Good day, ladies and gentlemen, and welcome to the Universal Insurance Holdings, Inc. fourth quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Dean Evans. Sir, you may begin.
Thank you. Good morning again, everyone. We do apologize for the inconvenience there. We had a temporary power outage and lost our phone system entirely. We are back now. I'd like to welcome you again to the fourth quarter earnings conference call for Universal Insurance Holdings, Inc. I, again, am Dean Evans, Vice President of Investor Relations here at Universal. With me in the room today, Chairman and Chief Executive Officer, Sean Downes, President and Chief Risk Officer, Jon Springer, and Chief Financial Officer, Frank Wilcox. Following Sean's opening remarks, Jon will provide an update on several important current topics. Frank will review financial results. The call will be reopened for questions. Yesterday afternoon, we issued our press release, which is available under the Press Releases section of our website at www.universalinsuranceholdings.com.
A replay of this presentation will be available on the homepage of our website until March 8th, 2018. Before we begin, please note that this presentation may contain forward-looking statements about our business and financial results. Forward-looking statements reflect our current view of future events and are typically associated with words such as believe, expect, and anticipate, or similar expressions. We caution those listening, including investors, not to rely solely on forward-looking statements as they imply risks and uncertainties, some of which cannot be predicted or quantified, and future results can differ materially from our expectations. We encourage you to carefully consider the risks described in our filings with the Securities and Exchange Commission, which are available on the SEC's website or the SEC Filings section of our website. We do not undertake any obligation to update or correct any forward-looking statements.
With that, I would like to turn the presentation over to our Chairman and Chief Executive Officer, Sean Downes.
Thank you, Dean. Thank you, everyone, for joining us today. Before we begin, all of us at Universal would like to send our heartfelt condolences to the victims and families of the Marjory Stoneman Douglas High School shooting. Parkland is part of our community where our employees and families reside, and we're all deeply saddened by this tragedy. We ask that all of you keep the great people of this community in your prayers. I'll begin by providing some highlights from the quarter, and will then review our growth initiatives and strategy. Jon will cover several important current topics, and Frank will conclude by discussing financial results. We were pleased with our results for the fourth quarter, for that matter, for the full year 2017.
Overall, we report a net income of $36.4 million and diluted EPS of $1.03 for the fourth quarter of 2017, which equates to an ROE of 33% for the quarter. For the full year, we generated net income of $106.9 million, diluted EPS of $2.99, and a 25.7% ROE. Although Hurricane Irma made landfall during the third quarter, there were numerous moving parts in the fourth quarter related to the storm, which Jon and Frank will discuss in more detail later in the call. However, I would like to briefly touch on a few high-level thoughts related to the event. In the months since Hurricane Irma made landfall, Universal has demonstrated the true value of our business model. Our comprehensive reinsurance program substantially limited net losses incurred from one of Florida's largest hurricanes in over a decade.
Our fully integrated structure produced various income streams in the months following the storm, our superior claims handling and catastrophe response teams delivered excellent service to our policyholders in the aftermath of the devastating storm, closing claims in a timely and orderly manner. In addition to our strong performance during Hurricane Irma, we were also pleased with our underlying results for the fourth quarter. We reported excellent top-line growth in the quarter, with 12.5% growth in direct premiums written, including 9.4% growth within Florida and 36.8% growth in other states. Our underwriting profitability was also strong, with a 77.6% combined ratio for the quarter and an 84.4% combined ratio for the full year. The latter of which is particularly notable given that this was a year that saw the largest hurricane make landfall in Florida in over a decade.
Additionally, during the fourth quarter, we took decisive action to strengthen our loss reserves for both current and prior accident years. This strengthening was driven primarily by the assignment of benefits-related claims within our Florida book, including the increased litigation frequency experienced during 2017 surrounding the AOB issue. Following this adjustment, we believe our loss reserves are appropriately set at current levels. I'd like to now briefly discuss our growth outlook heading forward. We believe we have positioned Universal well for the future by pursuing various organic growth avenues, which have resulted in a more stable, diversified, and balanced business. Our core Florida book continues to produce strong organic growth, with direct written premiums up 9.4% in the fourth quarter and 7.4% in the full year 2017.
We continue to believe that we can profitably grow on an organic basis in Florida using both our robust agency network and our direct-to-consumer platform, Universal Direct. Our 3.4% average statewide rate increase was approved by the Florida OIR in early December, and we began using the new rates for new business on December 7th and for renewals on January 26th. Geographic expansion remains a key element of our growth strategy. Direct premiums written within our other states book grew a strong 36.8% in the fourth quarter and 40.4% for the full year 2017. After writing our first policy in New York in October, Universal is currently writing business in 16 states and is licensed in an additional four states, Illinois, Iowa, New Hampshire, and West Virginia.
Universal Direct, our unique direct-to-consumer online homeowners insurance platform, is available in all of our active states and continues to demonstrate a solid growth trajectory. Since launch, we have nearly 8,000 policies in force for more than $9 million in premium. We remain confident that this multi-part organic growth strategy positions us well to deliver profitable growth going forward. After a year that posted numerous challenges in the insurance industry, including Hurricane Irma, several other significant hurricanes, and a few other substantial catastrophic events, we feel extremely confident that Universal is well-positioned for the future. We have a prudent organic growth strategy with a focus on underwriting discipline and writing profitable and rate-adequate business. We distribute our products within both Florida and our 15 other active states through a robust network of independent agent partners as well as our unique direct-to-consumer platform, Universal Direct.
Our vertically integrated structure allows us to provide superior customer service, reduce costs for both ourselves and our reinsurance partners, and remain extremely nimble. Our first-class claims operation is focused on timely claims handling and providing outstanding service to our policyholders. We have a strong balance sheet protected by a comprehensive reinsurance program. Last, but certainly not least, we have a deep and experienced management team that guides our more than 550 dedicated employees as we collectively strive to continue building Universal into a world-class organization. With that, I will turn the call over to Jon Springer.
Thank you, Sean. I would like to start with some additional color surrounding the impact from Hurricane Irma, then talk a little bit about our reserve position, and lastly, touch on the reinsurance pricing environment. Hurricane Irma made landfall in Florida on September 10th as a Category 4 storm and was a devastating event throughout the state. Despite Irma causing substantial losses, the ultimate net financial impact to Universal was substantially limited by both our comprehensive reinsurance program and benefits received as a result of our vertically integrated structure. We currently estimate $447 million of gross loss in LAE from Hurricane Irma, including $445 million from Universal Property & Casualty and $2 million from American Platinum Property & Casualty. Our all-states reinsurance program performed as expected, limiting net losses and loss adjustment expenses from Hurricane Irma to $37 million, our maximum retention.
In addition, because gross losses in LAE in states outside of Florida are projected to be $12.8 million, or $7.8 million above our $5 million retention, additional recoveries from our other states' reinsurance program during the fourth quarter served to reduce Universal's aggregate retention from $35 million to $27.2 million, or an overall retention of $29.2 million when you include American Platinum's retention of $2 million. Further, because Hurricane Irma satisfied an otherwise recoverable provision of our other states' reinsurance program, our retention in states outside of Florida was reduced from $5 million to $1 million for all non-Irma events. This change resulted in an effective savings of $1.4 million recorded in the fourth quarter of 2017 due to the Minnesota hailstorm, which had occurred in June of 2017.
Our other states' reinsurance program will continue to have a net retention of $1 million for events through May 31, 2018, as a result of this otherwise recoverable provision having been satisfied. As of the close of business yesterday, we've had 69,449 reported Irma claims, with current paid loss adjustment expense, and case reserves of $392 million. From a severity perspective, on the nearly 60,000 claims closed to date, we're averaging $4,733 of loss and loss adjustment expense per claim. These numbers include 24,000 claims that have been adjusted, reviewed, and closed with no indemnity payment, primarily due to the loss falling below the policy's hurricane deductible. As we've previously discussed, Universal benefits from our vertically integrated structure by retaining certain revenues and/or fees paid to our subsidiary service providers for various services provided, including reinsurance brokerage, claims adjusting, and other services.
This benefit is particularly notable during large catastrophic events such as Hurricane Irma, which resulted in a substantial number of claims, leading to increased activity at our service company subsidiaries. As a result of Hurricane Irma, the fourth quarter and full year 2017 included the benefit of additional revenues within our service provider subsidiaries, which led to a higher level of profitability than would otherwise be the case in a normal quarter or year. In particular, Universal Adjusting Corporation, which manages our claims processing and adjustment functions, experienced a significant increase in workflow, revenues, and net profit in the months following the storm due to a substantial increase in level of claims activity. Additionally, Blue Atlantic Reinsurance Corporation generated approximately $2 million related to reinstatement premium commissions.
In total, we estimate these additional revenues at service company subsidiaries resulted in approximately $35 million of net pre-tax benefit during the fourth quarter of 2017. Lastly, Hurricane Irma resulted in various other effects on our ongoing business, and in particular, we experienced an increased level of both new and renewal business, as well as a corresponding increase in policy fee income during the quarter ending September 30, 2017, and quarter ending December 31, 2017. Stepping back for a moment to tie all these moving parts together, the initial net loss in LAE we reported in the third quarter of 2017 related to Hurricane Irma was $37 million. This amount was partially offset during the fourth quarter by favorable revisions to ceded loss and LAE of $9.2 million to reflect recoveries related to our other state's reinsurance program.
Our service company subsidiaries generated substantial additional revenues following Hurricane Irma that led to approximately $35 million of estimated pre-tax profit during the fourth quarter of 2017. In total, for the year ending December 31, 2017, we estimate that Hurricane Irma had an aggregate net benefit on our financial results of approximately $7.2 million on a pre-tax basis. Turning now to loss reserves. Fourth quarter 2017 results include $26.2 million of unfavorable prior year reserve development related to accident years 2013, 2015, and 2016, driven primarily by assignment of benefits related claims within our Florida book, including the increased litigation frequency experienced during 2017 surrounding the AOB issue. Fourth quarter 2017 results also include $18.3 million of current accident year reserve strengthening, also driven primarily by AOB related claims. We believe our loss reserves are appropriately set at current levels following these adjustments.
The 2013 through 2016 accident years are well seasoned at this point. In total, as of year-end, we had less than 1,700 non-cat claims reported and outstanding for the 2013 through 2016 accident years, which is only 1.57% of the total claims received for those four accident years in the aggregate. In looking closer at the open claims for these four accident years, it is important to appreciate that we have already paid out $19.2 million in the form of partial payments on these claims and have an additional $9.3 million of case reserves attributable to them. On average, we're setting aside $17,000 per claim for these open claims, which compares to our total average claim cost of $9,340 during the same four accident years. Beyond these specific case reserves, we have an additional $10 million set aside for IBNR to handle claims yet to be reported.
To put some further context around these numbers, the expected amount of ultimate incurred loss and LAE for the 2013 through 2016 accident years is $991 million, including this adjustment. We've increased the loss picks for these accident years by 0.8 percentage points on average from the loss pick that was established at the end of 2016. This is on a direct earned premium base of $3.3 billion during the accident years 2013 through 2016. The total prior year reserve adjustment we recorded in the fourth quarter accounts for 1.5% of the total net earned premiums of $1.7 billion during that same time frame. Our reserve adjustments during the fourth quarter bring us to a level that is $5 million above the best estimate of our outside actuaries.
Regarding the reinsurance pricing environment, we are in the early stages of the 2018 reinsurance renewal, there continues to be some uncertainty around how catastrophe pricing levels will change. As a reminder, we have significant capacity with predetermined pricing already secured. As we discussed on last quarter's conference call, 35% of our total open market catastrophe capacity has pricing fixed at 2017 or prior pricing levels. Nearly 60% of the capacity in the layers estimated to be impacted by Hurricane Irma has pricing levels fixed at 2017 or prior pricing levels. This continues to be the area most likely to see pricing changes. This multi-year strategy will significantly minimize the financial impact of any upward pressure on catastrophe reinsurance pricing.
Taking into account this multi-year capacity and the coverage we purchased from the state-run Florida Hurricane Catastrophe Fund, we will have just 32% of our total reinsurance premium budget subject to any effect on pricing of open market catastrophe for the 2018-2019 reinsurance program. With that, I'll now turn the discussion over to Frank Wilcox for our financial highlights.
Thank you, Jon. For the fourth quarter of 2017, net income totaled $36.4 million. An increase of 166.5% compared to the fourth quarter of 2016, in large part as the prior year's quarter's results included the impact of Hurricane Matthew. Diluted EPS was $1.03, up from $0.38 for the fourth quarter of 2016. We reported strong total revenue growth of 12.4% for the quarter, with increases in every major category of revenue compared to the prior year's quarter. Direct premiums earned of $263.4 million, offset by ceded premiums earned of $79.7 million, generated $183.7 million of net earned premiums for the fourth quarter of 2017, compared to $164 million in the fourth quarter of 2016.
The increase was the result of organic growth from both Florida and other state growth initiatives, as well as increased new and renewal premiums in both in the third quarter and fourth quarter in our Florida book surrounding Hurricane Irma. Ceded premiums earned as a percent of direct premiums earned was 30.3% during the fourth quarter of 2017, compared to 31.3% in the fourth quarter of 2016. Commission revenue of $6.7 million for the quarter grew $1.9 million, or 39.5%, compared to the same quarter in 2016, driven by the benefit of $2 million of fee income related to reinstatement commissions received by Blue Atlantic during the fourth quarter of 2017. Policy fees of $4.2 million for the quarter grew 12.1% year-over-year, reflecting an increase in the number of policies written compared to the prior year's quarter.
Other revenues were $2.1 million, growth of 30%, or half a million from the prior year's quarter. Net investment income for the quarter was $4.4 million, growth of 27.5% from the fourth quarter of 2016. This increase reflects actions taken to maximize yield while maintaining high credit quality as securities mature, as well as the growing size of our investment portfolio and the beneficial impact of rising interest rates. We realized $100,000 of investment gains during the quarter, compared to $1 million of realized gains in the fourth quarter of 2016. We generated a net combined ratio of 77.6% in the fourth quarter of 2017, compared to 95% in the fourth quarter of 2016. The net loss in LAE ratio was 45.3%, compared to 61.9% in the prior year's quarter.
The fourth quarter of 2017 included a benefit of $9.2 million, or five points, of recoveries received from our reinsurance program related to Hurricane Irma, compared to $26.6 million, or 16.2 points, in the fourth quarter of 2016 from Hurricane Matthew. The fourth quarter of 2017 results include $26.2 million, or 14.3 points, of unfavorable prior year reserve development. As Jon discussed earlier, the development related to accident years 2013, 2015, and 2016, driven primarily by assignment of benefits-related claims within our Florida book, including increased litigation frequency experienced during 2017 surrounding the AOB issue. Fourth quarter 2016 results included $4.5 million, or 2.8 points, of favorable prior year reserve development. Lastly, the fourth quarter of 2017 results include $18.3 million, or 9.9 points, of current accident year reserve strengthening, also driven by AOB-related claims.
While the fourth quarter of 2016 included $16.8 million, or 10.2 points, of current accident year reserve strengthening. Our net expense ratio was 32.3% in the fourth quarter of 2017, compared to 33.1% in the fourth quarter of 2016. Our net policy acquisition cost ratio remained relatively flat at 20.7% in the fourth quarter of 2017, compared to 20.4% in the fourth quarter of 2016. Our other operating expense ratio was 11.6% in the fourth quarter of 2017 versus 12.7% in the prior year's quarter, which continues to reflect economies of scale, as well as increased earned premium volume in the fourth quarter of 2017 relative to the fourth quarter of 2016.
Additionally, our service company subsidiaries generated substantial additional revenues following Hurricane Irma that led to approximately $35 million, or 19.1 points, of estimated pre-tax profit generated by service company subsidiaries during the fourth quarter of 2017, which were reflected predominantly in loss adjustment expenses, and to a much lesser extent, in general and administrative expenses. The effective tax rate for the fourth quarter of 2017 was 37.9%, compared to 39.9% in the prior year's quarter. The current year's quarter includes several discrete items, which in the aggregate, reduced our income taxes by approximately $200,000, or an impact of 0.3 percentage points for the quarter.
Discrete items include a credit to income tax expense of $5 million for excess tax benefits resulting from stock-based awards that vested and/or were exercised during the fourth quarter, largely offset by a deferred tax asset remeasurement of $4.7 million related to tax reform legislation passed in December 2017. In late December, the Tax Cuts and Jobs Act of 2017 was signed into law, which, among other items, included a reduction in the federal corporate tax rate from 35% to 21%, effective January 1, 2018. Although we anticipate an overall benefit from this lower corporate tax rate in 2018, we are unable to make definitive estimates on the impact of the reduction due to changes in interpretations, assumptions, and additional guidance that may be issued by the IRS and/or the Financial Accounting Standards Board. Our balance sheet remains strong and conservatively positioned.
Total unrestricted cash and invested assets were $943.5 million at December 31st, 2017, growth of 24.6% from December 31st, 2016. We continue to maintain a high-quality investment portfolio composed primarily of fixed maturity securities, which are 99% investment grade, and we take a conservative approach to managing our investments. The weighted average duration of the fixed maturity investments in our available-for-sale portfolio at December 31st, 2017, was 2.6 years, while the annualized investment portfolio yield, defined as net investment income divided by average total invested assets and unrestricted cash, was 1.81% for the fourth quarter of 2017 versus 1.74% in the fourth quarter of 2016. Stockholders' equity was $440 million at December 31st, 2017, growth of 4.6% from September 30th, 2017, and 18.5% from December 31st, 2016.
Combined surplus for our insurance subsidiaries was $324 million at December 31st, 2017, compared to $336 million at September 30th, 2017, and $331 million at December 31, 2016. Book value per common share was $12.67 as of December 31st, 2017, growth of 3.7% from September 30th, 2017, and 19.6% from December 31st, 2016. We remain committed to actively managing our capital position and continue to take action on that front during both the fourth quarter and full year 2017. During the fourth quarter of 2017, we repurchased 10,000 shares for approximately $300,000 at an average cost of $25.71 per share. For the year ended December 31st, 2017, we repurchased 770,559 shares for $18.1 million at an average cost of $23.54 per share. Our current share repurchase authorization program has $19.8 million remaining and runs through December 31st, 2018.
During the fourth quarter, we paid both regular quarterly dividend of $0.14 per share and an additional special dividend of $0.13 per share. In aggregate, we paid a total of $0.69 per share of dividends during 2017, which equates to an annual dividend yield of 2.8% based on the average UVE share price throughout the year. Return on average common equity was 33% for the fourth quarter of 2017 and 25.7% for the full year 2017. We remain dedicated to providing value to our shareholders and believe this level of return on equity, particularly during a year that saw the most costly hurricane make landfall in our core market of Florida in over a decade, to be an excellent result. At this point, I'd like to turn the call back to the operator.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star 1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Arash Soleimani with KBW. Your line is now open.
Arash, thanks. This first question, in terms of that $35 million, I know $2 million of it came from Blue Atlantic. From that $33 million, can you just break out exactly how much was in the loss and LAE line, and how much was in the other operating expense line?
Yeah, Arash, this is Frank. The vast majority, if not all of it, was generated by our subsidiary, Universal Adjusting Corporation, which generated $33 million. There were some moving parts in G&A, but they were largely offset.
All right. It's fair to just assume all of the 33 just goes to loss and LAE then?
Correct.
All right.
Correct.
If I do that, if I back out that entire amount, the $33 million from loss, if I backed out the development, both from the current accident year and prior accident years, and I backed out the $9.2 million recovery, I think I get to a 29.5% core or underlying direct loss ratio for the quarter, which seems better than that kind of 30%-32% range that I think you guys have guided to in the past. I guess two questions there is, one, given that you had this adverse development and you're saying there's some heightened litigation and so forth, what's the new run rate on a direct basis? Does that 30%-32% still hold, or do you think it'll be a bit higher than that going forward? What's the right way to look at that?
Arash, this is Sean. Number one, obviously, after a large catastrophic event, your attritional loss ratio is historically always lower. That's why you're seeing that 29-ish number, I believe, Q4. Going forward, we'll be running at 33%. That's one and a quarter point higher than we have been running. That takes us in line basically to where we've looked at our past years that are fully baked in, and we believe that's the current loss ratio we'll be using for 2018.
Okay, thanks. I think you may have touched on this last quarter a bit also, when we think about Irma, are you seeing AOB play a part in those claims or not really?
Yes. We're looking at roughly right now, about 12% of the 69,000-odd claims so far have some sort of AOB connotation connected to them. You figure that's right a little bit over 8,000 claims either have some sort of rep on it, contractor or public adjuster.
Okay. I think Jon mentioned the average amount per claim, something in the, I think it was in the 4,000 range. What's the average if we're looking for the average for claims closed with payment rather than all claims?
How about go ahead to your next question. I can dig that out pretty quickly, Arash.
Sure. One of the questions I think a lot of people have been asking with a storm like Irma, obviously Irma could have been worse, and if it hit Miami and maintained that kind of cat 4, cat 5 speed. Does that change how you look at your reinsurance spend? Does it make you say, "Hey, if it did hit, there is a possibility it could have exhausted the tower. So, going forward, we might want to buy to a higher return period." Is that something that you look at differently now?
You were supposed to ask a question for somebody else than me, Arash. No, that's all right. That's fine. Does it change how we look at it? No, probably not. Obviously, we license both catastrophe models. We're analyzing things. When you look at Hurricane Irma, Hurricane Irma was a very significant storm, and we're talking about utilizing approximately 15% of our catastrophe tower. That's a long way from the top. Obviously, direction can change that, wind speed could change that. We'll continue to do a similar type of evaluation, and we'll look at the efficiency of the spend at the top end. If pricing levels are such that somebody offers us capacity at a level that makes sense, we may purchase some additional at the top. We're pretty comfortable.
I know we were comfortable as Irma was out there, and we're pretty comfortable with the decisions we've made in the past.
All right. I'll give you a break and bug Frank real quick. I just wanted to just touch base on the taxes again. I know you said that you guys aren't necessarily comfortable giving a hard and fast number for the tax rate going forward. Is there a ballpark range you could give us of how we should be thinking about the impact of tax reform?
I'll tell you what I can tell you, and tell you what I can't and why I can't. Let's just start out with the blended statutory federal and tax rate. We know that the federal rate went down 14 percentage points. The benefit on your federal income tax from your deduction of state income taxes goes the other direction a little bit. The net benefit from the statutory rate is 13.3%. Now, what I can't tell you are a lot of the unknowns, and those unknowns include continued guidance that might come from the IRS on how to interpret this new law and the effect that that might have on our transactions, as well as guidance that may come out from the FASB that could change how we account for certain elements of taxes going forward.
In addition to certain unknowns about our transactions, which are affected by these changes in tax laws. As far as the rate going forward, what we did is we did an exercise using 2017 as a proxy. While I wouldn't hang your hat on this, if we were to take the tax law structure and apply that to 2017, we saw that there was a net reduction in the effective tax rate of around 10%, but I would put a wide range around that.
Okay. Obviously, I know you guys can't speak for the OIR per se, but obviously in California, there's talk of the regulators sort of potentially pressuring insurers to share tax reform with the policyholders. Do you think there's a risk of that in Florida or based on the AOB environment and how everyone's kind of raising rates now, does it look like, regardless of tax reform, AOB will continue to result in the OIR being kind of lenient in the sense of allowing rate increases to continue?
I think it's too early really to determine that. Obviously, we're in the middle of a legislative session currently right now, Arash. We're not in the predictive business, but I would tell you that obviously right now, there doesn't seem to anything to be solid right now that is gaining any ground as it relates to any type of AOB reform. That's really all I could give you as it relates to that.
Okay. That's fair.
Arash-
All right. Well, thank you for-- Yeah, go ahead.
To answer your earlier question, we've closed 34,500 claims with payment for an average loss and LAE of just over $7,400 per claim.
Okay. No, that's helpful. I just remembered one other thing I wanted to ask. In terms of your reinsurance spend, what you're looking at for June 1, you mentioned on the last call that a lot of your program is on a multi-year basis, so a lot of it won't be exposed to any potential rate increases. Obviously, the kind of momentum that the reinsurers have had has kind of died down lately. Do you even expect to get a rate increase on the portion of your program that is subject to market rates?
It really is too early to tell. The stuff I said in my pre-prepared remarks, is what we know for certain, and that's that a little less than a third of our reinsurance spend is all that would be subject to any upward adjustment. We also know that reinsurers are looking closely at how companies handled this past event, and obviously we feel very confident in our response to Hurricane Irma. We feel like we'll do as well as anybody will in this upcoming renewal.
Right. How likely is the FHCF to raise rates? Is that something that would probably stay flat because it's not really subject to market forces?
We wouldn't expect any changes in FHCF rates for this upcoming year.
Okay. Awesome. Thanks for the answers, guys.
Thanks.
Thank you. Our next question comes from Ron Bobman with Capital Returns. Your line is now open.
Hi. Thanks a lot. Congrats on the, as Frank said, a great result.
Thanks, Ron.
I had a question on the, I guess it's sort of driven by the AOB reserving actions that you took. Is that going to drive your rate need indications, I guess, particularly in Tri-County and drive you to put in for additional rate increase requests with the state?
Well, certainly additional losses go into the rate-making formula. As Sean alluded to, we did just secure a rate increase that we just started charging on new business in December and renewals in January, that included a meaningful increase in the Tri-County. We will have to play through the next set of data to know for sure, but obviously increased losses can drive additional rate need.
Okay. I'll sort of jump around a little bit. What's the holdco cash balance? Cash and invested assets, I guess you'd call it.
Hang on one moment here.
I can move on and try to ask someone else a question while you do that.
Yeah. Please.
The subrogation reserving process, I'm just wondering, any changes to your assumptions there as that program has sort of rolled out and developed and progressed?
No. This was our second full year of analyzing that or outside actuaries analyzing that. Always some minor adjustments here or there, but we're very encouraged with our subro collection process. We were able to secure 20% more recoveries in 2017 than 2016, and we have an expectation that that percentage will be even higher in 2018.
Great.
Just for some clarity, Ron. We've brought in close to roughly $24 million so far the last two years, and we feel that that number, again, as Jon said, will continue to trend positively because of the work we've done earlier the last couple of years, and we'll start to see that work and actually the final number baked in. We're pleased with the results.
The 24, is that?
Sean, this is Frank.
Okay. Yeah. Frank, sorry.
I'm sorry to interrupt. I just wanted to give you the answer to your question. It was $67.5 million of cash at the holding company.
Okay. Sean, the 24, is that a two-year number or 24 each year?
24 is a two-year number as basically as of the end of 2017.
Got you. Okay. In the press release, there was a reference to the reserves being set above the actuarial best estimate. I assume for you making a noteworthy comment that it's not just a hair above the best estimate. Would you quantify it or give some indication of the magnitude of conservatism above the best estimate?
$5 million.
Okay. Thanks. Sean, you mentioned that sort of the AOB, the incidence of AOB in the Irma claim population was about 12% currently. In the ordinary course of sort of typical attritional losses, non-cat losses, what's that sort of comparable incident percentage?
20%.
20%? It's higher in a non-cat scenario. Okay.
Yes. The large deductible plays a role in that on the cat side.
Okay.
Whoever it may be is not as eager to participate in that claim due to the large size of the deductible.
Oh, I see. Okay. That makes sense. Thanks. My last question is, can you talk about the direct initiatives, the states where you're either forecasting or experiencing the greatest amount of growth and traction? Obviously, there's been some losses. For example, California's gone through a brutal year with the wildfires, and I'm sure there's sort of some degree of dislocation there, as well as in other states where there's been cat events. Texas, I presume, with Harvey. Are those geographies or others I'm not thinking of that are particularly sort of fertile ground for 2018 and 2019 as a result? Thanks. Then I'm done.
Yeah. Obviously, from a direct perspective, Florida's our biggest market. Obviously, then Georgia, Pennsylvania, South Carolina falling behind there. We haven't really come to a final conclusion on how we are really going to pursue Universal Direct. We've had a lot of different potential offers with Universal Direct to figure out the best way to fully implement that and the best way, obviously, that we feel that it'll benefit the parent company. Moving forward, we are open to many different avenues and cross-selling different products as well as products that are the same as ours from competitors. To give you an exact answer to that, we have a lot of things that we're working on, but nothing I can give it to you right now concrete.
Okay. I'm sorry. I actually had one more question. You mentioned in the press release the impact on premium volume in Q4 by virtue of the DFS order prohibiting non-cancellations. Do you think there's a sort of secondary adverse impact on the business that you were forced to renew or maintain that would've otherwise canceled? Is there any sort of adverse underwriting margin that we should be thinking about, you're thinking about, or that you already experienced in fourth quarter as a result of that? What would your estimate be on premium growth if that order had not been put in place? Thanks a lot.
Yeah, I don't think that the order necessarily drove a material increase. If you look at how we were growing the first three quarters, the fourth quarter was marginally larger. In terms of any adverse impact on that type of business, that remains to be seen. You'll have to ask that question in another year or so. I don't think, given the size of our book of business and the number of policies that we're talking about, I don't think it would ever be anything that would be material to our results.
Okay. Thanks again, and a great result in a tough year. Bye-bye.
Bye.
That does conclude our Q&A session for today. I would now like to turn the call back to Mr. Sean Downes for any further remarks.
As always, in closing, I would personally like to thank all of our shareholders, employees, board of directors, policyholders, and my management team for their hard work and loyalty to Universal. This concludes the call. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.