Good day, ladies and gentlemen, and welcome to the Universal Insurance Holdings, Inc. first 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, instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Dean Evans, Vice President, Investor Relations. Please begin.
Thank you, Latoya, good morning, everyone. Welcome to the first quarter 2017 earnings conference call for Universal Insurance Holdings, Inc. My name is Dean Evans, I'm 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, Chief Financial Officer, Frank Wilcox. Following Sean's opening remarks, Jon will provide an update on reinsurance, Frank will review financial results. The call will then 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 May 11, 2017. 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 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. 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. As usual, I'll begin by providing some highlights from the quarter, will then review our growth initiatives and strategy. Jon will then cover our reinsurance program, Frank will conclude by discussing our financial results. We are pleased to report another profitable quarter with strong top-line growth. For the first quarter, we delivered a 6.3% increase in total revenues a 6% increase in net earned premiums. We reported strong underwriting profitability with a solid 78.9% net combined ratio for the quarter. Although the quarter included some unexpected weather events, our claims handling team once again performed up to our high expectations, these events had a minimal impact on our quarterly earnings with only $3 million of pre-tax net losses and LAE as a result.
We reported net income of $31.2 million and diluted EPS of $0.86, which equates to a return on average common equity of 31.4%. We believe we have positioned Universal for the future by pursuing various organic growth avenues. These include further growth in our home state of Florida, expanding our footprint into new states, strategic initiatives such as Universal Direct, and new business lines such as a commercial residential product. These initiatives have resulted in a more stable, diversified, and balanced business that is well-positioned to drive growth and long-term shareholder value. Our core Florida market continues to produce solid top-line growth, with policies in force, premiums, and total insured value each increasing by roughly 5% in the first quarter.
While we are certainly a large part of the Florida marketplace, we continue to believe that we have the opportunity to continue to grow organically given our tremendous agency network in Universal Direct. Geographic expansion remains a core element of our growth strategy, and we continue to see an increase in policy count, premiums in force, and total insured value for states outside of Florida in the first quarter, with each showing growth of more than 40% from the comparable quarter last year. Of note, during the first quarter, we received our certificate of authority from Iowa. Currently, Universal is writing business in 14 states and is now licensed in an additional five states. Universal Direct, our direct-to-consumer online platform for homeowners insurance, is now available in all of our active states. Since launch, we have over 3,000 policies in force for more than $3.5 million in premium.
We continue to receive positive feedback from customers who appreciate the flexibility and convenience of purchasing homeowners insurance online. We recently partnered with BBMC, a national mortgage company, who offers a complete line of residential mortgage, refinance, and specialty loans. Universal Direct will provide real-time quotes to BBMC customers during the mortgage qualification process. This partnership is the first to be rolled out under the Universal Direct affiliate program, which we hope to expand in the future to include other businesses in the home purchasing arena through utilizing the proprietary B2B tool that we have created. We are confident in our business model, coupled with our commitment to providing best-in-class product offerings and service to our policyholders, which we believe positions Universal for profitable growth in 2017 and beyond. With that, I will turn the call over to Jon.
Thanks, Sean. I think the most relevant current topic to discuss would be an update on the status of our reinsurance placement to be effective June 1, 2017. Over the course of the past two months, we've met face-to-face with the vast majority of our reinsurance partners to discuss this upcoming renewal. As of late yesterday, after receiving and evaluating quotes from our lead reinsurers, we entered the market with firm order terms on the core all states catastrophe tower for UPCIC, and authorizations have already started to arrive this morning.
When you take into account the coverage provided by the Florida Hurricane Catastrophe Fund, the coverage we previously negotiated within multi-year transactions, and the pricing levels released yesterday, we have now established the cost of over 90% of our desired catastrophe capacity. At this point, the 2017 renewal is shaping up to be a year where we will be keeping our catastrophe retention at the same level on a growing book of business, buying catastrophe coverage to a higher level, and spending less as a percent of earned premium to do so. With that, I'll turn it over to Frank.
Thank you, Jon. For the first quarter of 2017, net income totaled $31.2 million, an increase of 23.7% compared to 2016. Diluted EPS was $0.86, up from $0.71 for the first quarter of 2016 due to the increase in net income, partially offset by a modest increase in diluted shares outstanding. During the quarter, we continued to experience top-line growth with increases in every major category of revenue compared to the prior year's quarter. Direct premiums earned of $236.4 million, offset by ceded premiums earned of $74.8 million, generated $161.6 million of net earned premiums for Q1 of '17, compared to $152.4 million in Q1 of '16. The increase was the result of organic growth from both Florida and other state growth initiatives. Ceded premiums earned as a percentage of direct premiums earned was 32% and 31%, respectively, during Q1 '17 and Q1 '16.
Commission revenue of $4.6 million for the quarter grew 11.8% compared to the same quarter in 2016, reflecting the differences in our reinsurance programs in effect during those periods, including an increase in our exposures covered by reinsurance. Policy fees of $4.5 million for the quarter grew 9% year-over-year from an increase in the number of policies written during the first quarter of 2017 compared to the prior year quarter. Other revenues of $1.6 million, which is comprised primarily of financing fees and charges, grew 6.1% from the prior year's quarter, reflecting both growth and consumer behaviors underlying the policies written during the periods being compared. Net investment income for the quarter was $2.7 million, growth of 68% from Q1 of '16. This reflects both an increase in our invested assets and actions taken to maximize yields while maintaining high credit quality as securities mature.
We realized $63,000 in losses from the sale of investment securities during the quarter, compared to $667,000 in realized gains in Q1 of 2016. We continue to maintain a high-quality investment portfolio comprised of 90% fixed maturity securities, of which 98.6% are investment-grade securities, and we take a conservative approach to managing our investments. Total invested assets reached $666.1 million as of March 31st, 2017, compared to $541 million one year prior, an increase of 23%. The weighted average duration of the fixed maturity investments in our available for sale portfolio at March 31st, 2007, was 3.4 years, while the book yield of this portfolio was 1.79% for the first quarter of '17 versus 1.25% in the first quarter of '16. We generated a net combined ratio of 78.9% for the first quarter of 2017, compared to 80.8% for the first quarter of 2016.
The net loss in LAE ratio was 43.7%, compared to 43.4% in the prior year's quarter. We recorded $3 million or 1.9 points of losses in LAE related to weather events beyond plan in the first quarter of 2017, compared to $8.5 million or 5.6 points during the first quarter of 2016. While there was 3.7 loss ratio points less of an impact from weather events beyond plan in the first quarter of 2017 versus 2016, this was offset by an increase in the underlying net loss ratio of 4%. Our net expense ratio for the quarter of 2017 was 35.2%, compared to 37.5% for the same period in 2016. Our net acquisition cost ratio increased slightly to 20.1% from 19.4%, largely reflecting increased acquisition costs related to our other state expansion.
This was more than made up for by a decline in other operating expense ratio, which was 15.1% in the first quarter of 2017 versus 18% in the prior year's quarter. The primary factors behind this decrease were a reduction in executive compensation and economies of scale. The effective income tax rate was 34.1% in the first quarter of 2017, compared to 38.6% for the same quarter in 2016. The first quarter of 2017 reflects two discrete items. The first was a credit to income tax expense of $0.8 million for excess tax benefits resulting from stock-based awards that vested and/or were exercised during the first quarter of 2017. This credit to income tax expense represents the application of a new accounting pronouncement. Prior to this quarter, excess benefits were reflected in stockholders' equity.
The other discrete item is a credit to income tax expense of $1.3 million, resulting from anticipated recoveries of income taxes paid for the years 2013 through 2015. Collectively, these discrete items lowered our effective tax rate by 4.3%, leaving our underlying effective tax rate for Q1 of 2017 in line with expectations. Our balance sheet continues to strengthen with stockholders' equity and book value per common share of $398.8 million and $11.37 per share as of March 31st, 2017, an annual growth of 26.9% and 25.9% respectively. Consolidated unrestricted cash and cash equivalents were $160.4 million, and combined surplus for our insurance subsidiaries was $350 million as of March 31st, 2017, respectively. We are committed to actively managing our capital position and took several actions on that front in the first quarter of 2017.
We repurchased over 100,000 shares for $2.5 million or an average cost of $25.46 per share. We believe these repurchases represented a tremendous value in light of our current return on equity. $15.4 million remains on our current repurchase authorization. We paid dividends of $0.14 per share in the first quarter, equating to an annualized dividend yield of 2.4% at current share price levels. Return on equity was 31.4% in the first quarter of 2017, compared to 32.6% in the first quarter of 2016. We remain dedicated to providing value to our shareholders and believe this 31.4% return on equity, coupled with our 2.4% dividend yield, is 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 the star and then one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. The first question is from Adam Davidson, Private Investor. Your line is open.
Hi. Congrats on a great quarter. I know on the last call you mentioned potential expansion into New York and New Jersey. Could you just provide an update on how that's progressing? Thanks very much.
Yes, thanks for your question. We have our rates and forms filed in New York and hope for an approval sometime this year. Last week, we actually received an approval in New Jersey, and as of today, we are live in New Jersey writing business. I'm pleased to say that we actually wrote our first policy this morning. We've had our folks in New Jersey for the last few months getting agencies appointed and basically just replicating the same model that we've used in other states. We will have our Fast Track folks in New Jersey to handle claims as they arise. We're happy and pleased to be a part of the New Jersey marketplace.
Great. Thank you. Congrats again.
Thanks for your question.
Thank you. The next question is from Arash Soleimani of KBW. Your line is open.
Thanks. Good morning.
Hi, Arash.
Can you talk about what you're seeing in terms of frequency of AOB lawsuits year-over-year and also relative to the fourth quarter?
No, we're not really seeing a large spike in lawsuits, Arash. I'm sure you're referring to the CaseGlide form. At any moment in time, you see how that goes up and down. I think it's a seasonal thing, to be honest with you. We have seen somewhat of increase as it relates to some plaintiffs' attorneys being a little bit more aggressive. One thing that we've done really that's different than the first quarter of 2016 is that all of our AOB claims that are in a litigious environment are being handled by our internal law firm of more than 20 attorneys. We're not really having to deal with outside attorneys. We're not having that extra cost that you would if you were using a third-party law firm. We believe that that is going to pay dividends to us down the road.
As far as the frequency is concerned from a lawsuit perspective, we're seeing that that's up a little bit. We're seeing the overall AOB frequency relatively flat or down by a tick or so. I do want to make it clear that the AOB issue is an issue for our company the same way it is everybody else's. I just think that what we've put into place over the last three years, as it relates to our own legal law firm, if you will, in-house, our Fast Track division, our subrogation division. When you couple all those things together, it's lessening the severity, when you compare us to some others. It is an issue, and we're doing everything we can to lessen the severity.
Basically, you're saying the frequency is up a bit, but all the stuff you're doing is kind of offsetting that from a severity perspective.
I would say as a percentage of AOB frequency related to plaintiffs' attorneys, that is up. AOB is relatively flat or down a tick or two.
Okay. Also, are you seeing any spread outside of Tri-County with AOB?
Yes, more than 50% of our AOB claims are outside of the Tri-County area.
Okay. Is it becoming more prevalent outside of Tri-County than it was maybe a year ago or so?
No, the ratios are basically in line with what they were a year ago.
Okay.
As far as the spread of the overall AOB claims.
Okay. Thanks. The other question I was going to ask, have you filed for rate increases yet this year in Florida, and if so, what are you expecting, and when do you expect to implement it?
We're just about at the end right now of our rate indication process. I'm sure as you're aware, in 2014, we had a minus reduction of roughly 2.4%. In 2015, we had an increase of about 2.2%. Last year, we were flat. In this year, we're looking at probably somewhere, I'm guessing right now, some things could change here the last week or two, but I believe we'll be filing for some mid-range single-digit increase sometime next month.
Okay. When do you think you'd be able to implement that, if approved?
Probably September 1, give or take.
Okay. The other question I had was around the liability for unpaid losses. I know you guys have some subrogation efforts and Fast Track that help, but I saw that drop quite a bit again in the first quarter. I just wanted to get an understanding of what was driving that.
Yeah. Arash, this is Jon. I think as I've said in the past, you really need to take a holistic view of loss reserves, looking at the number of remaining open claims, and in turn, how many claims have closed in whatever period of time you're looking at. When you take into account what our Fast Track team is doing in terms of new claims and how quickly we're getting to those claims and closing them, in addition to what we've been able to do with the "legacy claims," what you would see occurring during the first quarter is that we closed nearly 50% of the open claims that existed on the books as of 12/31/16. In addition to closing nearly half of those, we also paid out over $50 million of partial payments on those remaining open claims.
After you take into account all the claims closed and all the partial payments on the remaining opens, lastly, you would look at the IBNR and, of course, take into account the amount of anticipated subrogation recoveries to be included on top of the IBNR.
Okay. Is the Fast Track program, I guess, more robust in a sense than it was a quarter ago? Are you seeing major strides with that program? I'm just trying to think of what caused Fast Track to contribute that much more this time.
Again, just more bodies on the ground bolstering that division, creating some timelines that are even more stringent than they were in the past, basically handling 80% of all of our claims through the Fast Track division, which is obviously contributing to lesser costs as it relates to LAE. Again, when claims are in a litigious arena, we're having our own internal law firm handle the claims. All first-party lawsuits, AOB claims are all being handled by our internal law firm.
The 80% you mentioned for Fast Track, can you just, for comparison, what would that have been about a year ago?
I believe right now, when I talk about claims, these are claims that are eligible for Fast Track. You almost look at it as a triage when you're going into a hospital. Claims that we can get to, we can pay immediately, and settle within a few days. I believe that number probably in early 2016, off the top of my head, was more like 60-something, early 60s.
Okay.
When you compare that to where we're at now, it's a big difference.
Okay, thanks. From a prior period development perspective, I guess a question for Frank, was there any development in the quarter?
There was, Arash. It was negligible, 96,000. Less than 1%.
Was that favorable or unfavorable?
It was unfavorable.
Okay. When you mention the plan you have for storms, what do you guys assume as normal or expected?
We set aside, embedded within the loss ratio that we book to, an amount for Florida and a separate amount for outside of Florida for weather events. If you look at the loss ratio we book to, we break that into two pieces, a portion of it for weather, a portion of it for all other perils.
Okay. My last question on the expense ratio improvement, how much of that came from economies of scale improving versus executive compensation declining?
Each benefited us by about 1.5%.
Okay, great. Thanks very much for the answers.
Thanks, Arash Soleimani.
Welcome.
Thank you. The next question is from Samir Khair of Capital Returns Management. Your line is open
Hi, good morning. Just on the planned storms, do you have the numbers of the loss ratio for Florida of expected weather losses?
Samir, could you just say that a little bit? We lost you a little bit there at the end.
Yeah, sorry. I'm just asking to quantify the expected loss ratio for Florida weather on an expected basis.
Let me tell you the whole picture in terms of first quarter 2017. We booked to a 29.5% loss ratio overall. Specific to Florida, that would be a 27% loss ratio within Florida, approximately a 50% loss ratio outside of Florida. Breaking down that 27% for Florida, approximately 24.5% would be for all other perils and approximately 2.5% for Florida weather losses.
Got it. Okay. It sounds like there were some considerable weather losses outside Florida. Is that correct?
Yeah. I guess the number I didn't give you is the approximately 50% loss ratio outside of Florida is broken down roughly 40 for all other perils and 10 for expected weather losses. The activity outside of Florida in the first quarter, including 5 different PCS events, totaled a loss amount beyond what we had planned for. The largest of which was PCS 1713 happening in mid-January. We had over 700 claims from that. Second would've been PCS 1721 happening in late March. We picked up over 150 claims from that event.
Great. Okay. Just a few other questions on the subrogation, specifically on the GAAP prior period development. Any particular accident year losses that produced any noteworthy favorable or unfavorable reserve development?
No, nothing that stands out.
Okay. Just to make sure I understand the subrogation, on a GAAP basis, that's considered in the incurred loss and reserve numbers. In STAT, it's not, is that right?
In Schedule B, it's presented gross.
In Schedule. Okay. On the reserve numbers on the balance sheet, it is incorporated on the STAT. Is that correct?
Yeah.
Oh, okay. How often are you guys doing reserve reviews, fully blown versus actual versus expected analysis?
In terms of our outside actuary?
Yes. Internally.
Well, internally we're looking at it regularly, as you might imagine. In terms of our outside actuaries, we will continue to do two separate analyses a year.
Okay. That will include an analysis of the subrogation reserves as well?
Oh, absolutely.
Okay. Was there any material increase or decrease to the subrogation reserve from year-end 2016 and prior?
No.
Okay. Just on the subrogation, do you guys take credit for it as you see the opportunities within your claims files, or are you guys incorporating some allowance for it in your current accident year loss ratio pick?
It's within the go-forward loss ratio pick. The actuarial study that was done provided a predictable salvage and subro rate, which then, of course, was incorporated into loss reserves and in turn incorporated into future loss picks.
Okay. Could you quantify how many points it is?
No, I can't, not off the top of my head.
Okay. Just in light of your stock price, any share repurchases quarter to date?
We've not done any since the first quarter.
Okay, great. Thanks, guys.
Thanks, Samir.
Thank you. At this time, I'd like to turn the call back over to Sean Downes for 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. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Goodbye.