Good morning, ladies and gentlemen, and welcome to the UVE Q3 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rob Luther, Vice President of Corporate Strategy and Investor Relations.
Thank you, and good morning, everyone. Welcome to our discussion on our Q3 2019 earnings results, which we reported yesterday. On the call with me today is Steve Donaghy, Chief Executive Officer, Jon Springer, President and Chief Risk Officer, and Frank Wilcox, Chief Financial Officer. Before we begin, please note today's discussion may contain forward-looking statements and non-GAAP financial measures. Forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release, our earnings presentation, and UVE's SEC filings, all of which are available on the investor section of our website at universalinsuranceholdings.com and on the SEC's website. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release. With that, Steve, I'll turn it over to you.
Thank you, Rob, and good morning, everyone. Thank you for joining us today. Yesterday, we reported strong third-quarter results with non-GAAP adjusted EPS of $0.61 on revenue growth of 11.4% versus the year-ago quarter. Year-to-date total revenue was up 15.2% to $699.9 million. Direct premiums written were up 7.4%, due in large part to strong growth outside of Florida, in addition to rate increases within Florida and other states. Year-to-date EPS was $2.82 on a GAAP basis and $2.67 on a non-GAAP adjusted basis. Our year-to-date annualized return on average equity was 23.9%. Book value per share grew 12.7%, and our pre-tax income margin was a strong 18.9% year-to-date, all supported by premium volume, pricing, integrated services, and our investment portfolio performance.
We believe these results, combined with the outstanding work our claims servicing team has done in bringing closure to prior year catastrophe events and the launch this quarter of our multi-rater quote-to-bind platform on Clovered, where consumers can now receive up to five side-by-side quotes online from different carriers, positions us well to continue to deliver on our strategic priorities. With that, in a moment, Jon will provide an update on some risk management topics. But first, let me now turn it over to Frank to walk through our financial results. Frank?
Thank you, Steve, and good morning, everyone. As a reminder, discussions today on adjusted operating income and adjusted EPS are on a non-GAAP basis and exclude impacts from unrealized and realized gains and losses on investments and extraordinary reinstatement premiums and related commissions. Adjusted operating income also excludes interest expense. Total revenue grew 11.4% for the quarter and 15.2% year-to-date, driven primarily by continued organic premium volume growth pricing in our investment portfolio performance. Pre-tax income margin was 12.1% for the quarter, impacted by weather events above plan, partially offset by returns on our investment portfolio and integrated service performance. Year-to-date pre-tax income produced an 18.9% margin. EPS for the quarter was $0.59 on a GAAP basis and $0.61 on a non-GAAP adjusted EPS basis, and $2.82 and $2.67 year-to-date respectively.
These results reflect positive momentum from premium growth, investment performance, and a reduced share count offset by a higher core booked loss ratio in 2019 when compared to 2018, weather events above plan, and a lower benefit from integrated services as prior years' claims conclude. The year-to-date EPS decline relative to 2018 was driven by a pre-tax $6.5 million non-recurring benefit in policy acquisition costs in the second quarter of 2018. The company produced a strong annualized year-to-date return on average equity of 23.9% and book value per share growth of 12.7% year-over-year. Turning to our underwriting results. Premiums in force grew to approximately $1.3 billion, an increase of 8.5% from the prior year.
Direct premiums written were up 10.9% for the quarter, led by the full quarter's impact of rate increases in Florida and other states taking effect, as well as strong direct premium growth of 27.6% in states outside of Florida. Year-to-date, direct premiums written were up 7.4%, led by the rate increases taking effect, as well as strong direct premium written growth of 29.1% in other states. Net premiums earned were up 9.3% for the quarter and 11.2% year-to-date, driven by the previously mentioned factors, partially offset by the increases in ceded premiums earned in the third quarter per our previously released June 1st reinsurance program announcement, where we increased first event Allstate's reinsurance program coverage to $3.3 billion.
On the expense side, the combined ratio increased 15.8 points for the quarter to 97.8% and 11.9 points year-to-date to 90.5%, driven primarily by geographic diversification and increase in our core booked loss ratio at the start of 2019, weather events above plan, and a reduced benefit from our claims adjusting business, partially offset by a reduction in our expense ratio as set forth in the following. The expense ratio improved by three points for the quarter to 33.5%, primarily related to a 2.3-point improvement in the other operating expense ratio. Year-to-date, the expense ratio improved by 70 basis points to 33.2%, driven by a 1.7-point decrease in the other operating expense ratio, partially offset by a 90 basis point increase in the policy acquisition cost ratio.
The improvement in the other operating expense ratio for the quarter and year-to-date was due to economies of scale, executive compensation reductions, and higher reinstatement premiums in the prior year's comparison affecting the base of the ratio. The increase in the policy acquisition cost ratio year-to-date relative to the first nine months of 2018 was due to a non-recurring benefit of $6.5 million reported in the second quarter of 2018, related to a refund of prior year premium taxes as a result of a settlement with the Florida Department of Revenue, and higher reinstatement premiums in the prior year's comparison affecting the base of the ratio. We now expect the expense ratio for the full year to be between 33% and 34%. The net loss and loss adjustment expense ratio increased 18.8 points for the quarter to 64.3% and 12.7 points year-to-date to 57.3%.
Quarterly and year-to-date drivers include weather events in excess of plan of $15 million or 7.3 points for the quarter was related to weather events in Minnesota and a series of wind events in the southeastern states, including Hurricane Dorian. This is in comparison to $7.5 million in the third quarter of 2018. Year-to-date weather events in excess of plan were $22 million or 3.5 points, compared to $12.5 million for the first nine months of 2018. Prior year reserve development of $3.2 million or 1.6 points was recorded for the quarter, and $3.7 million or 60 basis points was recorded year-to-date, related to prior year's catastrophe events. For comparison, there was an immaterial development in the third quarter of 2018 and an unfavorable development of $2.2 million or 40 basis points for the first nine months of 2018.
All other net losses in LAE of $114.4 million or 55.4 points for the quarter and $333.3 million or 53.2 points year-to-date includes diversified growth in the company's underlying business, an increase in our core booked loss ratio at the start of 2019, and a reduced benefit from our adjusting business as prior year's claims conclude. Turning to services. Total services revenue increased 17.7% to $14.9 million for the quarter and 8.6% to $40.9 million year-to-date, driven by commission revenue earned on ceded premiums by our reinsurance intermediary, Blue Atlantic, and an increase in MGA policy fees and other revenue related to new and renewal policy volume.
On our investment portfolio, net investment income increased 14.6% to $7.6 million for the quarter and 34.6% to $23.2 million year-to-date, primarily due to increased assets under management and an asset mix shift to higher yielding investment-grade bonds during 2018 and 2019, which are having a greater impact on net investment income. Yields from the fixed income portfolio are dependent upon future market forces, monetary policy, and interest rate policy from the Federal Reserve. The company continually monitors the current Federal Reserve interest rate trends, which has impacted effective yields on new fixed income and overnight cash purchases in 2019, but the impact has been somewhat limited in comparison to the prior year due to prudent duration strategies and asset mix shifts. Realized losses for the year-to-date period were primarily the result of liquidating underperforming equity securities.
Unrealized gains were driven by market fluctuations in equity securities, resulting in a favorable outcome for the quarter and year-to-date periods. Taxes. Excluding discrete items, the effective tax rate for the third quarter was 29%, an increase of 2.5 points over the prior year's quarter. Year to date, the effective tax rate was 27%, an increase of 1.1 points over the prior year's first nine months. These increases were largely due to a change in the amount of both permanent differences and taxable income. Barring any unforeseen events, the remainder of the year for 2019, we expect an effective tax rate of approximately 27%-28% before discrete items. In regards to capital deployment, during the third quarter, the company repurchased approximately 964,000 shares at an aggregate cost of $25.7 million. Year to date, the company repurchased approximately 1.8 million shares at an aggregate cost of $49.9 million.
The $49.9 million returned to shareholders through opportunistic share repurchases year to date is the largest amount of capital deployed for share repurchases over any other corresponding nine-month period in the company's history. On June 5th, 2019, the Board of Directors of the company declared a quarterly cash dividend of $0.16 per share, which was paid in the third quarter on July 17th, 2019, to shareholders of record as of the close of business on July 3rd, 2019. Let me now turn it over to Jon to walk through some additional specifics.
Thank you, Frank, and good morning, everyone. I would like to start with some additional color on past CAT events and current accident year weather events, and will conclude with some comments on the current risk management market dynamics. The third quarter saw us make major progress in closing past catastrophe claims. Our in-house claims staff has done a tremendous job in servicing our policyholders in handling over 100,000 catastrophe claims in the past two years alone. On Hurricanes Matthew and Florence, we're nearing the end of the claims handling with approximately 20 claims remaining open on each storm at 9:30. We did increase the total gross losses just slightly to $47.5 million and $52 million respectively. Our Hurricane Michael total gross loss remains unchanged at $350 million, with approximately 400 claims remaining open at 9:30.
On Hurricane Irma, we started the quarter with 5,500 open claims and made significant progress during the quarter. As of 9:30, we increased our total gross loss to $1.25 billion, with just under 2,000 claims remaining open. We have made even further progress in October and stand here today with less than 1,000 open Irma claims. From a net exposure standpoint, as we have noted in the past, at this point in the life cycle of Hurricane Irma, the vast majority of any increase in loss is covered by the Florida Hurricane Catastrophe Fund. In regards to our current accident year weather events, for the hail storm in Brevard County, Florida, in Q1, approximately 90% of claims have been closed with incurred losses within our original plan for this event.
When looking at the weather events that took place nationally in Q2, we were fortunate to only be exposed to roughly half of the events due to our geographic business footprint. In the third quarter, there were meaningful weather events in Minnesota, as well as a series of wind events in southeastern states, including Hurricane Dorian, all of which led us to booking an additional $15 million beyond plan as Frank mentioned earlier. The majority of this additional weather loss booked in Q3 is related to Hurricane Dorian. This is a retention event, so gross would equal net for all intents and purposes. When coming up with the estimated gross loss, we considered several factors, including modeled loss estimates specific to our book of business, which is obviously more granular than a high-level state or regional market share analysis.
Also considered total market-wide loss estimates widely reported by the generally accepted catastrophe models and applied load and market share estimates across several states. Lastly, we looked at our own trend data thus far for claims volume. In looking at all these factors, we have taken a prudent approach to reserving for this event and feel comfortable in our booked position this quarter. As a reinsurance update, the majority of the Atlantic hurricane season is in the rearview mirror. We believe this was a largely benign hurricane season for Florida, with primary insurers absorbing the lion's share of losses within their retention. This result will serve as a strong bottom-line outcome for our reinsurance partners in the Florida market. Following the active loss seasons of 2017 and 2018, this is a well-earned result for all parties involved.
It is far too early to speculate on June 1st, 2020 reinsurance renewals, as we will allow the hurricane season to formally end, continue to track the positive effects of the Florida AOB legislation reform, and of course, monitor the reinsurance capacity effects of weather events around the globe. With that, I'd like to turn it back to Rob.
Thanks, Jon. I'd like to ask the operator to now open the line for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster.
Leave it on Q&A.
Again, that's star one on your touch-tone telephone. Our first question comes from the line of Christopher Campbell of KBW. Your line is open.
Hi. Good morning, gentlemen. Congrats on the quarter.
Morning.
Morning, Chris.
Yeah, I guess I'll start off with the large amount of repurchases this quarter. Obviously, a big slug there. How should we view the $25 million approximately that you bought back this quarter? Is that a good run rate going forward, or how should we think about modeling repurchases?
Yeah. Obviously those repurchases were in light of what we believe to be an undervalued price for us, and we took the opportunity with some capital that we had to repurchase that. I wouldn't look at that necessarily as the run rate going forward. I think that there are a lot of factors at play going forward, including what the stock price does. Capital that we may or may not have available to deploy. We look at the best use of our capital at any given point in time.
Got it. Brian, how much excess capital would you guys estimate that you have right now?
Well, it's not a disclosure that we make on an interim basis. At the end of the year, we will have a holding company-only financial statements, and you'll be able to gauge that from there.
Okay, perfect. Kind of looking at the commission revenue, that rose year-over-year. How should we think about modeling that one, that line item as well?
Well, the amount that we earned went up for a couple reasons. First of all, because our exposures have increased, and with that, the amount of reinsurance that we buy. We also are purchasing a larger percentage of our reinsurance from third parties, which is the portion that earns us that commission. The CAT fund is a smaller percentage of our overall program because there's a higher participation rate among other participants in that program.
Okay, got it. The way we should be thinking about the main drivers behind that should just be on the commission. That's not commission revenue that you are getting from the new platform, correct?
No. The vast majority of that is the commissions earned on the reinsurance program.
Oh, okay. That's the reinsurance. That is not like the commissions you guys get from this new multi-quote platform?
No.
Okay, got it. Looking at the expense ratio, that was pretty strong this quarter. Is mid-30s, like 33, 34 net expense ratio where we should be thinking about modeling you all?
Yeah. The short answer is yes. There are a lot of variables involved in that equation. There are two sides of the equation. There are the spend itself, which is your numerator, and then there's the net earned premium, and both are affected by different things. As far as the denominator, supply and demand of the product, primary rates, cost of reinsurance are all going to be at play there. Those things can put pressure or ease pressure, depending on which direction they go on the expense ratio. As far as our spend goes, our ratio is right within the range that we've been sharing with our folks, although on the lower end of that range, and we feel good about that. We feel that we've been disciplined with our spend. We don't spend it unless we believe that it's going to generate good dividends.
going forward, it depends. It depends on what happens with reinsurance prices. It depends on what happens with primary rates that are driven by a variety of different factors.
Okay, great. You had mentioned reinsurance prices. I'll go ahead and open up Pandora's box for Jon, right?
Sorry, Jon.
Given all of the Japanese typhoons, the potential impact on retro, I guess we're almost through wind season. Looks like Florida's mostly escaped the crosshairs of any big storm. I guess just how should we be thinking about mid-year reinsurance renewals? What would be the potential impact of what's happening in Japan? How sensitive do you think next year's reinsurance pricing is going to be to the retro market that renews at one-one?
There's a lot there, the short answer to almost all of those is it's really too early to tell. I don't mean to be coy with you, Chris, I would give you more if I had you. We've talked to a lot of our reinsurance partners. As I said in the opening, it was, or we are on our way, I should say, to a well-earned, relatively loss-free year, which our reinsurance partners certainly deserve. Our policyholders could use a year off from a major impact here in Florida as well, as well as our claims staff. Everybody has deserved the year that we're on our way to. It is just simply too early to tell, in part because of what you just laid out.
There are so many factors at play, including losses around the globe, including how that impacts the retro market for our reinsurance partners. There's a lot to sort out, it's too early.
Got it. Then I guess when we're looking at the different renewals, I guess just how independent or not independent is the Florida renewal versus, we're going to get a read-through on 1/1, there'll be some property stuff there, obviously, 4/1 is mostly Japan. I guess just when we're looking at that, if you had to come up with a growth correlation, how reliable would looking at either of those two renewals be in terms of predicting what's going to happen in mid-year? I mean, is it 10% correlated or I'm trying to think, because the last few years within Florida got hit by a lot of CATs, then that didn't impact the Japanese renewals. It looks like there is kind of some independence between the different areas, the way that the reinsurers could be differentiating the pricing.
There's definitely independence, we'll watch these things closely as you do, see what the experience is of those that buy at 1/1, see what happens on the 4/1 Japanese. At the end of the day, Florida renewals stand on their own, they can move directionally like the 1/1s and the 4/1s, or they could do something totally different. They really are independent.
Okay, got it. I'm looking at slide seven of the deck, it looks like, you guys had like, I think, Jon, you had mentioned a little bit in your script about the Hurricane Irma gross loss is now $1.25 billion, you're holding the Hurricane Michael loss pick. It looks like most of the $205 million of growth adverse development was Hurricane Irma. I guess just where do you stand in terms of your 2017 tower? What's the breakout between the limit you have available in indemnity versus what's still available in terms of the LAE pieces of that?
Yeah. Even though we've increased the Hurricane Irma loss, my statement is going to be very similar to the one that I made last quarter and that I made in the opening remarks. Where we are in the life cycle of this storm is that the vast majority of this increase is being borne by the Florida Hurricane CAT Fund. When you factor in some of the strategies that we deployed early on in this event with front-loading some of the loss adjustment expenses, we're in a position where an even greater share is being covered by the Florida Hurricane CAT Fund than may otherwise be apparent.
Okay. Got it. I guess just are you guys starting to see any benefits on a core loss ratio from AOB reform? Are there any operational metrics that you're seeing within the claims department that things are getting better? If so, how is that going to impact your upcoming rate filing?
Hey, Chris, this is Steve. From an AOB perspective, we continue to be cautiously optimistic about that legislation, we have seen benefit since the run-up at 6/1. One thing that we lose sight of at times, though, is that the AOB legislation, in conjunction with our own internal adjusting firm and the fast track process, we have people on site at many of our claims within 48 hours of the call in on the initial claim. I think a lot of people get comfort from that, we issue checks on site. I think our process is unique, we may see benefits that others may not due to our operational structure and our focus on claims.
It's not lost on all of us here that we sit here today with, as Jon had mentioned, under 1,000 claims on Hurricane Irma, which was roughly a 95,000 claim event. Organizationally, we have proven that we can manage through the difficult events that occur in any of the states that we do business in. I'll let Jon handle the last portion of your question.
From a rate filing perspective, again, as we said last quarter, we're planning to make a filing by the end of this year. We wanted to let a little bit of time pass so we get some more data and more accurate data to use in this next filing. We also did have a Florida rate filing that just went into effect on renewals at the end of May of this year. This upcoming filing will be made so that it times up with another May effective date.
Got it. It's my understanding that the new rate filings within 2020 have to account for any AOB benefits. Is that correct?
Well, I think there's still some details to be sorted out in that space, Chris.
Okay, great. Well, thanks for all the answers. Best of luck in fourth quarter.
Thanks, Chris. Have a great day.
Thank you. Ladies and gentlemen, once again, to ask a question, please press star one on your touch-tone telephone. Again, that's star one on your touch-tone telephone to ask a question. Our next question comes from the line of Bill Broomall of Dowling & Partners. Your line is open.
Great. Thank you. I just had a quick question on the strong growth outside of Florida. Do you mind just telling us, kind of giving some overview of where that's coming from, where you're having the most success?
Hey, Bill. Good morning. This is Steve. Thanks for your question. The growth outside of Florida really is predominant from the various agents that we've partnered with. As we've seen multiple agencies operate in many of our states, we benefit from their growth relative to their footprint. When you look at specific states, some are growing faster than others, and many of them are a direct result of the relationships that we have in that state. North Carolina, for example, where we've been for a long time, we grow more than we do in Illinois, where we just got into and are kind of spreading our wings, so to say. There's really not a particular area that I would say is better than another.
It's more a byproduct of the relationships we build and the trust the agency force and our direct-to-consumer channel can generate in the marketplace.
Got it. Okay. Thank you. Maybe talk on a philosophical level about Clovered and how you think about ramping up and getting flow through that platform. Is there a kind of a strategy? Obviously, there's a strategy, but maybe you could talk about your strategy to grow that platform.
Yeah. Clovered, which was originally Universal Direct and has morphed into Clovered, we continue to learn more and more about that space every quarter, Bill, and the byproduct of that is increased premium growth across the platform. We're growing Clovered in every state that we operate in. As you know, we recently announced the ability to have multiple quotes presented to the consumer, which we see as the next generation of the online efficiency in acquiring an insurance product for an insured. Now an insured can look at a Universal product next to four other carriers and make a selection that suits he or she the best. We feel very optimistic that that will continue to provide a platform for us and for consumers to exercise their desire to get insurance on their own.
Is the quote-to-bind capability available across all products that are offered through Clovered? Auto, home, everything?
Yeah, it's a great question. A lot of it depends on the carrier. We've been the first quote-to-bind carrier that we were aware of that you could do without speaking to anyone. Many of the auto carriers present something similar, but in the home space, it's a byproduct of the technology of the carriers. We're trying to pull them along with us to allow us to bind online, but we want to make sure we're following their rules and making sure they're getting the kind of risk they'd like to get within their portfolio. I think it's something that will evolve over time. Being a good partner in that particular venue, we don't want to do things that they're uncomfortable with, so we work very closely with them.
I think over time, more and more products will be presented in a multi-quote ability, such as flood and others, to really round out what the insured can acquire at one time online. We like the space, we like the technology, and we've always benefited from building that on homegrown technology rather than buying it from third parties.
Got it. Is it the same, this Clovered or quote-to-bind, I guess, platform, is it covering the same states that Universal Direct is? It's in all the states that, Florida plus outside of Florida, the footprint is available?
Yes, sir. Yes. It's in 18 states currently. Yes.
Perfect. Great. That's helpful. If I could, just one maybe or two clarifications on the cats. Did you say Dorian was a full retention loss? So I'm assuming I'm just taking that to mean that losses outside of Florida were over $10 million for your other states program. Did I hear that correctly? No?
No, I'm glad you asked for clarification there, Bill. What I said is, it is a retention loss, meaning that we would not be anticipating that the loss to reach a point where we would be able to recover.
Oh, got it. Got it. Okay. I'm sorry. Just for my modeling purposes, when you say $15 million above plan in your 37% loss pick, how much in Q3 do you build in there for weather events?
Yeah, I've got that number here. Our original plan, as set forth at the beginning of the year, we were setting aside a little over $21 million for all weather events in the third quarter. Now with the impact of Hurricane Dorian as well as a rather meaningful event in Minnesota in early August, we've decided to add an additional 15 to that number.
Got it. Okay. Thank you. That's very helpful. I think that's all I had. Thank you.
Have a good day.
Okay, Bill.
Thank you. At this time, I'd like to turn the call over to CEO, Steve Donaghy, for closing remarks. Sir?
In closing, I would like to thank our associates, consumers, agencies, and our stakeholders for their continued support of Universal. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.