Good day, ladies and gentlemen. Welcome to the UVE second quarter 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 follow at that time. If anyone should require 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 introduce your host for today's conference, Dean Evans. Sir, you may begin.
Thank you, Ashley. Good morning, everyone. Welcome to the second quarter 2018 earnings conference call for Universal Insurance Holdings, Inc. My name is Dean Evans. I am the Vice President of Investor Relations here at Universal. With me in the room today are 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 earnings 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 August ninth, 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, 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. 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. I'd 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. As usual, I will begin by providing some highlights from the quarter. I will review our growth initiatives and strategy. Jon will cover several important current topics. Frank will conclude by discussing financial results. We will open up the call for questions. Overall, we are pleased with our second quarter 2018 results as we reported net income of $46.1 million and diluted EPS of $1.29, which equates to an annualized ROE of 37.8%. We reported excellent top-line growth in the second quarter with 15.7% growth in direct premiums written, including 13% growth within Florida and 36.5% growth in other states. Our underwriting profitability was strong, with a 77.2% combined ratio for the quarter.
This includes weather losses above expectations of $5 million or 2.6 points, as well as $2.3 million or 1.2 points of adverse reserve development primarily related to Hurricane Matthew. These items were largely offset by $6.5 million or 3.4 points of benefit received due to a settlement of prior year premium tax audit. Our service company subsidiaries continued to produce benefits in the aftermath of Hurricane Irma, as Universal Adjusting Corporation and Blue Atlantic Reinsurance Corporation contributed $8.4 million and $0.9 million respectively to second quarter results. Lastly, as was the case during the first quarter, our effective tax rate benefited from the federal tax reform that was passed in 2017, which had a meaningful positive impact on our net income for the quarter when compared to the prior year. I'd like to 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 premium growth of 13% in the second quarter. This includes our growth in policy count, as well as the average statewide rate increase of 3.4% that was approved in December 2017. We continue to believe that we can profitably grow on an organic basis in Florida, writing business through both our robust agency network and our direct-to-consumer platform, Universal Direct. Direct premiums written within our other states book grew a strong 36.5% in the second quarter.
After writing our first policy in New Hampshire in early April, we are now active in 17 states with licenses in additional three states, Illinois, Iowa, and West Virginia. We expect to continue to expand our geographic footprint in a prudent and conservative manner going forward. 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. We currently have 10,800 policies in force for approximately $13 million of in-force premium. We continue to believe that Universal is extremely well-positioned going forward. We continue to grow our book of business. We remain confident that our multi-part organic growth strategy will enable us to deliver profitable premium growth. We have a solid balance sheet with a conservative investment portfolio, minimal debt or goodwill, and appropriately set loss reserve position.
We are protected by a comprehensive reinsurance program, which we enhanced at the most recent mid-year reinsurance renewal to include additional conservatism. Our unique vertically integrated structure positions us well to capitalize in the event of a disruptive industry event, as highlighted by our Hurricane Irma performance, which continues to manifest itself favorably in the current quarter's results. Given these strengths, we are excited about what the future holds for Universal. We expect to continue to deliver substantial value to our shareholders for the remainder of 2018 and into the future. With that, I will turn the call over to Jon Springer.
Thank you, Sean. I would like to first start with an update on Hurricane Irma. Will also provide a brief update on Hurricane Matthew, discuss the 2018 weather events to date, and recap our updated reinsurance program following the June 1 renewal. Following another three months of actively settling Hurricane Irma claims, we have increased our estimate of gross losses related to Hurricane Irma to $600 million. This change in gross loss estimate comes primarily due to the continuation of new reported claims and the aggressive nature of plaintiff attorneys on claims in Florida. We stress that this increase in gross losses for Hurricane Irma had a negligible change on our net retention, which remains at approximately $29 million for the event.
We had 7,746 new claims reported during the quarter, down from over 10,000 reported in the first quarter, bringing our total claim count as of June 30 to 81,723. We have closed over 74,000, roughly 90% of these claims, with an average loss and LAE severity of approximately $6,000 across all claims, and an average loss and LAE severity of $8,400 on claims closed with pay. From a financial impact standpoint, we have now booked to a level that reaches the portion of our reinsurance program that we are now responsible for paying reinstatement premiums. Specifically, for any Hurricane Irma losses ceded to our traditional reinsurance program in excess of $595 million, we will incur reinstatement costs of 9% for the first $193 million and 4.75% for the next $125 million.
To the extent that this occurs, we would expect any additional reinstatement costs to likely be offset by further revenues earned by our service provider subsidiaries. As a result of Hurricane Irma, the past three quarters have each 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. Blue Atlantic Reinsurance Corporation received $900,000 of reinstatement commissions during the second quarter of 2018. Universal Adjusting Corporation produced $8.4 million of pre-tax profit during the second quarter of 2018, the vast majority of which was related to additional revenues created due to the continued increased workload as a result of Hurricane Irma. Turning now to Hurricane Matthew.
Second quarter 2018 results include $2.6 million or 1.3 points of net unfavorable prior year reserve development related to Hurricane Matthew, which occurred in the fourth quarter of 2016. The prior year's quarter included $1.1 million or 0.7 points of net unfavorable prior year reserve development, also related to Hurricane Matthew. As of June 30th, 2018, the Hurricane Matthew incurred loss stood at $42.7 million, with only 78 remaining open claims. However, we elected to book this loss at $45 million to hopefully avoid any further development in this space. The net unfavorable prior year reserve development during this quarter is related to a negotiation on a specific multi-year reinsurance treaty that resulted in our agreement to cap losses ceded from Hurricane Matthew at $40 million gross for that particular reinsurance treaty, in exchange for favorable treatment on reinstatement costs going forward.
Second quarter 2018 includes $5 million, or 2.6 points of weather events beyond plan in calendar 2018 to date, compared to $6 million or 3.6 points of weather events beyond plan booked during the second quarter of 2017. The current quarter's losses relate to several meaningful weather events that occurred during the first six months of 2018, including winter storm losses in early January and again in early March, a windstorm loss in late March and another in mid-April, and the Hawaiian volcano in late May. During the quarter, we completed our 2018-2019 reinsurance programs for both of our insurance companies and continue to build on the recent trend of adding additional conservatism to our reinsurance programs without increasing the percentage of premiums sold under reinsurance.
Even with UPCIC's growing business, we structured our catastrophe coverage in a similar manner and maintained the same $45 million catastrophe retention for our Florida losses and the same $5 million catastrophe retention for losses involving states other than Florida. UPCIC also continued to purchase a contract to reduce its second, third, fourth, and fifth event retention for a catastrophe loss involving states other than Florida and expanded the top of its reinsurance tower for a single event up to $3 billion. With the manner in which UPCIC purchases catastrophe coverage, in order for the company to utilize all of those purchase limits, UPCIC would need to incur two events of nearly $2 billion or three events of $1.2 billion or four events of $1 billion.
In any of these catastrophe scenarios, the company would be responsible for its retention up to a maximum of $35 million per event, plus a one-time reinstatement cost not to exceed $24.8 million. To further insulate itself for future years, UPCIC has also now successfully secured over $365 million of catastrophe coverage with contractually agreed limits that extend for two or more years. American Platinum was also able to continue the conservatism trend by utilizing a lower percentage of premiums spent on reinsurance and adding coverage to the top end while maintaining the same $2 million catastrophe retention. With that, I'll now turn the discussion over to Frank Wilcox for our financial highlights.
Thank you, Jon. For the second quarter of 2018, net income totaled $46.1 million, an increase of 56.9% compared to the second quarter of 2017. Diluted EPS was $1.29, up $0.82 to the second quarter of 2017. We reported strong total revenue growth of 13.1% for the quarter, driven by growth in premium volume, net investment income, commission revenue, and policy fees. Direct premiums earned grew 12% to $274 million, while net premiums earned grew 13.8% to $192.3 million. Ceded premiums earned as a percent of direct premiums earned was 29.8% for the second quarter of 2018, compared to 30.9% in the second quarter of 2017. Commission revenue and policy fees each posted solid growth versus the prior year's quarter, up 22.9% and 9.8% respectively, while other revenue declined slightly by 1.1%.
Included within commission revenue was $0.9 million of fee income related to reinstatement commissions received by Blue Atlantic during the second quarter of 2018. We generated a net combined ratio of 77.2% in the second quarter of 2018, compared to 81.3% in the second quarter of 2017. The net loss and LAE ratio improved to 46.7% from 47.4% in the prior year's quarter. Second quarter 2018 included $5 million or 2.6 points of weather events above plan, compared to the $6 million or 3.6 points of weather losses above plan in the second quarter of 2017. Second quarter of 2018 results include $2.3 million or 1.2 points of unfavorable prior year reserve development, primarily related to Hurricane Matthew, compared to $1.1 million or 0.7 points of unfavorable development during the second quarter of 2017.
The second quarter of 2018 loss adjustment expenses include a benefit of $8.4 million or 4.4 points from additional revenues earned by Universal Adjusting Corporation related to Hurricane Irma. Our underlying loss in LAE ratio increased compared to the prior year, reflecting continued geographic expansion as non-catastrophe loss ratios in our other state scope are generally higher than in Florida, and the marketplace dynamics within our home state of Florida, including the impact of AOB-related claims. Our net expense ratio was 30.5% in the second quarter of 2018, compared to 33.9% in the second quarter of 2017. Our net policy acquisition cost ratio improved to 17.4% from 19.5% in the second quarter, driven primarily by a $6.5 million or 3.4 point benefit included in the second quarter of 2018 from the settlement of prior year premium tax audits, including both a refund and a reversal of premium tax accruals.
Excluding this item, the policy acquisition cost ratio would have increased modestly, driven by geographic expansion, as our other states' books typically have a higher commission expense than within Florida. Our other operating expense ratio was 13% in the second quarter of 2018 versus 14.4% in the prior year's quarter, which generally reflects the benefits of economies of scale. Net investment income was $5.8 million, growth of 79.5% from the second quarter of 2017, driven by growth in cash and total investments, improving yields, and actions taken to optimize treasury management. We reported $145,000 of realized investment gains during the second quarter of 2018, compared to $1.7 million of realized investment gains in the second quarter of 2017.
We reported $one and a half million of unrealized investment losses during the second quarter of 2018, driven by a decline in the value of our equity securities portfolio. This line item was added in the first quarter as a result of the adoption of accounting guidance for equity securities. The comparable number from our equity portfolio for the second quarter of 2017 was $0.6 million of pre-tax losses, which was included in other comprehensive income on an after-tax basis, rather than within net income. Total unrestricted cash and invested assets were $1.06 billion at June 30th, 2018, growth of 20.2% from June 30th, 2017. We take a conservative approach to managing our investments and maintain a high-quality investment portfolio composed primarily of fixed maturities, which are 99.5% investment grade.
The weighted average duration of the fixed maturity investments in our available-for-sale portfolio as of June 30th, 2018, was 2.8 years. The effective tax rate for the second quarter of 2018 was 24.8%, compared to 38.7% in the prior year's quarter. The decrease in our effective tax rate is primarily the result of the enactment of the Tax Cuts and Jobs Act of 2017, which resulted in a reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The second quarter of 2018 included net discrete items of $0.6 million or one percentage point, primarily from excess tax benefits resulting from stock-based awards that vested and/or were exercised during the quarter. We remain committed to actively managing our capital position. During the second quarter of 2018, we repurchased 250,000 shares for $8.4 million, an average cost of $33.48 per share.
Our current share repurchase authorization program has $8.7 million remaining and runs through December 31st, 2018. We paid a regularly quarterly dividend in the second quarter of 2018 of $0.14 per share, which equates to an annualized dividend yield of 1.5%, based on current share price levels. Additionally, we announced during the quarter that we had increased our regular quarterly dividend by $0.02 per share or 14.3%, beginning with the third quarter dividend. This increased dividend was paid on July 16th to shareholders of record on July 2nd, 2018. Stockholders' equity was $492.1 million at June 30th, 2018, growth of 5.8% from March 31st, 2018. While book value per common share was $14.11 as of June 30th, 2018, growth of 6.2% from the first quarter of 2018 or 16.7% from the end of the second quarter of 2017.
Combined surplus for our insurance subsidiaries was $357 million at June 30th, 2018, compared to $338 million at March 31st, 2018, and $324 million at December 31st, 2017. Annualized return on average common equity was 37.8% for the second quarter of 2018, compared to 27.9% in the prior year's quarter. We remain dedicated to providing value to our shareholders and believe this level of return on average equity is an excellent result. At this point, I'd like to turn the call back to the operator for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key 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. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. One moment for questions. Our first question comes from the line of Arash Soleimani with KBW. Your line is now open.
Morning, Arash.
Sir, your line is now open.
Hey, am I coming through?
Yeah, we got you. Go ahead, buddy.
Oh, okay. The premium growth in Florida, the 13% growth there versus the 6% PIF growth, I know there's the rate increase. What's getting it up to 13%? Is it that you're growing more now in tri-county or areas of the state where you have higher than an average rate increase?
Yeah, I think it's a few contributing factors. One, obviously, is the 3.4% rate increase aggregate across the state of Florida is rolling through our books. Two, obviously, Universal Direct, I think, is helping us with regards to that. As well, I think there is somewhat of a disruption in the marketplace as it relates to certain parts of Florida. Obviously, we are getting into hurricane season, and sometimes you see an increase there, it being a cyclical cycle where people buying insurance going into hurricane season. I think all those are contributing factors that contribute to that rate.
Okay, thanks. I guess going forward then, do you expect to still be in the double-digit range for the rest of the year in Florida?
I think the guidance we've given previously was high single digits. I think that's the expectation going forward.
Okay. Just a quick question on the ceded premium ratio. That was down a bit, obviously, this quarter. Is the $81.8 million of ceded premiums earned, is that sort of a fair run rate going forward? How should we look at that?
Well, I think there's a couple of things going on there. We did save some money on our reinsurance program relative to our expected earned premiums. As you just asked and Sean just answered, we had a large growth of premium in the second quarter, so that extended that ratio out a little bit.
Okay. I just wanted to touch base on the adjusting income that you've been making at UAC. Obviously, that's been very strong. Do you get any pushback ever from your reinsurance partners on your ability to generate income as the losses go up?
No, to the contrary, actually. Obviously, when a third party handles the loss, Arash, the loss adjustment expense is greater than when we handle it. Obviously, with our large adjusting firm and litigation firm, our ability to control the cost from a loss adjustment expense is greater than a third party, so they're pleased with it. Either way, they have to pay the expense. They'd much rather pay it to us where it's less than paying a third party.
How does it work in cases as we get further away from the storm, where you could have claims that it might be unclear if the loss is from Hurricane Irma or from a different type of event? Is there a conversation with the reinsurers in that sort of scenario?
I'm not really getting your question. Obviously, we do our due diligence to determine what the cause of loss is and how, obviously, the damage that occurred from the peril. Number 1, A, is it covered under the policy, and 2, is it directly correlated to Hurricane Irma? That's not really that hard to determine. There are some cases, obviously, that get into a litigation environment where we have to determine that. To answer your question, no, there wouldn't be any pushback or any issues with the reinsurers with regards to that.
Okay. Looking ahead into the third quarter, do you expect to see further income from the adjusting operations that you have?
I think it'll be minimal. Obviously, we continue to receive claims, but I think the claims that you're going to be getting in over the next few months will be much smaller. We will be generating some income on our existing cases, but I think it's a much smaller number than we put up the last two quarters. Frankly, I think it'll be minimal.
All right, thanks. I think Jon had mentioned that you're at the point where you would have to pay the reinstatement premiums, you also had said that if the gross loss goes up, you expect that reinstatement premium to be offset by adjusting income. I guess I was just curious, what would cause it to be kind of perfectly offset?
Obviously, when the loss increases, the Loss Adjustment Expense piece increases. If we're on the hook for 9% of the overall loss, that would be covered by the Loss Adjustment Expense correlated directly to that overall increase in incurred loss. That's kind of my stance on me saying it'd be minimal going forward with any quarters of putting up anything with Universal Adjusting Corporation.
Thanks. Maybe this is a question for Jon, but you mentioned a $29 million retention. Does that include American Platinum? If so, how do you get from the 37 to the 29?
Yes, it includes American Platinum. The difference would be the recoveries that we had from our other states' catastrophe program that served to offset the core retention.
A quick one for Frank. On the net investment income, I know that yields on invested assets were up year-over-year, looking sequentially from 1Q18 to 2Q18, you had about a $1 million uptick in net investment income. I just wanted to get a better sense for what drove that.
Well, we have several things. We're continuing to grow our cash and investment balances, obviously, with the premium that we're generating. We've got a relatively short duration portfolio, as our securities mature, we're reinvesting at the higher rates with the rate actions that the Fed has taken. After Hurricane Irma, we also realized that we didn't need to tap into the portfolio for liquidity, we got a little bit more aggressive, and we migrated some of the mix from our US Treasury obligations over to corporate.
Is it fair to assume that the $5.8 million of net investment income this quarter should basically carry forward to future quarters or even get bigger?
Yes. I think that the current yield is indicative of what to expect going forward.
Okay. I know there was a court case recently that basically said you could have multiple AOBs on the same claims. Do you see any impact to you guys from that?
No. Obviously, there were two court cases recently that have been in the media regarding specifically cases from a homeowners perspective. One is the one with HCI as it related to the multiple AOB, as you mentioned, and then the fee multiplier from Federated. We haven't really seen anything on either one. Each one of our specific divisions handles any particular case differently. In other words, we have an expert who would handle the water extraction. We have somebody who would handle the public adjuster from a represented perspective. We have somebody who would handle the case if it's in litigation. All those different entities that would be on the same AOB case are covered and handled globally. We never had an instance that's ever occurred for us where that's been an issue.
To touch base a little bit on the fee multiplier that people have been talking about recently, that's been around since 1985. There hasn't been anything at all that's been different. I just think that was something that's been in the media to cause some sort of upheaval regarding what's going on in this AOB marketplace. That isn't anything that we've experienced and isn't anything right now that we think is an issue for us, frankly, or anybody.
Okay, perfect. Just last question, can you break out the Universal Direct premiums for the quarter?
The Universal Direct?
Yeah, Universal Direct.
It was $2.7 million for the quarter.
Okay. What was the policy count?
Policy count currently right now, for the quarter or? For the quarter. Since the quarter.
Just as of the end of 2Q.
I'll get back to you on that. I don't have the quarter right now.
Okay. All right. Thanks for the answers.
Thank you. As a reminder, ladies and gentlemen, that's star then one to ask a question.
Was that the quarter?
Our next question comes from the line of Samir Khare with Capital Returns. Your line is now open.
Hi. Thank you. Good morning. Just on the Hawaiian cat losses, how many claims did you get? Did that trigger any of your 18 reinsurance coverages?
Yeah, we've had 16 claims reported to date. Given that the majority of those occurred in May, when we had satisfied our otherwise recoverable on our aggregate program, we will have a reinsurance recovery there.
Okay, great. On the rate increases, what are you guys putting in for rate increases for this year, in Florida and outside Florida?
Yeah, we just started the process right now for Florida. Other states are ongoing. We can get you that information. For Florida right now, it's early days, but we should have a pretty good idea here in the next month or so.
Okay. You guys in the press release talked about, I guess, the cat losses that were above budget. In your, I guess, budgeted loss ratio, how much do you guys think you're going to budget for storms?
I'll have to dig that out real quick. I can comment a little bit on the events that led to us booking the additional $5 million. Actually, I did, I think in my pre-prepared remarks, a couple of winter storm losses that got up into the $2 million-$3 million range, as well as some windstorm in March and April, also in the $3 million-$4 million range for those.
Okay, what's your, I guess, planned loss ratio that you guys book on a push basis? Is it in 30s%?
Okay. On a direct basis, 4.5 points.
Okay. Just about the increase of the Hurricane Irma loss, when did you advise reinsurers of that?
We have ongoing discussions with our reinsurers literally every day.
I'm just trying to figure out if that was a Q2, I guess, increase for them, or was it a Q3 increase?
I don't think that's necessarily for us to comment on, Samir.
Okay. Would we expect there to be any reinstatements commission income to Blue Atlantic in 3Q?
Well, we have paid, Blue Atlantic is paid reinsurance, excuse me, reinstatement brokerage as losses are billed and paid. While we advised that we're booking Hurricane Irma to $600 million, we have not yet billed or collected the $600 million. Yes, there would be future reinstatement brokerage commissions for Blue Atlantic, although they will be small.
Okay. Can you elaborate what
Sorry, Samir, you just cut out there.
Oh, I was just saying, can you hear me okay?
You're breaking up a little bit.
All right. Hold on. Is that better?
Yeah, you're all right.
I was wondering if you can elaborate on what you're seeing on Irma claims. I think you guys talked about that you're seeing an increase of reopened claims. When did you start seeing that acceleration? What do you think is causing them? Does your outlook on litigator rates on Irma claims change at all?
Let me answer your first question first. You kind of faded out in the second part. I'll let you come back to that. No, we haven't really seen an increase at all in our reopens per the guidance we gave previously in quarter one. Currently right now, we've received around 700 to 800 claims in Q2 and closed those claims in Q2. We're turning over the claims pretty quickly. We're not seeing a lot of reopens any greater than the number that we gave last quarter. It's running in line. Actually, it's decreasing a little bit. What was your second part of your question, Samir?
I think you answered it. That's fine. Thank you.
Okay.
Thank you. We do have a follow-up question from Arash Soleimani with KBW. Your line is now open. Sir, your line is now open.
I'm not sure if you just heard, Jon, I just wanted to know if you could repeat the statement. Was it 9% of 193 and then 4.75% of the next 125?
Yes. That would be beyond what we've booked already. We've booked the loss, we marked the loss at $600 million. To the extent that we cede losses to our traditional program, every dollar of the first $193 million, we would be responsible for 9%. As you said, the additional $125 million at 4.75%.
Perfect. Thanks.
Okay. Thank you. I am not showing any further questions at this time. I would now like to return the call back over to Sean Downes for any closing remarks.
Thank you. 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 participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.