FedNat Holding Company
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day ladies and gentlemen. Statements in this conference call that are not historical facts are forward-looking statements. Without limiting the generality of the foregoing, words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, protect, expect, guidance, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target or will or the negatives thereof or other variations thereon and similar words or phrases, in comparable terminology, 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-going 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 the date on which they are made and Federated National Holding Company specifically claims any obligation to update or revise any forward-looking statement to reflect new information, future events or circumstances or otherwise. 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 may be recorded. I would now like to turn the conference over to our host of today's call, Mr. Michael Braun, CEO and President, you may begin.

[Michael Braun:]

Good morning, and thank you for joining us today to discuss Federated National Holding Company's third quarter 2016 financial results. I'm joined on the call by Erick Fernandez our Interim Chief Financial Officer. Our financial results can be found in our earnings press release. I will go over some brief highlights and then we will open up the line for questions. Q3 2016 highlights as measured against the same three month period last year except where noted, 24.1% increase in gross written premiums to $161.1 million, 17.1% increase in Florida homeowners policies to approximately $271,000. 15.4% increase in total revenue to $83.8 million. 5.2% increase in book value per share excluding non-controlling interest to 17.72% as compared with 16.85% at December 31, 2015, net income of approximately $1.4 million. Four million of claims net of our quota share reinsurance from the impact of Hurricane Hermine which impacted the state of Florida. $6.8 million increase in our total loss reserves during the quarter which increases our total loss reserves at September 30, 2016 to $127.5 million. Our third quarter results continue to demonstrate solid organic growth in both written premiums and policy account which included the 5.6% Federated National Insurance Company Florida homeowners rate increase effective August 1. Third quarter losses included $4 million in claims net of our quota share re-insurance as a result of the impact from Hurricane Hermine and also from the continued assignment of benefits which is inflating the cost associated with our everyday claims on our homeowners book of business in the state. Our continued organic growth and high retention rate, our testament to the trust that our partner agents have in our company in a competitive Florida property insurance market. Our partner agency placed $38.3 million in new Florida homeowners’ premium, $4.7 million in new non-Florida homeowners’ premium and $24.6 million in premium in other lines of business, which with our renewed business during the quarter totaled $161.1 million in total gross written premiums. We continue to focus on delivering the best possible customer service experience to our policyholders, many of which have been impacted by Hurricane Hermine and Hurricane Matthew in the State of Florida and in the State of South Carolina. With that we are glad to open up the call to your questions.

[Operator:]

[Operator instructions] And our first question comes from Arash Soleimani of KBW. Your line is open.

[Arash Soleimani:]

Hi, good morning.

[Michael Braun:]

Good morning Arash.

[Arash Soleimani:]

I guess just to start, so the expense ratio was much, much higher than what I was looking for. Can you maybe just dig into what's driving that?

[Michael Braun:]

Sure, you know, I'll start with the overview that Erick made, dive deeper, but really when you look at the company as a whole, what's the primary business that we write as Florida homeowners and Florida homeowners if you look at that in 2016, you have two big issues; one is the reserves which we've upped from the year-end by $30 million as well as storms which include Matthew in Q4 is going to be about $30 million. So those are two huge numbers. To your question on auto, we absolutely do write auto. We've maintained the statement that as we build out that program in 2016 not to anticipate to see much profit on that program because we have to build out the infrastructure. With that we have a team of 35 people now and we'll probably write between 50 and 60 million this year. However, it's a high seeded program of approximately 85%. Those expenses that come in through the income statement and go out through the income statement are impacted by that quota share and the expense ratio which this auto business runs at a higher expense ratio. So once again, Erick can go deeper on that. The auto program really is going to contribute in a positive way or a negative way to our earnings in 2016 though we anticipate it will in a favorable way in 2017 and beyond, but it's causing definitely some changes on the income statement primarily as it results to expenses.

[Erick Fernandez:]

Yeah, hey Arash, this is Erick. Yeah, just to add to what Mike said, you know, in terms of the percentage and why it's so high, right? So there's a couple of things that are factored in here. One is the fact that the reinsurance contract added $10 million of seeded premiums in the quarter. Again, that would impact the ratio. The second part of this, and we’ve talked about this before and to Mike's point about auto, when you look at the expense ratio you've got to add in the other income which a lot of that growth that you're seeing from a year ago is offsetting some of that commission expense cost that you're seeing in the expense ratio. And then the last thing, and I don't want to go into kind of the inner workings of the quota share accounting, right, but we did have an additional $9 million of seeded premiums in the quarter related to the change in the experience account in the 30% quota share, which, again, $9 million kind of add all of those things together you get back to an expense ratio kind of sort of in line with historical quarters.

[Arash Soleimani:]

So I mean how - on the 30% program, is that part of what you were mentioning before with the change in the experience account?

[Erick Fernandez:]

Yeah, let me add to that right. So, what you're seeing if you just look at Q3 2016 and specifically the 30% quota share, there's two things that impacted the results; both are washes, but I want to illustrate it because it does impact the ratio and it does impact the absolute dollars, right? So as I mentioned there's $9 million increase to seeded premiums related to the change in the experience account and then the offset to that is sitting in losses in LAE and gets kind of lost with all of the noise in the cash, et cetera, right? But there's a benefit there of $9 million related to the seeded losses on the claims paid, okay, because back to the 8-K and what we're doing when we're going around the 30% quota share, we continue to see those losses. So that's kind of how it's flowing through our P&L. Again, the net impact of that is a loss at 0 but it does impact some of these ratios that you're referring to.

[Arash Soleimani:]

So I guess to ask maybe a bit differently, is the - the expense ratio, is it, I guess, artificially inflated this quarter? So, I guess like looking at 4Q 2016 or 1Q 2017, looking forward the next couple of quarters, would it get back to kind of the, you know, mid-30% to 40% range or, you know what I mean? Is this kind of just an unusual one time…

[Erick Fernandez:]

I mean, to your point yes, it's going to decline over time; one as the owners premiums increase, right, and then as we seed less losses related to the 30% quota share, overtime that will continue to go down. In terms of absolute dollar, right, kind of putting aside the actual ratio, if you look at absolute dollar that is a good run rate and, again, obviously as we grow premiums the expense will continue to grow, again, from an absolute dollar perspective.

[Michael Braun:]

And Arash, just for me to add in, our business remains the same in the sense of maintaining expense control. That's paramount to what we do, that doesn't change. But once again, unfortunately the ratios and the income statement is really kind of - there's so much noise as Erick is saying, because a lot of moving pieces to it. But, we haven't lost the discipline of our expense control by any stretch of the matter. It's - so there's no change in our infrastructure other than the balance of really the business that we're writing the auto primarily.

[Arash Soleimani:]

So when you say the dollar amount stays the same, are you referring to the $34.5 million in commission and other underwriting expense?

[Michael Braun:]

Yes, correct.

[Arash Soleimani:]

Okay.

[Erick Fernandez:]

Correct, and let me just add to that, right? So, if you look at a year ago, if you look at commissions and other underwriting it's $21 million, this quarter is $34 million, right? That's a pretty sizable chunk. Kind of to add to what I said earlier, a lot of that is premium growth both for homeowners and auto but in addition to that is the fact that we're no longer getting commission credit on the 30% senior premiums, right? So, that makes up most of that.

[Michael Braun:]

Arash, with that, we always appreciate all of your questions. We've got a bit of a queue here, please let's circle back to you if we could for some more of your questions if you have some more.

[Arash Soleimani:]

Sure.

[Michael Braun:]

Thank you.

[Operator:]

And our next question comes from Samir Khare of Capital Returns. Your line is open.

[Samir Khare:]

Good morning.

[Michael Braun:]

Good morning, Samir.

[Samir Khare:]

Good morning. I had sent some questions on your excess capital position, how much excess capital do you guys feel you have at this point? And then how soon after the quarter can you start buying back shares?

[Michael Braun:]

Well, define excess capital? The board evaluates where we're at on a regular basis. We have a committee that determines what we're going to be doing in terms of the buyback. Generally speaking we are not in the market, you know, two weeks before the end of the quarter and until after we report. So, in terms of capital in the holding company, I don't know if we've got a number on that Erick. I believe it to be around $65 million. There's plenty of capital there so, you know, the definition of excessive capital, we'll evaluate at the board level.

[Samir Khare:]

Okay, and then just kind of stepping back, looking at the business model, can you just help me understand on a gross and net basis, what do you expect the loss ratio and the expense ratio to be for homeowners and auto, when you know, absent cash, absent some funny accounting with quota shares and everything. What are the expectations for loss ratio and expense ratio?

[Michael Braun:]

Well, let me start with that before Erick can dig deeper into that. We've typically had homeowners at about 29.5 and now it's 36 and change. That's a big movement, that's primarily the result of assignment of benefits. And then on top of that we had a lot of weather. There's no reason to believe that we can't get that back down to that historical level and unfortunately the policy holders are going to have to bear some of that, if not most of it because of additional rate. So we do have new rate that came into the program in August which is, has, a very minimal benefit in Q3, it will have a continued benefit in Q4. Obviously one and two much better but next year at Q3, it will be fully earned in. So I think from a homeowners perspective we should go back to historical terms, certainly in terms of auto you're looking at mid to lower 60's but obviously we're writing that through independent agents as well as with general agents so there is some high commission expense associated with that.

[Erick Fernandez:]

Yeah, the only thing I'll add, right, so from a net loss ratio it's obviously spiked the last couple of quarters related to cash and some of it is elements. When we back those out, we kind of get to a, I'll call it 55%, 56% which is not where we want to be but given the AOB environment, that's where we are at the moment and obviously as we had the 5.6% rate increase that went in August 1, that will come down some.

[Michael Braun:]

And to reiterate Samir, the two items, including Matthew in Q4 you're talking about $30 million of weather and if you look at our balance sheet through Q3, we've got an extra $30 million of reserves.

[Samir Khare:]

Okay, and just on that actually, will Matthew prompt a capital contribution to the insurance sub in the [indiscernible]?

[Erick Fernandez:]

Currently we believe we'll be down-streaming some capital into the insurance company. We have not made a final decision how much it would be. That's driven by RBC among other factors. We made downstream maybe $10 million at year-end; it could be more, it could be less but we'll determine that at year-end. So, obviously the earnings within the holding company, or I should say the MGA, the company's MGA is definitely more positive these days than the underwriting profit but there's more capital, obviously, the non-statutory entities than the statutory.

[Samir Khare:]

All right, thanks I'll re-queue, thanks.

[Michael Braun:]

Thank you, Samir.

[Operator:]

And our next question comes from Ryan Byrnes of Janney. Your line is open.

[Ryan Byrnes:]

Hi, good morning everybody.

[Michael Braun:]

Good morning, Ryan.

[Ryan Byrnes:]

Hi, thanks guys. So, if I kind of back out reserve releases and catastrophes for the year, I have, on an underwriting basis, you guys, you know, modestly losing money. So my question is, is the strategy to continue to grow here if you're losing money on an underlying basis, on underwriting right now, or should we push rate in order to get some improved metrics here? I'm just trying to figure out with the -

[Michael Braun:]

You know, it's a trick question. You say, do we want to continue to grow if we're losing money? So there's two pieces to that. I believe our business model is sustainable, it's providing exceptional service to our policyholders. Once again, the two things that have impacted those $30 million in weather this year, I think it's pretty unusual. We haven't had those type of weather losses in a decade. In terms of AOB, it's going to get priced in the policy so when you had a movement of attritional losses you have to experience them before you can get them in rate. So, unfortunately, it's a significant movement in a short amount of time. I wouldn't say it's a massive amount of movement in this short amount of time so therefore unfortunately we are incurring that expense. We are - most of these reserves are going to bulk reserves and future claims based on a spike that we saw in 2015. So I think we're being very prudent in what we're doing. We're reevaluating our reserves on a quarterly basis. I believe we are still competitive in the marketplace and with our rate increase most of this underwriting profit should be resolved. So, hopefully that answers your question?

[Ryan Byrnes:]

The 5.6% rate increase, we - you're not looking for any more than that at this time, you're not going to try to push that further, that's going to be what we're going with?

[Michael Braun:]

Well right now the 5.6% is coming, rolling in, since August 1. I believe rates will go up in 2017, I do. I can't tell you how much but I do not anticipate the assignment of benefits being fixed at the legislative level. We're seeing assignment of benefits in the entire State of Florida. We're seeing it on high-end homes, we're seeing it on low-end homes, we're seeing it everywhere. So I think we're being very proactive by bumping our reserves, bumping our anticipated loss ratio and writing business that we believe - this is to be sustainable and taking the corrective action. It's just 2016 is a disappointing year so far obviously for two reasons; the storms and as we're bumping these reserves that does result in low rate but it clearly goes through the income statement and it's causing - it's an unimpressive quarter.

[Ryan Byrnes:]

Okay, great. And then my last one and I'll move to the back of the queue. It's more of a statement than anything else, but it would be easier for us to kind of analyze the homeowners versus the auto if they were in two separate segments. I think it's kind of throwing off some of the ratios between the businesses by having some of the auto business running through the other income line; that's just more of I guess a statement than a question but I guess it would make it easier on, I think, everyone if you were able to kind of segment those two separately.

[Michael Braun:]

You know Ryan, we need to step that up. We need to have more. I believe Erick is going to have more in the Q than what you see in the press release. I know it's creating a problem for people with auto losses, I understand that. So, we will improve the process.

[Ryan Byrnes:]

Okay, thanks guys.

[Michael Braun:]

Thank you.

[Operator:]

Okay and our next question comes from Doug Ruth of Lenox Financial Services. Your line is open.

[Doug Ruth:]

Okay, good morning everybody.

[Michael Braun:]

Good morning, Doug.

[Doug Ruth:]

Could you tell me what the market share is now?

[Michael Braun:]

You know, I don't have a specific number for your Doug, but generally we said it's about $10 billion industry. So, Florida we're still at about 5%, we're still seeing some growth in the market but I can tell you, the growth is there, it's steady but it's slightly less than the growth that we had a year or two ago just because it's being soft. So, I would say we're still at about approximately 5%.

[Doug Ruth:]

Okay, and how much insurance was sold by Monarch and how much insurance was sold by GEICO in the quarter and if there's any commentary to go along with that, that would be helpful.

[Michael Braun:]

Well, so GEICO is within Federated National and we're still averaging approximately $200.00 a week, $200,000 a week, that really hasn't moved and Monarch is about $400,000 a week that really hasn't moved. It's actually picking up a bit, you know, some weeks we're selling over $500,000 but, once again, the market is fairly soft I don’t know just made softer either one of those in a significant way, but they're fairly steady and Federated National is about $2 million a week.

[Doug Ruth:]

And is there any commentary from GEICO or anything, any new developments with Monarch?

[Michael Braun:]

Sure, no, nothing new to report so I think that our independent agents are a great partnership. Our - Allstate is our biggest partner by far. GEICO is a fantastic partner, they've been new with us for less than a year and Monarch - I'll tell you, the rates are a little high and we're not moving them. So I believe the market will come to us on Monarch. As we get more information we may modify that statement, but our intention is to be disciplined with what we're writing. It's a challenging market because the expenses have gone up, meaning the attritional loss ratio as well as it's a soft market where there's a lot of motivated people to write business.

[Doug Ruth:]

Okay, and generally the relationship with Allstate continues to be positive?

[Michael Braun:]

They're fantastic, absolutely. I think they're a great partner, we appreciate the corporate structure that they have, the MGA that they have and I think they're independent - I'm sorry, they're agents, they're captive agents are high quality agents just like our independent agents, we're very happy.

[Doug Ruth:]

Okay, and then with the Citizens, they made the statement about how they were going to try to change AOB with some of their contract language. Is there any indications that that's working at all?

[Michael Braun:]

Well, we have similar language on that, you know, Doug, so that went into effect in Q3 in September. I think that will help, but it's not the cure all; assignment of benefits is everywhere. You know, now you're hearing some of the horror stories where people are signing these contracts. A gentleman was just arrested who got over close to a million dollars and didn't make any of the repairs. So, hopefully the homeowners are becoming more informed. We're doing our best to inform them, Citizens is, I know the agents are. I know our competitors are to say, you know, why would you assign, why would you give away your contract? Why would you give away your coverage, your relationship with your carrier? So, I think that the growth of AOB that we saw in the latter half of 2015 that we're reserving for in 2016. I don't know that it's growing necessarily at the clip that it was, I think the growth is less significant. But it's evolved, I'll put it that way, and I think we're managing it well but we're here for our policyholders and we believe our service is second to none and that's what will be our long-term success.

[Doug Ruth:]

Okay, are you continuing to add additional employees?

[Michael Braun:]

Yeah, the last number I have is we're at about 365, the primary growth that we have is claims related, obviously, just because you get less economies of scale, obviously underwriting and the other HR, IT, accounting, finance, exec, those things all are current economies of scale with growth, but we really want to differentiate ourselves in the market by making sure that we're maintaining quality claims staff, you know, so that's where we're seeing the growth.

[Doug Ruth:]

Okay, and do you have any indication? You thought that the rates might go higher in 2017, is there - can you give us a little bit more as far as what percent you think they might have to change?

[Michael Braun:]

You know I don't have a number for you, we're conducting that review. We have an internal actuary, we utilize, use, the resources of an outside actuary. Currently the math obviously supports a rate increase. It's our intention to file that sometime, you know, in Q1 and have that hopefully approved at that time. But it would become effective most likely is our intention is August 1 as the other one is expiring. So we don't want to be too disruptive with our book of business, you know, and force business away. I would assume ultimately, I don't know what's going to get approved, but I would anticipate that it could be mid to high single digits that would ultimately get approved by the department, but I absolutely can't speak on their behalf and there's a lot of work to be done, you know, before we get there, but that's - the indication may be higher than that, but there's a variety of things that we consider when we want to go to market with new rates.

[Doug Ruth:]

Okay, and then my final question is now the stock is trading at a discount to the book value, is there any kind of commentary about increasing the stock buyback?

[Michael Braun:]

You know, that's a great question and as you know Doug, we've got three members of the board that are on that buyback committee and that's topic Number 1. So, we're reevaluating that and there's still dry powder on the current one, I believe it's close to $5 million so we're reevaluating that and as needed we can increase that as quick as we need to if we exhaust the current $5 million.

[Doug Ruth:]

Okay, I just want to make a final comment. I think you folks have done a very good job under very difficult circumstances. None of us really expected $30 million worth of weather or $30 million worth of AOB claims and I'm grateful for the effort of the people at Federated and what you're trying to do for us.

[Michael Braun:]

Well, appreciate it Doug.

[Doug Ruth:]

Thank you for answering my questions.

[Michael Braun:]

Thank you, you have a great day.

[Operator:]

And our next question comes from David Spear [ph] of Netor. Your line is open.

[Unidentified Analyst:]

Hey guys, good morning.

[Michael Braun:]

Good morning, David.

[Unidentified Analyst:]

So you mentioned that you're expecting auto to be a contributor in 2017. I'm just curious in terms of - you guys look at a hurdle rate in terms of policy count, you know, premium written there, you know, as to when you start to - when that business starts to contribute to the bottom line?

[Michael Braun:]

Well just to refresh, so it's primarily written through what's called general agents so they've got the overhead of the distribution and they go ahead and they work through independent agents. So there's a lot of expense on that side and unfortunately it's well documented, yet again, in this quarter that does flow through the income statement. Primarily the team that we built, that was claims related. I believe we've got the team it's just a matter of garnering the systems and, you know, better and making sure we can do so in a more profitable manner. So, I've indicated, you know, let's assume in 2016 the program runs at a hundred combined, that's not our goal, but let's just make that assumption; most of its seeded so there's not going to really be a big underwriting game, but I think the opportunity includes the fee income side so we get ten points for providing the paper as well as for handling the claims and I think we can do that for less than ten points. Unfortunately not in 2016, but 2017 absolutely we think we can on a go-forward basis as well. So we think we have the machine build so on the ten points perhaps in 2017, maybe there's a point or two that we can make a profit in 2018 and so it should improve from there and so on especially if the book continues to grow.

[Unidentified Analyst:]

But - and the difference in 2017 versus 2016 if you're writing close to $50 million in 2016? You know, what is - I'm just trying to understand what the differentiator in 2017 would be, what is needed to get to $70 million, I'm just trying to understand what -

[Michael Braun:]

No, I think we have the scale. I think we have the scale so we've got the business, we've grown back some of our general agent partners so our intention is to do better than a hundred combined. So I'm just making that generic statement. Our intention is to, you know, if we could get a total expense, a total everything of 90, low 90's, high 80's, that's the goal. If we can make sure that our expense ratio against the ten points, we could get it down and have two, three, four, five of those points being a profit that would be fantastic. That's going to take some time, it's not happening in 2016. I think we're going to make some good progress on that in 2017 and by 2018 I think it's going to be - I think it's going to contribute to the income statement in a meaningful way.

[Unidentified Analyst:]

Got it. And what's your retention running at in terms of, in regards to, policies right now, the percentage -

[Michael Braun:]

Yeah, homeowners we've generally run at 90%, it bounces up a point or two periodically, but trailing we typically on renewals run at about 90%.

[Unidentified Analyst:]

Got it. Then, in terms of a - it was mentioned, I think you mentioned it earlier, you have around $65 million in hold co-cash. I know Doug just mentioned earlier about the buyback, but I mean, it would seem especially, I mean I think your stock is now trading at around 16. It would seem especially at these levels based on the belief that you guys are going to really start seeing some benefits of this growth, we've seen that being a meaningful buyer it would be pretty accretive longer-term. So I hope that would be the case because -

[Erick Fernandez:]

David, I hear you loud and clear on that and we as the committee will discuss it. I'm on the committee with two other board members and we will absolutely discuss that. We do tend to get blocked frequently, a lot of restrictions with a buyback but I hear you loud and clear and I hear that from a lot of shareholders so I hear you.

[Unidentified Analyst:]

It's appreciated because the point I would make is that it only really becomes accretive once that share count really starts meaningfully going lower. And so when that does happen that will be, I think there will be some real benefit to this company from seeing that.

[Erick Fernandez:]

Yep, I think you for saying that, yes.

[Unidentified Analyst:]

All right I really appreciate it, all the best guys.

[Michael Braun:]

Thank you, David.

[Operator:]

[Operator instructions] We do have an additional comment or question from Samir Khare of Capital Returns. Your line is open.

[Samir Khare:]

Hi, when are you guys expecting the 10-Q to come out?

[Michael Braun:]

I would say early next week.

[Samir Khare:]

Okay, just to reiterate Ryan's point, I think you need to get that out with the press releases. There seems to be so much needed detail in there, so I would encourage you to do that in the future periods. And just -

[Erick Fernandez:]

You're talking about what? Breaking down the auto and the homeowners?

[Samir Khare:]

Well, I mean you guys in the press release keep referring to Note 2 in the 10-Q or detail that we are kind of after. So, I mean, I think it would be prudent to get that out with the press release. And then just on the buyback, you guys don't have a 10b-5 plan or anything like that do you?

[Erick Fernandez:]

We do not, correct.

[Samir Khare:]

Okay, why is that? I think it would be a great use of - this would be like the perfect time to have that type of program.

[Erick Fernandez:]

Good point and again, we'll discuss that at the committee so yes, thank you.

[Samir Khare:]

Okay, and then the 36.1% gross loss ratio on homeowners, that's what you guys will be picking then going forward in the next quarter or two, I suppose, how quick should we think about that coming down in 2017 with the benefit of the rate increase?

[Michael Braun:]

Well, so you're correct, that's where we're currently at and we reevaluate that on an ongoing basis. It could go up, it could go down, but absolutely it can't stay that high, it needs to come down whether it's through rate, whatever it may be. So, in a flat world I believe it would come back down by the time all of these earnings are earning correctly with the increased rate next August. But there's a lot more in that math than just that statement so I think that 5.6% rate increase of which we're keeping 80% of that because really there's no other expense other than some commissions; that will make a significant impact on that. But the question becomes what happens with our attritional losses, do they trend up, trend down or stay the same? You know, I think the rate will be significant, will significantly help, that process.

[Samir Khare:]

Okay, and just kind of building on my last set of questions in the last person who asks questions, what should the expense ratio be on a gross and net basis on the auto business to be profitable and offset the -

[Michael Braun:]

What we'll do - well that's more language, you're kind of coming in and out. That's more language that we'll put in the Q for you as well. You know, so - but it's clearly a different business model.

[Samir Khare:]

Okay, and just on AOB, have you guys seen any instances of AOB claims on policies that have the new language and if so, is it helping with severity?

[Michael Braun:]

Well, you know, unfortunately it just went into effect in September so here it is, you know, six weeks later. That means the probability of a claim being in that first six weeks with the new effective date, and then having a claim, you know, one of the policies renewing and then having a claim is small. I'm not aware of it specifically. Statistically I would call it remote at this point but every day going forward it's going to be more and more likely and by next September, you know, 100% of the claims should be reported with that new language.

[Samir Khare:]

Okay, and then Q4 to date, are you guys seeing a pickup of AOB since last quarter?

[Michael Braun:]

You know, Q3 was funny because, you know, two of the three months were great months and then September really kind of turned out to be an odd month for us. So, you know, it's hard to say it so early, you know, we just continue to evaluate it, but you know, it's not going away.

[Samir Khare:]

Okay, and then how about with claims from Hurricane Hermine or Matthew, are you guys seeing an increase of LB?

[Michael Braun:]

Not necessarily, those guys are out there. Those actors are out there absolutely in the field, you know, trying to get on these claims and they're going to reopen claims, absolutely, the claims - they're very good at reopening claims and creating, opening, new claims many months out. We see that on the attritional losses, I'm sure we'll see it within Hermine and within Matthew as well. These guys are out there, there's a lot of them.

[Samir Khare:]

Okay, and then since AOB is so pervasive, besides rate and just education of the policyholder, are you guys doing anything else from the claims front to try to address it?

[Michael Braun:]

Well we're trying to - excuse me, we're trying to keep our agent informed, trying to keep our insured informed, we're trying to settle the claims yet ever quicker, but we also have a very serious fiduciary responsibility to the insured that we investigate the claims thoroughly so that can take a little bit of time and not just close it as quick as possible. There's a whole process we have to do. So, you know, we're also - we're well aware of a lot of these AOB type vendors, you know, that are out there and you kind of develop a relationship with them, new ones continue to pop up. But there's a lot of things that we're doing to manage it on the claims side, but once again when you insert people into a claim, even when you close it and they reopen it and we insert people into a claim that makes the claim more expensive.

[Samir Khare:]

Okay, and just -

[Erick Fernandez:]

We're trying to keep it simple and keep it between us and the policyholder and close it quickly and fairly.

[Samir Khare:]

Okay, and just on the claims front, how many claims, open claims, do you guys have from before 2016, do you have that?

[Michael Braun:]

I don't know if you've got that in front of you, I can tell you like Matthew we've got about 50% of those claims, there's about 4000 claims. So from prior years a typical claim, you know, a typical claim should be closed, you know, let's call it 20 business days. Obviously you can get some very complicated claims, specifically large losses, or on the casualty side of the policy or you can close a claim and then it can reopen six months later or a year or two years later or you can get a claim reported a year or two years late. But clearly the vast majority of what the claims team is working of 2016. I don't know that we've got that number for you, we'll try to locate that and circle back to you, but the vast majority would be the current year.

[Samir Khare:]

Okay, and then just on the 4000 or so Hurricane Matthew claims, was that predominantly all Florida or was there any other states?

[Michael Braun:]

Well, so basically on the modeled results at the time Matthew impacted the state, the states of Florida and South Carolina for us, also world-wide property. We thought it was $75 million and $2 million. We stand by those numbers, but the models have come down. So if you look at our mass industry events, you know, it appears that it's a much smaller event than what they thought it could have been, what it was and then after the fact they brought those numbers down. So I believe that it's $75 million plus $2 million at this time. It may take us an extended period of time to get there but I think those are fair numbers, you know, but I wouldn't be surprised if Matthew came in much lower, I really wouldn't but you've got to add the AOB effect to it. But I'm certain it's over the $18.45 million retention that we have on our reinsurance program.

[Samir Khare:]

Fair enough, thanks guys.

[Michael Braun:]

All right, thanks Samir.

[Operator:]

I'm showing no further questions at this time. I'd like to turn the call back over to Michael Braun.

[Michael Braun:]

Well, we want to thank everyone for their interest today. If anyone has follow-up questions I'm always available as well as Erick and thank you very much, have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.