Good day, ladies and gentlemen, and thank you for standing by. Welcome to the UVE first quarter 2019 earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during today's conference, please press star then 0 on your telephone keypad. 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 first quarter 2019 earnings results, which were reported yesterday. On the call with me today is Sean Downes, Chairman and Chief Executive Officer, Jon Springer, President and Chief Risk Officer, Steve Donaghy, Chief Operating 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, Sean, I'll turn it over to you.
Thank you, Rob, and good morning, everyone. Thank you for joining us today. Yesterday, we reported our first quarter 2019 results, and we're off to a good start to the year. Total revenue was up 23.5% to $237 million. Direct premiums written were up 7.1%, due in large part to our strong growth outside of Florida. EPS was $1.14 on a GAAP basis and $1 on a non-GAAP adjusted basis. Our annualized return on average equity was 30.4%. Book value per share grew 17.2%, and our pre-tax income margin was a strong 22.7%, all supported by our premium volume, pricing, integrated services, and our investment portfolio performance. Turning to our progress on our strategic initiatives. We received rate increase approvals in Florida and Georgia for new and renewal business, with the majority of these changes to take place in the latter half of the second quarter.
We continued to proactively expand our addressable market in the first quarter by launching Universal Property and Casualty Insurance Company, as well as Universal Direct, our proprietary platform in Illinois, which is one of the top five largest personal residential homeowner states in the country by direct premiums written. We also added nine carrier appointments to our digital insurance distribution channel, Clovered, across homeowners, auto, flood, and E&S lines, which include a mix of national and specialty carriers. These milestones show marked progress against our strategic priorities and put us in the position to focus on disciplined growth, maximize earnings stability, and continue to strengthen our foundation. Additionally, we continue to monitor the recent developments with the assignment of benefits legislation in Florida and have continued to make good progress since our discussion in Q4 on accelerating our operational focus on claims resolutions.
These efforts continue to result in a reduction in our outstanding non-cat litigated claims year-over-year, as well as a reduction in our new inbound litigated claims since the changes we implemented. Overall, we're seeing positive momentum across the company on our initiatives to position ourselves for the future. In a moment, Jon will provide an update on our reinsurance progress. First, let me now turn it over to Frank to walk through our financial results. Frank?
Thank you, Sean, 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 23.5% for the quarter, driven primarily by higher organic premium volume pricing in our investment portfolio performance, partially offset by realized losses in our investment portfolio. Pre-tax income margin was 22.7% for the quarter, bolstered by our investment portfolio and integrated service businesses. EPS for the quarter was $1.14 on a GAAP basis and $1 on a non-GAAP adjusted basis. Annualized return on average equity was 30.4%. Book value per share grew 17.2% year-over-year. Turning to our underwriting results. In-force premium grew to approximately $1.2 billion, an increase of 12% from the prior year.
Direct premiums written were up 7.1% for the quarter, led by growth of 31.5% in other states and 3.4% in Florida. Underlying growth in Florida was tempered by more disciplined underwriting guidelines, while our other states' geographic expansion continues to be strong. Ceded premium earned as a percent of direct premium earned declined 1.4 points to 29% for the quarter. On the expense side, the combined ratio increased 10.6 points for the quarter to 87.2%, driven by increased losses in connection with the diversified growth in the company's underlying business, increased estimated losses as discussed in Q4, a reduced benefit from our claims adjusting business, and the Q1 hail event in Brevard County, Florida, partially offset by a reduction in our expense ratio as set forth in the following.
The expense ratio improved 1.7 points for the quarter to 33.3%, driven primarily by a 1.6% point improvement in other operating expense ratio to 12.5%, related to scale benefits and reduced executive compensation. We expect the expense ratio for 2019 to be between 34% and 37%, allowing for continued investment in our operations. The net loss and loss adjustment expense ratio increased 12.3% points for the quarter to 53.9%. Quarterly losses in LAE drivers include weather events in excess of plan of $5 million or 2.4 points for the quarter were directly related to the hail storm that affected Brevard County, Florida in March. There were no weather events in excess of plan in Q1 of 2018.
All other losses and loss adjustment expenses of $108.3 million or 51.6 points for the quarter includes diversified growth in the company's underlying business, an increase in estimated losses as previously discussed in the fourth quarter, and reduced benefit from our adjusting business as prior year claims conclude. Turning to services. Total services revenue increased $12.2 million for the quarter, driven by commission revenue earned on ceded premium by our reinsurance intermediary, Blue Atlantic, and an increase in MGA policy fees related to new and renewal policy volume. On our investment portfolio, net investment income increased 70.2% to $8.1 million for the quarter due to rising interest rates compared to the prior year's quarter asset mix, as well as higher average levels of invested assets. Realized losses in the first quarter of 2019 were 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. The effective tax rate for the first quarter was 25.3%, an increase of 2.8 points over the prior year's quarter, largely due to higher net credits for discrete items in the first quarter of 2018. For 2019, we expect an effective tax rate between 26.5% and 27.5% before discrete items. In regards to capital deployment, during the first quarter, the company repurchased approximately 321,000 shares for a total cost of $10.1 million. The company's current share repurchase authorization program has $4.4 million remaining as of March 31st, 2019, and runs through May 31st, 2020.
On April 10th, 2019, the Board of Directors of the company declared a quarterly cash dividend of $0.16 per common share of stock, payable May 10th, 2019 to shareholders of record as of the close of business on May 3rd, 2019. Let me now turn it over to Jon to walk through some additional specifics.
Thank you, Frank. Good morning, everyone. I first would like to add a few additional comments on the Brevard County, Florida hailstorm that occurred at the tail end of Q1. I will give an update on our current loss position as relates to the three major catastrophe events in 2017 and 2018 and reserves in general. Finally, provide some additional color surrounding our upcoming June 1 reinsurance renewal. On the Brevard County hailstorm, our teams are working diligently to support consumers affected by the hailstorm. At present, we have had approximately 250 claims reported and expect that this number may continue to grow in the coming months.
While an exact loss number would be difficult to predict at this point, as Frank mentioned, we have elected to add an additional $5 million beyond plan for 1Q weather events, in large part due to this late first quarter event. In regards to the three major catastrophe events, Hurricane Irma, Hurricane Florence, and Hurricane Michael, our ultimate loss projections disclosed in detail for each of these events at year-end remain unchanged as of the end of the first quarter. Our claims team successfully closed another 2,100 of the remaining open catastrophe claims during the first quarter, bringing the total claims closed on these three events to over 97,000. As we noted in Q4, we accelerated our operational focus on litigated claim resolutions in the second half of 2018, particularly in the fourth quarter, which resulted in resolving numerous outstanding claims in a timely, fair and equitable manner.
That performance has continued in Q1 with open non-cat litigated claims down meaningfully from Q1 of 2018 and sequentially when compared to Q4 of 2018. This continued progress along with putting up close to $100 million in reserves in Q4 better positions us going forward. As a reinsurance update, over the course of the past several months, we've met face-to-face with the vast majority of our reinsurance partners to discuss our experiences in Hurricane Irma, Hurricane Florence, and Hurricane Michael, the difference in the storms, and the upcoming June 1 reinsurance renewal. There continues to be widespread speculation around the magnitude of change for catastrophe pricing at June 1, both in the Florida market as a whole and as relates to our specific program, including what form AOB legislation will take and that potential impact on reinsurance pricing.
To provide some color specifically to our reinsurance program, our reinsurance partners have paid catastrophe losses totaling nearly $1 billion on our behalf from the three major hurricanes impacting the Southeast in 2017 and 2018. This was subsequent to more than 10 years without any severe cat impact in Florida, including at which time we ceded hundreds of millions of dollars to our reinsurance partners. There are, of course, many other factors that can come into play, but generally speaking, one would expect catastrophe prices to decline after loss-free years and rise in years following major loss activity. Let me walk you through some of the specifics as it relates to our core first event reinsurance tower for this year. As previously disclosed, we started this renewal season with over $365 million of open market catastrophe capacity already secured at predetermined pricing via prior multi-year deals.
We are projecting to receive nearly $2 billion of capacity from the Florida Hurricane Catastrophe Fund at terms generally similar to last year. This leaves less than 30% of our 2019-2020 reinsurance capacity to be renewed in the current market. The market pricing for the majority of this remaining first event capacity has already been sent into the worldwide catastrophe reinsurance market for its proper subscriptions, and since last week, we have already been receiving authorizations from our reinsurance partners for the 2019-2020 hurricane season. All told, we are nearly 90% completed on our first event core tower, and will turn our attention to the supplemental parts of the program very soon. In summary, we designed a thoughtful, strategic reinsurance program over the past several years, one in which has afforded us the ability to provide stability throughout part of the cyclical nature of the reinsurance market.
In addition, we have created strong, committed relationships with our reinsurance partners while other forms of capacity entered the marketplace. We assess on a rolling basis the most cost-effective, stable approach to reinsurance and will continue to do so going forward. 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.
Ladies and gentlemen, if you have a question or comment at this time, please press star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then one on your telephone keypad. Our first question or comment comes from the line of Christopher Campbell from KBW. Your line is open.
Hi. Good morning, gentlemen.
Good morning.
Good morning.
My first question is, can we just get some color on the expense ratio improvement? I guess just how much this quarter was from scale, and then how much was from executive comp savings?
Yeah. Around $2 million came from executive comp and the balance from scale.
Okay, $2 million from-
There's about an $8 million reduction year-over-year, give or take, so about $2 million a quarter.
Okay, got it. Since you guys came in, I have you pegged at like a 33.3%. Frank, I think you said in your script that the guidance is going to go up to 37% or 34%-37%. I guess just given the strong growth, what's driving that expense ratio higher? Is that higher ceded premiums from reinsurance cost increases? Just trying to help understand why that would be going up.
Well, we're allowing ourselves that range for operational initiatives, many of which would be surrounded or related to the branding initiatives, specifically Clovered, technological platforms that we'd be investing in during the year, and some of that could lead into the next years. We just want to allow ourselves that range to be nimble.
Okay. Got it. That's a net range, correct? Not off the direct, right?
That's correct.
Okay. Got it. Okay. Next one is just, I think Jon mentioned no change to the gross Irma, Florence, or Michael loss estimates. I guess just could we get an update on what are your reserves for each of the storms? What's the current IBNR, and then what is the monthly burn rate? To I guess have an idea of kind of what's the survival ratio on those, if I looked at it that way.
Yeah. I'll share a few numbers with you, Chris. I don't know that I have exactly everything you just asked in that question. We had disclosed previously that the ultimate we've booked for Irma was $960 million. As of the end of the first quarter, we had incurred loss of $917 million. That, of course, would leave $43 million there of IBNR. It's important to understand that we have less than 6,000 open claims, and we've already paid partial payments totaling nearly $80 million on those 6,000. That sometimes gets lost in this equation. If you factor in the remaining, let's call it 6,000 open claims, nearly $80 million already paid, reserves on those claims totaling nearly $50 million, and then $43 million of IBNR on top of that, we still have a fair amount of room within that Irma ultimate.
Got it. The Florida Senate just passed the AOB reform bill yesterday. I know it's really still too early to go through everything, but I'll ask anyway, right? What are your thoughts? What would be the biggest impact that you saw from the passage of that bill on UVE's book? Do you think that also is going to create any additional pressure on your mid-year reinsurance renewals if we see this spike of AOB related claims coming in that could cause adverse development for you guys or for your reinsurance partners?
Chris, it's Sean. I'll start off. A few of the things after digesting Senate Bill 122 is number one, the correction to the one-way attorney's fees looks to us to be the number one most important item, as well as maybe the possibility of limiting AOB depending on how your policy would be structured going forward. Those two things jumped out to us the most. We really appreciate the Insurance Commissioner, David Altmaier, and his help in pushing this and getting this over the finish line. As to your second part of your question, I really don't see that would be an issue as far as us looking at a major increase as far as litigation is concerned because of the change here.
I think a lot of these folks thought there was going to be some sort of change that was going to transpire previously, and as Jon stated in his opening remarks, we've seen a consistent reduction quarter-over-quarter in our non-cat litigation. I think there could be something that may see a spike of people trying to get in some litigation in the last minute, but as of right now, I don't foresee anything happening that would affect us from a reinsurance perspective.
Okay. Got it. Would UVE's game plan be to offer these AOB light or no AOB policies? Any idea of how much cheaper those would actually be for policyholders?
Yeah, the answer to those questions is it's too early, obviously, Chris, for us to make that determination. We'd obviously have to look at what the verbiage is directly correlated to this legislative change, and then obviously from an actuarial perspective, look at it from a rate perspective and see how it would change our rate indications going forward. It's early days for that to make a determination.
Okay. Got it. If we get this AOB reform, any potential impact that you guys think in terms of this year's reinsurance renewals, like maybe less of a rate online increase? Would we expect maybe a more of a benefit in next year's reinsurance renewals once new products and all that type of stuff rolls out?
Yeah. Well, the bill, once it's signed by the governor, is intended to be effective July 1. As reinsurers are evaluating this prospectively, it will certainly help. It will lessen their exposure to some of the things that occurred specifically during Hurricane Irma. It is obviously very difficult to quantify. I think the general consensus at this point amongst those in the reinsurance market is that it certainly helps. It remains to be seen exactly how it will be quantified and work its way into the reinsurance pricing.
Okay, great. Well, thanks for all the answers. Best of luck the rest of the year.
Thanks, Chris. Have a good day.
Thanks, Chris.
Thank you. Our next question or comment comes from the line of Samir Khare from Capital Returns. Your line is open.
Hi, good morning.
Had a quick question about the expense ratio as well. In the quarter, it was lower in part because of the lower compensation accruals. Is this in light of the 2018 results, or what's causing the lower compensation accrual?
No. Sean renegotiated his contract, expired 12/31/2018. He renegotiated a new deal with the compensation committee, which resulted when you compare to the amount of compensation that was reported in the proxy or will be reported in the proxy, would represent a reduction of over 55%.
Samir, if you recall, I attempted to make some changes to my contract the last two years. We were obviously not able to do so because of the tax change. We would have had to take a large hit in the specific quarter when that contract was changed.
Okay. Frank, the 34%-37% expense ratio guidance, does that contemplate a continuation of lower compensation?
Well, yes, that would naturally include that lower compensation, but allow for, as I pointed out, future investment with the wide range, obviously.
Understood. Okay. The rate increase that is going to affect in Florida, how much is it for?
2.6.
2.6, okay. I believe this is a change from, I guess, your late 2018 rate increase of 2.9. Can you just talk about how it evolved and if it's incorporating your view in higher loss ratio and when it's fully earned in, should we expect that the loss ratio you're booking to come down?
I'm not exactly sure on the 2.9. There is a little bit of work that needs to be done towards the end of a rate filing to get to that final approval by the OIR. That might have been the difference there. The last part of the question, could you repeat that again, Samir?
Sure. I was just wondering if there's any incorporation into this rate filing of your view on higher loss ratios, seeing as that you guys had the reserve charge at the end of the year, and then you guys increased the loss ratio you're booking such that when it's fully earned in a year or two from now, that we could expect a lower loss ratio to be booked.
Well, I don't know exactly where we'll be a year or two from now. Obviously, when we're asking for a rate increase, it is because of our loss experience. We would hope that the effect of increasing our rates would result in an improved loss ratio.
Okay. Any guidance on what gross written premium growth might look like throughout the year, whether it'll be above or below the 7% level we saw this quarter?
I think that's how to look at it, mid single digits into high single digits.
Okay. Just on buybacks, what's your philosophy on buying back during wind season? Is it safe to assume that you guys-
Buybacks during what?
During wind season.
Yeah. Obviously, as we've stated before, we're constantly evaluating our capital needs and with the help of our board, make a determination when it's in the best interest for us to purchase stock. Obviously, during hurricane season, a little bit more conservative with our buybacks. I think obviously, we'll take a look at that here in the next month because of our existing buyback plan right now, I think it has remaining roughly $4.4 million in it. We'll be advising you on that sometime here shortly.
Okay. How much cash do you have in your unregulated companies that would be available for buyback currently?
Well, we don't report that on an interim basis. The amount is available in the 10-K for the financial statements, the holding company, I believe it was 90 something million at that point in time.
Yeah.
Okay, thanks.
Thank you. I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.
As always, in closing, I would personally like to thank all of our consumers, our employees, our agents, and our shareholders for their continued support of Universal. This concludes the call. Have a nice day. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.