FedNat Holding Company
Q4 2016 Earnings Call Transcript

Published: 10 Mar 2017

[Operator:]

Good morning. And welcome, to Federated National Holding Company's Fourth Quarter and Year-End 2016 Financial Results Conference Call. My name is Andrew, and I will be your operator today. Please note that today's call is being recorded. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. 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, expect, guidance, indicate, 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 or 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 our 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 day on which they are made, and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. [Operator instructions] Now at this time, I would now like to turn the conference over to Mr. Michael Braun, CEO and President of Federated National Holding Company. Please go ahead, sir.

[Michael Braun:]

Good morning. And thank you, for joining us today to discuss Federated National Holding Company's fourth quarter and full year 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'll open up the line for questions. Q4 2016 highlights as measured against the same three month period last year except where noted; 9.5% increase in gross written premiums to $137.1 million; 9.8% increase in Florida homeowner policy to approximately $279,000; 39.3% increase in total revenues to $88.6 million; $47.6 million increase in gross written premium on our personal automobile line of business to $69.5 million in 2016 compared to $21.9 million in 2015; $47 million of gross claims from Hurricane Matthew, which impacted Florida and South Carolina, a decrease from the initial estimate of $77.5 million; $21.4 million of claims out of reinsurance from Hurricane Matthew; $30.6 million increase in our total loss reserves during the quarter, which increases our total loss reserves at December 31, 2016 to $158.1 million. Net loss of $12.1 million or $0.89 per share, book value per share, excluding non-controlling interest, was $16.26. The quarter's results were impacted by $21.4 million in losses, net of our reinsurance programs related to Hurricane Matthew, which impacted Florida and South Carolina in the month of October. The $21.4 million impact is made up of an $18.5 million retention from the excess of lost property capacity reinsurance, $2.3 million related to the reversal of the profit-sharing balance on 10% Florida only property quota share, which was previously recognized as income, since the exception of the reinsurance treaty; $400,000 in loss from National Insurance Company and $250,000 from the 10% of the losses from South Carolina’s $2.3 million gross loss, which were not covered by Florida excess of loss quota share agreement. The year was challenging for the Company, based on significant increase in losses and multiple weather events and separately from the inflated cost of handling homeowner claims in Florida, primarily as a result of the growth of assignment of benefits, or AOB. Federated National Insurance Company had an average state by the rate increase of 5.6% that has been effect since August 1, 2016. And as recently filed and requested another rate increase of 6.5% to be effective August 1, 2017, which could gradually offset the increased cost associated with AOB claims. Our fourth quarter results reflect continued revenue growth, as well as organic growth in both written premiums and policy counts in our homeowners Florida and non-Florida business segments. We have expanded our non-Florida homeowners program with the recent addition of Texas, where we wrote our first policy in February 2017. Our written premium growth is a result of continued high retention rates, driven by our commitment to servicing our policy holders. Our partner agents place $30.5 million in new Florida homeowner's premium, $3.1 million in new non-Florida homeowner's premium, which with our other lines of business and our renewed business during the quarter, totaled $137.1 million in total gross premiums written. With that, we are glad to open up the call to your questions.

[Operator:]

[Operator instructions] We’ll be taking our first question from the line of Arash Soleimani of KBW. Your line is open.

[Arash Soleimani:]

Just to start off with a numbers question. Can you provide five year development and also current accident year development? And also let us know what drove those items, if there was any? I guess I wasn’t here or something otherwise.

[Michael Braun:]

So, in Q4 from a prior year development, we had $1.6 million of prior year development split between CGO and homeowners Florida, both of those related to calendar year 03/2014 and weren’t related to AOB. And then from a 2016 accident year, the biggest thing you will see is we strengthened our reserves around one specific auto program to tune of about million half in Q4. So would be other outlier item in our losses outside of obviously, Matthew.

[Arash Soleimani:]

So you said no AOB in any of the numbers, right?

[Michael Braun:]

Correct.

[Erick Fernandez:]

But, Arash to clarify, we’re clearly a higher attritional loss ratio that’s been driven by AOB.

[Arash Soleimani:]

I just wanted to make sure there wasn’t prior year or current accident year strengthening related to that. And is the attritional increase, I think you mentioned in the release of $5 million. And that seems to be in line with 6 points of additional growth that you mentioned since you also did increase the attrition on 4Q 2015 a bit?

[Michael Braun:]

Correct. There is no change in our attritional loss ratio related to 2016 accident year. We continue to be at 36.1%.

[Arash Soleimani:]

And my other numbers question was around the gross earned. Can you provide the breakout of gross earned between homeowners auto? Or just what it was for those two lines of business?

[Michael Braun:]

So, homeowners in Q4, all homeowners are $127.8 million. And then auto was 18.7.

[Arash Soleimani:]

Thanks for those numbers. And the other question I wanted to throw you guys is Allstate has mentioned that they are reentering Florida, I think in April of this year. What implications does that have for your partnership with them and does that imply additional pricing competition in Florida?

[Erick Fernandez:]

I spoke with the folks at Allstate yesterday. We are aware of that we can't specifically tell you what their intentions are. But it appears that they have a limited appetite, and their pricing is not the most competitive, so they definitely have some desire to be in Florida with Castle Key. We’ll monitor that. But I don’t see it that as a game-changer or a big threat to our distribution through our voluntary agents, or our business with advantage which is Allstate's general [indiscernible]…

[Arash Soleimani:]

Along those lines, do you think the RMS model that’s coming out is going to have any impact on competition?

[Michael Braun:]

I think it's going to impact the industry. We've been RMS heavy for a number of years. I think most of our competitors are much more air driven. But at the end of the day, I don’t think it's a dramatic change, RMS. But clearly, that will impact peoples’ exposure that you have to purchase reinsurance with, and you are pricing good. So, I don’t think it's going to be a big impact, but it's another movement within the Florida property space.

[Operator:]

Thank you. Our next question comes from the line of Sam Hoffman from Lincoln Square. Your line is open.

[Sam Hoffman:]

I just have a question on your long-term objectives. Do you think that the rate increases that you filed, which I guess are 5.6% this year and 6.5% now for 2017. And do you think those are going to be enough to get you to the 15% ROE objective once they fully earned through I guess some time by the end of 2018?

[Michael Braun:]

To answer that, when you look at our loss ratio, our loss ratio has moved from approximately 29.5 to 36, which is about 6.5 points; 6.5 points on $465 million book is $30 million. So, what had we taken? We have taken rate of 5.6%, which has had pretty much no impact in Q3, let's call it $0.5 million of earned premium of additional written premium; Q4, let's call it about less than $2 million. By the time we get to Q3, I think you're looking at about $6 million in a flat book just off that additional rate. So, I think we're looking at that rate generating about over $25 million of premium, additional premium in a flat world. What expenses are associated with that; really acquisition. So, you're talking about, let's just call it 12-13%, to the retail Asia. That additional premium will not affect our reinsurance expense nor will it affect our attritional loss ratio. So the 5.6% is huge, absolutely huge. We’re well under way. In addition to that, we have filed for 6.5%, which should bring $30 million of additional premium into the Company. Once again, the only cost associated with that is acquisition. The only additional cost, I should say. That is huge. Now, this premium, as we bring it on the books, takes time to earn out. It's painfully slow. And when you identify that you need way and when you prepare your filing and when you submit it to the OYR, and you review they review, and it goes back and forth and then you don't have whatever they approve and then it gets programmed, and then it goes into the policies. It's terribly-terribly slow. It takes really about two years. We're well down that path. We're about a year down that path where all that work has been done, and one way that it's already in the books earning out gradually and the other one should come online. Do I believe those rates are correct? I think that is sufficient rate with all available information, at this time; if AOB is resolved in the legislative session in 2017 perhaps we can give rate back; if AOB is not resolved, I think additional rate may be needed; and if AOB, which appears in our book to be plateauing, it appears not to be getting worse. And it appears and it’s actually slightly improving. If that's the case, our rates should be sufficient, may be sufficient, and we're going to continue to evaluate that. But the other question that you might be asking is what does this rate do to our book and our competitiveness. We believe that we are competitive; we see multiple carriers taking loans; AOB is an industry phenomenon, and it's hitting everybody. And it has taken about $600 million versus prior year in the industry; $590 million, which is significant. So I believe we remain competitive; and I believe the increased cost associated with AOB are pushing up our rates and we have no choice but to raise the rates to pass-through those expenses, unfortunately to our policy holders.

[Sam Hoffman:]

And do believe, just following up on what you just said. Do you believe that you can grow through this, including the way that you're taking? And obviously you had good new business from the quarter, other renewals you gave up the budget policies, it looked like. So, I mean, do you believe that you can continue decent growth through this period.

[Michael Braun:]

Yes. However, let me clarify. Currently, we're waiting in Federated National approximately 2 million a week of new business. So, if you have, just real quick math, on existing $450 million book and let's just use 10%, that means we have to, just through evaporation, we lose $45 million, we’re writing a 2 million a week times 50 weeks, that's a 100 million. Just off that, we should have growth of, let’s call it, $50 million on an annual basis. Obviously, things change on an ongoing basis. So the answer is yes. Will be have the growth of growing by $150 million, $200 million, some of these huge numbers that we had in the prior years? The current math would say, no; however, this market been flux. And I believe there will be ample opportunities in the voluntary space for us to write business, to half that are greater way and/or other situations that may come about. A lot of people have been impacted in this industry. You don’t just take $590 million into the industry, and not have that impact carriers. It’s going to impact here, that will create opportunities, either through scenarios where we can create additional value short-term, when I say short-term quickly, with some of these other carriers, or our tried and tested method of writing to voluntary. So yes I believe we're competitive and we remain to be so. And I reiterate and remind you that we are a destination source to most of our agents. They want to place the business with us and we need to be competitive. Also, our distribution is unique that we have the great partnership with Allstate, we have the great partnership with GEICO here in Florida, and a lot of other preferred carriers. So, yes the answer is I believe our growth will continue. It's just a matter of what that growth rate will be.

[Sam Hoffman:]

And my last question is there are number of one-time items in the quarter. I mean the differed tax adjustments the caps. There is one thing I don’t understand is the $8 million of increase in expense from unwinding a quote share. Is that a onetime item or is that an ongoing item?

[Erick Fernandez:]

This is Eric. So, the $8 million that we mentioned on the press release has to do with the fact that, in Q4 of 2015, we had additional feeding of commissions as the 30% property quota share was in place at that time. In this quarter, we don’t have that. The 30%, the three has ended, so that’s not in place now, so we're exceeding a lot less commission. So when we compare Q4 2015 to this current period, just that alone, shows that we have additional $8 million of expense when it's really just a reinsurance item.

[Michael Braun:]

Sam, let me step in on that. There is a lot of movement on the income statement between the quota share that we had in place, the 30% plus the 10%. But let me just compare 2015 and 2016; 2015 pretax we made $65 million; 2016 zero. Where did that money go? Two things; 0.65 increase on our official loss ratio and $465,000 affordable, that’s $30,200,000. And then Mother Nature, in 2016, net $34.5 million. Those two numbers combined equal $64.7 million. So yes, there is absolutely having a lot of accounting, and I'm sure you’ll have some follow up. I'm sure you’ll reach out to Eric to go deep on. But rest assured those are the two items. Now, in terms of Mother Nature, that’s what we’re in business of doing, and I make no apologies to that. In terms of the AOB, the shareholders need to understand what we're going to do. We're taking rate, I'm not certain that legislation will pass that will improve the situation. We're taking rate which is appropriate, and those are the two items by far that impacted us in 2016. What will happen in 2017, I can’t tell you specifically as it relates to Mother Nature as that unfolds, we’ll share that. But in terms of rate, as I indicated, $25 million rate increase from last year; we’ll be earning out 100%, in August that's huge and I think that's the focus of what we're doing.

[Operator:]

Our next question comes from the line of Samir Khare from Capital Returns Management. Your line is open.

[Samir Khare:]

I see that -- you’re saying that you’re raising price to help offset from the AOB pressures. But what are you guys doing in terms of shutting down zip codes, enhancing underwriting and claims operations to help mitigate the problem. And Mike, I think you said in the past that you’re willing to shutdown the agents that are providing bad business. Have you canceled any of the agents as of yet?

[Michael Braun:]

Couple of things, we have not shut-off zip codes, you've heard Dade Broward being cut-off over-and-over in the industry, that is not the case with us. We underwrite the business, and I would actually argue, some of the most profitable business you can write in the State of Florida is in Southeast Florida, which is Dade, Broward and Palm Beach. AOB is a huge problem, and it is in expense. The claim on an AOB is twice a non-AOB claim. So what we’re doing is we're working with our agents. Our claims team has continuously improving and evolving and adapting to the industry. We've got about 175 people in claims, including about 40 field adjustors. And we are proactively communicating with the insurers, proactively working with the agents. But there is lot of bad actors out there that are intent on getting on a claim and inflating those costs. And that is unfortunate, but that's what’s happening. So no, we don’t have -- we’re not shutting down counties and zip codes in that regard. We’re underwriting it, and we’re working with the agents and communicating with them, as well as some insurers. It's the -- claim handling is tricky, but it's just a lot of people that are jumping on in claim, which is making it expensive. And we're adjusting those and modifying our strategy continuously; but as is the other side, the folks that are intent on getting on a claim.

[Samir Khare:]

Are you guys able to change your underwriting such that it could identify potential bad actors?

[Michael Braun:]

The attorneys are putting in the suits, a small group is disproportionate. And Citizens has put out a tremendous amount of information that's very helpful to the investing community, as well as everybody, legislators included. That's the small group; the dry out and the plumbers. It's a small group that is abusing the process, and when we come across fraud, we do share it with the state. But in many cases what a lot of people call AOB fraud, it's not AOB fraud. It's not fraud. It's just people getting on claims enough unnecessarily, in my opinion, raising the cost associated with that. So, yes, we're doing what we can, but these folks are out there and we’re doing some very effective marketing in many different regards to get on claim. And it's not just Federated National. It's not just Federated National. This is an industry issue, so it's everywhere.

[Samir Khare:]

And then given the competitive environment, how you've seen your homeowners policy retention change? And I think you said you’re writing $2 million in new business a week. How much of that is through advantage, how much with respect to GEICO?

[Erick Fernandez:]

In terms of the retention, we typically are around 90%, it bumped up a point or two or down a point or two based on -- it's always moving up and down. But I would call it on average 90%. In terms of Allstates, they’re our largest producer by far. There obviously are growth with everybody has slowed, including with Allstate. And with Geico, they're writing Florida of about 200,000 a week and then non Florida, another 25,000 or 50,000 a week. So, that's -- we'd like to see that increase. But that's where we're currently at.

[Samir Khare:]

Do you have a number for the Advantage per week?

[Erick Fernandez:]

The Advantage, I don’t have that in front of me. It's about $120 million book with them. And I'll follow up with you on that Samir. But there it’s typically about 20% of the new production, so you're going to call that around $400,000 a week, 450,000 a week. But I'll get a better number for you.

[Samir Khare:]

And then the reversal of the profit commission in the quarter. Did that deplete all the accrued profit commissions on the quota share? And then, I guess, second question on that is how should we think about how you'll book the next two quarters with respect to ceded premiums that relates to this profit commission or experienced account?

[Michael Braun:]

That did reverse the balance to zero. And then in terms of the next two quarters, just like we've done the previous six quarters, we'll go ahead and calculate what the profitability of the quota share is after Q1 and after Q2, and we'll adjust our numbers accordingly.

[Samir Khare:]

And then the commission income was down quite a bit. What's causing that?

[Michael Braun:]

There's a little bit of variability in that account quarter-to-quarter, part of that is the changing commission rates within our five programs in auto. We do have our agency income running through there again that can vary quarter-to-quarter. In terms of looking at that, I would also look at the full year, where we had pretty significant revenue growth there. And that’s -- when you look at it for a full year, some of that variability stabilizes.

[Samir Khare:]

And so we shouldn't project off of the latest quarter, sounds like that…

[Michael Braun:]

I would project out looking at the full year you I do anticipate it being little bit more steady in 2017.

[Samir Khare:]

And then auto business production was down quite a bit. I think you alluded to a program running, can you just expand on that?

[Michael Braun:]

Samir we have five different programs. Unfortunately, two of them we did turn off. We had three running. There are some challenges on the auto program. So from an underwriting perspective, we do not make money in 2016. However, from and MGA perspective, we did; and on a consolidated basis, I would say it was slightly profitable. However, we need to do better. We need to have an underwriting profit. As you know it's a heavy quota share program and our reinsurance partners need to be profitable on that program for us to sustain it. So we're tweaking the existing programs, but we think we got rid of some of those other ones that we got rid of, we didn't see the opportunity for improvement. We need to do better with auto but, on a consolidated basis in '16, slightly profitable but we need to focus in on that underwriting profit. We need to do a better job there.

[Samir Khare:]

I was just going to ask, what should we expect in 2017 in terms of size of [technical difficulty] what you guys looking at that…

[Michael Braun:]

It's a tough question. Because in terms of gross written at that $70 million, if I said with some of the underwriting challenges, if we lose the reinsurance on some of those programs, that book could decrease. But if we can figure -- we think we’ve identified the challenges. We need to make sure we can not only renew those programs but also grow those programs. So, I don’t want to give you number. It could be $50 million or could be $100 million. There is a wide variance there. And I apologize that I am not giving you better number. Our intention is to grow it. We see some great opportunities. But we need to make sure our reinsurance partners are on the programs and we need to make sure they are profitable as well.

[Samir Khare:]

And the problems that you’ve guys identified, what do they -- what kind of problems…

[Michael Braun:]

Well, some of the general agents just were not generating the business that was sustainable in a profitable manner some of the other ones are clearly ready. I think you're very good in the industry, you know that frequency and severity on auto claims is an industry event, primarily associated with stacking and striking driving. So once again how you resolve that issue. And so people are not distracted that’s going to continue and you need additional rates. So, we’ve taken rate and are requesting rate on these programs.

[Samir Khare:]

What do you guys booking in that right now…

[Michael Braun:]

Gross loss ratio, do you have that…

[Samir Khare:]

Or just sort of going forward, what you guys booking at that?

[Erick Fernandez:]

We’re roughly around 90% through 2016, and we do expect in 2017, to lower that as we implement some of the things that Mike was referring to.

[Operator:]

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

[Greg Peters:]

I just have one question for you. And I’ve noted your commentary around the rate increase that you were able to achieve last year in Florida, and the expected rate increase you hope to achieve in 2017. And I'm just curious about your perspective of how your competitors are responding to the same pressures that you're seeing. And if they were taking rate last year and if you're seeing a flood of other companies filling for rate increases so far in 2017.

[Michael Braun:]

To that, I think we're a little ahead of the curve. I think we're a little ahead of the curve and taken the lot of reserves, which is unfortunate to our share holders in Q2 and Q3. I think we're a little ahead of the curve in terms of taking rate, which from our policy holders’ perspective, is unfortunate. But this is needed. The AOB is the driver. What are others doing? I see a lot of people starting to take rate more frequently; however, I think it's happening slowly. So, with that what occurs and I think some people are trying to hold on to market share. And I think when you're holding on to market share with rates that’s too low, that could create a big problem. So, once again the industry had a bad year, Florida Property, and less there is something that fixes it, the answer is rate. But I think that it's well documented that domicile had multiple conversations with all that carriers in the industry. And their question is this; what are your results; and what are you doing to improve your results; you can’t just downstream money into an underwriting loss; what are you doing to prevent an underwriting loss on an ongoing basis. That's the challenge. And I don’t know that there is any other answer to the increased expenses on these claims other than taking rates. So, I don’t think that the industry can fight it. I think it's here, and I think you’re going to see more people taking rate.

[Greg Peters:]

Just as a follow-up to that, Mike. The retention rate in the State of Florida for residential homeowners has been somewhat unusual compared with most of the rest of the country. And I suppose that stems from the long-track record of cyclicality on availability of homeowners in your state. And I guess if the market is going to be taking rate in 2017, will it really lead to dislocation or will the homeowners, residential homeowners, just hunker down and accept it, and move on.

[Michael Braun:]

Well, I think it's a combination, Greg. That's a great question. So, you see a lower retention rate in Florida; because of the dislocation; because of the large amount of companies that have come and gone and have changed their rate significantly. You don't have the brand royalty in Florida like you do some of these other states. A lot of these other states, the big boys are there and they have a brand royalty based on a number of things. But I would call it brand exposure. So, what will rate do, I think if you have a rate, generally, I'll tell you, I like to maximize our rates that no more -- I try to prevent policy holders from getting anything more than 9.9% rate increase on these big rate increases. Because it lessens the impact to them, it lessens the impact to the agents, us and so on. So, yes, some people will shop it, some people will shop it if the increase to the premium a dollar, but I think 5.6% in 2016, I think that’s reasonable that should minimize the disruption and appears to be doing so. And I think 6.5% in 2017, if that gets approved. I think that should minimize our disruption as well. So, you got to ease these things in. And the legislators and the OIR they get calls when you see big rate increases, and they don’t like getting that from policy holders. So, I think it's politically correct as well to implement those rate increases gradually.

[Greg Peters:]

Mike, in your opening comments or maybe it was in one of your answers, you spoke of work going-on on the legislative side to correct AOB. It's my impression and correct me where I’m wrong. But it would be my impression that the likelihood that something happens on a legislative front 2017 is probably low. Am I misreading this situation, or is really 2018 a more likely target for some reform?

[Michael Braun:]

Greg, unfortunately, I agree with you. I don’t see AOB being paid in 2017, the industry is putting up multiple proposals; I think the Department of Insurance, the OIR, has been fantastic; I think Citizens has been fantastic, making information public, educating people; however, there is a lot of people that don’t look at it in the same lens and are absolutely against resolving AOB, and the driver such as one-way attorney fees. I put the probability if something is changing in 2017 but very remote, that best; and there is actually proposals out there that could amplify AOB. The industry the play in this industry is very strong. And there is some proposals out there. I don't think that's going to happen either. I think that AOB is going to stay as is, and I think the rates, as a burden that will be carried by our policy holders and all policy holders in the state of Florida perhaps in 2018 or beyond if rates continue to go up, would you then see some type of adjustment or fixed in the legislative body. That's my personal opinion.

[Operator:]

Our next question comes from the line of Doug Ruth from Lenox Financial Services. Your line is open.

[Doug Ruth:]

The $590 million AOB is that -- are you attributing that all to 2016?

[Michael Braun:]

There is an industry, this is statutory. It's an industry number that I have, and I haven't actually in front of me, its $576 million. So basically the net income and the industry, statutory this is, of the Florida carriers is down 89.6%, it’s down $576.3 million. So this is off of statutory filings. So, there has been massive erosion in underwriting profit in Florida in 2016. Correct.

[Doug Ruth:]

Is that from the five public companies?

[Michael Braun:]

No, this is from the 62 companies that write property in the State of Florida. This was released by S&L on Tuesday.

[Doug Ruth:]

What is the Company's statutory surplus at this point?

[Michael Braun:]

So year-end 2016 FNIC is $141 million NNIC 31 million…

[Doug Ruth:]

Do you have any estimates of what it might be at different points in 2017, or?

[Michael Braun:]

I don’t know that we have that at our fingertips. But based on 2017, we see what are shareholders expect from us, they want a net income to be positive. They want book value to increase. And absolutely when you see how it eroded in '16 versus '15, I can't tell you what's going to happen with Mother Nature. But obviously, 2016 we had a lot of tornadoes, hail, and multiple hurricanes. That happened in 2016. I don't know what that will do in 2017. AOB that's real, you’re talking attritional loss ratio up $30 million, and I'm telling you we're taking rate, a good chunk of that will earn out correctly in 2016. So, I think from an underwriting perspective, you’re going to see a huge improvement and from a net income perspective, I think you're going to see a huge improvement.

[Doug Ruth:]

And what is the status of Monarch at this point?

[Michael Braun:]

Well Monarch, is unfortunately not growing like it should be. It's about $12 million book. We're only writing about $100,000 a week of new business. The program is a fantastic program. Unfortunately, the pricing is still bit above the market. If AOB continues to be a problem, which I believe to be the case, the market should move to where Monarch is. We're evaluating and looking at Monarch's program in terms of the pricing, trying to penetrate the market better. But we don't want to be foolish and buy into the market at an unsustainable rate. So, from an underwriting perspective, we're extremely disciplined. We're deploying that capital wisely. However, from a shareholder perspective, it’s very disappointing. Because we have capital in there that has not been deployed and is not generating the business we wanted to. So it's very frustrating; however, we're being disciplined in our approach, because we want to write profitable sustainable business. I'm extremely excited about Monarch, because its locked and loaded, ready to go, and we want to penetrate the market. I think that as this market shifts a bit, which absolutely appears to be underway, I think Monarch is extremely well positioned.

[Doug Ruth:]

Are you able to quantify how much above the market Monarch might be?

[Michael Braun:]

Well, it still varies. But I would day that, unfortunately, you got to be in the top five to be relevant in terms of competitiveness. And Monarch’s really not there at this point. So, we may still be about 10% above the market. But once again, Doug, there are so many variables there based on the type of construction; based on your build and the square footage; based on geographic location. So, what we're trying to do is sharpen that pencil. We're trying to identify where we can take rates down appropriately. Whether it's based on construction site, what we can do, we don’t want to be foolish and just say we're going to drop rates 10% and rather. We’re trying, if we can bring rates down 2%, 3%, 4%, 5% in a smart manner, that’s what we’re trying to do right now. The actuaries are working on the program, but that’s how we're looking at the market.

[Doug Ruth:]

What do you think is happening with the Demotech ratings now?

[Michael Braun:]

So, Demotech is under a lot of pressure. They’ve been in the news obviously, where they reviewed the industry. And they are putting out a report on Monday, is my understanding. I'm not sure exactly what's in that report, but it's going to, I guess, give everyone their year-end -- publicize everyone's year-end 2016 ratings. Demotech is under a lot of pressure from a lot of different folks, but I think they are concerned with the underwriting profit within the industry; they are concerned with AOB; I think they are concerned with the sustainability of writing business at a low price. They want to answers from the carriers, which includes; what's your capital; what's your plan of action; what’s your rate. So, I think that Demotech will impact the market significantly in 2017, primarily with small carriers, and they have repeatedly stated that they’re looking at peers, primarily as it relates to statutory surplus that are on the low ends, and other things; high quota shares or perhaps things like that. So, I think that will unfold in 2017.

[Doug Ruth:]

Well, I got two questions left. What's the size of the staff at this point?

[Michael Braun:]

Last number I had is 408 people, by far the largest team at claims. And we retain most services in-house, so we can be considered a little heavy on staff, but rather than -- I mean even printing, I mean even mailing; we do that in-house; we think it's better control; better quality; and actually better pricing. So, we do a lot of things in-house where everyone feel the gestures, that’s the gestures; obviously every department, underwriting, marketing, IT, HR claims, risk, accounting, finance, you name it, we’ve got all the functions.

[Doug Ruth:]

The last think, I think that the investment community we’ve hung in there with here, we’ve heard the stories. But I got to tell you, personally, if the management team and the Board of Directors stepped up and bought some federated stock, it would really be a big encouragement, it would really show us that you folks have confidence in the future of the Company. I think it would just really be a huge deal for us.

[Michael Braun:]

Sure. I understood. And I can tell you that, when you think of the Board, I think the Board has some pretty good shares within the Company; in terms of management, we do as well; in terms of purchasing shares, meet personally. I think you probably are aware of a lot of shares that invested over the years. As a matter of fact, this week alone it's costing me $300,000, about 250,000 to 300,000, depending on the price of the stock to pay the taxes on my shares as they invest. I'm looking at a million dollars just in 2016, and then again in 2017, to buy, to pay the taxes on shares as best. I'm very long on the stock. I believe in the absolutely, plus in 2016, I bought my options I believe it was 40,000 options. So I don’t know that that always goes noticed. But I hear your statement, and I'll share it with the rest of the team.

[Doug Ruth:]

We've got St. Patrick’s state, so I am thinking corned beef, cabbage and saturated stock, it all sounds -- I think they all go together pretty well.

[Michael Braun:]

Sounds good…

[Operator:]

Thank you. Our next question comes from the line of David Seer with Needer Capital. Your line is open.

[David Seer:]

First off, I want to commend you guys for the buyback, specially the recent actions. Just want to confirm. So that's an additional $10 million to the $10 million that was announced in November that hasn’t been completed yet?

[Michael Braun:]

Yes, let me clarify on that. So, March of 2016, we authorized, the Board authorized, $10 million which was adjusted. In November, it authorized $10 million, which is just expired as of March 1, and that was approximately, what was that $4 million.

[Erick Fernandez:]

2.3 million…

[Michael Braun:]

So that has since expired; so those two $2.3 million and $10 million of the $20 million that was authorized. The Board is just authorizing new one, which hit the wire this morning, $10 million, effective immediately. And that's out there for a year. So, thank you.

[David Seer:]

So, there is $10 million but you have the authorization as of right now to buy $10 million?

[Michael Braun:]

Correct.

[David Seer:]

And how much cash do you currently have at holdco?

[Michael Braun:]

After the downstream about $35 million. However, once again, we’re generating positive cash in our non-statutory entities, primarily the MGA.

[David Seer:]

And a few on the MGA, because I know you mentioned at the Raymond James conference the other day. I think you mentioned that the MGA business is making lot of money for shareholders. Is there any way you can quantify that number on an isolated basis of what that MGA business generates?

[Michael Braun:]

We don’t have that handy. We can certainly circle back.

[Erick Fernandez:]

It is significant. I mean if you look at the $65 million in 2015, it was, I believe, around $35 million of that. It's significant then also our reinsurance intermediary is very profitable; Century Risk with Insure-Link, so those entities. So you’re absolutely right, David, it's two sites for our business, the underlying profit, which has struggled in 2016 but on top of that, we have MGA that’s very profitable.

[David Seer:]

Yes, I mean, because you did. Because in the presentation, I think one of the items you highlighted that you’re shifting towards a more fee-based business model, I think that's the way you put it. So, I think especially to shareholders, I think it would be very helpful to kind of illustrate what that model is actually generating, or capable of generating, just so we can have a better understanding in that aspect.

[Michael Braun:]

Very good point, David, and making a note of that and the product that we do also sell. And we're very proud of our partnership with Hiscox, which is a Lloyds syndicate. It's only about $3 million, $4 million book. In addition, we have a partnership with Hudson where we sell a liability umbrella, which is about $3 million book. We're trying to expand that. We're working on a number of initiatives. We would like to offer our partner agents as many products as possible.

[David Seer:]

And then just last one. So, you mentioned I think it was that in 2016 the $30 million was due to -- you had a breakeven year in 2016, you said about $30 million was due to attritional loss. So, just want to clarify. I think you then said that for this year, you should, as a result of the rate increases, get about $25 million in additional premium. So all else being equal, if you were to have per se the same type of year as you did last year, due to the rate increases you would add about $25 million earnings in say 2017 all else being equal?

[Michael Braun:]

Once again, the world is not flat.

[David Seer:]

No, I'm just -- what I'm saying is if in the exact same year as a result of the rate increases, you have the exact [indiscernible] et cetera.

[Michael Braun:]

So the two things we're looking at is you're right; attritional loss ratio that $25 million of the 5.6% that will be earning out a 100%, correct, as of August. So let's say that, yes, in a flat year we have that, which takes care of the vast majority of the problem. And then, unfortunately we did have some weather in Q1, we're looking at tornadoes and hail, primarily tornado of about $3 million. So those are the two items. I think rate solves the 6.5% increase and the attritional loss ratio. You're right it’s just a timing issue.

[Operator:]

Thank you. Our next question comes from the line of Arash Soleimani from KBW. Your line is open.

[Arash Soleimani:]

I just want to follow-up again on the homeowner’s growth. So, you may have made a comment earlier about the retention in Florida. But the $33.6 million of new business you wrote, I mean that implies close to about $3 million a week, so that looks like it was a pretty healthy new business rate. But then homeowners overall looks like it only grew 8.5%, so it almost implies that retention was, if I look at last year's fourth quarter number, it implies that retention was about 78%. Does that sound right? And if so, why would it have been so low?

[Erick Fernandez:]

Homeowners, there's a couple of things there; so let's say we write a 100 policies; 100 policies are bound. So that's what we say when we wrote business, we say what did agents bind. Of that you're talking you got to take about a 10%, 12% haircut on policies, maybe someone was buying a home and they did not close on it; whatever it may be. Maybe it was a home and that we went out and inspected it, and we saw a roof that was in bad shape. So, immediately you got to take off, let's call it 12 points there. And then from there if you get down to, let's call it 88 and then you can take up what of those 88 will make it through a renewal offer. And if you take out 10% there and now you're down to, let's just call it 80. So, that's how you get there with the math.

[Arash Soleimani:]

But I guess is that rate lower than where you historically run?

[Erick Fernandez:]

No, we're not seeing it moving much. Our underwriting, those that clear underwriting, has very, I would call it, 10 to 12% that don’t actually make through a whole 12 month under policy for a variety of reasons. And then knows that do make it through and then actually renew. I would say another 10% of the operation. That’s been consisting year after year.

[Arash Soleimani:]

So, I guess, with that something, what was the main driver of the deceleration in the homeowner's growth rate?

[Erick Fernandez:]

Why did we not -- what are you saying, why did we not grow as much in Q4?

[Arash Soleimani:]

Yes, I'm saying, because with the $3 million per week of new business that you did in Q4, the rate of growth seems lower than would have otherwise been expected. So I was just trying to figure out what was it that caused that. Was it lower retention? Is there is something else that was a headwind in the quarter?

[Erick Fernandez:]

Yes, I can go although deeper with, I guess, offline. Because I'm not sure I'm following your question 100%, but may be we’ll just follow up afterwards, if you don’t mind?

[Arash Soleimani:]

Sure. And then the other question I have just on the rate increases that you have the 5.6 and you're going to hopefully you get the 6.5. So if you compound the 6.5 over the 5.6 that implies about 12.5 points combined rate increase. Let's say, you keep 87% of that because 13% goes to agents, so items gets you to about 10.9. So if you have 10.9 and then I think you said the loss ratio on a gross basis has been up about 6.5 points. So that implies, I guess 4.4 points of additional margin that you should get once these rates are both fully earned in. Is that -- does that jive with how you’re thinking about it?

[Michael Braun:]

Arash, that’s exactly how I look at it. For the record, the actuaries have got hundreds and hundreds of pages that look at the map little bit differently. But that’s exactly how I look at it; the world is not flat; other things do come in; additional expenses, savings. So, at the end of the day, you're right. You have three expenses reinsurance, which has been very favorable for the last five year; and I would anticipate this upcoming as be mind the new cap program in late May. I'm anticipating flat to an improvement with rates being down a little bit. The acquisition, I don’t see any changes in acquisition. So, those two items, let's call them flat for simplicity, the attritional loss ratios are third expense. And you just nailed it, that’s exactly it. That’s how we’re going to recover the deterioration in our underwriting profit, which is driven by one item there, which is attritional which is driven by AOB.

[Arash Soleimani:]

On the auto combined ratio, I know you said the loss ratio was 90. But what's the combined ratio when you include expenses?

[Michael Braun:]

It's significantly higher on a gross basis.

[Erick Fernandez:]

It's roughly breakeven for the year.

[Arash Soleimani:]

So you're saying the 90% loss ratio with the expense ratio and you said breakeven, you mean it goes to 100% or?

[Erick Fernandez:]

When you combine it from a consolidated basis, the combined is roughly 100% when you factor in all the fee income [multiple speakers].

[Arash Soleimani:]

…excluding the fee income, just looking at the purely underwriting, so if we pretend there’s no fee income, I just wanted to get a sense of what the combined ratio there is.

[Erick Fernandez:]

Generally speaking, I would say its 110%, generally speaking.

[Michael Braun:]

Yes, and that's the challenge, because not only do we have to have our MGA profitable on the private passenger program, we've got to have an underwriting profit in there as well for our reinsurance partners. There is a lot of accounting on terms of how it’s ceded and so on. So you may want to follow-up with Erick as well.

[Arash Soleimani:]

Was that 110% then the gross combined ratio, excluding any fee income?

[Michael Braun:]

Correct.

[Arash Soleimani:]

The other question I had, so in terms of Monarch, I know you said the rate still seem like they’re above. And if I recall I think you guys took the rates down by 11% or so, maybe it was 12 to 18 months ago…

[Michael Braun:]

12% last April, correct.

[Arash Soleimani:]

12% last April, okay. My question was AOB, I mean AOB didn’t seem like it was getting as much press as it is the last few months. But I guess are you surprised that rates have not cut-off given that you took your rates down before AOB was as advertised of an issue?

[Erick Fernandez:]

So AOB we've been talking about for about two to three years, but it really beat really hard in 2016. Monarch, we've treated it very gingerly, and we came out. We got it licensed in 2015, and we knew we have high-rates. But the market moves continuously, so that was part of the strategy. Us bringing rates down 12% at that time, we thought that was correct; absolutely, in parts, because of some of the concern, some of the trends that we had as it related to AOB. You always want to launch that perfect product, but it's not that easy. It's usually multiple steps, and it's much easier to step down into the program than to come. And this is the one thing that I try to avoid at all cost, specifically with our state expansion why we have an MGU as a partner. It's far better to ease your-self into the market than to jump-in by the market and then have to take rate to at effect. So we're trying to continue to ease into it.

[Arash Soleimani:]

And when you say ease in, I guess looking at the homeowner’s side you’re using the MGU now. Is the plan in the future to just directly appoint independent agents in the other states, and that's how we cheaper from acquisition cost perspective?

[Michael Braun:]

So couple of different things you just asked. So Monarch is Florida, that's direct, et cetera; non-Florida, and I guess switching topics, we do use an MGU. Yes, that does cost us money. So, we believe it pays for itself by better underwriting results. So FNIC, non-Florida, we do utilize our partners SageSure, and we've given them great latitude. And then we're absolutely are the great operators, great management team, and they execute the plan very well. And they’re paid based on profit. So, Monarch, Monarch is looking at state expansion. I'm not sure that we’ll be using SageSure for that expansion that maybe direct. We're continuing to look at that. But once again, I would say, why SageSure does have higher acquisition expenses, we believe that pays for itself.

[Arash Soleimani:]

I just wanted to move to the ceded premium ratio, so that was 50.5% in the quarter. And so basically, that's just higher than what I would expect given that the 30% quota share has been unwound. And I know you have obviously you are ceding about 80% or so on the auto-book, but that's still I guess only about 10% of the book. So, are there any -- can you walk us through, are there any unusual adjustments or numbers moving through ceded premiums that are elevating that ratio?

[Erick Fernandez:]

So there is three things running through ceded premium; one is, you mentioned the excess of loss that cost is fixed for the reinsurance year, which starts in Q3 of ’16. And then second part you mentioned is 75 to 80% heavily or auto business that's heavily ceded. And then the last piece is the 10% quota share, which you know a part of that is very straight forward, as it's just 10% of what we see for homeowners Florida. But then there is the last piece of it, does get funky from an accounting perspective, which has to do with the profit sharing balance, and that also factors into ceded premiums as well.

[Arash Soleimani:]

And what was the adjustment from the profit sharing balance?

[Erick Fernandez:]

So, if you look at just overall, both the 30% and the 10% quota share, it was roughly in the quarter $14 million of ceded premiums, combined both, the actual ceding of the premiums plus the adjustment around the profit sharing.

[Michael Braun:]

Arash, with that, I mean you’ve always got good questions but you have a lot of questions as well. We’ve we got other callers, we don’t want to lose. If you don't mind, I’d like to move to the next caller, and then maybe you can follow up with Erick. Is that all right with you?

[Arash Soleimani:]

Sure, thank you.

[Operator:]

Our next question comes from the line of Ron Bobman from Capital Returns. Your line is open.

[Ron Bobman:]

I think, a couple of questions to clarify, so [technical difficulty] as it relates to rate action and a couple of the top in the [technical difficulty], it's not in the 80 or 77, basically that seem sort of an [technical difficulty] trends could be the rate action?

[Michael Braun:]

Unfortunately Ron, you've got a terrible connection there. But I think you're asking about the retention. So generally, if we write a 100 policies, a 100 policies are bound. Those actually go through the first year of the full 12 months. Let's take away about 12%, and then so now you're down to 88%. And of the 88% that actually renew, let's just call that roughly 90%. You're down to about 80%, so the number is 78% to 80% is a reasonable number.

[Ron Bobman:]

Then my other question really relates to the automobile business. Your homeowners' business, from a premium perspective, is multiples the size of the auto business and the auto business sounds like it may be shrinking at least as it relates to program count. The profit margin opportunity and the combined ratio margin opportunity is meaningfully higher as multiples are also superior in the homeowners' business, potentially, as compared to the auto business. Obviously, the homeowners' business is your core business and the potential for profitability is multiples of the auto business. Given that you generating [technical difficulty] on a consolidated basis, the auto business and given, importantly, the serious challenges that you face in your core homeowners' business, as well as the core challenges that the auto experts face and are grappling with in their auto businesses, which is not your core. Why are you bothering with an auto business at all?

[Michael Braun:]

Sure. So once again, it was hard to hear most of that question, but my understanding is you're asking about why we are in the auto business. What we see as the opportunity is this. The staffing that we have is about 50 people that are committed to our auto program. It's really a fee based product. So in other words, the staffing is primarily adjusting. But I think 99% of them are of the staff that we have is associated with adjusting. The business plan is this. We want to make an underwriting profit. For it to be sustainable, we need to make an underwriting profit. However, let's put aside the underwriting profit. The MGA feed that we anticipate we get 10 points for the financing and for ULA, unallocated loss adjusting. Our goal is to only use five of those points, and make high points. So make 5 points on that and if we write it 4

[Operator:]

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

[Samir Khare:]

Just wanted to ask you, is any part of the Florida agents' commissions. Is any of that based on profitability of the both?

[Michael Braun:]

Well, yes and no. And I want I mean by that is this. To generate business with us, you're an agent and we do track your loss ratio, and if you write terrible business, we're going to turn you off. So, it depends on a number of things. So sometime you can have a shop loss, and if you have $300,000 liability claim and agents only got $300,000 book, he’s fried. So, we do look not only at the quantity, we also look at the quality. Meaning, why does an agent have a loss ratio. We do give incentives. We do give overrides to agents that produce better business. And it's based on a number of things, based on the type of business and the quantity of business and including, we do include the loss ratio of that agent in that analysis.

[Samir Khare:]

Does any part of the expense ratio in this quarter reflect the decrease or reversal of accrued management competition through the year?

[Michael Braun:]

Some of it. But I would say, I will put that number less than 500,000.

[Samir Khare:]

And just coming up on fixed ones, are you guys looking to renew the quota share at all, during this renewal, I would…

[Michael Braun:]

We're comfortable that XOL can satisfy our needs. And I would say, there is a lot of big folks on our program are jockeying to maintain their line and increase it. So, I feel very good where we're at.

[Samir Khare:]

And then could you tell us about the progress of your CFO search?

[Michael Braun:]

We, once again, I think Erick has done an fantastic job. We also three board members, myself and two other, the chair of the audit and chair of the board that have conducted a search, and we're very near to disclosing something here in the next couple of weeks. We’ve got multiple good candidates, including Erick in there. So we’ll be making that announcement here subject to finalizing everything. But I think that we’ll have closure here in the next few weeks.

[Samir Khare:]

Then can you just talk about Q1 cat related weather or storm weather what your exposure is in that?

[Michael Braun:]

I would say right now you’re looking at $3 million hit unfortunately in Q1, that's primarily associated with two storms. One that really impacted most of Florida, that's about $2 million. And we’ve got claims all over the state; from South Florida to the West Coast up in the Northeast and the Panhandle. And then we had a separate incident, separate tornados and wind event that came through that literally just went down I10 from Jacksonville, Tallahassee, Pensacola, into our book in Louisiana. So right now, the rough number I have for you is $3 million.

[Samir Khare:]

Then in your opinion, do you think Allstate's intention to grow in Florida has anything to do with their view on homeowner’s profitability being at a trough level?

[Michael Braun:]

I can't tell you what -- I can't represent Allstate. But based on the financial results, in my opinion based on the results of the industry, I don’t think that to inviting for someone to grow in market, if you haven’t been in the market. So, I don’t know specifically their intentions. I think they have an auto book that they do their great partner. They have a great -- very big auto book in the state. I think they’re second largest writer. And I'm sure they are just trying to maintain their presence in Florida, and perhaps roundup that account. I'm not threatened by it. I'm not. I can't say enough good things about our partnership with those folks. I'm not threatened by it. I don’t see it as a huge appetite. And I don’t think their product is overly competitive. They'll pick up some policies, yes, but I'm not threatened.

[Samir Khare:]

Then given the expertise of some of the Florida home-owners specialist, do you think it make sense for Allstate to potentially acquire a Florida specialist to fulfill its aspiration?

[Michael Braun:]

I can't speculate on that. That's a great question and I can't speculate on that. I'm very proud of what we do. I'm very proud of our partnership with Allstate, as I am with GEICO and Progressive that writes business for us in non-Florida, and our independent agents. So, I think we're going to continue doing what we do. And regardless of how Allstate penetrates the market, I don’t think it's going to be big. But I can't speculate on what their intentions are.

[Operator:]

And it looks like we have no other questioners in queue at this time. So, I'd like to turn the call back over to management for closing comments.

[Michael Braun:]

Sure, thank you. I just want to thank everybody for their time today, and follow-up questions. Erick and I are always available. Our contact information is out there. And wish everyone a great day. Thank you.

[Operator:]

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program. You may now disconnect, at this time. Everyone, have a great day.