Universal Insurance: Fundamentally Sound In Challenging Conditions (NYSE:UVE)

Universal Insurance Holdings, Inc. (NYSE:UVE) remains stable in a stormy market landscape. The challenges are more evident – inflation and insurance exodus in Florida, to name a few. But, revenue growth and adequate cash balances allow it to withstand the blows. Meanwhile, the stock price is moving sideways. It appears to be in line with the still uncertain environment. But, it makes it cheaper and undervalued, offering more opportunities for gains. Also, dividend payments are consistent and sustainable.

Company Performance

The state of Florida may be a risky environment for companies in the capital market. The volatility and higher exposure to natural calamities are some typical problems. But, there seems to be more than meets the eye. It is more directed towards the insurance industry, particularly P/C insurance companies. Since 2017, there have been six companies leaving the state. This year, another three are in their liquidation process. It is futile to deny that Florida is on the verge of a P/C insurance exodus. Amidst the roofing scams and controversies, policyholders and lawyers are hurting many companies. Despite all the hullaballoos, Universal Insurance Holdings, Inc. remains unperturbed.

Thankfully, policymakers are extending their support to insurance companies. In 2021, they provided an additional layer of protection. With that, the frequency of fraudulent claims may decrease this year. UVE is still standing along with Progressive (PGR) and Fidelity (FNF). In response to these problems, it implements tighter underwriting restrictions. These aim to avert or lessen the possibility of scams. But, it adds another challenge to lower policy renewals and policies in force.

Today, the company remains one of the primary providers in Florida. Now that the state is seeing insurance companies leaving, UVE may become more of a staple. Thanks to its financial capacity, allowing it to cater to many clients. It remains capable of adjusting its operations to avert the impact of scams and higher costs. This attribute helps drive its organic growth, giving it a strong competitive advantage. Its operating revenue amounts to $288 million, a 9% year-over-year growth. This increase stems from higher premiums, investment gains, and commissions and fees.

Amidst the impressive numbers, we can see that policies in force decreased. In Florida alone, policies in force dropped from 720,000 to 670,000. We may infer that the rise in revenues is driven by the increased price of premiums. It is a logical approach to offset the influx of policyholders filing for claims. It also offsets inflationary pressures that raise costs and expenses and interest rates. Also, note that UVE is one of the cheapest insurance providers in Florida. So, a price increase will not make it expensive compared to its peers.

But it has to generate more revenues to brush off the unanticipated frequency of claims. The actual claims exceeded the expected claims. Unrealized losses on equity securities did not help, either. As such, the company incurs higher claims and losses. The decrease in independent insurance agents appears to have limited its operating capacity. So even if commission expenses are lower, the operating costs and expenses are still high. The increase is almost twice as much as the increase in operating revenue. Hence, the operating margin is 0.079 compared to 0.137 in the comparative quarter. Nevertheless, the fact that the company remains profitable still means a lot. Aside from the insurance exodus, companies in Florida are struggling with lower capacity. It is also visible in UVE, given the decrease in agents who attract new clients and maintain renewals.

We must also take note that it continues to tighten its underwriting restrictions. UVE is known for its aggressive underwriting. But now, it is slightly veering away from its original strategy. For example, it is now more specific as to the maximum roof age it can cover. Roofs are the primary reason for insurance claims. The older the roof is, the higher the chance it may get damaged with or without natural calamities. It costs the company thousands of new clients and renewals. That may be the primary reason behind the decrease in policies in force.

Even so, it is a more prudent and conservative strategy to avert more costs of potential scams. Florida only accounts for 9% of US home insurance claims. But, 79% of them are undergoing lawsuits with the majority of them being fraudulent. As such, it maintains stable operations even if it is not as robust as in 2021. Despite lower margins, it maintains a positive net income.

How Universal Insurance, Inc. May Stay Afloat

While the core operations do not seem to be as robust as before, UVE remains a force to reckon with. Its solid and intact Balance Sheet displays its stable cash levels and investments. Their combined value comprises 82% of the total assets compared to 79% in the previous year. It is also 26% larger than borrowings and insurance policy liabilities. Even if it makes a single payment for all its liabilities, it will still have enough to sustain itself.

The company is also managing its financial leverage very well. Its resources are more adequate even after buying back shares for almost $4 million. It leads to an impressive ROE of 17%. So, if it expands, it may use its cash and investments alone or reissue its treasury shares. The high cash and investment balance also shows it can sustain itself even during net losses. The thing is it continues to generate positive net income and cash inflows. Its efficient asset management allows it to adjust its operations, especially today.

The boom in the housing market is another catalyst for its strong rebound. It may have to step back a bit and reassess its operations in Florida, its primary market. But, it may expand and increase its market presence in other states. Its current pricing is still reasonable and lower than the average in many states. Its average premium for a $200,000 coverage is $1,400-$1,500 per year. It is way lower than the average premium for the same coverage in the state at $1,648. So, it may go head-to-head with other companies of its size in other states.

Currently, 26 million Americans may buy houses in the next twelve months. It is far higher than the average number of houses sold at 5-6 million per year. Despite inflationary pressures, 34% are more confident in their capacity than in 2021. It is no wonder that home or P/C insurance is hyped up and may expand more. Recent statistics show that global and US P/C insurance may increase by 3.7% and 6%, respectively. Indeed, there is still a lot of untapped potential in other states. Note that the occurrences of natural disasters raise the demand for P/C insurance. UVE, being at the forefront of P/C insurance in Florida, has already established itself. It has a good track record with most premiums written and ceded in 2021. It is capable of doing so, given its outstanding financial position.

As it deals with the problems in Florida, I expect it to maintain its current size and pricing strategy. The operating revenue may be lower at $1.08 billion with an operating margin of 0.07. I consider the impact of inflationary pressures, excessive claims, and fewer independent agents. But as economic conditions become manageable, it may rebound. In 2023-2026, the operating revenue may have a gradual increase to $1.12-1.24 billion. Likewise, I project the operating margin to increase to 0.08-0.14.

Price Assessment

The stock price of Universal Insurance Holdings, Inc. is moving sideways. After its steep decline to $11.26, it rebounded a bit to $12-13 and stayed there since then. With $12.68 as its current price, it has already been cut by 24% from its starting price. The price also shows a PS Ratio of 0.34, which is within the ideal range. It means that $0.34 is needed to deliver an operating revenue of $1. Indeed, the decrease in the stock price highlights its cheapness and potential undervaluation.

Likewise, dividend payments make it an attractive stock. For more than a decade, these have been consistent with special dividends in almost all 4Q. The average annual dividend growth is 2.82%. It will be 2.72% if we account for special dividends. This year, annualized regular dividends per share may stay at $0.64. If special dividends remain unchanged, the value will be $0.77 per share. We may assess the stock price better using the Dividend Discount Model.

Stock Price	$12.68
Average Dividend Growth Rate	0.02783251232
Estimated Dividends Per Share	$0.64
Cost of Capital Equity	0.07230569844
Derived Value	$14.79122288 or $14.79

The derived value confirms the undervaluation with an upside of 17% in the next 12-24 months. If we also account for special dividends the derived value will be $14.10. It may be logical, given the consistent dividends and adequate financial capacity.

Bottom Line

Universal Insurance Holdings, Inc. appears to slow down amidst a more challenging market environment. But, its operating revenue continues to grow while net income remains at a positive value. The strong Balance Sheet shows it can sustain its size and expand even without borrowing. The stock price is still moving sideways while dividends show why it is an ideal investment. The recommendation, for now, is that Universal Insurance Holdings is a hold.