Whitney Tilson’s email discussing Universal Insurance Holdings, Inc. (UVE)’s response to the short case Lakewood Capital’s Anthony Bozza made on Tuesday.

Universal Insurance Holdings issued a press release this morning, responding to the short case Lakewood made on Tuesday. The market sure isn’t convinced, as the stock is down another 15% today.

Perhaps I will take the time at some point to rebut this point by point, but in the meantime a few quick thoughts:

  • Universal Insurance didn’t really respond to this (the most damning charge): “Universal is massively under-reserved: it has only $300 million in equity backing $148 billion of risk ($1 of equity for every $524 of risk, 60% higher than its peers)”
  • The response to this is nonsensical: “By denying so many claims, Universal has much lower loss ratios (and hence higher profits) than its peers”. Of course if an insurer denies valid claims, it will have lower losses and higher profits.
  • The response to this mostly dodges the question: “Universal Insurance is not rated by AM Best; it receives a D- from Weiss; it receives an A only from Demotech, a joke of a firm”
  • Ditto for this: “Universal consistently incurs losses higher than it reserves for, which inflates earnings and book value every year”
  • Quite the non-response regarding Universal Insurance’s joke of an auditor (Plante & Moran)
  • The last answer in response to the CEO’s multiple arrests is comical:

Mr. Downes has reviewed each of the incidents with the independent Directors, responded to their questions, explained the circumstances, some of which go back to youthful indiscretions, and fully satisfied the independent directors regarding his ability to lead the Company.  None of the incidents, they noted, implicate or speak to Mr. Downes’ integrity, honesty, leadership, or ability to manage and grow the Company.

OK, maybe he gets a pass for the arrests in the early 1990s (when he was in his early 20s; he’s now 45) for trespassing, indecent exposure, disorderly conduct, and resisting and officer, but what about the DUI with no license in 2005, being sued in 2009 for “hog-tying and hazing as a prison guard”, the 2010 arrest for simple battery, and the 2013 arrest for disorderly conduct?

[drizzle]Is this behavior consistent with what policyholders, regulators and shareholders would expect of the CEO of an insurance company???

Universal Insurance Holdings, Inc. Sets the Record Straight

Responds to Misleading and Inaccurate Information by a Short Seller Designed to Negatively Impact Universal’s Stock

Universal Insurance Holdings, Inc. 30 minutes ago


FORT LAUDERDALE, Fla., Nov. 20, 2015 /PRNewswire/ — Universal Insurance Holdings, Inc. (UVE) today issued the following detailed response to the misleading and inaccurate attack on the Company by a short seller:

The company was a penny stock in many different failed businesses before becoming a Florida property insurer The company was reorganized in 1997 to focus on an opportunity to write personal residential (homeowners) insurance in the Florida market.  The company hired experienced insurance personnel and retained well-known, reputable vendors in the development of its insurance business.  Over the following 17 years, UVE has continually grown and enhanced its in-house capacity to service its insurance business.  The combined group now has nearly 400 employees and 70,000 square feet of operational offices.
The stock has risen 216x in the past decade, by far the best performing stock with $1+ billion market cap or more Although the price of a stock can be influenced by many factors, the predominant reasons for the growth in UVE’s stock over the last decade have been the growth in surplus in its insurance subsidiaries and the earnings from its insurance operations.  UVE’s results have been achieved due to the hard work of nearly 400 employees who are committed to sound underwriting, prompt claims handling, and effective customer service.  The statutory surplus in UVE’s primary insurance subsidiary, Universal Property & Casualty Insurance Company, has grown from $5 million as of 12/31/04 to $233 million as of 9/30/15.
Florida is a very dangerous place to write property insurance because of the high value of properties combined with the hurricane risk – it has 27% of U.S. insured coastal property value and is the site of 7 of the 10 largest U.S. hurricanes It is well-known in the residential property insurance industry that Florida makes up a significant portion of the United States’ hurricane exposure.  This is why a company like UVE, which is dedicated to understanding coastal risks and writing personal residential insurance, is able to compete effectively in Florida and other markets.  UVE understands the Florida market.  UVE has in-house and contracted third party expertise in designing and purchasing reinsurance programs to protect against the risk of hurricanes.  Throughout its history, UVE’s insurance subsidiaries have purchased more reinsurance than required under regulatory and rating agency guidelines, both in terms of the magnitude of a single large event that would be covered and the possibility of multiple events in a single season.
Three huge hurricanes hit Florida in 2004-05 – in the wake of those, national insurers exited the Florida market because risks were too great – in their place, state run insurer filled the void This statement is partially correct, but also contains mistruths.  First, it was Hurricane Andrew in 1992, and not the storms of 2004-05, that primarily caused national multiline carriers to reassess the allocation of their capital between the Florida residential market and other insurance markets.  Second, after 2004-05 and continuing today, several large, prominent national insurance groups write significant residential insurance business in Florida.  It is patently incorrect to suggest that national insurers “exited” the Florida market when they have been, and remain, a significant part of the Florida property insurance market.  Finally, it is critical to point out that the short sellers are referring to events that took place a decade ago as if the 2004-05 hurricanes are somehow news today.  The fact is, UVE actually experienced the 2004-05 hurricanes and was there for its policyholders.  By having a strong reinsurance program and a dedicated claims team, UVE paid its insureds over $171M (11,819 claims) in 2004 and another $81M (12,055 claims) in 2005.
In 2011, Citizens customers were handed over to a bunch of small, thinly capitalized Florida insurers – the Florida market became the wild west We are uncertain what any statement relating to recent assumptions from Citizens Property Insurance Corporation in 2011 has to do with UVE or its subsidiary insurers.  The UVE insurers did not assume any policies from Citizens in 2011, nor have they assumed any policies from Citizens since then.  In fact, other than one small transaction 17 years ago in 1998, the UVE companies have not taken any policies from any state-sponsored insurer.  The UVE companies produce their business organically, one policy at a time, with the assistance of local independent insurance agents servicing policyholders in the communities where they live and work.
Universal and its peers have gotten lucky, as there hasn’t been a major hurricane in Florida in the past 10 years, which has resulted in low losses and low reinsurance pricing, which has led to explosive growth in Universal’s reported earnings All insurers operating in Florida, and especially those of us who live and work here, are pleased to have been “lucky” enough over the last ten years to have not seen significant storm activity.  However, it is

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