UVE - Universal Insurance Holdings

[thepupil]

I have been working on this one for a while but have not completed all my DD, starter position for now and looking to build over time as the catalysts are a bit lacking. I figured I'd enlist the help of the board should anyone be interested and also throw her out there for critique. I know there are lots of people interested in insurance out there and this is one unusual insurance company. The "writeup" is more of a smattering of notes at this point.

 

I got the idea from VIC, which had a writeup on a competitor Homeowners Choice. I also know some people that know some people that work for UVE. My ears perked at a Christmas party back home (I'm from South Florida) when someone mentioned that Universal handed out two mini coopers and a vacation to Maui at the employee holiday party; it seemed a bit excessive for 300 odd employee firm. The combination of the VIC article on a competitor and my anecdote make me thing there may be something here.  I've been unable to confirm the mini cooper story, though it is consistent with other findings that suggest the company spends money liberally.

 

On HCI, I have no value to add to this well done writeup:

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/105440

 

Note that HCI has risen 37% since the writeup and UVE is up substantially since I first shorted it as well. Tough times for someone short fast growing florida insurers!!!  UVE is up 6% today before earnings after close and has risen recently on the news it will be included in an index (went up 9% day of announcement).

 

While HCI is a little different than UVE, I think it isn't coincidental that two of the most expensive insurers that i can find do the exact same thing (Florida Wind) and have "interesting" management with questionable risk cultures. For example HCI uses part of its float to invest in unprofitable marina's as real estate speculation. I would call coastal real estate Texas hedge for a Florida P+C insurer!

 

But on to the nitty gritty.

 

UVE, Universal Insurance Holdings is a short because it is being priced at 2.8X book off exceedingly high and very likely unsustainable earnings, engages in a high risk non diversified business model (the vast majority of business is Florida Wind), and does not appear to have any real observable competitive advantage on either the asset side (investing) or liability side (underwriting hurricane risk). Furthermore, there some yellow flags here and a few red ones in terms of corporate governance, business ethics, etc. The stock does look cheap on an earnings basis though (about 9X trailing).

 

A benign decade in terms of hurricanes in Florida, a good pricing environment for insurance,  along with a depleting regulatory tailwind (the takeoff insurance agreements with Citizens which you can read about in the HCI writeup), allowed Universal to grab share and grow equity from basically nil to $175MM today. Universal currently has 7% market share in Florida and has sported the below ROE's. This performance makes Ajit Jain look like an idiot and sets off my "holy shit that can't be sustainable" alarm. If it is sustainable than this board should change its name to Corner of Berkshire and Fairfax and Universal and we should all purchase the stock.

 

2006: 78%

2007: 74%

2008: 39%

2009: 25%

2010: 26%

2011: 13%

2012: 18.5%

2013: 35%(TTM)

 

Yellow and Red Flags:

 

So digging a bit into UVE, there are some interesting dynamics at play. First and foremost, the longtime CEO and founder of the company has basically exited his 40+% position in the company and resigned in 2013 after a pretty damning regulatory report. He was solely in charge of investments and racked up millions of dollars of commissions trading junior gold miner stocks. You can find the details in the attached regulatory report. All investments are now outsourced to Deutsche Bank, which I view as evidence that this company has no advantage on the asset side.

 

The outgoing CEO exited by selling his stock back to the company at a discount to market in several transactions ranging from ~the low single digits to most recently around $11 per share. A reinsurance company that the firm does business with was also allowed to buy UVE stock at a discount (a weird way to pay a reinsurance company).

 

This is described here:

On May 23, 2013, UIH entered into a $20 million unsecured term loan agreement and related term note (“Term Loan”) with RenaissanceRe Ventures Ltd., as lender (“RenRe Ventures”). The Term Loan is part of a series of agreements entered into by the Company and RenRe Ventures and its affiliates pursuant to which, among other things, the Company purchased a catastrophe risk-linked transaction contract from an affiliate of RenRe Ventures and such affiliate will reserve reinsurance capacity for the Company’s reinsurance program and receive a right of first refusal in respect of a portion thereof. As part of the series of agreements with RenRe Ventures and its affiliates, on May 23, 2013, UIH, RenRe Ventures and Mr. Meier agreed to assign to RenRe Ventures a portion of UIH’s right of first refusal to repurchase shares of UIH’s common stock owned by Mr. Meier under the first repurchase agreement entered into on April 1, 2013. RenRe Ventures will have a right of first refusal to repurchase one-third of the shares offered by Mr. Meier to any third party, up to the lesser of 2 million shares or 4.99% of UIH’s’s outstanding common stock, through December 31, 2014.

 

There have been two CFO resignations in the past 4 years:

 

On July 30, 2013, George De Heer, Chief Financial Officer and Principal Accounting Officer of Universal Insurance Holdings, Inc. (the “Company”), notified the Company that he is voluntarily resigning, effective September 30, 2013, for personal reasons. There was no disagreement or dispute between Mr. De Heer and the Company which led to his decision to resign.

 

On September 30, 2010, following a recent illness, James M. Lynch resigned as Executive Vice President and Chief Financial Officer of Universal Insurance Holdings, Inc. (“Company”) and its wholly-owned insurance subsidiaries, Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property & Casualty Insurance Company (APPCIC). There were no disagreements between Mr. Lynch and the Company on any matter relating to the Company’s financial statements, accounting policies or its internal controls. He will remain with the Company as its Director of Financial Analysis.

 

Interesting Audit Language:

It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

 

The company held its annual meeting in Hilton Head, South Carolina, which in my opinion indicates a lack of frugality.

 

They've had regulatory issues from their obvious investment incompetence but also from their treatment of policy holders:

http://www.bizjournals.com/southflorida/news/2013/05/30/regulators-fine-universal-property.html?page=all

 

The Better Business Bureau has some great reviews

http://www.bbb.org/south-east-florida/business-reviews/insurance-agents-and-services/universal-property-and-casualty-insurance-company-in-fort-lauderdale-fl-5003510

 

And this guy

http://www.propertyinsurancecoveragelaw.com/2013/04/articles/consumer-protection/what-a-coincidence-universal-property-casualty-engages-in-postloss-underwriting-and-makes-30-million-in-profits/

 

Love the SEC correspondence about what the business purpose of a reinsurance contract with a wholly owned entity is...seriously what risk has been transferred if you use yourself for reinsurance (they've since changed this up)

http://www.sec.gov/Archives/edgar/data/891166/000119312512127507/0001193125-12-127507-index.htm

http://www.sec.gov/Archives/edgar/data/891166/000119312512106685/0001193125-12-106685-index.htm

http://www.sec.gov/Archives/edgar/data/891166/000119312512127507/0001193125-12-127507-index.htm

http://www.sec.gov/Archives/edgar/data/891166/000000000012015525/0000000000-12-015525-index.htm

 

 

That's the start of my work. All in all it looks like a company with a bad risk culture, a bad spending culture and results completely out of whack with what you'd expect.

 

And a very high valuation on a P/B basis. The question of course is what is the catalyst? I think a big hurricane could destroy this company if there are issues with the book, or just force a rerating.

 

Also I think that competition will come in and force pricing lower. Warren Buffett even mentioned how hurricane pricing had come down a lot today on squawk. That should help damper the ROE a bit. Additionally, I love it when the company declares a dividend or buys back stock. Capital return indicates they aren't reinvesting at those high rates.

 

Feedback welcomed. Hope that wasn't too long and disorganized.

upcic130508-13-CO1.pdf

[thepupil]

BUFFETT: Yeah, it's interesting. I think the public has the impression that because there's been so much talk about climate that events of the last ten years from an insurance standpoint in climate have been unusual. The answer is they haven't.

I mean, we-- you read about these events, but you were reading about events 30 or 40 or 50 years ago. And we've been remarkably free of hurricanes in the United States in the last five years. So if you were writing hurricane insurance, it’s been all profit. There have been more -- some more tornadoes than normal, but it's not had any effect in terms, so far-- the effects of climate change if any have not affected our-- they have not affected the insurance

market.

BECKY: They haven't. So that's not something at all that you guys have changed your calculus on --

BUFFETT: I have made no difference. I calculate the probabilities in terms of catastrophes no differently than a few years ago.

JOE: Hey Warren and--

BUFFETT: That may change in ten years.

JOE: I think it's been three thousand days since it something like a category two hit

landfall. That's the longest in history for a hurricane. And you mentioned tornadoes. Last year it was actually well below. I don't know about if you add up all the recent years, but, I watched you after, you know, Al Gore’s big year it was a horrible year, but the one that he said we're going to have-- that's going to be repeated year after year, the one where he had-- we went

CNBC SQUAWK BOX TRANSCRIPT: Monday, March 03, 2014 PAGE 21 OF 48



through the whole Greek alphabet and started again, with hurricanes. I watched you, you

knew. You knew. you knew, you knew, you knew. And you knew that that was going to be an opportunity to raise premiums, and then not really have any events over the -- and it played out, exactly like you thought. I don't know how you do it.

BUFFETT: Well I love the apocalyptic predictions on it, because-- you're right, it probably does affect rates. And the truth is that writing U.S. hurricane insurance has been very profitable in the last five or six years. Now the rates have come down very significantly, so, we aren't writing much-- if anything in the U.S

[JAllen]

Spent some time on this a few months ago.  Have you done work on their reinsurance contracts, which as you suggest, are the primary determinant of this company's future, IMO.  At first I was excited that it would just take a moderate hurricane in S. Florida, which average every four years (over the past fifty or so). But after making a spreadsheet with their reinsurance contracts, it appeared that they were effectively fully hedged, or at least claim to be.  That is, their reinsurance contracts covered them for every major occurrence.

[thepupil]

Thanks J. The new 10K just came out so I'll look into the reinsurance more and lay it out more rigorously.

 

My gut is you don't put up their returns being "fully hedged" and the qualitative here suggests they probably take big risks. And when I've read some of their q's and k's in the past some of their reinsurance transactions seemed like they were kind of buying "put spreads" and keeping the far out tail.

 

It's a weird company! A bit of a puzzle.

[thepupil]

HCI Results out, stock down 12% AH (back to even on that one lol). HCI is even better than UVE from a valuation and ridiculousness of ROE perspective. They made $65MM in 2013 on $120MM of equity (end of '12). Move over Warren Buffett!!!

 

HCI is $490MM MCap after the correction about 3X book. Briefly when it was up today, the market cap exceeded its total assets (1/2 of which is cash), which implied (assuming no future growth of course) that the insurance liability was basically worth nothing. So between HCI and UVE you can short about $950MM of market cap adn $320MM of insurance  equity with super concentrated books in Florida wind. You are basically the steamroller here, and those guys are picking up your hundred dollar bills in front of you. They are getting rich until one day they get steamrolled and an event forces a repricing of the stocks. But it could also never happen. Maybe Florida weather has witnessed a "paradigm shift".

 

I've got to be missing something. Do you all know of any successful insurance companies that specialize in a single geography and single type of catastrophe risk? It seems strange that Florida's largest private P+C (Universal) fits that description.

 

Making money in insurance can not be this easy.

 

Full Year 2013 - Financial Ratios

The company’s loss ratio applicable to the year ended December 31, 2013 was 27.8% compared with 42.1% for the year ended December 31, 2012.

The expense ratio applicable to 2013 was 29.7% compared with 29.9% in 2012. The combined loss and expense ratio to net premiums earned was 57.5% in 2013 compared with 72.0% in 2012.

[thepupil]

http://seekingalpha.com/pr/9369893-universal-insurance-holdings-inc-announces-share-repurchase

 

Universal with its last round of share repurchases at a discount to market (but about 250% multiple of book) from the former CEO who has gone from 25+% ownership as of the 2012 proxy (filed 4/2013) to less than 5% in less than a year. Also the company waived their right to buy more shares at a discount to market and the former CEO then sold more shares in a private transaction.

 

"Additionally, the Company announced that it has waived its right of first refusal to an additional 1,100,000 shares of common stock owned by Mr. Meier, who has informed the Company that he sold those shares in a separate privately negotiated transaction. As a result of these transactions, Mr. Meier now owns less than 5 percent of the Company's outstanding common stock.."

 

From my additional work on the company and talking to a few people , I believe, as JAllen pointed out, much of their risk has been reinsured out, because of low pricing for reinsurance for Florida wind.

 

My logic was bass ackwards when i cited Buffett talking about pricing in Florida getting terrible and that being good for the UVE short case. Buffett was talking about reinsurance pricing. Low reinsurance pricing is good for UVE and is a component of why they've printed money. So a bad hurricane season won't kill the company from a balance sheet perspective (it obviously won't be good), but it may reprice reinsurance (which reprices every year) which is what brings down the mind boggling ROE's.

 

As it was explained to me the HCI's and UVE's of the world are price inelastic buyers of reinsurance because they don't have enough balance sheet for all the risk they underwrite.

 

[Daytripper]

Are you still short?  I'm no technician, but $10-12 looks like a near-term possibility.

[twacowfca]

http://seekingalpha.com/pr/9369893-universal-insurance-holdings-inc-announces-share-repurchase

 

Universal with its last round of share repurchases at a discount to market (but about 250% multiple of book) from the former CEO who has gone from 25+% ownership as of the 2012 proxy (filed 4/2013) to less than 5% in less than a year. Also the company waived their right to buy more shares at a discount to market and the former CEO then sold more shares in a private transaction.

 

"Additionally, the Company announced that it has waived its right of first refusal to an additional 1,100,000 shares of common stock owned by Mr. Meier, who has informed the Company that he sold those shares in a separate privately negotiated transaction. As a result of these transactions, Mr. Meier now owns less than 5 percent of the Company's outstanding common stock.."

 

From my additional work on the company and talking to a few people , I believe, as JAllen pointed out, much of their risk has been reinsured out, because of low pricing for reinsurance for Florida wind.

 

My logic was bass ackwards when i cited Buffett talking about pricing in Florida getting terrible and that being good for the UVE short case. Buffett was talking about reinsurance pricing. Low reinsurance pricing is good for UVE and is a component of why they've printed money. So a bad hurricane season won't kill the company from a balance sheet perspective (it obviously won't be good), but it may reprice reinsurance (which reprices every year) which is what brings down the mind boggling ROE's.

 

As it was explained to me the HCI's and UVE's of the world are price inelastic buyers of reinsurance because they don't have enough balance sheet for all the risk they underwrite.

 

Thank you thePupil and JAllen.  I read one of their SEC responses that you posted, and It suggests they are far from being fully reinsured. After being criticized for reinsuring themselves, they told the SEC that they had bought on the open market a $140M excess of loss above $44M reinsurance contract for which they paid a pittance of$4.4 million. They stated that the contract required them to reimburse the reinsurer for 20% of non elemental loss, but they did not state how much they had to reimburse the reinsurer for the most likely catastrophe claim, windstorm loss which is the main loss their policies cover.  Their annual premiums are over$700M.  This suggests that they are at risk of being wiped out by even a moderate hurricane that hits their area of coverage.

[JAllen]

Has anyone else done more work on UVE?  We're stingily bidding for a few puts now that hurricane season is about to commence and the stock has continued to rise.

 

Some learnings and takeaways from some recent, additional work:

 

• Brad Meier has now sold every single share of stock he owned.  His ownership stake was well into the tens of millions of dollars at the time of his departure. UVE bought back much of his stock, tens of millions of dollars worth, consisting of greater than 10% of UVE's capital at the time of his departure
  
• After five hurricanes hitting Florida in 2004 and 2005, not a single hurricane has hit Florida since - 8 years without a single hurricane
  
• Over the 70 years ending 2005, 18 hurricanes hit Florida, or an average of one every 3.88 years.
  
• They HAD reinsured themselves (this is crazy, it's hard for me to believe). See page 61 in latest 10-K
  
• The gross property values the company had insured as of 12/31/2013 was ~$120 billion, with $111 billion in Florida
  
• In three South Florida counties, Palm Beach, Broward and Miami, the company has $35 billion of aggregate gross insured values
  
• UVE's capital is $174 million
  
• They have quite a few different contracts with various reinsurers, including Odyssey Re, with various advances, receivables, recoverables and other items from Odyssey Re aggregating $142 million at 12/31/2013
  
• According to this list on the company's website, the company has reinsurance with over fifty entities
  
• They have a $25.0 million surplus note with the Florida State Board of Administration (“SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (“ICBUI”)
  
• The company routinely had large investment trading losses in prior years (ranging from ~1% of surplus to over 10%) until switching investment administrators to Deutsche Bank in 2013
  
• UVE is the largest private property insurer in the State of Florida
  
• The stock has nearly doubled in the last six months since the company began trading on the NYSE.  Here's a chart.  I know of no other reasons the stock should have risen so rapidly
  
• UVE typically completes their reinsurance program late May.  See last year's release
  

It's late so this is all for now.  I would love to hear others' thoughts about UVE.  Believe the key to understanding UVE is definitely their reinsurance.  Doing more work on them soon and will be digging into the NAIC statements.

[JAllen]

I take it no one else is following UVE much.

 

 

UVE is remarkably buying back stock at 2.56 time reported book value. If you think they're under-reserved by 44%, which is the average amount they've been under-reserved by for 2006-2009 (after Katrina but still giving 4 years for a trend to develop) then the company has spent 4.5% of its equity buying back stock at 4X book value, in the last three weeks. 

 

 

This is crazy to me and is not the sign of a conservative, massively-hurricane-exposed insurer headed into hurricane season!

[thepupil]

I particularly love the press releases every time they buy back a little stock. 3 in May so far!

 

I fear they will do a big equity, convert, or private placement offering.

 

it is clear they are trying to pump up the stock. Cramer didn't help by mentioning it positively in the lighting round the other day. 

 

http://www.cnbc.com/id/101708307?__source=yahoo%257cfinance%257cheadline%257cheadline%257cstory&par=yahoo&doc=101708307%257cLightning+Round:+3D+Syste

Universal Insurance (UVE): It's a good company with a decent yield, said Cramer. It's fine as part of a diversified portfolio.

 

 

 

Universal Insurance authorizes new $2M share repurchase program        at theflyonthewall.com                          (Wed, May 28)

Universal Insurance Holdings, Inc. Announces Completion of $2 Million Share RepurchasePR Newswire        (Mon, May 19)

Universal Insurance Holdings, Inc. Announces Completion of $1 Million Share RepurchasePR Newswire        (Wed, May 14)

[JAllen]

They're buying back stock as the directors and officers are selling as part of 10b5-1 plans.  This is disingenuous at best. 

 

 

They released their reinsurance details May 30th of last year so hoping for those soon.

[JAllen]

They don't seem to want to sell stock at all - just to buy it back.  It would actually be the smart long-term conservative move here, but they seem to want to buy back stock.  They would buy back 36% of the shares in a year if they continued at the pace May has seen.

[thepupil]

yep, as a short i like them buying back stock, it is dilutive to BVPS and makes them all the more fragile. BUT, I just worry why they are buying back stock.

 

Are they going to try to get the stock price even higher to do an offering and de risk the company and hurt our short thesis? (bad)

 

Are they just providing liquidity to their 10b5-1 selling? (good)

 

Obviously we want these guys as fragile levered and blow up prone as possible. But I can't help but be a little paranoid.

[JAllen]

yep, as a short i like them buying back stock, it is dilutive to BVPS and makes them all the more fragile. BUT, I just worry why they are buying back stock.

 

Are they going to try to get the stock price even higher to do an offering and de risk the company and hurt our short thesis? (bad)

 

Are they just providing liquidity to their 10b5-1 selling? (good)

 

Obviously we want these guys as fragile levered and blow up prone as possible. But I can't help but be a little paranoid.

 

 

They can only prop up the stock so much.

 

 

While I hope to make money on our puts, I'm deeply concerned for Florida.  I'm a native Floridian with something like a couple dozen relative living there, including my parents, so yeah, it would be quite bittersweet to make money on these puts.

 

 

It all comes down to reinsurance.

[thepupil]

hah, me too. grew up in south florida, parents there, and tons of friends there (a few distant friends actually work for UVE; i fear for their jobs) 

 

it obviously is not a good thing that such a seemingly shaky company is the largest private insurer in Florida.

[thepupil]

I made this to compare 2014 vs 2013 reinsurance programs.

UVE_Reinsurance_2014_vs_2013.xlsx

[gfp]

From insurance insider -

 

Florida renewals fall by up to 20%: Guy Carpenter

-------------------------------------------------------------

Florida reinsurance pricing renewed with risk-adjusted decreases of between 12.5 percent and 20 percent on average, reinsurance broker Guy Carpenter said today (3 June).

 

The reductions are below some of the dire market predictions recently canvassed by The Insurance Insider, although Guy Carpenter did report that some accounts had seen rate decreases of up to 25 percent.

 

"Competition was intense at 1 June 2014, with markets offering capacity with flexible terms and conditions at reduced pricing as traditional reinsurers sought to protect their market share and alternative providers looked to utilize growing funds," Guy Carpenter said.

 

As previously reported, many cedants also successfully negotiated multi-year transactions with their reinsurers.

 

Guy Carpenter said that rates also fell for non-Florida and retrocessional business, although there were signs that the retro market may have bottomed out "at least for now".

 

"Assessing the outcome of the 1 June 2014 renewal, it is clear that the pace of the pricing decline observed in 2013 has not relented," said Lara Mowery, Guy Carpenter's global head of property specialty.

"Reinsurance buyers received significant rate decreases for both Florida and non-Florida renewals, compounding 2013 decreases."

 

She added that as cat bond pricing continues to fall, reinsurers are striving to find ways to compete.

 

"New product offerings are abundant, as flexibility and tailored coverage are becoming trademarks of this rapidly evolving market."

 

The firm reported that capacity from alternative markets now makes up around 15 percent, or $50bn of global property cat reinsurance limit.

 

Guy Carpenter noted that reinsurance rates in the Sunshine State had settled into a fairly stable band between 2007 and 2012.

 

However, pricing fell below this level at last year's renewal, reflecting the full magnitude of the decline in catastrophe bond pricing.

 

The decline was compounded at the 1 June 2014 renewal as reinsurers succumbed to competitive soft market conditions.

 

"Many primary companies took advantage of the soft market conditions to re-evaluate their risk management targets and strengthen their use of reinsurance by purchasing more comprehensive coverage," Guy Carpenter said.

 

The broker highlighted softening terms and conditions that featured as a key part of the renewal negotiation across Florida and non-Florida business.

 

The inclusion of terrorism, expanded hours clauses and multi-year coverage were the main point of focus.

 

"Price continued to be the priority for most cedants, however with valid reasoning and data in support of requested changes, tailoring hours clauses and extending coverage into multi-year alternatives generally had a minimal impact on firm order terms," said Guy Carpenter.

 

On Florida renewals specifically, the broker noted that volatility in quoting behaviour increased in 2014 as pricing further softened.

 

It added that while some quotes at the top end of the spectrum were above 2013 pricing on a risk-adjusted basis, the vast majority of quotes represented decreases of between five and 15 percent.

 

"As reinsurers look to position themselves in a market that is particularly attractive to alternative capital, pricing approaches are more varied than has been typical for the Florida market," observed George Carse, branch manager of Guy Carpenter's unit in Tampa, Florida.

 

The broker also highlighted further softening in the retro market driven by overcapitalization and a lack of loss activity.

 

"Although mid-year has not historically been a core date for retrocession renewals, companies that have not traditionally bought retrocession cover expressed considerable interest in various products this year," the broker said.

 

"This was driven by a general feeling among buyers that terms have now reached levels where transferring catastrophe exposure into the marketplace has become a more realistic option," it continued.

[thepupil]

yep, looks like UVE and HCI are  going to print money again this year with conditions only getting better.

 

The shitty part about this short is you NEED a big event or two to remind those rushing to supply risk capital to the industry that hurricanes hit Florida or you need rates to come down with more insurers entering the market to take advantage of the lower reinsurance rate. In other words, you need some form of mean reversion and basic supply and demand to take hold.

 

But until that happens, the negative carry in the form of ridiculously high ROE's just beats you down.

 

I think Mr. Downes and crew are still cruising to more profits for this hurricane season

 

I wonder if he is more a fan of  the cigarette boat or the custom chopper?

 

Custom Chopper

http://www.designbyjoyce.com/pauljr/universal_property_bike.html

http://johnsonstrategiesllc.com/upcic-fines-penalties

 

Cigarette Boat

http://www.heraldtribune.com/article/20100314/ARTICLE/100319846

http://www.boatinfoworld.com/search.asp?pg=29&type=sb&criteria=Cigare&gid=971EF7BC-8866-48ED-BBA1-FBAC35EC9DAC&rc=532&prevpage=28

 

In 2001, Universal Property & Casualty borrowed $142,000 to acquire a 35-foot Cigarette racing boat. The vessel, named “Miss Universal,” was bought for “business use and marketing,” according to Securities and Exchange Commission documents. That same year, the company posted a $3 million loss, according to their year-end annual report filed with the SEC.

 

In other news, an insurance claims adjuster by the name of Aplin Peer donated $100,000 to the Sean P. Downes foundation in 2009. The Downes foundation gave $90K to Saint Andrew's School (where Sean Downes junior was a good basketball player before transferring to another school according to youtube videos) and Athlete's Edge (some sort of training camp thingamajig).

 

I find it a little strange that an insurance adjuster felt compelled to donate 100 G's  to an insurance company's CEO's foundation that gives money to said CEO's sons prep school. 

 

Sean Downes Jr. & Athlete's Edge

http://www.athletesedgetraining.com/youth-training-fau-in-boca-raton/

 

Form 990 of the Sean P Downes Foundation

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCgQFjAB&url=http%3A%2F%2F990s.foundationcenter.org%2F990pf_pdf_archive%2F262%2F262491571%2F262491571_200912_990PF.pdf&ei=mMONU-vbDdfMsQSazYKAAw&usg=AFQjCNFQsg3Sbq25YY4KUc67FzlXTnUUVA&sig2=BYxgSYqJ2jGnKX3mnkygzQ&bvm=bv.68191837,d.cWc&cad=rja

[thepupil]

not for UVE, but HCI short must be getting crowded....annoying

 

Dear Trader,

 

We have noted a substantive change in the market rates for securities lending/borrowing (SL/B) in the below listed securities. As you currently hold a short position in these securities in your account , and are borrowing them in the SL/B market, your cost to carry the short position may be impacted by the change in rates.

 

Contract Current Borrow Fee Anticipated Borrow Fee

HCI@NYSE -0.3%                      -12.3%

 

Please note that the rates shown are indicative only and may deviate from the final borrowing cost rates. We are providing the information as a service to:

* alert you to the possibility of increased costs, and

* provide an indicator as to possibility of the stock becoming non-borrowable which could in some cases lead to a buyin (this is usually limited to stocks with extremely high borrow rates, for example 30%, which may be called back by lenders when the high rate is related to events such a tender offers, or unusual corporate actions).

 

Please note customers may monitor the borrow costs for securities using the Short Stock (SLB) Availability utility available under the Support Tools tab in Account Management.

 

[oplia]

I have been reading about UVE and HCI over the last week. Both seem very compelling shorts especially with recent share price jumps.

You seem to consider UVE to be a 'take-out' company similarly to HCI, however it seems that historically UVE was not really participating in the take-outs (only minor participations in 2013 and 2014). I took data from here (https://www.citizensfla.com/about/depopinfo.cfm?type=stats&show=pdf&link=/shared/depop/documents/2014.pdf)

So at least from the info I found it seems that UVE is not depended on Citizens depopulation whereas HCI is fully dependent on it.

 

In this case, it would seem that HCI is a much better short when both companies trade at similar P/B - the upside can be realized not only from major hurricane events and margin pressure due increasing competition in Florida wind insurance (both of which apply for UVE) but also from any changes in Citizens take-out opportunities. Basically HCI has an additional factor which will likely bring down the company.

 

Am I missing something here?

[thepupil]

no you are not missing anything. UVE does have underwriting capabilities and is not a pure takeout company like HCI. UVE is a little less crowded of a short (7% short interest vs 15%).

 

In my opinion, both will be affected by new entrants into the takeout market and new entrants into the market in general, but you are right in that HCI is the pure play.

 

I am short both, but you need to respect the fact these companies just print money and it is a tough headwind to fight so size appropriately if you wish to go down this road.

 

It looks like we'll have yet another year without a decent hurricane hitting Florida.

[Guest Schwab711]

Any thoughts on the probability of government rescue? What size event would it take to cause them to be insolvent?

[oplia]

The reinsurance rate difference between HCI and UVE is huge. HCI spent only 32% of GPW on reinsurance whereas UVE spent 59% of GPW during TTM. Part of the difference is due to no reinsurance for 6 months on the HCIs take out policies. But the takeout at the end of 2013 amounted to c. 1/5 of all policies outstanding, so even with no reinsurance on these for 6 months, the total effect should be around 10% of the portfolio reinsurance costs. Difference between HCI and UVE is way bigger than that, and I am trying to figure out why that might be.

 

Keeping in mind that both companies operate in commodity type industry and I assume have access to exactly the same reinsurance contracts and rates, it would seem that lower percentage of premiums ceded is direct indication of HCI retaining significantly more risk on own books compared to UVE. But the question is how much more? Is it the case that if the company spends two times more on reinsurance then it cedes two times more risk? Or does every incremental risk unit to be ceded gets more expensive?

 

I am kind of got lost in trying to figure out the details of reinsurance contracts. So if anyone has done the analysis, would be great to hear it.

[JAllen]

We're definitely still short this via puts but will probably take a true short position sometime soon (short positions for this are margined 100% unfortunately) because of the price rise.  We are short only two stocks and think UVE will trade at $5 at some point in the next couple of years.

 

 

The uplisting and promotion that occurred a year ago is solely responsible for the price doubling since then, in our opinion.

 

 

We haven't focused on the take-out stuff at all.  The astronomical P/B value ratio and unthinkable gross property insured / capital + reinsurance ratio are about the only two things that matter here.