FedNat Holding Company
Q4 2019 Earnings Call Transcript

Published: 28 Feb 2020

[Operator:]

Good morning, and welcome to FedNat Holding Company's Fourth Quarter and Full Year 2019 Conference Call. My name is Sarah, and I'll be your conference operator this morning. [Operator Instructions] Before we begin today's call, I'd like to remind everyone that this conference call is being recorded as well as broadcast live via the webcast. Additionally, today's call will be available via webcast replay later this afternoon and accessible by visiting the Investor Relations section of FedNat's website at www.fednat.com.Now, I'd like to turn the conference over to Bernie Kilkelly for FedNat Investor Relations. Bernie?

[Bernie Kilkelly:]

Thank you. Good morning, and welcome again to FedNat's fourth quarter and full year 2019 conference call. Our earnings release and prepared remarks include references to non-GAAP measures, such as adjusted operating income. We use these non-GAAP measures to provide greater transparency and a more meaningful, efficient comparison to prior year's results. Our non-GAAP and reconciliations from the GAAP measures to the non-GAAP measures are available in our earnings release.Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target or will and other similar words or phrases are intended to identify forward-looking statements.The matters discussed on this call that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements made on this call due to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in this conference call, our press release issued yesterday and other filings made by the company with the SEC from time to time.Forward-looking statements made during this conference call speak only as of today's date. And FedNat specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise.Now I'll turn the call over to FedNat’s Chief Executive Officer, Mike Braun.

[Mike Braun:]

Thank you. Good morning, and welcome to our fourth quarter and full year 2019 conference call. Ron Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer, are here with me this morning. As you know, we issued a press release last week that we pre-announced several significant items that impacted fourth quarter results.On today's call, I'm going to review those items and provide more detail. Then I'll discuss the current environment in FedNat's markets and our strategies for dealing with near-term challenges in some of those markets. After that Ron will provide a deeper dive into the fourth quarter financial results and our balance sheet and then we'll have time for questions.Before diving deep into last week's announcement, I want to provide a high-level outlook as we enter 2020. There is no question that there are challenges in the Florida homeowner's space but we're confident in our market position. We're taking the right steps in the near term to take additional rate and follow our stringent underwriting practices in Florida to combat higher levels of frequency and severity from increased litigation costs.We will continue to restrict new business in Florida until our rate actions are implemented and more accurately reflect our increased cost of doing business. The rate increases we detailed in last week's release, which will – Ron will address further are expected to add over $25 million of incremental premium in 2020 as compared to 2019, which net of related acquisition costs will be available to help alleviate the impact of adverse claims trends.We believe the AOB Reform Legislation enacted in 2019 is a long-term positive for Florida homeowners but it is only the beginning. We remain very supportive of tort reform efforts that continue to be introduced by the Florida legislator. More on that to come, but we're entering this year with our eyes wide open and believe we are taking the actions necessary to improve our financial performance in 2020 and build shareholder value for the long term.In particular, over the last year, we have implemented our strategy of expanding into more profitable coastal homeowner markets outside of Florida. Our organic growth as well as the Maison acquisition positions us to profitably expand our presence in coastal markets like Texas, Louisiana, South Carolina, Alabama and today we announced our entrance into Mississippi.To illustrate just how significant our non-Florida strategy is and the momentum that we are carrying into 2020, note that compared to the fourth quarter of 2018, non-Florida gross written and gross earned premiums doubled and our policies in force tripled, aided by the addition of Maison in December. More importantly, our non-Florida book was profitable in the fourth quarter including Maison, so all of this growth represented profitable growth.I want to provide more to fuel some update on the items we announced last week. In the press release, we detailed four significant items that impacted the fourth quarter results. First, we had catastrophe claims of $4.5 million pre-tax, net of reinsurance and profit share, which was roughly in line with our expectations.Gross catastrophe claims were $6 million including $3 million in Florida and $3 million from non-Florida, which are subject to a 50% profit-sharing agreement with our managing general underwriter. The catastrophe claims in the fourth quarter were related to tropical storms Olga and Nestor as well as other PCS events, which impacted Texas, Florida and other states.I'm proud to say that FedNat's dedicated staff who once again provide a quality service to our policyholders and our trusted agents in their time and need, which is always our number one priority.The other items we announced last week, all share one common theme, which is the macro headwinds we faced with the litigious operating environment in our Florida market both in homeowners and in our non-core lines that are in runoff.In our non-core lines, auto and CGL, we recorded $8 million in pre-tax reserve strengthening on prior years, including $2.5 million in auto and $5.5 million in CGL, both of these lines are in run-off and we continue to work our way through the remaining inventory of claims. The adverse development in auto, resulted from some claim reopens and adjustments to the overall tail, but we are confident in our reserve position and the remaining claims will run-off within a year.In our CGL line, we have no policies in for us, but are experiencing the impact of aggressive litigation environment, which is impacting frequency of claims from prior years. We have updated the anticipated trends and have made the appropriate adjustments to our bulk reserves to reflect what we are seeing in the claims environment.In the Florida homeowners business, we recorded $4 million pre-tax of adverse prior year development. This was primarily due to higher than expected loss trends and weather related claims, primarily from hail and wind storm events in accident year 2018, including the adverse impacts of AOB activity, related to these pre-reform accident years.Additionally, we took the necessary steps to strengthen reserves in our Florida homeowners business for the first nine months of 2019, recording $5 million of additional loss reserves. This strengthening was related to elevated water claims and to a higher than expected influx of claims and related litigation costs that occurred prior to the enactment of AOB reform on July 1, 2019.As I mentioned at the top of the call, we continue to believe that AOB reform legislation will be a big win for Florida homeowners in the long-term by helping to limit premium increases for policyholders as a result of lower cost to insurers. While the volume of AOB's lawsuits has continued in the second half of 2019, it is important to clarify that substantially, all of the lawsuits pertain to dates of loss prior to July 1, 2019, the date of the full effectiveness of AOB reform.To put an even sharper point on it, from July 1 through last week, we have only had six AOB lawsuits on claims with post-reform dates of loss. This compares with the second half of 2018, when we had approximately 80 AOB lawsuits over the comparable time frame. This reduction of over 90% in the number of AOB claims going to suit will unquestionably have a favorable impact on overall AOB claim severity on a go-forward basis.With that said, our view in the short-term market opportunity in Florida has become more muted in the past few months. The powerful plaintiffs bar in Florida has many avenues through which it continues to bring litigation against insurers. Since 2007 -- I'm sorry 2017, the percentage of our Florida homeowner claims that have involved either a public adjuster or an attorney or a contractor has doubled. We feel that this is a strong indicator of the larger trend we are operating in our environment.As we stated, we are supportive of tort reform efforts that are being sponsored in the Florida legislator, which we believe can get to the root of this issue and help prevent abuses that lead to higher rates for all policyholders in Florida. But we are not hopeful that anything will be passed in the short term, so we are taking the right steps to mitigate this, proactively taking additional rate and remaining vigilant in our underwriting. As a result, we do not currently plan to grow our Florida book, though we will continue to reevaluate our appetite as the year unfolds.While the Florida market has become more challenging, FedNat is successfully implementing our strategy of expanding our presence in more profitable non-Florida markets, including the successful acquisition of Maison at the beginning of December. Following the Maison acquisition, the percentage of FedNat in-force homeowner policies outside of Florida increased from 25% to 36%. We expect that percentage to increase in 2020, as our Florida book stays flat to slightly down and we take advantage of opportunities to profitably grow in non-Florida markets.Additionally, we are pleased to have expanded into the state of Mississippi. We will be underwriting a homeowners' business in that state through our non-Florida third party managing general -- general aid underwriter which remains a valuable partner in our non-Florida markets. We are continuing to write non-Florida business through our MGU and also directly through Maison. Both channels are part of our growth plans to expand profitably in these markets.During 2019, Maison's attritional loss and combined ratios improved significantly as a result of rate increases, implemented throughout the year. As a result, during the period of our ownership which was basically the month of December, Maison made a positive contribution to our non-Florida profits and we continue to expect Maison to be accretive to earnings per share in 2020.Over the course of the next 12 months or so, we expect to harvest $3 million in ongoing operating synergies, largely by in-sourcing underwriting and customer service operations from Maison and have those functions handled by our FedNat staff. The integration process has been smooth since the closing of this transaction.Together with our legacy book of business, we enter 2020 with an excellent reputation in the market that continues to attract strong partner agents through the broader insurance network. FedNat also continues to benefit from $8 million in savings from our combined 2019-2020 reinsurance program which is in effect through the end of June. We are currently working on our 2020-2021 reinsurance program and we are pleased with the large number of re-insurers who are participating in our program, including those that are looking to increase their current participation level.In addition, we see encouraging signs in the alternative markets that afford additional options for our reinsurance needs. It is still too early to comment on what we expect the pricing to be on our upcoming reinsurance program, but we are confident that the approved and planned rate increases we detailed in our press release last week, which Ron will discuss later, will enable us to maintain the combined ratio targets that we are aiming for.Now, I'll turn the call over to Ron to go over fourth quarter numbers in more detail.

[Ron Jordan:]

Thanks Mike and good morning everyone. As Mike mentioned, we're facing challenges given the current claims environment in the Florida market but we are encouraged by the profitable growth and strong performance we're generating in our non-Florida book including the recently acquired Maison business.In the fourth quarter, we reported a loss of $0.51 per share compared to a loss of $0.73 per share in last year's fourth quarter which was impacted by Hurricane Michael. On an adjusted operating income basis, 4Q 2019 generated a loss of $7.9 million or $0.59 as compared to a loss of $4.9 million or $0.39 per diluted share in 4Q 2018.As Mike delineated, these results included catastrophe losses from severe weather events as well as the impact of adverse development in our core and non-core lines. I'll speak to several of these items as I offer comments on each of our lines of business.Our homeowners' business accounted for an adjusted operating loss of $2.3 million in the fourth quarter compared to an adjusted operating loss of $1 million in the prior year's fourth quarter.Quarter-over-quarter favorability from lower catastrophe losses this year was more than offset by higher reinsurance costs that took effect on July 1 and by the reserve strengthening related to both the first nine months of 2019 and prior accident years totaling $9 million.It is worth pointing now that within homeowners, all of the fourth quarter and full year adverse loss experience pertain to our Florida book of business, we experienced zero adverse loss development in our non-Florida book of business for the quarter or for the full year.That is reviewing data point that underscores just one element of the importance we have placed on our strategy for expansion in more profitable and stable non-Florida markets. Excluding the impact of weather and reserve strengthening, our underlying homeowners' gross loss ratio in the quarter was approximately 36.5%, which is generally in line with our near-term expectations.Gross written premiums in our homeowners' line grew 17.6% to $147 million in the fourth quarter. Our Florida premiums were basically flat reflecting our continued underwriting prudence, while our non-Florida premiums which included one month of Maison essentially doubled with growth of 92%. Even without the contribution from Maison, our non-Florida gross written premiums grew by 67%.We are continuing to capitalize on opportunities to write profitable business in these markets with Texas, South Carolina, Louisiana, and Alabama each growing by at least 15% led by Texas which grew by 151%.Note that we expect our SageSure non-Florida book to grow meaningfully again in 2020 somewhere in the vicinity of $40 million over and above 2019 in terms of gross written premium.Continuing on the topic of homeowners' premiums, as we announced in our press release last week, we are proactively taking rate in the Florida homeowners' market our new expedited reinsurance rate increase of 2.8% was approved and will be effective for renewal business beginning March 15.Additionally, we anticipate a 7.4% annual rate increase for our homeowners business in Florida to be effective beginning with June 15 renewals subject to regulatory approval. In parallel with taking rate in Florida, we've also taken increases in our non-Florida book.In Texas, we anticipate a 5% rate increase to go into effect in April or our legacy Texas book and are already in the process of earning out the benefit of a 31% Texas rate increase that went into effect in August of 2019 in the Maison operations.Mike already mentioned that these and other rate increases will generate over $25 million of incremental premium in 2020. Ultimately, when fully earned out in the third quarter of 2021, it is estimated that these increases will contribute over $50 million of incremental annual premium as compared to 2019.And note that if pricing on the upcoming renewal of our catastrophe reinsurance program changes, we will quickly avail ourselves of Florida Fast-track process to request additional rate as appropriate.Our non-core lines of business generated adjusted operating losses of $5.6 million this quarter as compared to $3.9 million in last year's quarter. This variance was largely driven by adverse reserve development of $8 million in 4Q 2019 as compared to roughly $6 million in 4Q 2018. We strengthened bulk reserves in both these lines of business during the fourth quarter and are in good shape heading into 2020.Before I conclude, I want to update you on our financial position, capital structure, and investment portfolio. Our balance sheet and capital position remains strong with ample capital and flexibility.Book value per share was $17.25 at the end of 2019, an increase of 240 basis points from $16.84 at the end of 2018. We had $133 million in cash on hand at the end of the fourth quarter and our HoldCo and non-regulated subsidiaries had liquidity of over $65 million or roughly half of the total, which will enable us to continue our commitment to returning value to shareholders through our dividend and share repurchase program.Regarding share repurchases, we resumed buybacks immediately following the closing of the Maison transaction. In the month of December, we repurchased 238000 shares at a total cost of $3.9 million. We have continued to be active in 2020.Through Tuesday of this week we have repurchased an additional 188,000 shares at a cost of approximately $3 million leaving roughly $7 million available on the $10 million repurchase authorization announced by the company back in December.Our Board will continue to make decisions on repurchases based on market conditions. But overall, we continue to view repurchases of our shares at a price below book value as an attractive use of our capital.Turning to our investments, we continue to manage the portfolio conservatively. Since September 30, we reduced our duration and further increased our credit quality. Our fixed income investments have an average duration of just under 3.5, and a high quality composite S&P rating of A minus, with a total carrying value of just over $530 million.Our re-insurance subsidiaries all finished the year in good shape with respect to capital, liquidity and RBC ratios and in December Demotech reaffirmed the A ratings it is assigned to each of our carriers.To close, the Florida homeowners market will present continued challenges in 2020, but we believe we have the right strategy in place to navigate these challenges while putting the company in a stronger position for the future both in terms of claims reserves and go forward rate filings. We are conservatively managing our presence in Florida and remaining focused on increasing the breadth and depth of our non-Florida book. As such we have entered the New Year with great confidence in the actions, we have taken to position ourselves for improved financial performance.And with that, I'll turn the call back over to Mike.

[Mike Braun:]

Thank you, Ron. With that we'll go ahead and open up the call. So operator, if you could go ahead and take the calls from the queue that'd be great.

[Operator:]

Thank you [Operator Instructions]. Our first question comes from the line of Doug Ruth with Lenox Financial Services. Your line is now open.

[Doug Ruth:]

Hi, good morning everybody. Should you be hiring some of these lawyers that are suing you to be defending you is that a strategy that would be worth pursuing?

[Mike Braun:]

Well, good morning, Doug. The legal environment in court is very difficult and actually the reality is that many attorneys on the defense side go to the plaintiff's side because they make such a good living it's a real challenge. Over the last three years, we've implemented our own in-house legal team and it's at approximately 10 people so it went from zero to 10 over the last three years, so we're comfortable with our strategy and how we're dealing with the litigious environment that we're operating in both with our in-house legal resources, the legal resources that we use outside the company. But lawsuits in Florida it's a real challenge it really is.AOB reform was a great first step, but more steps are needed. There is lots of information out there about the challenges and fee multipliers and there is some good ideas being passed around in Tallahassee, which is in session as we speak. It'd be great to see some of those items implemented, but I just don't see it unfortunately at this point Doug, I think it's going to be a continued challenge and the policyholders lose – the policyholders lose We have capital. We have competitive rates and we cannot write the amount of business that we would like to write until our premiums catch up with our costs so it's really unfortunate but that's the reality of the situation.

[Doug Ruth:]

I understand. When you look at the other industry participants is there anybody that you think is doing better than you are as far as handling these claims.

[Mike Braun:]

Well, the entire market the Florida homeowners market is really being challenged so certain people can have better short term scenarios at different times and we're all about learning from others in the marketplace both from our vendors and if we see our competitors do things, but I do believe we're handling the situation appropriately. I believe we have the appropriate resources and the appropriate folks both inside this building as well as the vendors that we utilize both from a legal perspective, as well as other resources. It's a challenge, Doug it is not unique to FedNat it's a challenge to the entire Florida homeowners market and it's getting – unfortunately the frequency and severity of it is ongoing – it's ongoing and next time you're in Florida and you look at the Billboard, you look at the TV spots, there is no shortage of it. So we have to adjust our pricing for these inflated costs and we will increase our appetite to write more business as our premiums catch up to those costs.

[Doug Ruth:]

Okay. Maybe we could talk about two positive things could you tell us what's happening with SageSure and you seem very optimistic about 2020 with the relationship there?

[Mike Braun:]

Well, SageSure is a fantastic partner they're quite an organization that is very successful they write our Florida –I'm sorry our non-Florida business for our insurance company FedNat Insurance Company, and they're doing a fantastic job. They are writing Texas and growing significantly there Louisiana Alabama, South Carolina and as well as now Mississippi, so we really appreciate that partnership they do a great job and we have continued expectations of growth. But more importantly profitable growth with that with that partner for 2020 and beyond, we're very excited and encouraged with what we have in that partner.

[Doug Ruth:]

Okay and my final question is the Maison agent have – have you seen some expansion by them of your products that was one of the synergies we had talked about are these -- how is that going so far.

[Mike Braun:]

So we're really pleased with the folks at Maison it's a small group of folks it's about 30 staff that we have integrated well. In terms of the operations, they'll be switching over to our computer system gradually upon renewal and that takes an extended period of time. In terms of the agents, there's two different ways to look at it. Within the state of Florida we anticipate putting Maison's product through our distribution. We're excited about that, but we're cautious about that for the exact same reason because of the litigious environment. So we're -- it's a go slow approach within Florida. Outside of Florida I think the folks there Doug and his team are doing a very good job with Maison. They're continuing to remain focused primarily on their two big states, which is Louisiana and Texas and we're pleased with that.

[Doug Ruth:]

Okay. I think you're doing the best that you can under the circumstances and I'm grateful for what you folks are trying to do for the shareholders so thank you for answering my questions.

[Mike Braun:]

Thank you, Doug. Have a good day.

[Operator:]

Thank you. Our next question comes from the line of Greg Peters with Raymond James. Your line is now open.

[Greg Peters:]

Good morning. I was listening to your comments about claim inventory. I think you said the number of claims with attorney involvement has doubled from 2017 to today. Can you give us an idea of what the claim inventory looks like at this point and how that might compare with where it was at this point last year. I guess, you're considering that AOB has been the reform has been implemented it still seems like your the pipeline of claim activity with legal representation continues to be robust and so just wondering on a macro basis if there is any improvement at all or if it's still relatively high?

[Mike Braun:]

Yeah, very good question, Greg and basically our represented claims has doubled from approximately 9% to 18% in the last few years so nearly 20% of those claims and those folks will tout call us before you call the insurance company. These commercials run endlessly on the television, radio elsewhere and they are inferring a substantial payout and there is a term in Florida called the lawsuit lottery, but really the lawsuit lottery I would say is disproportionately benefiting the firms that are representing the claimants.So we've always treated our claimants fair. We've always communicated with them. We've always had intentions of working with them and resolving their unfortunate situation no one likes when a claim happens. We've always done that working with them in their unusual situation trying to get them back to where they were before the claim, but these ads -- and think of the money the industry is spending on these billboards and these commercials and there was a firm that was getting the naming rights to two colleges their football stadiums. The numbers are staggering, absolutely staggering.The policyholders of Florida are paying all of it and it's unfortunate so Greg, the trends are not improving as we anticipated. To clarify, AOB reform has reduced our third-party suits; however, first-party suits have ticked up because of the changing environment and once again, it's unfortunate our costs have increased, we're taking rate, the policyholders have to pay it and when we have rate that reflects our costs we will increase our appetite within the State of Florida.Until then, we'll be prudent in what we write in Florida. We don't see these challenges and headwinds in our non-Florida States and you see that we've grown rapidly non-Florida over the last four years. We've shut nearly 50,000 policies in Florida it's really sad and we've ramped up non-Florida by the same amount of business actually even more with the acquisition so we're responding to the situation as we see appropriate.

[Greg Peters:]

So if I look at your homeowners business and the loss ratio and I take out the prior year reserve development and take out cat losses to try and get to sort of what the underlying loss ratio for homeowners business looks like. Can you give us some perspective on what is that number because there's a lot of moving parts, obviously from the development et cetera. Can you give us an aside deal what that number looked like for 2019 and then is it your expectation that that number again ex-cats ex-prior year development is going to improve in 2020 or deteriorate?

[Mike Braun:]

Sure, Greg. Just using the fourth quarter as a basis to talk from that underlying was right around 36.5 and that is I think a reasonable expectation from our perspective as we head forward into 2020. We're obviously hopeful that all of the rate increase actions that we've talked about should help lower that to at least some degree.Of course, our recent experience has been that we are we're kind of on a down escalator in terms of emerging loss trends and so rate increases are -- recently have done -- have been more about keeping pace with loss trends as opposed to lowering our loss ratios so we're hopeful though that with AOB reform and this round of rate increases that's coming in 2020 we will see that tick down over time that 36.5 that I mentioned of course that's overall homeowners so it's higher in Florida it's lower in non-Florida. Also of course the blend between Florida and non-Florida is continuing to shift towards non-Florida. With Maison we'll have 12 months of Maison in 2020 as opposed to just one month in 2019.

[Greg Peters:]

Okay, and I know you said on the head comments about reinsurance costs and you said, it's too early to comment. But it feels like there is rhetoric in the marketplace so very robust pricing environment from a reinsurance perspective and that might suggest the casual observer that there is going to be some headwinds in terms of margins from reinsurance and I was wondering if you could just comment on that and that's my last question.

[Mike Braun:]

Yeah, Greg. The reinsurers have really stepped up for us with these storms primarily Irma and Michael and they paid a lot of losses. I do believe they got a substantial rate increase in the market both from us and from others in 2019. We're currently working through an $8 million per quarter increase in our reinsurance spend, so I believe pricing to be more reasonable in the reinsurance space.I understand the rhetoric. I understand the comments in the environment for reinsurance pricing, but yeah I don't know where the pricing is going to go. But I think we're well equipped regardless and I think the majority of that pain is -- we've already taken it with the last renewal where pricing was up approximately 20%.

[Greg Peters:]

Okay, great. Thanks for your answers.

[Mike Braun:]

Thanks Greg.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Matt Carletti with JMP. Your line is now open.

[Matt Carletti:]

All right, thanks. Good morning.

[Mike Braun:]

Good morning Matt.

[Matt Carletti:]

First one is a quick one, just -- was there any change in Q4 to your gross Irma or Michael loss estimates?

[Mike Braun:]

Yeah, so for Irma, FNIC we moved it up to $820 million, for MNIC it's now at $47.5 million, and then Michael went up $25 million to $475 million.

[Matt Carletti:]

Okay, great. And then the other question I had just relates to the prior period development. I know you gave some color, I was just hoping you could maybe dive a little deeper in that, you guys took a pretty big swing at things here in Q4, but we've had other swings at things over the past couple of years that have been very hopeful that it takes care of the issue -- both I'd say for Florida homeowners as well as some of the runoff lines.Can you -- what confidence can you give the investing public that this was a bigger swing or this was more conservative, I don't know if that's some perspective you can give on what was case versus IBNR or where you are versus maybe your external actuarial range, but anything you can discuss to help give more perspective on that I think would be helpful? Thank you.

[Mike Braun:]

Yeah, Matt. That's a great question and we have taken development unfortunately multiple times and I don't think that's anything unique just to FedNat and you asked about the numbers on Irma and Michael and the whole industry has taken development on those as well.So let me break that up, so there is three separate lines of business. The first being homeowners and what we're seeing is the litigation of pre -- let me clarify Florida homeowners, pre-AOB reform and the folks are tenacious with what they're doing on those claims, the way they're coming in and with the way they representative and the activity that's occurring.Therefore, pre-AOB reform, we absolutely had to go ahead and up the reserves on those instances. Post-AOB reform as we spoke about, AOB reform has been very successful in part. AOB contracts are down massively, I believe it to be 90% -- 90% plus in that range. AOB suits down 90% plus in that range, but first party suits that's what remains a challenge.So we're increasing our reserves pre-AOB reform, post-AOB reform we are keeping our expectations or I should say our attritional loss ratio high where we were hoping for some goodness, some diminishing pressure on those ratios and these attorneys that are pursuing these instances are agnostic to the line of business, so we're seeing some of the same trends in our CGL business as well, and when you go ahead and you get a claim on a policy from multiple years back that impacts you not only from a case perspective, but you also have to make the corresponding bulk for further anticipation, so -- and then the last item is auto.Auto as you know is a fairly short tail product, we're at three years so to clarify in summary and on all three of those CGL, we took a really big increase on bulk reserves, we think it's appropriate, we're comfortable with our position. Auto, once again we've had some development, it's a short tail we're right at statistically the end of that tail we are there. So we feel good on that as well, and AOB reform pre-AOB, once again we've taken a big, big increase in those reserves, post-AOB we're taking it there as well.So unfortunately multiple areas in Q4, we feel it appropriate, we're comfortable with the reserves that we have, with all best available information, and we continue to monitor trends. And therefore, that's why, it's decreasing our appetite to write new business. So hopefully I'm answering your question there.

[Matt Carletti:]

Yeah. No, that's very helpful. And I have just one to follow-up specific to the Florida homeowners' book, the pre-reform claims. What -- in your book of business, what do you generally view as kind of a tail there or ask another way what kind of age of -- we go back to the July implementation and what's before that, how much time you really need to see kind of how that sorts out from an attorney involvement perspective and so forth.

[Mike Braun:]

Yeah. The challenge is the homeowners' tends to be short tail like auto, so let's call it approximately three years. You've asked once again about Michael and Irma. Irma FNOL, you have to report it within three years. So we're at approximately 2.5 years on that. Yeah, we continue to get 40 to 50 first notices of loss per week. So those are short tail products. And I think in terms of the pre-AOB, we took a sizable increase on reserves Matt, I think we did what was appropriate.

[Matt Carletti:]

Okay. Thank you for the color, and best of luck going forward. Thank you.

[Mike Braun:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Bill Broomall with Dowling and Partners. Your line is now open.

[Bill Broomall:]

Great, thank you.

[Mike Braun:]

Good morning. Bill, are you there?

[Bill Broomall:]

Hey. Yeah. I am here. Can you hear me?

[Mike Braun:]

Yeah. We can hear you.

[Bill Broomall:]

Sorry. I’m not used to be on calls, so I was on mute. Just following up on your last statement about the 40 to 50 FNOLs per week. As we head into this year where Irma will be that 3-year anniversary of the event, do you -- what kind of expectations do you have leading up to that kind of anniversary date for claims for Irma.

[Mike Braun:]

Yeah, Bill. I anticipate a spike. Going back to Wilma in 2005, the last 90 days and that was a five-year statute back then. We saw a spike, and I can tell you the marketing efforts that we see out there from the vendors, and so on. They are ongoing. So I think as people see that three-year statute coming on the horizon. I anticipate their marketing efforts to maintain if not increase.

[Bill Broomall:]

Perfect. Thank you. And then following up on your comments about legislative fix, I know there is a couple bills that are current out there, whether it's a contingency fee multiplier bill, the Omnibus bill. There is a bad faith bill, I think all from Senator Brandes. From your perspective, is there one bill versus another that might have a bigger impact on helping control some of the costs that you've talked about?

[Mike Braun:]

There is multiple pieces to it Bill. Obviously, the contingency multiplier is big and that gives massive leverage and massive reward to the plaintiff's side that can distort behavior in the marketplace. So there is a -- there is a lot of good things Bill that are being proposed. And I hope we can see some of that implemented. But honestly, we're not operating the business under that premise. But we're going to be prudent, so we see new trends. And that goes back to our capital position. As Ron said in his opening comments, here we are continuing to buy back our stock.It's unfortunate our shares are so depressed, but at below book, it's kind of an easy analysis for us to do. We don't have shareholder capital for that intent of doing a buyback, but for the inability for us to want to go within Florida, we think that's most appropriate use of company proceeds and that's what we're going to continue doing. So there's multiple statements in the market there that could occur in Tallahassee in terms of these bills, but until something is passed we are just going to operate with the facts that we do have.

[Bill Broomall:]

Perfect, thank you for that answer. And then, on your comments about rate, about the statewide 7.4% increase, but for other peers, in Florida, in their recent rate filings, we've also seen companies talk about, non-renewing policies or non-renewing agencies, as a way, in certain degree access kind of rate, where you're cutting out some of them maybe they're under performing books.I know you commented a few minutes ago about, 50,000 policies that you cut-out, but when you think about rate going forward, but also other actions that you can take beyond rate, whether that's again further culling some agencies or policies.Can you just talk about, how you see that playing out for your book specifically, cleanup or it take some action?

[Mike Braun:]

Yeah. There are a couple of things there. So, we're filing for our rate indication. And Bill, you're dialled into Florida. And there's a lot of public information, there is carriers with indications of 20, 30, 40, 50 points. And there is carriers asking for, a good portion of that.So, we did ask for 100% of our indication. And 74 is a much more manageable number than 20% or 30%. In terms of where, we're seeing challenges, it's water -- it's water-related claims which is the highest frequency. And those are the most expensive claims.So you try to underwrite around that as best you can. And charge the appropriate rate as best as you can. And in terms of geographic, everyone's well aware that South Florida has been a challenge for many decades. And unfortunately in the last few years -- in the last 3-4 years, we've seen a material change in how claims are occurring within Orlando.And those prices -- based on those trends, we see pricing needs to increase by upwards of 50%, in some of those cases, in Orlando. So you just pull back. You pull back, if you can't get the rate for your costs. And that's what we're doing.So, we're taking rate. We are restricting new business. We're non-renewing policies, as appropriate until the costs are better -- are better reflected in our premiums.

[Bill Broomall:]

Perfect. Thank you for that. And last one from me is, we saw a -- now that you're growing a little, outside of Florida. We did see a storm in early January that, kind of passed through the Southeast.And I was wondering if you've seen any pickup in claims, related to those early January, events. That's it from me. Thank you.

[Mike Braun:]

Yeah. Bill, we definitely have some claims, in January, in those states, up along Louisiana, Texas, et cetera. I would say it's modest at this point. And nothing outside of what we would consider normal expectations.

[Bill Broomall:]

Great, thank you.

[Mike Braun:]

Thanks, Bill.

[Operator:]

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to, Mike Braun for closing remarks.

[Mike Braun:]

Thank you, all for your interest in FedNat. We remain committed to building value to our shareholders, through improved financial performance. And through our capital management, which includes a healthy dividend and a share reach purchase program, which are supported by both our strong balance sheet and cash position.While the Florida homeowners market remains challenging. We are prudent with our underwriting. And therefore limiting new business until additional rate has been approved and improves our economics within Florida.We also remain committed to expanding our existing homeowners business, in more profitable homeowners markets, outside of Florida. And I'm pleased both with the performance of our long-term partnership with SageSure and our recent acquisition of Maison, which is helping to accelerate our profitable non-Florida growth.We thank you all once again for your interest. And encourage investors to reach out to either me or Ron, with any additional comments or questions Thank you all. And have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.