250 million in operating cash and equivalents. At year-end, shareholders' equity was $429.7 million and total debt was $103.7 million. Demotech, a consulting firm that specializes in financial stability ratings, gives an A rating to Universal Insurance. This is based on a safe total assets to total liabilities ratio as well as a strong reinsurance program that limits the company’s total net exposure to a significant claim event.
Valuation
If analyst estimates turn out to be correct for 2022 and 2023, then the sock sells at only 5.8 times and 5 times forecasted earnings. However, due to the volatile and cyclical nature of insurance profits, most analysts used price-book calculations to determine over- or undervaluation. With book value per share of $13.76 at year-end 2021, the company is selling at 85% of book value.
The company typically pays a quarterly dividend, but usually supplements it with a year-end special dividend as well. For 2021, the scheduled quarterly dividend totaled 64 cents and the special cash dividend was 13 cents. Based on those dividends, the yield equates to 6.6%. However, the special dividends are not guaranteed and although neither are the regular dividends, based on expected regular divdends, the forward dividend yield could be 5.5%.
Guru holdings
Gurus that have added Universal Insurance positions in the last six months include Donald Smith & Co, Barrow, Hanley, Mewhinney & Strauss and Azvalor Managers FI (Trades, Portfolio).
Conclusion
I believe Universal Insurance's stock is substantially undervalued at this time. Simply trading at book value would create an 18% return. That return combined with a potential 5%-plus dividend yield should generate total shareholders returns over 20%. Further, at these low valuations, the company would make a prime acquisition candidate.
