Geoff Gannon March 21, 2021

Universal Insurance Holdings (UVE): A Cheap and Fast-Growing Florida Hurricane Exposed Insurer I’m Going to Pass On

This is a stock I talked about on a podcast with Andrew. It looked cheap based on the simple ratios you might use to decide if something’s a value stock. And the business of writing homeowner’s (and renter’s) insurance in Florida seemed like something that could be good enough (in some years) and simple enough for me to understand and possibly invest in.

However, what I found when looking into Universal is a lot of stuff I don’t really like. Having said that, the stock is cheap. It is very leveraged to good underwriting results. So, in a good year (especially a tame year in terms of Florida hurricanes) the stock could easily go up a lot. It is a value stock. It’s cheap. But, it’s unlikely to be something I’d buy.

Let’s start with how cheap it is. If you look at something like you’ll see that UVE is trading at around book value. The P/E doesn’t look good. But, the “E” part of an insurance company like this is going to involve both investment results and underwriting results. Underwriting results at UVE are going to depend mostly on the loss ratio (the expense ratio shouldn’t vary a lot here) and the loss ratio is going to depend a lot on weather. UVE uses a lot of reinsurance. However, the way these reinsurance agreements are set up – UVE is very exposed to the frequency (not so much the magnitude) of hurricanes in Florida. As a result, I suspect that recent weather related losses for UVE are larger than you might expect. You’d expect them to be manageable because there haven’t been a lot of really bad hurricanes in a while. However, there actually have been a lot of events. You can read about the reinsurance deals in the company’s investor presentation. I’ll sum it up by saying that UVE stands to lose fairly similar amounts – much more similar amounts than I expected before reading about the reinsurance deals – from each event per year than you might think. So, you might be scared off by the risk of one really big hurricane and underestimate the impact of several medium sized hurricanes.

This brings me to the company’s “plan” and its guidance. This is the first thing I don’t like about UVE. The company does earnings calls. And it gives guidance. I don’t think it’s a good idea for a company like this to guide. UVE is guiding on the basis of weather performing “to plan”. So, it is basically plugging in something like 10% of each premium into weather related losses. But, some years the actual losses could be 30% of premiums instead of 10%. In another year, it could be almost nothing. On a recent call, an analyst asked about the fact that the company had performed below plan for many consecutive quarters in a row. That’s the problem with guiding around normal weather. It’s actually not as abnormal as it might sound to have …

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