Universal Insurance Holdings, Inc. (UVE) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Universal Insurance Holdings Q4 2016 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Dean Evans, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Andrew, and good morning everyone. Welcome to the fourth quarter 2016 earnings conference call for Universal Insurance Holdings, Inc. My name is Dean Evans and I am the Vice President of Investor Relations here at Universal. With me in the room today are Chairman & Chief Executive Officer, Sean Downes; President & 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 and 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.universalinsuranceholding.com. A replay of this presentation will be available on the home page of our website until March 9, 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 and are typically associated with the 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 and 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 filing 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 Sean Downes.

Thank you, Dean, and thank you everyone for joining us today. As you may be aware Dean joined Universal earlier this month as our new Vice President of Investor Relations. His extensive insurance industry investor relations and financial analysis background make him an excellent addition to the Universal team as we work to expand our IR efforts and enhanced relationships with the investment community. We're excited to have Dean onboard and I know he is looking forward to speaking with all of you in the weeks and months ahead. We also recently announced the addition of Kimberly Cooper, our Chief Information Officer and Chief Administrative Officer to the Board of Directors effective January 19, 2017. Since joining the Company in 2007, Kim has been a tremendous asset to Universal and has worked closely with senior management, developing and implementing many risk management practices and key IT systems and processes. I look forward to continuing to work with there and I'm pleased to have her insight, dedication and expertise on our Board of Directors going forward. With that, let's turn to our results for the quarter and year. As usual, I'll begin by providing some highlights from the quarter and we'll then review our strategy and growth initiatives. Jon will cover several important current topics and Frank will conclude by discussing financial results. We're pleased to report another profitable quarter, with strong top line growth, despite the significant impact from Hurricane Matthew in early October has got substantial damage in Florida and the South East. For the fourth quarter, we reported a 10.2% increase in total revenue and 8.9% increase in net and earned premiums, with each of these two items higher than any other quarter in our history. Our profitable underwriting result in the quarter, which included a sizeable industry loss event, is a testament to our underwriting acumen and substantial reinsurance program, which Jon will discuss in further detail shortly. We reported net income of $13.7 million and diluted EPS of $0.38, which equates to return on average common equity of 14.4%. For the full year, we generated 999.4 million of net income, diluted EPS of $2.79 in the very impressive 29.4% ROE, despite the excessive heat we experienced this year including the worst first quarter in Florida history and Hurricanes Hermine and Matthew which occurred in the second half of the year. Our ability to deliver a profitable quarter in the year in the phase of significant weather related losses highlighted the resilience and strength of our business model. We continue to focus on maintaining high underwriting standards to ensure a high quality and rate adequate book of business, maintaining appropriate levels of reinsurance coverage and building a best-in-class internal claims infrastructure and catastrophe response team. Notably, as expected, our rigorously reviewed and frequently stress tested response plan performed extremely well during Hurricane Matthew, which allowed us to efficiently provide support and assistance to our effected policyholder while quickly assessing and processing claims. Our outstanding response to Hurricane Matthew reflects our commitment to running high quality service for our policyholders and independent agency force to our vertically integrated structure. The investments we have made in our claims handling operations including our fast-track team, our paying dividend both of our ability to quickly close claims and to ensure our customers' needs are being met effectively and efficiently. We're proud to say that 2016 marked the year strong, strategic and operational execution across all aspects of our business. We have actively 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 the Commercial Residential product. These initiatives have resulted in a more stable, diversified and nimble business that is well positioned to drive growth and long-term shareholder value. For example, our core Florida market continues to produce solid top line growth with policies and force premium and total insured value each increasing by approximately 5% in 2016. Importantly, our growth both inside and outside of Florida is entirely, organically driven. Geographic expansion remains a core element of our growth strategy and we make great strides in 2016. Our subsidiary UPCIC is now licensed and operating in 14 states, and we continue to see an increase in policy count and totaled insured value for states outside of Florida. For the full year '16, total insured value for states outside of Florida was 21%, as compared to 16% in 2015 and 12% in 2014. A key milestone for Universal in 2016 was the launch of our direct-to-consumer online platform for homeowners insurance Universal Direct. Introduced in April of 2016, we steadily expanded Universal Direct's availability throughout the year and is now available in all of our active states. Since the launch, we have written over 1,800 policies in force for more than $2 million in premium. We continue to receive positive feedback from customers who appreciate the flexibility and convenience of purchasing homeowners insurance online. We will seek to prudently expand this unique offering in the year ahead including pursuing strategic partnership opportunities where appropriate. Such as our most recent partnership with Liberty Mutual under which we are now operating Liberty Mutual's extensive auto products on Universal Direct. We discussed our entry into the Commercial Residential business during last quarter's conference call, and we are happy to report that American Platinum Property and Casualty Insurance Company with our first Commercial Residential policy during the quarter, fourth quarter. We believe this business allows us to tap into large complimentary market, leverage our vast agency force and expand the depth of our operations, providing an additional avenue for further organic growth. Overall, we are pleased with the progress we have made in 2016, and we remain focused on executing on the four key pillars of our strategy to drive profitable growth. First, we will continue to provide high quality service through a vertically integrated structure. Second, we will continue to increase our policies in force in Florida by seeking profitable rates adequate and 100% organic growth. Third, we will continue to diversify our revenue base and risk by increasing our policies in force and states outside of Florida through our geographic expansion strategy, adding complimentary product lines and implementing unique operating such as Universal Direct. And fourth, we will continue to optimize our reinsurance program as our risk profile changes. We are confident that leveraging these pillars and our commitments to providing best-in-class offerings and service to our policy holders positions universal for profitable growth in 2017 and beyond. With that, I will turn the call over to Jon Springer.

Thank you, Sean. Let me start with the brief overview of UPCIC's Hurricane Matthew losses. As of year-end, we had just over 7,000 claims reported for Hurricane Matthew and nearly 6,600 had already been successfully closed. That 94% closure rate is a real testament to our catastrophe response team and to our dedicated claims operation. With now 225 full-time employees our claims department continues to grow and advance in all areas. Hurricane Matthew created just another opportunity for this department to excel. From a dollar perspective as of year-end, we had paid out 25.5 million in loss and loss adjustment expenses, had 1.8 million up in specific case reserve and set aside another 4.6 million of IBNR, making Hurricane Matthew just under an estimated $32 million growth event for UPCIC in the fourth quarter of 2016. Importantly, as previously advised, our specific catastrophe reinsurance program covering all non-Florida states responded for those subject losses above the retention of $5 million. The reinsurances on this cover have been fantastic partner and we were advanced to the first $5 million of recovery from this program early on. We expect another 300,000 of loss recovery from this program, as the payout of losses plays out in the coming days. This $5.3 million reinsurance recovery reduces the loss for UPCIC to a pretax event of 26.6 million after tax approximately 16 million. This estimate is right in line with the 14 million to 18 million after tax range, we provided during our conference call last quarter. In addition to the reinsurance recovery, this program will also provide complete coverage for our $376,000 assessment from the North Carolina JUA. From an ongoing reinsurance perspective, we're currently in the early stages of the process for the June 1, 2017 renewal of our catastrophe reinsurance coverage. The structure of the 2016 catastrophe reprogram worked exactly as planned by providing UPCIC with some additional relief on an event impacting our exposures outside of Florida. So, we will likely continue with the similar structure for 2017 season. It is very early days in terms of pricing and coverage expectations, but all reports to-date indicate the reinsurance supply continues to exceed demand, making way for the possibility of further reinsurance cost reductions. Just to quickly touch on one other important items, since our last conference call, we've successfully completed two separate actuarial reviews by Willis Towers Watson. The first was completed in mid-November using loss data as of the end of the third quarter; and the second was completed earlier this month, using loss data as of yearend. In total for all years 2016 and prior, we have booked a loss amount slighted higher, more conservative than their independent actuarial best estimates. With that, I'll now turn the discussion over to Frank Wilcox for our financial highlights.

Thank you, Jon. We generated solid profitability during the fourth quarter of 2016 notwithstanding $26.6 million of pretax losses and LAE recorded for Hurricane Matthew. Net income for the fourth quarter of 2016 totaled 13.7 million, a decrease of 15.5 million compared to 2015. Diluted EPS for the quarter was $0.38, down $0.82 for the same quarter in 2015, as a result of the decrease in net income. During this time, we continue to experience top line growth with increases in every category of revenue for the fourth quarter of 2016 compared to 2015 while net earned premiums and total revenues were higher than any other quarter in the Company's history. Examining our results a bit closer, direct premiums earned of 238.7 million offset by ceded premiums earned of 74.7 million, generated a 164 million of net earned premiums for the fourth quarter of 2016, compared to a 150.6 million for the same period in 2015. The increase was the result of organic growth from both Florida and other state growth initiatives. Ceded premiums earned as a percent of direct premiums earned was 31% and 32% respectively, during the fourth quarter of 2016 and 2015. Net investment income for the quarter of 3.5 million was 1.71 million, or 96% greater than the fourth quarter of 2015. This reflects both an increase in our invested assets based as well as actions taken to maximize yields, as securities mature while maintaining high credit quality. Total invested assets reached 651.6 million as of December 31, 2016, compared to 489.4 million one year prior, an increase of 33%. Commission revenue of 4.8 million for the quarter grew 16.8% 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 3.8 million for the quarter grew 10.2% year-over-year from an increase in the number of policies written during the fourth quarter 2016, compared to the prior year quarter. Other revenue of 1.6 million, which is complies primarily of financing and charges, grew 13.8% from the prior year's quarter reflecting both consumer behaviors underlying the policies written and growth. Net losses and LAE were 101.5 million for the fourth quarter of 2016, compared to 60.6 million during the prior year's quarter. A large portion of the overall increase of 40.9 million was driven by the 26.6 million incremental losses in LAE related to Hurricane Matthew. In addition, fourth quarter results included 16.8 million of current accident years, reserves strengthening and 4.7 million of favorable prior year reserve development. General and administrative expenses were 54.4 million for the fourth quarter of 2016, compared to 53.6 million for the same quarter in 2015, an increase of 766,000. An increase in expenses from growth was mostly offset by a decrease in executive compensation in part due to a decrease in performance bonuses linked to pretax income. We generated a net combined ratio of 95.1% for the fourth quarter of 2016, compared to 75.8% for the same quarter in 2015. The net loss ratio was 61.9% in the fourth quarter of 2016 compared to 40.2 in the prior year's quarter with the majority of the increase reflecting incremental losses in LAE related to Hurricane Matthew, which accounted for 16.2 points of losses in the current year's quarter. In addition, the fourth quarter's loss ratio included approximately 10.2 points of current accident year reserves strengthening as well as 2.9 points of favorable prior year reserve development. Our net expense ratio, which is G&A as a percentage of net earned premiums for the fourth quarter of 2016 was 33.2%, compared to 35.6% for the same period in 2015. The primarily factor behind the decrease in the expense ratio was the reduction in executive compensation and economies of scale. Our full year net combined ratio for 2016 was 82.6% compared to 73.7% for 2015, and included 46.1 million or 7.3 percentage points related to weather events beyond expected during the year. The effective income tax rate was 39.9% in the fourth quarter of 2016 compared to 39.1% for the same period in 2015. Our full year effected tax rate for 2016 was 39%, which is slightly lower than 39.2 for '15, and in line with expectations. Our underlying effective tax rate has been trending down from historical rates primarily from reductions in the amount of non-deductible executive compensation, lower state income taxes as we diversify outside of Florida and increasing use of tax exempt securities. Our balance sheet remains strong with stockholders equity and book value per common share of 371.2 million and $10.59 per share, respectively, as of December 31, 2016. Consolidated unrestricted cash and cash equivalents were 105.7 million and combined surplus for our insurance subsidiaries was 331 million, as of December 31, 2016, respectively. Elaborating on full-year results, we generated net income and diluted earnings per share of 99.4 million and $2.79 respectively. Weather activity beyond expectations in 2016 reduced net income by approximately 28.5 million after tax or $0.80 per share on a diluted basis. There were no significant impacts to earnings from storm activity during 2015. Return on equity was 29.4% in 2016 compared to 41.8% in 2015. We remain committed to providing value to our shareholders, and we believe this 29.4% return on equity is an excellent result in light of the increased frequency of weather events experienced during 2016. At this point, I'd like to turn the call back to the operator.

Thank you. [Operator Instructions] Our first question comes from Arash Soleimani with KBW. Your line is now open.

So, just to start off, what are you plans for primary insurance rates in Florida in 2017? It sounds like last time you mentioned, you are expecting to raise rates, wanted to know if you could provide some magnitude around that?

We are currently in the process right now of creating, gathering the data to create our rate indication. We don’t have that information yet. Obviously, you've seen some of our competitors have filed for some rate increases. I think it would be a representative issue and AOB issue. I think it's prevalent as it is, I think it's safe to say that we probably would be looking at some sort of rate increase, but it is little too early yet right now to make that decision based upon us being in the early stages of creating that rate indication.

And can you talk about how your combined ratios in states outside of Florida compared as a combined ratios in Florida both on the growth and net basis?

Sure. Good morning, Arash. This is Jon Springer. The combined ratios on from a growth standpoint will it be very similar obviously the makeup would be a little bit different with the loss ratio being lower in Florida higher in the other states, but of course the corresponding reinsurance spend is higher for Florida, lower in the other states. Expense ratio is fairly consistent, so from a growth standpoint you tend to get to a very similar number. When you look at it from a net combined ratio standpoint, the way the math works in terms of Florida having the lower loss ratio and higher reinsurance spend, Florida ends up being just ever so slightly better than the other states. But really within 4 to 5 points the outside.

Thanks. So, on a non-cap basis, if we exclude the tornado losses we have in the first quarter of 2016 and the impacts of Hurricane Hermine and Hurricane Matthew. How should we expect the 2017 growth loss ratio compared to 2016? You expect it to increase given the environment in Florida.

Well, I am sure as you saw, we've bolstered our reserves in the quarter four and that really had to do with basically our non-cap performance. We've seen a little bit more aggressiveness from some of the plaintiffs law firms, contractors et cetera, as it relates to this represented AOB issue. I think, Arash, the easy answer to that question would be that, we're probably going to increase that; and I think looking at somewhere between 29 and 30 is a safe bet for us. Obviously, there is a lot of unknowns as you're aware we meet to citizens language, we've only had 25 claims that have really been effected by that Me Too language and that’s been a positive, I will tell you. But, obviously, there is a lot of things that are going on with some bills, sort of UCO's bills, that he is proposing, I think would obviously be something that would definitely impact this industry positively, as it relates to AOB. So, without knowing what's going to be on horizon for us, I think everything remains constant, we probably expect to be in that 29 to 30 range going forward.

Thanks. And moving to the gross expense ratio, how should we think about that in 2017? Will your expansion efforts cause that to go up in the short-term? Or do you expect to get benefits of the sale, right away in 2017?

Arash, our gross expense ratio for -- this is Frank by the way. Our gross expense ratio for 2016 was 24%. Looking to 2017, I don’t see a drastic change in that. I'd give you a range in 23 to 26. We're joining economies of scale. We don’t need to replicate the infrastructure and other states that we have in Florida, as we expand. That being said, as you know we're brick-and-mortar business, we're vertically integrated and we handle all aspects of our business. So, we invest in our sales from time to time. Those investments, the benefits from those investments have however don’t necessarily manifest themselves in the expense ratio, they could be reflected elsewhere. When you look at our combined ratio and you see that we're 9% to 10% below, the average of our peers for the past seven or eight quarters. You can clearly see the benefit that, Jon talks about, which is paying our claims. And Jon actually shared a very nice statistic 94% of Matthew was paid out, and the industry average was low below that. So, we believe our model is unique. We believe that we're paying dividends when we invest in our infrastructure and that investment is in the underwriting areas, in the claims areas, in the finance areas. So, we're enjoying economies of scale, but there is also investment going on.

Thanks. And moving onto premium growth, should we expect that to kind of remain steady in the upper or single digit range? And going forward what state you're particularly excited about?

I think that the upper single digit growth rate is very good as something going forward, that’s where we have been for the last two years and that’s where we would expect to be going forward. In terms of which state we like, the short answer is we like all of them. We feel like priced correctly in each of the states that we are in obviously in the short-term especially when we are growing new states, a loss here, a loss there can skew the numbers. But overall, we like all of our states. Of course, we like Florida, we fell like we are positioned extremely well in Florida both from a rate structure as well as we talked about regularly the structure of our claims department and our ability to combat some of the challenging situations. Outside of Florida some of our states are much more established than others. When you look at our expansion we started expanding a little back in 2008, and then of course play that well way up to adding states just this past year. So some are much more established, we are more recognized in those markets. We feel we are doing particularly well in both North and South Carolina even despite of Hurricane Matthew as well as Massachusetts. We will plan to continue riding business in growing in all 14 of our states. But I touched down on a few that we particularly like.

Thanks. And since you've mentioned in the prepared remarks, could you just extend a little bit about Commercial Residential and your plans there?

Yes, obviously, the key thing there Arash is, we are leveraging our agency force. We are doing this on a very slow methodical diligent pace. We've written I think two or three policies today, average premium around $35,000, but it’s something that we're getting our feet with, making sure we are doing it the right way. And I think overtime, we will see some good growth from it. But I wouldn’t expect anything too big in the next two quarters just because the way we are going about it make sure we are doing it right.

You talked about this earlier with the reserves, but I guess how did you experienced of AOB change in 4Q '16, and I guess even year-to-date 2017 versus the prior year and prior quarters? Would you stay, it's looking stable? Do you think it's getting worse or you're potentially seeing some signs of light?

We saw a little bit uptick in frequency nothing major. But the severity is down, just give you couple of numbers. In 2014, on average HO-3 with AOB connected to it, we had a severity about 21,000. In '15, it was around 19,400. In '16 right now, as of this date, it's not fully cooked, it's running around 17,590. So, I think once that’s fully cooked, I am sure you are going to be right around that 19,000 number. So, from a severity perspective, I believe that it's relatively flat. From a peer represented issue, we are seeing a much more aggressive law firms out there right now and taking shots at claims. So, we have been working on that specifically and trying to battle that situation, I think that’s something that obviously is affecting the industry as a whole, and we're not immune to that. But I think our ability to get out of these claims quicker with a fast-track team in the day of the claim and the next day is mitigating the potential for plaintiffs slaw firms, public adjusters, contractors et cetera to intervene to create that separation from us to our insured. So, I think it's an issue that I think we're battling as good as we can. And I think obviously, we've start to see what happens here with the Me Too that we did to citizens, as we get more our frequency in. And then also see what happens from a legislative perspective. And obviously as you are fully aware, this company has been participating in takeout in 18 years. So, I think there is different starting points when you talk about some companies to others not all companies that participated in take outs but I think if you take the Company that has participated in the takeouts those starting point that type of risk or that type of insured in that risk et cetera maybe not as favorable as a policy that we were able to organically grow ourselves and our pipeline. And also obviously rate structure has something to do with it and then most importantly I think is the way in which our legal department claims division is set-up and then what your methodology is in handling this claims. We have over 60 folks in our legal liability and subrogation division. We're extensively pushing all three of those, and I believe that those are helping us to make this problem less severe. It is a problem, it's a problem for everybody, everybody wants to have some sort of legislative changes, positively affect what's going on. It's no different than the sinkhole issue or the [Indiscernible] issue in the previous life, but we're doing everything we can that we believe is in the best interest of the Company and our policyholders to try to mitigate fraud as best we can.

Thanks. And I know part of this you've answered in terms of the, Me Too language from Citizen's. But how are you combating the claims that are reported after repairs have already been made. What can you do to protect your loss ratio from that phenomenon?

Yes, well, two things. One, I think, I don’t think we're seeing as much of that is a lot of the others just because we're getting to the loss quicker. A lot of those claims faster over 4, 5, 6, 7 days, people talked to relatives, talked to neighbors that they then put them onto at attorney, onto a public adjuster, onto a contractor. And then, that starts the actual loss begin to process of adversely going in the wrong way. When we do have a situation when we get to a loss early and there are contractors on who are already performing and fixing whatever issues occurred, we just have to use our experience. We have a claims department here with folks that are in this business well over 25 to 30 years. So, I think our expertise in that helps us, but there is still fraud being committed even in that situation. And it just, it's our duty to try to handle as best we can and that's what we've been trying do.

Thanks. And just moving back onto the reserves that you addressed us also in your remarks, but obviously that's the balance there has been declining year-over-year. Just given the environment, what gives you, I guess what gives you comfort with the current reserve balance with them?

Well, I mean a lot of things that give us comfort. I mean just to start as I mentioned in my opening remarks, having completed two separate independent analysis by one of that the most respected actuarial firms in the world gives us comfort that we've got some pretty smart people looking at this thing, many different ways to make sure that we're ending up where we should be. I think in terms of your comment just about reserve declining really to do a proper analysis on that you have to take into account the number of remaining open claims, and how many claims have been closed. Sean has talked several times about the implementation of our fast-track team, how quickly we're getting to claims, how quickly we're closing claims. Obviously, those claims that are adjusted in closed. We no longer need any amount in the reserved category. So to do proper analysis, you have to take into account that, you also would have to be able to fully appreciate the partial payment on the remaining open claims because it's very common that we do get money in the policy holders hands, quickly may the full claim is not adjusted and settled but a large portion of it has already been paid. And then off course you would turn your attention to the reserved call on and the potential need for IBNR and that IBNR number obviously would be offset by anticipated subrogation that we expect to receive in the future. So, in order to really look at it, I guess what I'm saying is the after doing a very deep dive into the data and we've just done two of those. One with data as of the end of the third quarter and another would data as of yearend.

To add on that Arash as well, we're trying to make our case B2B all in dollar if you will, of the actual point. So, if the case reserve could encompass the full benefit of what the actual incurred loss would be. That’s kind of what we're shooting at, and then, obviously, your traditional IBNR the unreported fees. And then like I said, our legal department, we've been focused 100% in the last year and half to two years on our subrogation team and we've seen amazing gains with our subrogation team, and what we been able to achieve in that department. And that just again is another layer that participates in IBNR. So, we feel pretty confident about where we're at relates to that.

Thanks. I just had one last question I wanted to add on just given current events. If corporate tax rates are lower than current administration I am talking about that. You expect that to drop to the bottom line or do you expect that that would be passed through the consumer? And if it’s the ladder, how quickly do you think those, I guess rate decreases would be passed through? Or what it results in first think for example more reinsurance, just wanted to know how you thinking about that?

Well, I think you're thinking about it correctly. There is a lot of unknowns there, the biggest one would be timing. What is the timing of this potential corporate tax rate change? What is the timing of our next pending rate filling to potentially be impacted? Obviously, aware that when we do make rate changes then may roll on to our book of business over the course of twelve months, a lot of timing issues there to be able to just say the money goes to the bottom line or the money ultimately returns to policy holders.

And our next question comes from Ron Bobman with Capital Returns Management. Your line is now open.

And Dean, welcome to Board, but next time you got to stop Arash after five and asked him circle back, double digit with too long. So, I had a question Sean or Jon, could you talk a little bit about the auto strategic relationship that you mentioned in the prepared remarks?

Yes, we are in early days with that right now, but I would say how it's working right now. I don’t have any concrete numbers to give you as far as success rate with that because we haven’t received their report yet. But if you're buying a policy online at Universal Direct, you are then offered to go to a co-joint JV website that was created between our sales and Liberty Mutual. And you offered an auto policy. So, we are working on it like I said it's early days, but we feel that going forward, we can gain some traction with that, make that a solid reciprocal relationship.

Thanks. And when you mentioned in '17 or going forward, you are going to entertain pursue other strategic relationships. How wide conceptually might that be or should we think of it really as the extensions of the Liberty Mutual type of relationships in effect other lines of business other states, but it's going to be sort of supplemental insurance sales? Or could it be a lot wider than that?

It’s a great question. I think you think about it right now in simplistic terms, such as what we are doing with Liberty Mutual. But there are some wide ranging thoughts and some discussions that we have had with some folks that are very interesting that we are going to continue to try to figure how that may best fit. There is a lot of different things and you can talk about the banks, mortgage markets et cetera. So, there is a lot of different things we are looking at Ron, but again it's I think that the main situation is just trying to figure how best to offer some products to people who are looking to buy insurance, and then figure what type of products people are purchasing that need homeowner insurance and try to create some sort of joint venture that makes sense for both parties.

Can you provide any metrics on Universal Director as far as recent new tiffs or premium and relative rate of increase?

Yes, we are in access of 1,800 policies currently for premium in excess of 2 million. We are closing about 10% of the quoted decoded business online right now, which is a fantastic rate. So, we are pleasantly surprise with this. We really have only been in all of our states for a few months, so we are cautiously very optimistic about the potential for Universal director going forward and continuing as to be a positive organic pipeline for the company.

A challenge that sort of all of the Florida, some of the legacy Florida model lines face that they entered, and our Broaden geographic footprint is sort of getting nicked and cut some hailstorms in other states, severe thunderstorms, minors snowstorms et cetera sort of death by a 1,000 cuts. And I guess in some respect sort of reinsurance question, but maybe it's broader than that. How do you think about trying to sort of minimize the damage, minimize the losses, minimize the average hit to EPS on a weather to quarterly or an annual basis from smallish events in other state, new states from the Carolinas to even north states, as you build the business geographically and buy your reinsurance? That’s it for me thanks.

We thought about this a lot and we have evaluated several different options. I think it really starts with getting your primarily rate correct from the beginning. So, you need to understand and appreciate that, as you put it those 1,000 cuts are going to happen overtime in these other states that we are in. So, we have attempted to bake into our rate the ability to withstand those smaller cap-type events. From a reinsurance perspective, we have evaluated several different types of aggregate products. The challenge with those aggregate products Ron is that they can be expensive. So, well, it may sound good and feel good to purchase an aggregate, and say, listen we capped it off here at this level, you really need to appreciate how much have you paid to do that. And we evaluated those things very deeply last year and as you all know it's been talked about quite a bit we decided to purchase another states underlying or current tower down to $5 million. So granted that doesn't necessarily help us for a million dollar event in Delaware. I get that, but it did give us comfort certainly as Hurricane Matthew was approaching and ultimately causing the damage that it did in Georgia, South Carolina and North Carolina that we indeed did get some reinsurance recovery to take this thing out of the loss in the other states portfolio.

That's specific helped. And just so I understand if any, into the same quarter if we had that Matthew event in Delaware and then there was one another Matthew event, the different Matthew event in another one of your states. Is your retained under that scenario capped at 10 million sized in each of those states assuming you don’t go through the top of the tower?

No, under our current reinsurance program, it is in currents retention. So, we have coverage about 5 million for any event that causes loss outside of Florida. So, if we have million dollars event in Delaware, we would retain the four million net. But again…

But if you have to fixed growth in Delaware and fixed growth in South Carolina in the same quarter you would retain 10 totals from this two unrealized events?

The only way we would get a reinsurance recovery as if we've given occurrence an event or single event exceeded $5 million. So, it is not an aggregate program it's an occurrence program.

Thank you. Our next question comes from Vimal Gupta, as a private investor. Your line is now open.

I have two questions. One is the new feed, I think you have devoted last year in implementing direct insurance. But you were granted certificate of authority in New York and New Jersey over a year ago. Do you have any plans to start writing insurance in these states?

Yes, we have plans to starting those states and we are currently in the process of gaining approvals from each of those states to our rate and form filings. As you've may have remember us talking about in the past in order for us to properly create a rate structure we need to do our homework and that takes time. We've been in those states -- we've been talking to agents who've been evaluating a potential competition in those states to create our own rates. Then we needed to final those with the departments of insurance in those states and we're currently in the process of waiting for that approval before we can commence righting business.

Regarding joint ventures something like Liberty Mutual. Can you just speak a little bit more, what you could expect in 2017 in terms of revenue or benefit or something as much as you can?

Yes, as I said little bit earlier, Vimal, there is a lot of different avenues that we’re looking at. There isn't anything right now that I can speak to definitively because we haven’t officially agreed to any terms yet. But there is a lot of things like a said earlier are simplistic as it relates to offering auto, a lot of the different single simplistic insurance products that we could put on Universal Direct. And then there are something that we're looking at that are wide range, that would be a pure JV prospective that would be reciprocal from us and whatever the other entity may be. But we’re working it and into a pretty deep. And I think we have something for you by next call.

Thank you. And our next question comes from Sameer Kher with Capital Returns Management. Your line is now open.

I have a few questions on different line items. On the expense -- and I apologize if this is covered at some part of [Indiscernible]. But on the expense ratio, you guys said in the press release that there is lower because of incentive complex. Is there reversal of accrued executive comp in Q4, and if so, how much?

No, there wasn’t any reversal, as I've mentioned in previous quarters, we've lowered our stock-based compensation and the reason it's been lower is that, it’s a fix dollar amount versus a fix share amount. When it was a fixed share amount and you had awards that would take place in the future, and as the stock prices goes up, so to those comp expense. So, now there is fixed dollar amount and we're experiencing less stock-based compensation as a result of that. What also happened during this quarter in particular is the reduction in pre-tax income from the storms reduced the basis from which we calculate management incentive bonuses. So, those two factors drove down the expense ratio, I think by about 2%.

Okay. And on the direct initiative, what are the aspirations for 2017, you guys have, sort of the target that you guys have in mind internally?

We do have a target, I am not quite sure I could share that with you right now, Sameer. But I would tell you that, we're seeing, as I said earlier, a very positive closing rate from our quote to bind. And I think, as we get little bit more in dept with some marketing and something that we have lined up to start doing, we're going to see this thing gain a lot more traction and it has, and we're very pleased right now that we've done 2 million in premium. And lot of people said that this couldn’t be done, it was much too much of an expensive process for people to do online. But I think as we're seeing a segment of millennials and people they're just -- the time is valuable to them and they want to go ahead and do this separate process online. So, the best part about it is that we have built all these platforms, owned all these systems ourselves, and they give us the ability to change and manipulate it on a daily basis as we see fit to positively effect of the platform. So, the quick answer to your question would be, I think you're going to continue to see the growth that we've had, since we’ve been on all these states in the last three months.

And I think the growth will be potentially going in a positive manner.

Okay. And then the joint ventures you have with Liberty Mutual, is that any exclusivity to it? Will there be geography or time?

No.

No. Okay. And then on the Hermine and Matthew, do you guys see an elevated instance of AOB?

We have seen really no AOB as it relates to that. It's really unquantifiable the number is so small. I think we have had 47 enthuses on 7,000 claims, so nothing really to talk about that’s of any worry to us.

On the reserve review you discussed looking above the estimate. How far above that estimate you are booked?

We booked 2 million of the actuarial of that.

Okay and was there any change to prior quarter cap and if, where?

No not at all.

And you guys have metrics as to what the IBNR is as a percentage of total reserves at year-end 2016 versus 2015?

I don’t have that handy, Sameer. We will be happy to have a conversations offline with the scheduled for being in front of me.

And you talked about subrogation efforts. Do you have a metric that you can give us to show the progress of these efforts?

Yes, obviously, like I said we have been building this apartment since mid '15, and we are seeing approximately around 10% return rate to it right now, on our overall incurred losses that are affected. Look, we run an insurance company that most of the claims are water related, so baked into that obviously there is a lot of circumstances where we are able to recover from the subrogation of perspectives. Since we started this in '15, the beauty of it is due to special limitations, you can go back x amount of years and work on the claim that you had in those previous years. So, that’s what we have been doing, working on that and trying to figure out help that to utilize our expertise and getting some of that money from subrogation purpose. Theoretically, we have our own internal law firm here and inside we use those folks as well as our other subrogation folks to participate. And when we see claims that from a fast-track respective all the way up to large loss that we believe that there is some subrogation connotation attached to it, we then put it into its appropriate bucket and then those folks start working on it. So, that’s a huge part of our business.

And Frank, can you talk about any changes to the investment portfolio given current environment?

When you look at the net returns year-over-year, we have about 96% increase in net investment income and that’s a result of several things, a lot of actions that we have taken, but we had about 33 increases in invested assets. So that certainly accounts for some it. We have also as securities mature or we put new money into the portfolio we have been funding munies to take advantage of the tax benefits on that. We have been reallocating our allocation from U.S. governments over to those munies. We have also extended the duration out, our average duration is now in access of three years we are somewhere between two and three last year. All of that has increased the yield. And we have done that without necessarily sacrificing our credit quality. We still have a very high credit W minus. In addition to that, our returns have improved as a results of negotiations that we have gone through with our investment advisors to negotiate the fees down, and that certainly increases return on investments. Now rate environment obviously rates went up a little bit and they may continue to go up a little bit and will have the same impact as everyone else.

Okay. And just stepping back any thoughts on the recent suspension of guidance from Demotech and what that mean to your operation, your competitive position and your appetite acquiring companies or outlook to business?

Yes, there is going to be no negative impact to any of our entities at all. And I would tell you that the only positive would be, maybe either something additional organic business maybe that we could obtain because of it but I would be cautious about that because most of those smaller carriers were mostly take our companies. So, again I don’t think it's anything that's would be a negative for us at all and maybe as slight positive.

Okay. And then did it affect your appetite on acquiring companies or books of business?

Look, we're always open to the possibility of listening and looking in the M&A arena, we just haven’t seen anything right now, we kind of fit our portfolio of what we wanted to do going forward. We are very pleased with the way we're putting business on organically with our traditional agency forces as well as Universal Direct. So, we're always looking and listening Sameer, but there isn't anything right now that I would tell you that's increasing our appetite.

I'd now like to turn the call back to Mr. Sean Downes, Chairman and CEO for closing remarks.

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 today's call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.