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United Insurance Holdings Corp (NASDAQ:UIHC)Q4 2018 Earnings Conference CallFeb. 19, 2019, 5:00 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Greetings and welcome to the United Insurance Holdings Corp Fourth Quarter and Year End 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded.
I would now like to turn the conference over to your host, Adam Prior of The Equity Group. Thank you. You may proceed.
Adam Prior -- Investor Relations
Thank you, and good afternoon, everyone. Thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. In addition, the Company has made an accompanying presentation available as well. You're also welcome to contact our office at 212-836-9606 and we would be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website. Before we get started, I'd like to read the following statement on behalf of the Company.
Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws including statements relating to trends and the Company's operation and financial results and the business and the products of the Company and its subsidiaries. Actual results from UPC may differ materially from those results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the U.S. Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of the new information, future developments or otherwise.
With that, I would now like to turn the call over to Mr. John Forney, UPC's Chief Executive Officer. Please go ahead, John.
John Forney -- President and Chief Executive Officer
Thanks, Adam. This is John Forney, President and CEO of UPC Insurance. With me today is Brad Martz, our Chief Financial Officer. On behalf of everyone at UPC, we appreciate your taking time to join us on the call. As Adam said, for the first time, this quarter we are publishing an investor presentation in conjunction with our earnings release. You can find it on our website at the address shown at the top of our press release and I encourage you to review it. While we will not be going slide by slide through that presentation, we may refer from time to time to some of the data and analytics Included therein. As expected, we had a lot of noise in the quarter from Hurricane Michael and other cat activity, not to mention the effects of the new accounting rule related to equity gains and losses. However, underneath it all, there were a lot of positives; one, we continued to produce strong organic growth both personal lines and commercial lines grew at a double-digit rate in the quarter. For the year, we wrote about 150,000 new personal lines policies, retained over 89% of our business and ended the year with over 560,000 personal lines policies in-force, 60% of them outside the state of Florida.
For the year, in commercial lines, we wrote 1,233 new policies, retained over 86% of our business and ended the year with over 5,300 policies in-force. Overall premiums of both commercial and personal lines business have been stable. Our underlying combined ratio for the quarter declined over 600 basis points from a year ago. Hopefully, this helps put to risk any lingering concerns about underlying performance after the outlier non-cat losses we had in Q3. Please make sure to look at page 12 in the investor presentation, which shows that our accident year actuarially indicated personal lines loss ratio for 2018 without its lowest level since 2014. both, overall and in Florida.
The Florida actuarial indication for non-cap personal lines loss ratio was down over 5 points year-over-year. We have taken a variety of rate and underwriting actions over the past couple of years that have enabled us to continue to grow organically where we want to grow, while driving down underlying loss ratios, thereby providing us additional underlying margin to withstand future cat activity and remain profitable.
Third, during the quarter, we gained approval in Florida for our first A.M. Best-rated product from our newly formed subsidiary journey. Subsequent to year-end, we wrote our first journey policy and there will be many more to come. That speed to market, journey wasn't even formed until the end of September, and we are in the market with an approved admitted market product two months later, and I've already put business on the books.
Thanks to the great team at AmRisc for all their efforts to help us get journey launched and into the market so quickly. This will be a big vehicle for growth for us in 2019 and beyond, as we add states and products to it. Last positive, I'll highlight, during the quarter, we extended our quota share reinsurance program with Munich Re, TransRe and Gen Re and negotiated renewal of much of our 2018 loss affected cat layers at favorable pricing. We appreciate the strong partnership mentality demonstrated by our reinsurers. And we look forward to working with them to complete the remainder of our six-one (ph) renewal. Please refer to pages 17 and 18 in the investor presentation to get a better appreciation for the depth of our reinsurance programs which cover a variety of risks for our various entities and in aggregate total of $4 billion.
At this point, I'd like to turn it over to Brad for his remarks.
Brad Martz -- Chief Financial Officer
Thank you, John, and hello, this is Brad Martz, the CFO of UPC Insurance. I'm pleased to review UPC's financial highlights and would also like to encourage everyone to review our press release and investor presentation for more information. The highlights for the fourth quarter included first solid top-line growth with premiums written increasing nearly 16% and gross premiums earned totaling $308 million. For the year, gross premiums earned grew to just under $1.2 billion, an increase of 20% year-over-year.
Second, UPC saw significant improvements in its underlying results. Our underlying combined ratio was 81.3%, an improvement of over 6 points from the same period a year ago, driven by positive movement in both the underlying loss and expense ratios. This helped bring our underlying combined ratio down to 89.1% for the year, which is up almost 4 points year-over-year, due to catastrophe losses being 5 points higher in 2017.
Third, UPC had a core loss of $1 million or $0.02 a share, a decrease of $34 million from the prior year, due primarily to catastrophe losses of $41.7 million or $0.72 a share, compared to only $1.4 million or $0.02 a share in the same period a year ago.
For the year, UPC had core income of $16.5 million or $0.38 a share, which declined $18.4 million from the prior year, primarily from a $24.2 million decline in merger and amortization expenses before tax.
Finally, UPC experienced favorable income tax adjustments in both the current periods and the prior period as well as the change in federal effective rate year-over-year. So, the company's results before income tax provide a much clearer measure of performance. For example, if you take UPC's fourth quarter loss of $19.4 million and add back the catastrophes of $41.7 million, which are not comparable year-over-year, as well as the net investment losses of $12 million, which are non-operating, you get $34.3 million of income before tax.
That's a 20% increase over the prior year using the same calculation. Similarly, for the year, a similar result in curiosity (ph) to compare our income before tax and just remove the net investment losses, which are almost all unrealized. UPC's pre-tax income also increased from $843,000 in 2017 to $3.4 million in 2018. This year-over-year improvement is inclusive of all cat losses, which are comparable for the full year. In short, management feels the true earnings power of the business remained strong despite all the items impacting comparability and we believe it's reasonable that margins will improve further in 2019. Additional details regarding UPC's total revenue for the quarter beginning with direct premiums written, they consist of 71% personal lines and 29% commercial lines. Commercial lines grew 19% year-over-year, slightly faster than personal lines at just under 15%. Roughly 59% of our growth in direct written premiums came from Florida and the Northeast remained our fastest-growing region, up 16% year-over-year, led by New York.
Assumed commercial excess and surplus lines premiums grew 122% to $22.9 million during the quarter. A 17.1% change in ceded earned premiums for the quarter was slightly higher than the 12.4% growth in gross earned premiums, due to lack of any quota share sessions for the one month of December 2017. Investment income increased 42% year-over-year to $7.5 million in the quarter. Realized gains of $2.3 million and unrealized losses from equities of $14.3 million resulted in a $12.6 million decline in revenue for the quarter and $7.6 million for the year, due to the new GAAP accounting rule change John mentioned previously.
Other revenue decreased $6.6 million or 63% year-over-year, due to the change in our presentation of ceding commissions earned, implemented during the second quarter of 2018. The ceding commissions earned during the current quarter were $10.7 million.,
Moving on to losses. UPC's fourth quarter losses increased $50 million or 69.4% from $72.1 million last year to a $122.1 million this year, due to a $9.7 million or 13.7% change in non-cat losses, consistent with our premium growth and a $40.3 million increase in catastrophe losses. This produced a gross loss ratio of 39.6%, up 13 points year-over-year and a net loss ratio of 67.2%, up nearly 24 points from last year.
Net retained cat losses during the current quarter added 13.5 points to the gross loss ratio and 23 points to the net loss ratio. Hurricane-related losses totaled $28.2 (ph) million and the remaining $13.6 million was due primarily to the increased retention of non-hurricane events under the Company's aggregate reinsurance program. Reserve development on prior accident years of $8.5 million added nearly 3 points to the gross loss ratio and 5 points to the net loss ratio during the quarter. For the year, this was $4.3 million or about four-tenths of 1% on total reserves of nearly $200 million and a base -- premium base of $1.2 billion gross earned, which is not very significant. Despite this development, UPC saw favorable trends in non-cat loss ratio by accident year across all lines of business both inside and outside of Florida with the biggest improvements coming from personal lines in Florida.
Excluding the impact of net retained catastrophe losses and reserve development, UPC's gross and net underlying loss ratios improved nearly 3 points compared to the same period a year ago. UPC's non-loss operating expenses decreased $5.9 million or 7.2% year-over-year during the quarter, driven primarily by an $8.5 million decrease in amortization expense related to our 2017 merger with American Coastal. So, our underlying expense presents more comparable result after adjusting for ceding commissions. It increased $1.1 million or 1.4% year-over-year. The underlying gross expense ratio improved 2.5 points to 24.6% and the underlying net expense ratio improved over 3 points to 41.7%.
Moving to our balance sheet, UPC ended the year with total assets of over $2.3 billion including nearly $1.1 billion of cash in invested assets. At December 31, the duration of our fixed maturities declined to 3.5 years, while yield to maturity improved to 3.15% and 100% of our holdings or investment grade with an overall composite rating of A+. Unrestricted liquidity at the holding company was approximately $71 million at the end of the year and shareholder's equity attributable to United shareholders decreased to $520.2 million with a book value per share of $12.10 and $12.31 excluding accumulated other comprehensive income. Lastly, tangible book value per share excluding OCI increased over 3% despite occurring approximately $100 million of catastrophe losses during 2018.
I'd now like to reintroduce John Forney for some closing remarks.
John Forney -- President and Chief Executive Officer
Thanks, Brad. It was not a very satisfying 2018 for you or for us, much higher than normal cat activity sapped our earnings. But even while processing almost 100,000 claims about four years worth during one year, we continue to build a strong and diversified franchise. 2019 is off to a good start relative to the path couple years in terms of cat activity. So, we feel optimistic that the investments and operational improvements we have made have a good chance to help us produce much better results in 2019 and beyond. We appreciate your support for UPC as we continue to move forward.
That concludes our remarks and we're happy to take questions at this point.
Questions and Answers:Operator
At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.
Elyse Greenspan -- Wells Fargo -- Analyst
Hi. Good evening. My first question, can you give us where Hurricane Michael losses were booked for the quarter on both a gross and net basis?
Brad Martz -- Chief Financial Officer
Hi. Elyse, this is Brad. Hurricane Michael for the quarter was booked $128 million and net was $27 million.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. And then so was the remainder of the cats in the fourth quarter really just related to how the retention works on your reinsurance program over the other -- were there other smaller events?
Brad Martz -- Chief Financial Officer
Yes, they were about $4 million worth of new events during Q4 that were truly new and the remaining little $9.6 million, $9.7 million was related to the increased retention related to the events from prior accident quarters in 2018.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. Perfect. And then the the unfavorable development in the quarter is $8.5 million or so. Can you just give us a little bit more color on what that stemmed from, I'm assuming most likely probably accident year '17. But if we can just get a little bit more color there, that would be helpful.
Brad Martz -- Chief Financial Officer
Yeah, we missed on the most immature accident quarters from 2017 Q3, Q4 of last year. So, we had to take a more conservative approach to our development factors this year. I mean, the primary driver is Florida non-cat homeowners severity. We are actually seeing lower frequency and the rate changes we've implemented are obviously helping the accident year loss ratio improvement we described and shown in the investor presentation. So, we remain pretty optimistic about the trends, but we obviously missed on our expectations development.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. And then on -- you know, you mentioned like the way changes, you guys also mentioned them a bunch last quarter as well. We were discussing some of kind of the one-off, non-cat losses. Can you give us an update maybe specific to Florida and some other rate, as a more rate that you guys are looking to take as we think about 2019?
John Forney -- President and Chief Executive Officer
We are looking to take more rate in Florida. We have a refiling pending. So you'll continue to see that occur, but as we mentioned, our non-cat loss indications for the year in Florida were down 5 points year-over-year. So we feel good about how we're positioned.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay, that's helpful. In terms of the tax rate, there was some true-up that impacted the current quarter. Do you have an outlook for how we should think about the tax rate for 2019?
Brad Martz -- Chief Financial Officer
Outlook on tax rate remains unchanged at 26%. You're just going to see some unusual results when you have low levels of income given the size of some of our temporary differences. So, we understand the frustration there trying to, make sense of the tax results, but posting stronger book income relative to taxable income will help correct that.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. And then my last question, I mean you placed on part of your reinsurance program to start the year then. Also, some of it comes up at mid-year. As we get closer to mid-year, are you guys anticipating making any significant changes to your outbound reinsurance purchase this year?
John Forney -- President and Chief Executive Officer
We'll purchase slightly more reinsurance to account for the growth. But the structure that we've employed has served us so well over the last couple of years that we don't anticipate any major changes in the structure and we're in the midst of discussions with all our major partners right now about the the exact layering and pricing. So, it's business as usual in terms of reinsurance placement. We have very strong partners and we're working with them right now to get the placement done.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay, thank you very much, I appreciate the color.
Operator
Our next question comes from the line of Markus Hollander with Raymond James. Please proceed with your question.
Markus Hollander -- Raymond James -- Analyst
Hey. Good evening, guys. Thanks for taking my question.
John Forney -- President and Chief Executive Officer
Thank you.
Markus Hollander -- Raymond James -- Analyst
So at least touched on some of the questions I wanted to ask. But I guess just on the underlying combined ratio target of 85% obviously being at above or below the five-year average. I was just hoping you guys could give us some more color on how are you -- how was the Company set up to achieve that and if there is a time frame for it?
Brad Martz -- Chief Financial Officer
Time frame is immediate. We expected that target and price our products accordingly each and every year. Obviously, there is volatility and uncertainty in our business and that's reflected in that history, but time frame is immediate.
John Forney -- President and Chief Executive Officer
And I would say, it really is the five-year average that we've had, you know, it's a couple of basis points off and there is some distortion in last year's underlying combined ratio relative to '17 because of the effects of the different sessions in each year under our quota share and the effects of the unwinding of the debt that goes along with the merger that we did with American Coastal. Those distort things. When you look at underlying stuff, if you took out all quota share sessions or underlying our cat loss ratio growth before any sessions to reinsurers went down significantly. So, the underlying book of business is performing at a level that supports that underlying combined right now. And so it's not --it's not as -- it doesn't even suppose any improvement in our underlying results to get to that, if that makes sense.
Markus Hollander -- Raymond James -- Analyst
Yeah. Thanks for that. And then another one on the journey sub. You mentioned in your remarks, you guys already wrote a business for with AmRisc, but I think you said it was an admitted policy. And I understand the whole rationale for the radio was to get on the non-admitted side of the business, is that reasonable or are you just guys just planning to write that type of business in 2019?
John Forney -- President and Chief Executive Officer
The journey is an admitted market company and although it has been that they play on journey is not to get into the surplus line space. We've accomplished that through blue line. The play on journey was to get into different markets on the personal lines side and different products on the commercial line side, and that's what we've done. The first policy that we wrote with journey was commercial lines admitted market apartment building in Florida, which typically has gone to E&S markets, because apartment lenders require an A category A.M. Best rating. We now have an admitted market A category A.M. Best rating in Florida, which is kind of a category buster and gives us a really nice advantage.
Markus Hollander -- Raymond James -- Analyst
Okay, great. Thanks for that. And then just lastly, do you guys think the losses in the retro market will have any meaningful impact on your insurance pricing when it comes to renewals?
John Forney -- President and Chief Executive Officer
Time will tell. We're-- obviously, there's been a lot of stress in the reinsurance markets. You all know that as well, as we do. But the partners that we do business with are looking at the long-term like we are, and over the long term, we expect our partners to make money not every year, just like over the long term our results are going to be a lot better than they've been in 2018 and 2017. So, yes, there's been some pain on the reinsurance side and we want our reinsurance partners to feel like they have a profitable long-term relationship and that it's a win-win. So that's why I said we're working with them right now to try to find a fair way to do it.
Markus Hollander -- Raymond James -- Analyst
Okay. Thank you for your answers.
Operator
(Operator Instructions) Our next question comes from the line of Christopher Campbell with KBW. Please proceed with your question.
Christopher Campbell -- KBW -- Analyst
Yes, hi, good afternoon, gentlemen.
John Forney -- President and Chief Executive Officer
Hi, Chris.
Christopher Campbell -- KBW -- Analyst
Hey. I guess my first question just kind of following up on Elyse's about the unfavorable development. So it sounds like that's the most recent accident year. So I guess how is that going to factor into your core loss ratio Pex (ph) for 2019?
Brad Martz -- Chief Financial Officer
As I mentioned, it's going to have a trickle down effect to the most immature accident quarters. But it's immaterial really in the scheme of things. On our overall loss ratio, it's 20 basis points, something like that. If that -- I mean, it's just not a material number and it was sort of a prudent year-end thing for us to do, but again as I said, the non-cat loss ratio Pex factoring all that in, in Florida, are 500 basis points lower year-over-year. So, we are seeing a material improvement in the business and an immaterial amount of development for the year doesn't impact that.
Christopher Campbell -- KBW -- Analyst
Got it. And just -- I understand it's immaterial, but I guess just where was the development coming from? Is that kind of more or like -- are you seeing AOB creep back into like the core business or anything like that? Just any other colors you could get. -- or any other color if you could get on it?
John Forney -- President and Chief Executive Officer
AOB, it's not a significant factor for us. As we've talked about before, we've been reducing -- we've never had a lot of business in Tri-County. We don't -- haven't written any new business in date since I've been at this Company 6.5 years ago. We stopped writing new business in prior sometime ago. We've been non-renewing policies down there. Our premiums are up 30% or 40% down there and our loss ratio -- non-cat loss ratio in the Tri-County year-over-year 2017-2018 was down 12 points -- 1,200 basis points, 12 percentage points of non-cat loss ratio. So, no, that's not what's driving it.
Brad Martz -- Chief Financial Officer
Exactly. And again, I got to reiterate 2018 we feel like was as well reserved as we've ever been. So we're taking all this information into account setting your annual reserves on the current accident year as well. So we don't expect that to continue and I have no concerns about the development whatsoever.
Christopher Campbell -- KBW -- Analyst
Okay, got it. That's very helpful. I guess another one on the reinsurance cost, looks like the ceded premiums were up to 40% versus 36.7%, I guess, a year ago. So I guess just could you unpack that on what's driving that increase, is it, -- is it more coverage. I guess just how should we think about like the higher cost in terms of what more United is getting for that.
Brad Martz -- Chief Financial Officer
It's a full 12 months of the commercial, residential business produced by American Coastal is what it is . Last -- in 2017, you only had nine months of that, the commercial res has a higher ceding ratio relative to the personal lines, as you might expect. So, that's the change.
Christopher Campbell -- KBW -- Analyst
And the other change is that there wasn't any quota share in place...
Brad Martz -- Chief Financial Officer
Just one month.
John Forney -- President and Chief Executive Officer
...for a month of December 2017. So, we had one full month more of 20% sessions on their quota share in 2018. So, no, we're not paying more if there is some comparability issues.
Christopher Campbell -- KBW -- Analyst
Okay, got it. That makes sense. And then, just I was looking at the slide deck that you guys had, was there any more Irma loss creep, because I think the last number I had for you guys was like $747 million and then slide 18 of the presentation has like a number $900 million. So is $900 million the new number for that?
John Forney -- President and Chief Executive Officer
It's not very new, but it's been -- it's a number from a couple months ago.
Christopher Campbell -- KBW -- Analyst
Okay. So, $900 million is your latest gross number for Irma, correct? Hello?
John Forney -- President and Chief Executive Officer
Yes.
Christopher Campbell -- KBW -- Analyst
Okay, got it, guys. Just want to confirm that. And then I would just want to know little bit on switching to Michael. I know you guys had a big range, like the $50 million to $120 million gross originally. Now, it's only like $8 million above that at $128 million. I guess are you seeing the -- any signs that Michael could have loss creep similar to Irma, are you seeing, like the attorneys making their way up north or anything like that?
John Forney -- President and Chief Executive Officer
We're not seeing any evidence of that on our book.
Christopher Campbell -- KBW -- Analyst
Okay, great. And then just one other. Yeah, just kind of of question about like just the collateralized piece. I know like I think I asked a question last quarter about just in terms of I guess you guys released collateral and I understand it's not a commutation and I think you said like losses would have to develop like twice as much for that to like matter. So I guess and just how do you need to plug that going into like the next program, because the collaterals released. I mean, how does that work in terms of that piece of the program is like -- is the reinsurer already using that to write new business, because you don't think that the losses are going to hit that? I guess it's a buffer table question in essence, but I guess just if we're leasing that collateral, the reinsurers are going to start using that to write. How does that impact your program and then what you have to purchase going forward?
John Forney -- President and Chief Executive Officer
As it impacted us at all the collateralized programs that worked exactly as they were designed to work and exactly as they were advertised. There's buffer tables that allow collateral release after certain periods of time, if losses developed up into those areas, where collateral was released, the reinsurers are obligated to post new collateral and we clawed back. That's worked multiple times on Irma flawlessly within a matter of days and so we don't have any concerns about the collateralized reinsurers or how it works and the partners that we deal with have access to a lot of capital. So, they are not strapped for cash and trying to beg and borrow to make ends meet. They have capital to support their past obligations and their future obligations and so we haven't seen any signs of distress from our reinsurance partners on the collateralized side.
Christopher Campbell -- KBW -- Analyst
Got it. Is there any concern on the reinsurer side just in terms of the loss creep and then having to like you know maybe return collateral after it's been released on a buffer table? Is there any concerns on the reinsurer side, like maybe they wouldn't want to participate on our program, going into next year, they would have higher rates if that were an issue?
John Forney -- President and Chief Executive Officer
Nobody has enjoyed the Irma loss creep at all. Obviously, the numbers have gone up significantly for the industry as a whole over a long period of time and that's not something that anybody planned on. For us, our losses on Irma as a percent of our market share in the affected areas are still less than they should be than our market share, the PCS number, and so relatively speaking we performed well on Irma. Doesn't mean that we've enjoyed it or that our reinsurers have enjoyed paying losses that far after the fact and everybody's got to fact that into how they price their products going forward. So, that's how it works and we all had to figure out what exactly that means.
Christopher Campbell -- KBW -- Analyst
Great. Well, thanks for all the answers. Best of luck in 2019.
Operator
Thank you. We now like to turn the call back over to management for closing remarks.
John Forney -- President and Chief Executive Officer
Okay. Well, thank you so much, everybody, for joining us on the year-end call. We really appreciate your interest. We appreciate the good questions, and we look forward to continue dialog over the rest of 2019. So thank you, again.
Operator
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.
Duration: 33 minutes
Call participants:Adam Prior -- Investor Relations
John Forney -- President and Chief Executive Officer
Brad Martz -- Chief Financial Officer
Elyse Greenspan -- Wells Fargo -- Analyst
Markus Hollander -- Raymond James -- Analyst
Christopher Campbell -- KBW -- Analyst
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