Universal Insurance (NYSE:UVE) is a compounding machine with incredible momentum. Though the company's outsize exposure to Florida hurricanes continues to retrain its valuation multiple, Universal proved in 2017 that its growth and wealth compounding machine could withstand the largest Florida hurricane landfall in over a decade and emerge stronger than ever.
In its recently released 10-K UVE revealed that it posted a hurricane-impacted 2017 full-year 25.7% ROE and Q4 33% ROE despite still experiencing some lingering effects from Hurricane Irma as well as storm damage in other states. This impressive result reflects UVE's sound underwriting practices as well as the success of its efforts to bolster its reinsurance program and diversification of profits outside of Florida. Additionally, the company's investment portfolio has become an increasingly prominent player in contributing to the company's profitability beyond simply serving as a reserve. Income from investments should grow even faster in 2018 and beyond as the company's conservative fixed income investment focus has positioned them to capitalize nicely on rising rates. With a portfolio of unrestricted cash and invested assets quickly approaching $1 billion and an annual book value compounding rate of ~20%, shareholder equity is growing rapidly.
In addition to effectively compounding shareholder equity, UVE continued its strong growth trajectory, seeing quarterly y/y revenue growth accelerate over the course of the year as its out-of-state diversification efforts achieved robust 40.4% growth in 2017, led by its Universal Direct online program.
UVE Revenue (Quarterly YoY Growth) data by YCharts
The company also recently announced an approved 3.4% average statewide premium increase for 2018, well ahead of the long-term rate of inflation, reflecting the strength of its business model in generating increased profits. An additional tailwind for 2018 and beyond is the US tax reform, which management, while hesitant to give an exact figure, estimated potential benefits of approximately 10 percentage points on their effective tax rate, though it could likely be more than that. Given their high compounding rate, this will likely have significant long-term benefits in generating long-term shareholder equity/book value.
While its primary focus over the past several years has been on improving business diversification and bolstering company reserves and reinsurance, the company has reached the point where it is starting to hike shareholder returns as well by buying back shares at an average price of $23.54/share in 2017 with significant funds still allotted to the buyback program for 2018. Additionally, UVE paid out a special year-end dividend for the second year in a row; a prudent alternative to growing the regular quarterly dividend rapidly given the potential for heavy hurricane losses.
Investor Takeaway:
With so much going right for Universal Insurance, it is still important to remember that severe hurricanes can influence market sentiment, causing share prices to plummet rapidly (as was seen over the past two hurricane seasons). That being said, the company's reinsurance model, large reserve, and diversified income stream seems more than capable of withstanding potential losses, making the core business relatively safe. When combined with tax and interest rate tailwinds and UVE's double-digit growth, this makes shares appear pretty cheap at present. Assuming 2017 is an average year for earnings (even though its was a far above average year for hurricane activity) and the company never grows again (again, an extremely unlikely and over conservative assumption), it is still projected to return ~15% per year at present prices:
My recommendation is to open/hold a small to medium sized position in UVE to hold for the long-term, add on fear-driven dips, and sit back, relax, and watch as this compounding machine does its work for your net worth.
Samuel Smith
Samuel Smith has a diverse background that includes being lead analyst and Vice President at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering with a focus on applied mathematics and machine learning.
Samuel leads the investing group High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The service also features regular trade alerts, educational content, and an active chat room of like-minded investors.
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Analyst’s Disclosure: I am/we are long UVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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