FedNat Holding Company
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good morning, and welcome to Federated National Holding Company's First Quarter 2018 Financial Results Conference Call. My name is Michelle 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. [Operator Instructions] Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target or will and other similar words or phrases are intended to identify forward-looking statements. These matters discussed on this call that are forward-looking statements are based on current management expectations involving risk and uncertainties that may result in these expectations not being realized. Actual events, outcomes and other results may differ materially from what is expressed or forecasted in the forward-looking statements made on this call due to numerous risk and uncertainties, including, but not limited to, the risk and uncertainties described in this conference call, our press release issued yesterday and other filings made with the Company with the SEC from time-to-time. Forward-looking statements made during this conference call speak only as of today's date. The 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. Now I'd like to turn – I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of Federal National Holdings Company. Please go ahead, sir.

[Michael Braun:]

Good morning, and welcome to our 2018 first quarter investor conference call. We are off to a strong start to the year, as our efforts to improve our operational efficiencies while retaining the high-caliber service that we are known for have resulted in improved financial results. I will start by discussing our first quarter highlights and then provide an overview of our ongoing focus to ensure that FedNat remains well-positioned for continued success. Ron will then provide a more detailed review of our financial results. Turning to the highlights, our results show that the momentum we established in prior quarters has continued in the first quarter and we believe it will accelerate further with each new quarter. We continue to execute on our strategy while focusing on our strengths to build on our high-quality book-of-business in the homeowners market within Florida, and the other select coastal states. We have also taken action to improve our overall profitability by exiting Auto and commercial liability, two non-core business lines that were a drag on earnings over the past year and added volatility to our performance. For the first quarter, we reported $7.5 million or $0.58 per share and $93.1 million in revenue. This is a significant improvement over the $0.18 we reported in last year's first quarter and close to matching the $0.60 that we reported for the full year of 2017. Return on equity before investment losses was 15.7%. Net income at Homeowners, our core operation was $6.9 million, more than double the $3.1 million that we reported in last year's first quarter. Our overall net loss ratio was 56.1%, much lower than it has been in the past five quarters, as a result of the efforts of our entire team, along with the 10% rent increase that went into effect last August and continues to roll on to more of our new and renewal policies resulting in increased earned premium with each additional quarter through this year. Our net loss ratio on Homeowners improved to 54.2% in the quarter, compared to 63.5% in the first quarter of 2017. Our premium revenues reflect a solid performance in Homeowners, once again our core business, though this growth is massed by intentional declines in Auto and CGL, as we exit those lines of business. Gross written premiums of a $134 million in the quarter included a $123 million of Homeowners’ premium of 1% year-over-year, primarily due to sustained growth in our non-Florida states. Overall, our net earned premiums also increased slightly to $82 million, year-over-year, driven by almost 10% growth in Homeowners, but once again offset by intentional declines in Auto and CGL. Our net expense ratio moved up to 44.2%, due to some seasonality in our profit share expensing in our non-Florida homeowners markets, some payroll costs and professional fees. We continue to focus on expense control and operating efficiency and we made further strides on that in the quarter. We reduced our staff level by approximately 50 people during the quarter, which will drive annual savings in excess of $3 million. Overall, our combined ratio was the lowest that we've reported in the last eight quarters. Our exit from the auto program is progressing well and auto had a negligible overall impact on the quarter's results, as compared to a loss of $1.5 million in the prior year's quarter. We currently have two auto programs in place that are generating premiums and average to non-renew, the remaining business are moving forward on the timely basis in accordance with statutory guidelines and regulatory approvals. In addition, we executed an assumption treaty on our book in Texas and if approved by the Texas Department of Insurance, we will apply – provide us with a clean exit on new and renewal business on June 1st. Book value per share excluding non-controlling interest grew to $16.36 from $16.29 at year-end 2017 and Ron will delve into the math a bit further in his remarks. Traveling to our forward-looking business strategy, we have a clear focus on improving our leading market position within the Florida homeowners market and prudently expanding our book in neighboring coastal states. More specifically, we have three key areas of growth. First, as one of the largest players in the Florida market and given our strong partner, agent relationships and underwriting expertise, we have room to grow. Second, the consolidation of Monarch earlier this year, is targeted at building a similarly strong operation into risk-adjusted class, which comprises the largest segment of the $9 billion Florida Homeowners insurance market. We are excited about Monarch as an excellent long-term growth vehicle for FedNat and are busy setting the stage for accelerating its growth in 2019. And finally, we continue to build our book in neighboring Gulf and Atlantic states with a focus on Texas, Louisiana, South Carolina and Alabama. In these markets, our focus is on coastal zones where we've identified the greatest need for our expertise, leveraging our capabilities that we've developed in twenty plus years of leadership in Florida. A key differentiator for FedNat is our strong relationship with our panel of more than 80 highly-rated reinsurers. Due to our stringent underwriting, we expect that our need for excess of loss reinsurance for major events such as hurricanes will reduce the size of our upcoming reinsurance program by approximately $150 million from $1.5 billion to $1.35 billion or about 10% less. We also expect that integrating the reinsurance program for Monarch into Federated National's program will further reduce our upcoming reinsurance costs. This will result in significant savings that will immediately flow to our bottom-line starting in the third quarter, all by utilizing the same methodology that we have used in the past to determine our reinsurance needs and while projecting the earn-out similar gross premiums over the next twelve months, as we have in the past twelve months. We are in the market now, negotiating our reinsurance renewals and are confident that we will get the most competitive terms based upon our proven track record and the availability of capital competing for our business within the space. In the first quarter, we were actively opportunistic in repurchasing our stock, buying 323,000 shares for about $5 million in capital. This investment is roughly a four-fold increase over the fourth quarter and demonstrates our belief that our stock remains an attractive investment opportunity and best use of company funds. We will continue to utilize our repurchase program when we believe the opportunity represents a good use of corporate proceeds and an appropriate return for our shareholders. In summary, we believe we are very well-positioned to continue to improve our performance and drive profitability by leveraging our core strengths in the Florida Homeowners market and other select coastal states. I would now like to turn the call over to Ron for a closer look at our financial performance and then we will look forward to taking your questions. Ron?

[Ronald Jordan:]

Thanks, Mike and good morning to everyone on the call. Our strong first quarter earnings reflect the early benefits of initiatives we've put in place to improve our operating efficiency and underwriting profitability. We believe that we have a solid financial platform and capital structure to support the longer-term growth strategies that Mike outlined in his remarks. I'll walk through our first quarter financial details and provide a few comments on our balance sheet. Net income in the quarter was $7.5 million or $0.58 per share, a significant increase over the first quarter of last year and a sequential improvement of $0.10 per share from 4Q 2017. Investment income in the quarter was $2.9 million, while realized and unrealized investment losses in our earnings were a loss of $1.1 million. Excluding these losses, earnings came in at $8.2 million. Total revenue for the first quarter was $93.1 million essentially flat with last year's comparable quarter. Homeowners, our core operating business, drove the overall strong performance with earnings of $6.9 million, compared to just $3.1 million in the year ago first quarter. Total net premiums earned were $82.1 million, slightly above last year's first quarter with Homeowners up almost 10%, driven by non-Florida growth, but offset by intentionally lower Auto and CGL premiums. We are pleased with our loss and loss-adjusting expense results this quarter, as compared to 1Q 2017, which included $4.8 million of net storm losses. Our 1Q 2018 overall net loss ratio of 56.1% reached to slower level in -- lowest level in the last nine quarters and showed strong improvement over the 69.7% and 67.3% reported in the first and fourth quarters of 2017 respectively. Homeowners’ net loss ratio improved to 54.2%, compared to 63.5% in the first quarter of last year and 58.9% in the fourth quarter of 2017. Excluding CAT losses in all periods, the Homeowners’ net loss ratio was 55.4% in this quarter, down from 60.5% in 4Q and 57.7% in 1Q 2017. In the first quarter of 2018, we earned $700,000 pre-tax in incremental catastrophe claims handling revenue, down from the $1.6 million in 4Q 2017 and those of course relate to Hurricane Irma. Those revenues appear in our consolidated financial statements as a reduction to net losses of - in the Homeowners line of business. Our net expense ratio increased to 44.2% in the quarter due to higher profit share costs on our strong results in our non-Florida Homeowners book, professional fees and seasonally higher payroll costs. Payroll costs in the quarter included $380,000 of severance and other exit costs related to our expense reduction initiatives. Even with the profit share and severance costs, our combined ratio overall of 100.3% was the lowest reported since the first quarter of 2016. Excluding the severance impact, the combined ratio was just under 100% and the combined ratio in our core Homeowners business was just over 95%. Turning to our non-core operations, our Auto business line had gross written premiums of $6.3 million, which is a healthy two-thirds drop from $19.3 million in the 2017 first quarter, as a result of our decision to shutdown unprofitable programs, ultimately leading to our fourth quarter 2017 decision to exit this line altogether. We are well into the process of exiting the Auto business line, subject to statutory and regulatory constraints and have significantly reduced our exposure in this area including reductions in staff levels in the Auto area of our claims function. In addition, the Texas Assumption Treaty Mike mentioned, if approved will shorten the runoff horizon on our largest Auto block, Texas by several months. So the historical headwinds and impact to our earnings from Auto have diminished and are expected to have little impact on our future results. This was evidenced by our first quarter in which Auto had a negligible impact as compared to a loss of $1.5 million in last year's first quarter and $2.2 million in the fourth quarter of 2017. Our other line of business, which includes our commercial general liability operations, contributed $1.3 million of net income before investment losses, as compared to $0.9 million in the first quarter of 2017 and $1.1 million in the fourth quarter of 2017 and that's despite the $1 million increase in interest expense this quarter due to our senior debt offering in December. We include all our investment income and interest expense in this line of business, the other line of business. Our quarterly net investment income has shown strong growth coming in at $2.9 million in the first quarter of 2018, up from 2.3 last year and 2.8 in the fourth quarter of 2017. Our CGL, Commercial General Liability business line contributed $2.5 million in both gross written and net earned premiums, down from comparative periods in keeping with the actions we've taken to shrink this program, culminating in our March 2018 decision to exit this line of business. The net loss ratio for other was 75.4%, down eight points from first quarter of last year and 67 points from the fourth quarter, which included a $1 million large loss CGL claim and some prior year reserve development. Before I turn to the balance sheet, just a few more comments on the earnings front. It's worth noting that 1Q, 2018 was a pretty clean quarter in terms of the lack of weather or notable prior development or other notable normalization adjustments and is a good depiction of our current state earnings power on a no-weather, no-development basis. While I don't have a crystal ball on those two topics, I do know that we have some positive earnings developments ahead of us. Number one, net earned premiums in of our Homeowners line of business will benefit from the continued earn-out of our August 2017 10% rate increase, which won't reach its full fruition in terms of the monthly and quarterly runrate until the end of this year. That represents an additional $3 million of gross earned premium in 2Q and another $2 million in 3Q on top of the first quarter runrate. The second item, in the second half of 2018, net earned premiums in Homeowners will also enjoy boost from lower seeded premiums. As Mike mentioned, as a result of rigorous exposure management in our Homeowners book, we anticipate being able to purchase a smaller reinsurance tower for the 2018, 2019 cycle. Taking pricing completely out of equation and based solely on our need for less reinsurance on our improved book of business, we believe that our CAT reinsurance spend will decrease by 10% for the 2018, 2019 cycle. Such a decrease would take our Homeowners, CAT seeded premium percentage down from the 34%, 35% range to the 30%, 31% range, representing $16 million to $20 million pre-tax of savings versus the 2017, 2018 cycle, net of related brokerage revenue impacts. Of course, half of that amount would benefit the second half of 2018. And then, the third item, our senior management team across the company is pursuing operational efficiencies related to processes and technology and these efforts are bearing fruit. In the first quarter, we’ve reduced our staffing by approximately 50 positions, which will generate annual savings of approximately $3 million. Due to the severance costs in our results in this current quarter, our 1Q results don't reflect much of any benefits from these reductions just yet. So clearly, we have some positive earnings momentum moving towards the second half of 2018 and we are excited about our prospects. So turning now to the balance sheet, our debt position at March 31st was $44 million, net of debt issuance costs, down from 12/31 due to the payoff of $5 million of debt that was associated with our Monarch joint venture. As a reminder, our debt consists of $20 million of fixed rate debt payable in five-years and $25 million floating on three month LIBOR due in ten- years. For the floating portion, in terms of second quarter 2018, that interest rate has been pegged at 2.31% roughly. That's 61 basis points higher than first quarter, representing roughly a $40,000 pre-tax increase that we'll experience in our interest expense for 2Q, compared to 1Q related to the floating rate on that debt. Mike mentioned our $16.36 per share book value as of March 31, which increased $0.07 from year-end despite the impact of rising interest rates on our bond portfolio. The unrealized gain/loss position on our bond portfolio slung by $5.7 million unfavorable after-tax from an unrealized gain position of $1.8 million to an unrealized loss position of $3.9 million. Excluding that impact, our book value per share as of March 31 came in at $16.66 a share. That's up 3% from the comparable $16.16 measure as of year-end and that represents a 12% annualized growth rate. Our investment portfolio is conservative and continued to perform well with a carrying value of $451 million at quarter end. The large majority of our portfolio is invested in fixed-income securities that carry a composite S&P rating of A minus. We had $56 million in cash at March 31 for a total cash and investments position of just over $0.5 billion. As Mike mentioned, we used $5 million in the quarter to repurchase shares at an average price of $15.49. We have deployed $4.3 million of our most recent share repurchase authorization up through the end of last week leaving $5.7 million of authorized, but unused repurchase capacity. In terms of liquidity, as of March 31, our holdco and other non-insurance entities together had liquidity of approximately $50 million, consistent with the liquidity position we communicated on our last conference call after our full year 2017 results were reported. And with that, I'd like to turn the call back over to Mike for any further remarks and before we take questions.

[Michael Braun:]

Thank you, Ron. With that operator, if we could go ahead and take calls, that’d be fantastic.

[Operator:]

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

[Arash Soleimani:]

Thanks, good morning.

[Michael Braun:]

Hi, Arash.

[Arash Soleimani:]

Hey. In terms of the reinsurance program, I apologize if I missed this in the beginning of the call, in the renewal, will you continue to have a quota share or will it be all XOL starting July 1?

[Michael Braun:]

Yes, we are still evaluating that. We've got a great partner on our quota share program. And so we are evaluating that. It's a current program of 10% that is set to expire in June. So, nothing that we can commit at this point. But we are still reviewing it.

[Arash Soleimani:]

And did you have a sense, overall, in terms of the change in rate online across your renewal or that's so on time.

[Michael Braun:]

Are you referring to CAT program, the excess of loss?

[Arash Soleimani:]

Yes.

[Michael Braun:]

Yes. I think the market is extremely competitive. There is a lot of capital out there. Last fall, at PCI, there was a lot of talk of substantial rate increases. Then that kind of became some moderate rate increases. So we are in the midst of it now and with our strong panel of 80 reinsurers and us needing with our – us tightening up the book with less exposure, meeting a smaller program. I think we are very well positioned for a strong renewal. As Ron stated earlier, we spent $180 million last year on our reinsurance program and we are using exact same methodology. We are looking at a program that's 10% smaller. So we think that's going to translate to a substantial savings on our reinsurance spend. I am not even addressing the marketplace in terms of the pricing will be, but just year-over-year it's less need that we have.

[Arash Soleimani:]

So, is it fair to assume that, because Auto obviously is still a headwind on the seeded premium ratio, is it fair to assume that, I guess, ex Auto for the Homeowners book, that the seeded premium ratio should improve, likely stay the same, once you have the new program in place?

[Michael Braun:]

Yes, the driver on that, as Ron stated, if you just look at excess of loss, you are looking at probably with the rate increase, as well as a drop in the reinsurance needs, you are looking at probably a four point pickup where seeded were dropped. So clearly, Auto and CGL, kind of make those numbers a little bit more confusing. But the lion share of what we do is, is Homeowners and that's in terms of the CAT program.

[Arash Soleimani:]

Thanks, and another question I wanted to just to touch on obviously, there are slides out there and you guys have received the bid from a competitor, just wanted to get your thoughts on that. And what you think of the offer? And, any additional color you can provide.

[Michael Braun:]

Yes, no, absolutely, it's well-known that HCI has an interest in merging with our company. We absolutely understand their interest in our company. From our voluntary book of business that we've built over the years, the trust that these partner agents that we have, have they placed their business with us, to that ease of use of our software that enables these agents to effortlessly place new business with us and service that business to the high-quality book that we not only have in Florida, but Texas, Louisiana, South Carolina, Alabama. We are absolutely a destination for our partner agents. They want to place business with us. We have a very high-quality book of business with a lot of homes that have mitigation features that hold up to the threat of hurricanes very well. We've got a robust reinsurance panel. We've got great reinsurance relationships that ensures that we’ve get the most competitive terms at the best pricing. So, we've got a great team in clients that gives peace of mind to everybody that when they do business with us. And our staff, top-notch staff that provides best-in-class service that makes it all happen. So, we absolutely understand the interest that HCI has in our company. The challenges is there is a valuation. We have actively looked at scale issues, growing the company organic, we are working with other companies for many years and we haven't been able to find the correct opportunity. So, whether it's some type of consolidation will occur in the Florida property market. I don't dispute that. I have no doubt that that will occur and we want to make sure that when that occurs, that our shareholders are compensated correctly for that consolidation. We have a leadership role in this market. We've got a strong position. We are going to continue to do what we do, and if we can find the right opportunity to create value for our shareholders and create bigger scale and even better service, we are absolutely interested. The challenge is the valuation. It's not the desire to stay smaller and stay the current plan regardless. We are looking to create value.

[Arash Soleimani:]

Thanks. And, the combined ratio this quarter was a 100.3 and you had improvement in the loss ratio, the expense ratio went up. I mean, all things being equal though, if we assume, Auto becomes a smaller headwind and you mentioned Q3 is when the full rate effect takes place. So is it fair to assume that that should sequentially improve the combined ratio in 2Q and again in 3Q on an ex CAT basis, obviously?

[Michael Braun:]

Yes, absolutely. We expect improvement there for a number of reasons, both – not just the denominator impact that you mentioned, but also for numerator reasons as we’ve just described from an operating expense perspective and continued initiatives focused on our cost and operational efficiencies.

[Arash Soleimani:]

Great. And then, just my last question, on the 50% profit sharing you had mentioned, is there any ability to negotiate that rate down? And is that kind of like a standard - industry standard commission amount on the profit sharing?

[Michael Braun:]

You know, that's an MGU that we are partners with, Arash. We have no desire to change those terms at all. You could consider it to be rich. However, it's appropriate. They are fantastic and I can tell you that it's full alignment of interest. And because they are performing so well, it's unfortunately making a little bit of noise in our expense where we've got a higher commission - contingent commission and actually, we've talked about it in the – among our team here, as you know, it's really in my eyes, in non-accounting perspective, it's a reinsurance. Really, it's a 50% quota share is how I look at it. So it's a strong partnership. They are a very good organization. And we are thrilled with them.

[Arash Soleimani:]

All right, great. Thanks for the answers.

[Michael Braun:]

Thanks, Arash.

[Operator:]

Thank you. And our next question comes from the line of Greg Peters with Raymond James. Your line is open. Please go ahead.

[Greg Peters:]

Good morning. Thanks for the call and taking my questions.

[Michael Braun:]

Good morning, Greg.

[Greg Peters:]

I wanted to circle back on the reinsurance discussion. When we think about reinsurance for primary companies, actuaries are often speaking in terms of a 1-in-100 year, 1-in-200 year 50 type of coverage. And I am curious with the reduction in your reinsurance, what that does to that ratio? And also on the reinsurance, I am wondering – I think, last year’s structure was sort of a cascading structure where unused portions following events were available for future events. Is that still going to be the case in 2018, 2019?

[Michael Braun:]

Yes, great questions. In terms of the methodology that we've used in the past, it's the exact same methodology that we are using this year, and what that is, is, there is models out there, AIR and RMS that we blend and we want to ensure that we are covered for that first event, as well as in aggregate. So, same methodology. And really the reason why there is – the tower can be shorter this year is, we have less risk. We have less number of policies in Florida, slightly less. We have less, what's called, TIV, Total Insured Value and we also have less modeled output meaning we have been more stringent on new businesses that's come in the company to ensure that it models correctly, as well as we've been non-renewing those risks that are not performing in our book of business. What that does is, it actually hurts us short-term. So we've artificially hurt ourselves in this current quarter, because the premiums would be lower than if we had kept those policies onboard and the same thing will occur in Q2. In terms of Q3, it is if we like 10% less program and if the cost drops by 10%, I am not really commenting on pricing in the market, I am just saying that if the need drops by 10% and the corresponding price drops by 10%, that's a significant amount of money that will be immediately felt in Q3. In terms of a cascading feature, you are absolutely right. So all these layers do interlock with one another and those would cascade down for the first event, as well as second, third, whatever the number of events that we have, it would all cascade down. We are thrilled with our reinsurance panel. It's a pretty robust panel. We've got 80 folks on there, and the challenge for us is making sure that they can all have their – maintain their piece of the pie as the pie is getting smaller. But we value those partnerships and I think the pricing in the market is pretty competitive and we feel really good about our reinsurance renewal.

[Greg Peters:]

Thanks for that color, Mike. Just as a follow-up on the reinsurance piece, can you give us an update on what the gross loss was from Irma? Has it – has there been any creep in the estimates or is your initial pick held steady or provide us some color on what's going on in the claims side there?

[Michael Braun:]

Yes, very good yet again. Right now, we originally said that we anticipated about a $300 million loss. We are revising that up significantly to around $450 million for Federated National and another $23 million for Monarch. So you're talking about $473 million. There is a movement on it without a doubt. So now in terms of our shareholders, just to remind everybody, we did take the first $18 million net as well as on Monarch, the next $3 million and then we've got reinsurance up to approximately $1.5 billion. So the net cost to the organization has not changed, does not change. In terms of Irma, obviously people are well-versed on AOB and the litigation within the state of Florida. I think we do a very good job with our claims handling. And in terms of litigation, we've got about – in the 200-plus range, under 300 of our files are currently in the litigation stage and that's out of about a 34,000 total policy – I am sorry, claim count that we have. We still are getting new claims that come in each and every week, and giving those the appropriate care. So, believe it or not, they still due to come in and they will continue to come in through the balance of 2018 and they are going to come in, quite honestly in 2019 and probably 2020. There's a three-year statute on that. So, it does move and – but I do believe we are handling them very well and we are closing them as best we can and paying those folks on their loss as appropriate.

[Greg Peters:]

So, I guess, I mean, that's an interesting development, because with $500 million gross loss on Irma and you talk about your new reinsurance program essentially you've positioned the company to withstand, as we think about the 2018, 2019 storm season, three storms on the fourth storm, you are going to have – you're going to run out of limit. Is that the right way to think about this if we had three Irma-like storms in 2018?

[Michael Braun:]

Yes, so, in terms of Irma. Irma, there is 67 counties in the State of Florida. We have losses in 60 of the 67 counties. Our number one loss area is Marco Island in Southwest Florida. Our number two county for losses is Broward, which is over on the East Coast about 200 miles away, that's how massive this event was and basically you just said, we are going to utilize about a third of our reinsurance power. So now to your point, if there was more than one event in 2018, we did have an additional $1 billion of limit for any future events that could have occurred. So on a go-forward basis, we believe in our reinsurance program, but one of the things that we are really pretty comfortable with, is our trading relationship with our reinsurance partners. So, those folks are great partners to have. We can always buy additional reinsurance. So in other words, if we have an event and we think we need more limits for the remaining part of the season, those folks have capital and they're ready to trade with us and having in a panel of 80 people, that's of great value. These are things that you can't do when you have alternative type reinsurance IOWs and things like that. They not always operate in the same manner or even cap-ons for that matter. When you have a cap-on and an exhaust, you are done. So then you've got to go and figure out how to replace that. So having these relationships we think is of great value.

[Greg Peters:]

Perfect. Thanks for your answers on the reinsurance piece. The other question I had was around the comments Ron made around the loss ratio. I think, he said in the first quarter ex CAT, it was running around 55 and he made a statement, Ron and I don't want to put words in your mouth, but something to be effective, that's a good runrate, but then you also highlighted this new earned premium that's coming from the rate increases. If we were to take this first quarter 2018 results and look at first quarter 2019 with all the rate activity that's yet to earn out, what do you think that loss ratio might look like in the first quarter 2019? Same type of experience in 2018 and 2019, what, I mean, what's the impact there?

[Ronald Jordan:]

Yes, it would come down several points between the lower seeded losses that we just discussed on the XOL program and then, the continued earnout of the 10%. I have to admit I haven't done the math that far out to see where it would be, but it would – I would say, it would come down several points, three or four, five points.

[Greg Peters:]

Okay.

[Michael Braun:]

And Greg, to add to that, you got to remember also the amount that we've added to reserves over the last two years has really spiked our attritional loss ratio. We've moved it over seven points in the last two years and a lot of that sits in bulk reserves. So, with the earnout of premium over the last really couple of quarters, we have not realized or I should say, we've continued to put reserves at the higher premium at the same level, at the same ratio. And with the expectation that that can stop at some point, and should come back down to its normalized point. So in other words, if we've got a 10% rate increase, the attritional loss should obviously correspond. So that, that the attritional loss would come down 10%.

[Greg Peters:]

Thanks Mike. On the bulk reserves comments, do you feel like your bulk reserves have been built up to the point where you have redundancy in them or if that's the case, when would that be realized? Or do you think it's adequate and you think that you are going to just keep the current level for the foreseeable future?

[Michael Braun:]

Our independent actuary is happy where they are. I can tell you all my blends. I think, we've made substantial improvement in the program that needs to be reflected in that. And that conversation takes place. However, the actuary is the one that sets the reserves. But I do believe that our improved claims handling, our communication with our agents, with insurers and just really our rate increase, I think there is a lot of initiatives that have not been fully baked into the bulk reserves that I am hopeful will translate into us stopping to reserve at the level with that we are and back to a more - in my perspective, a slightly lower more appropriate. But at this point, we absolutely believe the actuaries got the – he believes in his numbers and that's what we are booking.

[Greg Peters:]

Thanks for your answers.

[Michael Braun:]

Thanks again, Greg.

[Operator:]

Thank you. And our next question comes from the line of Ron Bobman with Capital Returns. Your line is open. Please go ahead.

[Ron Bobman:]

Hi, thanks and good morning. It’s a good report.

[Michael Braun:]

Good morning, Ron.

[Ron Bobman:]

Thanks for the added – it was good report. Thanks for the added information with respect to expenses and the premium, et cetera. Appreciate that.

[Michael Braun:]

Thank you.

[Ron Bobman:]

I had a question on the topic of HCI. On the date, April 30th most recently when the company and the Board corresponded back to HCI and basically said, no thank you, it's unacceptable. The – a half of share of HCI was worth approximately 24% more than FedNat's stock price on the same day. Obviously, 24% is a big number. How did the Board justify the lack of any inquiry, any investigation and any sort of discussion with HCI over their proposal at that point in time?

[Michael Braun:]

Well, so, to that Ron, I have talking Parish over the years and over the prior months as well. And actually, Bruce and I had met with him. So, I can tell you the Board took the offer and considered it. We utilized with the services also – as well as a banker to assist in that analysis, as well as legal overview. And, we believe that offer is a low offer. We've looked at other opportunities in the Florida space. And we don't see anything near that level. So we thought it was a bit opportunistic and that's why we passed on it.

[Ron Bobman:]

So, you founded a decision, but I mean, 24% is a quite a material differential at the time. So, obviously, you think the company's prospects – the company is worth more, the company's prospects organically were superior to what was being represented in the stock market at the time, which I can understand that frame of logic and sort of the – that thinking. But, I think you owe it to the shareholders, given the magnitude of the difference, the 24% that I keep pointing to, could be more specific and I recognize you did start on the prepared remarks with respect to the expense ratio and the premium earn-out, et cetera, but I think you got to set specific expectations that you have as a management team with respect to the P&L and ROE with respect to setting the bar for what net earned premium is expected to be this year, setting the bar for what you expect the ex CAT loss ratio to be this year. What you expect the expense ratio to be this year. If you are not going to conduct discussions, then I think you owe it to the shareholders that own the other 90% of the shares to understand why you think the prospects are so much better than what this party's not final presumed, not best presumed offer was, but still 24% were from where you were. So, that's the point I'd like to make.

[Michael Braun:]

Ron, understood and once again, we try to be transparent and we always look for opportunities to improve on that front as well and we will do so. We do believe that the stock price has been depressed for a couple of different reasons over the last year here and there is a lot of things that had temporarily in our opinion, depressed the share price. So understood. And we will continue to communicate with you and all of our shareholders to that effect.

[Ron Bobman:]

Yes, I think you need to communicate with all the shareholders and set the specific figures as to why you think there is a mismatch between what you expect profitability to be prospectively and why everyone else in the stock market, which is the scoreboard is so much lower.

[Michael Braun:]

Sure, understood.

[Ron Bobman:]

Thank you.

[Michael Braun:]

Well, yes, I appreciate that.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Samir Khare with Capital Returns. Your line is open. Please go ahead.

[Samir Khare:]

Bunch of my questions relating to the quarter. Can you quantify the three components of the Homeowners seeded premium, XOL, the seeded premium from the latest quota share and the – I guess, the adjustments from the preceding quota shares?

[Michael Braun:]

Good morning, Samir. We are just pulling that up for you.

[Samir Khare:]

Okay.

[Michael Braun:]

All right. So, XOL reinsurance. This is talking first quarter 2018.

[Samir Khare:]

For Homeowners.

[Michael Braun:]

Yes, just Homeowners. $45.3 million of CAT seeded premium. And then, for the two old quota shares, we've got $1.7 million of seeded premium in the quarter, and then under the current 10% quota share that's currently in effect, $8 million of seeded Homeowners premium in the first quarter.

[Samir Khare:]

Okay. So for the two old quota shares that was - is that a benefit to the seeded premium or a charge?

[Michael Braun:]

We seeded $1.7 million of premium under this tree.

[Samir Khare:]

Okay. And then, going forward, will the adjustments on the older quota shares still occur? Or do you expect them to occur?

[Michael Braun:]

Yes, they will continue to occur until we recapture. Until we close those out they should continue to decline, over time.

[Samir Khare:]

Okay. And the Homeowners acquisition cost that incorporate some profit share with the non-quota business. Is that paid in Q1 of 2018 in respect of 2017 results, or is that an accrual real-time?

[Michael Braun:]

Samir, would you mind – repeat the question, I missed the start of the question.

[Samir Khare:]

The elevated acquisition costs that incorporates some profit share with the non-Florida business.

[Michael Braun:]

Yes.

[Samir Khare:]

I am wondering, is that paid in Q1 in respect of 2017 results or is that an accrual for the plotted commission real-time?

[Michael Braun:]

No, that's a – it's a real-time, current quarter accrual. So there is no significant lag there in terms of our accounting of accruals. It's a real-time quarter-to-quarter basis.

[Ronald Jordan:]

Samir, more on that is once a year we do true-up with those partners. And the program runs exceptionally well. It runs sub-80s and with that, that results in a big number that we've got to set aside to true-up with them at year-end. So, that's where it sits.

[Samir Khare:]

Okay. So I am just wondering is – should we expect every Q1 there will be a little bit of a bump in that expense ratio or should expense – expect like a 20% acquisition ratio for the remainder of this year?

[Michael Braun:]

Yes, now, you should not expect an annual first quarter bump, because we are accruing it real-time all throughout the year. So, from a cash flow perspective, there is a true-up in 1Q, but there shouldn't be an accounting reporting true-up. So, as far as the go-forward expectations, what we have is the mix of our business is changing, right. We are less CGL, less Auto, more Homeowners, and specifically, more Florida Homeowners. So there are those mix changes that are going to settle forward over time.

[Samir Khare:]

Okay. And what was the dollar amount for this? I am a little surprised that it was running so high given that Florida is about 10% of your earned premium. Non-Florida, sorry, 10% of Florida?

[Michael Braun:]

It's a $50 million book. It's – I think it's up to $60 million at this point. Do you have the actual dollar amount?

[Ronald Jordan:]

Yes, yes, we've got it. The profit share was $2.4 million in the first quarter.

[Samir Khare:]

Okay. And just on the alignment of the interest of the profit commission with respect to non-Florida, how is it structured? Is there a claw back, if there is adverse development on this business?

[Michael Braun:]

Correct, it includes CAT as well. So, its inception to-date, all states, it goes from the beginning of time, forever. So, yes, correct. If any program heats up, if any state gets hit, it's all incorporated into the same thing. To clarify, when you say a claw back, it's not that they would be cutting us a check back. I don't have– I mean, the contract is five years old. My recollection is, is that, it would come out of the profit share and the profit share is pretty significant. Once again, the book performs well. So - and it includes, like I said, inception to-date, all states.

[Samir Khare:]

Okay. And, on new business production, how much premiums you guys writing per week and how much of that is from each of Geico and Allstate?

[Michael Braun:]

Yes. So in terms of Allstate, they are still about a $120 million of our book. We are still about a $465 million Florida book. In terms of new business coming in, we are averaging about $1.5 million a week. It tends to tick-up. We are seeing some ticking up on that as of late. In terms of non-Florida, we are writing about $750 million a week, and let me clarify, $1.5 million in Florida, $750,000 in non-Florida. A lot of that coming in from Texas and once again, we are primarily focused at Tier 1, Tier 2, Houston area, and we are getting a little bit of San Antonio, but in terms of Louisiana where good amount of business there, South Carolina as well. Alabama, we just don't see the opportunity there. It's coastal, but it's a small book and we are looking to expand in some additional states, primarily in the Southeast, perhaps late 2018, but I think that's more 2019. We are just being cautious with how we do it.

[Samir Khare:]

Okay and of that $1.5 million in Florida per week, how much of it is coming from each of Geico and Allstate?

[Michael Braun:]

In terms of Geico, it's between Florida and non-Florida, it's about $200,000 a week. And I would say, that's pretty well distributed between, I would call it half Florida. So, $100,000 for Florida, $100,000 for non-Florida. And then Allstate, once again, they are about 25% of our book, 20% to 25% of new business, pretty consistent, and then Monarch, once again, we just haven't really done much with Monarch. That's a little under $100,000 a week of new business on top of that.

[Samir Khare:]

Okay. And, on the headcount reduction, were most of these done in the Auto and the CGL group?

[Michael Braun:]

Yes, absolutely. That was a heavy team in terms of payroll. We've been very quick to adjust our payroll. I can tell you the service level has not diminished in terms of that. And there has been some other opportunities in our property team as well, but primarily Auto and some CGL. You are going to see that we are actually down more staff count in Q2 and expense associated with that. But I think you are looking at another – in Q2, I think we are down another 15 people on top of that. So we are pretty aggressive in terms of expense control. However, we are not willing to forego the service that we are known for.

[Samir Khare:]

Okay. And then, just so I am allocating the cost in the right place. You guys are quoting that in the Homeowners line though it is seems right?

[Michael Braun:]

We are recording what, the expense for labor?

[Samir Khare:]

Yes.

[Ronald Jordan:]

I am sorry, it's allocated to the right lines of business. So, severance costs related to Auto or in Auto for example.

[Samir Khare:]

Okay, okay. And then, how much was spent in this quarter and last quarter on legal and financial advisory, please?

[Michael Braun:]

All right. I would have to get back to you offline on that.

[Ronald Jordan:]

You are talking about claims or non-claims?

[Samir Khare:]

No, I mean, in terms of assessing the HCI proposal?

[Michael Braun:]

Yes, I would say, we've got a couple of hundred thousand dollars in our legal in the beginning of the year here.

[Samir Khare:]

Okay. And then, just on the reinsurance, Ron, could you say what you said, again, before how much savings do you expect to get from the new program?

[Ronald Jordan:]

Yes, so, what I said is that, our seeded loss ratio with respect to excess of loss CAT, we'd expect to come down four points. And that’s that's probably $16 million to $20 million net of the – an offset related to the related brokerage, because we do earn some brokerage revenue on the program. So net of that offsetting reduction, $16 million to $20 million for the 2018, 2019 program year. Just divide that by two, half that amount would benefit our 2018 calendar results.

[Samir Khare:]

Okay. And I apologize if you said this earlier, what are you guys thinking about your retention level?

[Michael Braun:]

We are looking at $20 million for FNIC and $3 million for MNIC.

[Samir Khare:]

Okay. And just on the comments on the exposure management that led to a lower reinsurance percentage of gross earned premium, simplistically speaking, is that accomplished by reducing exposures in the Tri-County?

[Michael Braun:]

No, I would not say it's relative to Tri-County. A lot of people talk about Tri-County, how it's problematic. There is challenges, absolutely. But we have no intentional desire to reduce our exposures in Tri-County. We are at 25% roughly of our policies in Tri-County. We have no defaults. It's all a voluntary book. We are happy with that book. So, it's not geographically centered. It's more on a policy basis. And once again, homes that don't perform well could be problematic in our program and we are going to see a substantial benefit from that in the second half of this year starting July 1.

[Samir Khare:]

Okay. And then, how many claims – with respect to Irma, how many new claims came in, in Q1 and Q2?

[Michael Braun:]

In terms of – we are still averaging about 400 claims a week. I know, one week we had a busy week of about 800 claims. So, it continues to come in. I don't have it as an aggregate of the quarter, but I can tell you in terms of total, as of today, we are looking at 34,290. And they continue to come in 10 to 20 a day, easily.

[Samir Khare:]

Okay. And how many reopened claims do you guys have?

[Michael Braun:]

We are at about...

[Samir Khare:]

What percentage.

[Michael Braun:]

Yes, about 20%, 25% of our claims are reopened. But they could be reopened for a variety of reasons. A lot of people will continue to ask the question about litigation and so on. It could be a supplement. It could be a small adjustment to the claim. In terms of litigation, you'll see that we tend to be lower than others in terms of litigation. And right now, we are looking at under 300 that are in litigation. And here is the interesting part. You say about Tri-County. Over 200 of those that are of the 300 are in Tri-County that are being litigated. So there is challenges in Tri-County. We don't dispute that, but we are happy with our book there.

[Samir Khare:]

All right. Thank you very much.

[Michael Braun:]

All right. Thank you, Samir.

[Operator:]

Thank you. And our next question comes from the line of Doug Ruth with Lenox Financial Services. Your line is open. Please go ahead.

[Douglas Ruth:]

Congratulations Mike and Ron and Eric.

[Michael Braun:]

Thank you, Doug.

[Douglas Ruth:]

What would it take to start to ramp up the Monarch book of business?

[Michael Braun:]

We've looked at that, we've had that book about three years. It's underperforming in the sense of we thought we could be more competitive in the space where you have homes that are less mitigated. It's a pretty competitive space out there. So, we are retooling that and really what we are looking at – I don't want to say too specific of what we are doing. But we are going to be retooling that. And I think that's a growth vehicle for us in 2019. Here we are in 2018, in May. A couple initiatives that we are working on that are going to roll out we think in the fall and should benefit us in 2019.

[Douglas Ruth:]

Okay. And what are your thoughts about the dividend at this point?

[Ronald Jordan:]

Yes, Doug, the dividend obviously is very important to you. And I enjoy the dividend as well and the Board is well aware of where we are at and we discuss that and have discussed increasing it. We have not made that decision as of this time. And, we are continuing to evaluate that. But, I know a lot of people like that dividend and that yield is important to people and that's well represented in our Board discussions and will continue to be so.

[Douglas Ruth:]

In your prepared remarks that are part of the press release, you had talked about leveraging your relationship with your trusted agent partners. Do you have anything specifically in mind that you haven't told us on the call?

[Michael Braun:]

Well, I think we have a lot of goodwill with our partner agents. That's a fact. And I think, agents are looking to place business with us absolutely, for the peace of mind, for the ease of use. We are easy to work with. We are tough with our underwriting and we adhere to it. But we make the user experience for our agents pretty seamless and our claims reputation further benefits all. So, we are looking for opportunities to provide more value to our agents, absolutely. Once again, nothing specific to give to you at this time. I think we've got a great reputation in the marketplace and we are trying to enhance that.

[Douglas Ruth:]

Okay. Thank you for answering my questions. Congratulations again everybody there on the really nice report.

[Michael Braun:]

Yes. Thank you, Doug. And with that, we've been on the call for an hour. So we are going to go ahead and wrap up the call at this time. But anyone who has got any follow-up questions, whatever it may be, please do not hesitate in reaching out to myself, to Ron, to Eric and we are always available.

[Operator:]

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