Whitney Tilson’s email on Lakewood Capital’s Anthony Bozza short pitch on Universal Insurance Holdings, Inc. (UVE) from the Robin Hood Investors Conference 2015, as we tweeted earlier
— ValueWalk (@valuewalk) November 19, 2015
Note: Lakewood Capital declined to comment to ValueWalk, but the company issued a response on Bozza’s original presentation and another one this morning- both can be found below Tilson’s remarks. The stock is currently down 14% on our earlier tweet.
Lakewood Capital’s Anthony Bozza short on Universal Insurance Holdings, Inc. (UVE)
At the Robin Hood Investors Conference two days ago, Anthony Bozza of Lakewood Capital (a very smart guy with a great track record, who’s especially well known for well-researched shorts) presented an epic takedown of UVE, a Florida home insurer that, Bozza claims, is severely underpricing hurricane risk (among many other misdeeds), yet the stock was trading at 4x book (now a still absurd 2.9x).
Lee Ainslie of Maverick Capital said that it was the best short pitch he’s ever seen in 25+ years in the industry – and he may be right. The audience certainly agreed, as the stock crashed 31% that day. It’s now one of my largest short positions, as I think it’s certain to go to zero.
Lakewood isn’t releasing the slides, alas, but here’s a summary from Activist Shorts (a very useful service – email the founder, Adam Kommel at firstname.lastname@example.org and use my name to get a free trial).
Summary: On 11-17-2015, at the Robin Hood Investors Conference, Lakewood Capital recommended shorting Universal Insurance Holdings, Inc. According to ValueWalk, Lakewood said that Universal Insurance Holdings, Inc. did not pay out claims. Lakewood also said that the company’s management had a “shady” history and that its CEO had been arrested five times. Hours later, Universal Insurance issued a press release saying that Lakewood’s allegations were “misleading,” and the company said that its reinsurance program provided it with the necessary protection from significant storms. Universal Insurance also said that organic expansion had driven 100% of its growth and that the company had received all necessary certifications from the states in which it operated.
Update 2:37PM EST 11/19/2015 Tilson sent the following notes via email, Tilson states “Following up on my earlier email, I took good notes from Bozza’s presentation”
· The company was a penny stock in many different failed businesses before becoming a Florida property insurer
· The stock has risen 216x in the past decade, by far the best performing stock with $1+ billion market cap or more
· 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
· For these reasons, national carriers and a state-backed insurer have fled the market, and been replaced by thinly capitalized local insurers, including Universal
· 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
· Universal has grown its book of business rapidly, especially in the most hurricane prone area of Palm, Broward and Dade counties, where Universal has 10.9% share
· 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)
· Universal’s stock (at 4x book before its recent decline; 2.9x book now) is absurdly overvalued relative to national insurers (1.1x book on average) and the other local insurers (2x book)
· Universal runs a shoddy operation, denying claims at every opportunity and engaging in “reunderwriting”, as demonstrated by a complaint rate 55% higher than its peers; also, see these exposes by two local TV stations (here and here)
· By denying so many claims, Universal has much lower loss ratios (and hence higher profits) than its peers
· Universal consistently incurs losses higher than it reserves for, which inflates earnings and book value every year
· Universal lied to its regulators, claiming it was losing money or making much less than it was, in order to get big rate increases approved, but these days appear to be over as pricing has leveled off and peers warn of rate pressure
· Universal is not rated by AM Best; it receives a D- from Weiss; it receives an A only from Demotech, a joke of a firm
· Universal is audited by Plante & Moran, a joke of a firm; the median market cap of public companies it audits is $33 million
· Universal’s CEO, Sean Downes, earned $14.1 million in 2014, making him the 3rd highest paid CEO of all public companies based in Florida
· Downes and his predecessor have earned $98 million since 2003, equal to 23% of cumulative earnings and 45% of 2014 book value
· Downes has been arrested five times from 1990-2013 for trespassing, indecent exposure, disorderly conduct (twice), and simple battery
Update 5:50PM EST from a Whitney Tilson email
I am struggling to think of anything I’d want to see in an insurance company short that UVE doesn’t have – and can’t come up with a single thing. Insuring enormously risky things? Check. Vastly under-reserved? Check. Unrated by any major ratings firm? Check. Cooking the books? Check. Deceiving regulators? Check. Screwing customers? Check. Joke of an auditor? Check. Stock absurdly overvalued? Check. Wildly overpaid CEO with a long arrest record (indecent exposure?!)? Check.
I guess one could argue lack of a catalyst – and in the absence of one, the earnings and stock could keep going up – but a major hurricane hitting Florida is just a matter of time and then it’s a zero.
Below is a write-up posted on Value Investors Club 14 months ago, and another write-up is posted here.
2) Yesterday I published an article entitled Wayfair Doubles Down On Poisoning Its (And Its Partners’) Customers. Here’s a summary (full text below):
- I had three items of furniture sold by Wayfair tested for formaldehyde, and two of them showed toxic levels.
- In addition to selling these two items on its own website, the company is selling them on the websites of the partners for which it does fulfillment.
- I suspect that these two toxic cabinets are only the tip of the iceberg.
- Wayfair continues to sell both and actually slashed the price of the most toxic one in what appears to me to be an attempt to dump it.
- The deny-and-attack strategy that Wayfair appears to be adopting is what Lumber Liquidators tried in the 2-3 months after the devastating 60 Minutes story.
Since then, Wayfair has wisely pulled those two products. I expect the tests results in about a week from two other products that an industry source identified as potentially toxic, so stay tuned…
I am short Wayfair’s stock because I believe it’s significantly overvalued, primarily because (as I wrote in my article last week and presentation on Monday) it has one of the worst business models I’ve ever seen. Competing head-to-head vs. Amazon, Home Depot, Target, Williams-Sonoma, etc. (did I mention AMAZON???), I think the company’s odds of ever reaching breakeven, much less earning a profit, much less earning enough of a profit to justify a $3 billion market cap are close to zero.
This formaldehyde problem is a catalyst for my short position, to be sure, but isn’t likely to be a major issue if – and this is a big if – Wayfair is smart in handling it. It was smart to stop selling Ark laminate flooring, but the company is being very dumb right now in (apparently) adopting a deny-and-attack strategy. It’s just not that expensive to temporarily suspend sales of a small fraction of the seven million products Wayfair sells and implement a proper compliance program to ensure that its customers aren’t being poisoned (unless the problems are more widespread than I believe, which would explain the company’s recent actions – and spell doom for the stock).
As I noted earlier, for the health and safety of Wayfair’s customers, I hope the company immediately suspends sales of the two toxic products I’ve identified (and similar ones) and implements the other obvious steps I’ve outlined. As someone short the stock, however, I hope they channel their inner Lumber Liquidators and turn a manageable situation into a disaster. Stay tuned – this could get interesting…
Posted on ValueInvestorsClub.com
UNIVERSAL INSURANCE HLDGS (UVE) (Short)
September 08, 2014 by rjm59
Price: 14.20 EPS $1.80 $0.00
Shares Out. (in M): 35 P/E 8.5x 0.0x
Market Cap (in M): 500 P/FCF 0.0x 0.0x
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA
Quality Rating: 3.5 (14 votes)
Performance Rating: 4.6 (13 votes)
UVE, Universal Insurance Holdings on the surface looks like it COULD be a great value stock pick:
- Buying back lots of stock (share count from 41.2mm to 35.2mm: -15% over the last 5 quarters)
- A growing dividend and reasonable yield of 3.3%
- Trading at 8.5X P/E
- ROE of 35%+
- Growing fast: doubling revenue and profits over the last few years
BUT: UVE is an insurance company where these kinds of superficial value metrics can reverse course rapidly and are a mere “second derivative” of the asset base. UVE appears to be one of the most overvalued insurance companies in the market and could fall by 50% to return to normalized levels or much worse if there is a large wind event in Florida. At its current market cap around $500mm, UVE trades at 2.7X Price /Book which is higher than any other P&C insurance company in the market that I could find based on that metric. For comparison, Progressive Insurance has traded fairly consistently at ~2.3X P/B and has one of the more sustainable competitive advantages of any P&C company.
The stock buybacks last year were at bargain prices and did increase the intrinsic value per share but there was a colorful story to it as they were buying the stock back from a CEO who resigned after a regulatory investigation. More recent stock buybacks appear to be highly value destructive given the valuation.
Similar to HCI, which was written up last year on VIC, UVE’s primary business is Florida wind. Historically this has been an unprofitable line of insurance and so the biggest player has been the government run Citizens. Over the past couple years, like HCI and others, UVE has been able to boost their revenues and profits by using “take-outs” where insurers can take over policies from Citizens in bulk and cherry pick profitable policies: effectively a loophole allowing a wealth transfer from the tax payer to these private companies.
Over a year ago Citizens brought in a new tough CEO to end this taxpayer scalping and instituted a clearing house so the policies would be competitively bid. Since the last bulk take-outs Nov 2013, the out process has been unavailable to boost revenues and profits in big chunks. More importantly for the timing of this short – the TTM comps are just about to roll off so I would expect to see financials reverse from growing to shrinking revenues and profits. The bulls who are extrapolating growth will find themselves highly disappointed in the near future.
*Just after I wrote this draft* UVE did just participate in a recent large round of take-outs that will go into effect for November (http://www.floir.com/siteDocuments/Takeouts/TakeoutsSummary2014.pdf) where they can take out up to 51,293 policies so they may be able to keep up the revenue growth for another little bit given the highly competitive nature of this take-out, it seems unlikely they will be able book margins anywhere close to what they have in the past.
Buffett has said that it’s not possible to judge the true value of a financial institution by its numbers alone as the true risk comes from the culture of the organization. Well, here are a few cultural elements to consider what skeletons may be hidden in the closets in the event that there is a wind event (after an incredibly long stretch since Katrina since anything meaningful).
- CEO resigned early 2013 after a scathing regulatory report (and $1.3mm fine) in response to his losing excessive amounts of money trading gold mining stocks while racking up large brokerage commissions: http://www.propertyinsurancecoveragelaw.com/uploads/file/FOIR_Order.pdf
- Sketchy post-loss underwriting and shirking claims: 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/
- More commentary and context: http://www.tampabay.com/opinion/editorials/editorial-root-out-insurer-abuses/2124592
What is UVE worth?
Loss Ratio for UVE:
It’s clear that a company without any long term sustainable advantage will have competition erode excess margins (ROE 35%+ and loss ratios steadily declining). A fair value of 1x book value for such an enterprise seems like fair value though the downside optionality at UVE given the scary risk culture in the event of a significant wind event makes me think <1x BV would be more appropriate.
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer’s securities.
- Citizens take-out’s all finished (just announced a massive one that was highly competitive) & increased competition reduce growth rate which normalizes valuation (-50%)
- YOY comps get very difficult starting next quarter
- Highly concentrated insurance risk: Any large Florida wind event could cause wipeout
FORT LAUDERDALE, Fla., Nov. 17, 2015 /PRNewswire/ — Universal Insurance Holdings, Inc. (UVE) today issued the following statement to correct misleading allegations and misinformation presented by Lakewood Capital Management, a short seller:
“Universal Insurance is a national homeowners insurance company with operations in 11 states and direct written premium of $684 million through September 30, 2015. The Company operates in a highly regulated industry, and has received all necessary certifications from the states in which it operates. Universal has established a consistent track record of top- and bottom-line growth. For the first nine months of 2015, the Company reported net income of $77.3 million, an increase of 48.7% year over year. Diluted EPS for the first nine months of the year was $2.15, an increase of 45.3% year over year. The Company’s growth has been driven by its focus on 100% organic expansion based on a rate adequate, high quality book of business, first-rate customer service and claims processing. Universal believes that the strategic changes and improvements made to its reinsurance program in 2015 will continue to drive financial improvements. Specifically, the Company’s 2015/2016 reinsurance program provides it with the necessary protection from significant storms and allows it, as a result of its improved capital position, to retain a greater share of its profitable business. The Company believes that the statements made by Lakewood Capital Management are misleading and contain partial information, designed to negatively affect Universal’s stock.”
About Universal Insurance Holdings, Inc.
Universal Insurance Holdings, Inc., with its wholly-owned subsidiaries, is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Universal Property & Casualty Insurance Company (UPCIC), a wholly-owned subsidiary of the Company, is one of the leading writers of homeowners insurance in Florida and is now fully licensed and has commenced its operations in North Carolina, South Carolina, Hawaii, Georgia, Massachusetts, Maryland, Delaware, Indiana, Pennsylvania and Minnesota. American Platinum Property and Casualty Insurance Company, also a wholly-owned subsidiary, currently writes homeowners multi-peril insurance on Florida homes valued in excess of $1 million, which are limits and coverages currently not targeted through its affiliate UPCIC. For additional information on the Company, please visit our investor relations website at www.universalinsuranceholdings.com.
FORT LAUDERDALE, Fla., Nov. 19, 2015 /PRNewswire/ — Universal Insurance Holdings, Inc. (NYSE: UVE) announced today that its independent Directors met last night to review statements made at a recent investment conference which cast the Company in an unfavorable light. Sean P. Downes, the Company’s Chairman, President and Chief Executive Officer, asked Lead Director, Michael A. Pietrangelo to meet with the management team at its corporate offices in Ft. Lauderdale to discuss this matter in its entirety and report to the independent Directors.
“We remain confident in the integrity of the Company’s operations and its executives. After a full discussion by the independent Directors, we unanimously reaffirm our full support for the management team,” said Mr. Pietrangelo.