FedNat Holding Company
Q2 2018 Earnings Call Transcript

Published: 11 Aug 2018

[Operator:]

Good morning. And welcome to FedNat Holding Company’s Second Quarter 2018 Financial Results Conference Call. My name is Nicole 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 FedNat 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 at this time, I would now like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of FedNat Holding Company. Please go ahead, sir.

[Michael Braun:]

Thank you. Good morning. And welcome to our 2018 second quarter investor call. Joining me are Ron Jordan, our Chief Financial Officer and Erick Fernandez, our Chief Accounting Officer. I will start with some highlights of the quarter and of the first half of the year and then Ron will provide a detailed review of the financial results. After which we’ll open the line and take questions. We are pleased with our financial results in the quarter and the first half of the year, which reflect the continued success of our teams’ strategies to improve our profitability, including our underwriting results. We believe FedNat is well positioned for strong sustainable growth on a go forward basis. Earnings per share for the second quarter of $0.69 was more than double the $0.30 reported in last year's second quarter. Revenue in the quarter totaled $95.7 million relatively unchanged from the prior year's second quarter, excluding investment gains and losses. In the first half of 2018, we earned $1.26 per share, which is more than double the $0.60 per share reported for all of 2017. Our book value per share increased to $16.89 from $16.36 at the end of 2018 first quarter, representing 13% annualized growth rate. The second quarter was relatively quiet from a weather perspective, enabling our team to remain focused on doing a great job of blocking and tackling during the quarter. Second quarter results were driven by a solid performance in our Florida homeowners book and higher written and earned premium in our non-Florida homeowners book. We are pleased to have lowered our loss ratio and reported our best combined ratio in two years. Our proactive exposure management and our loss and expense reduction initiatives are contributing meaningfully to the bottom line. We think this performance sets us up for a strong second half and one that’s turning out to be a transformative year for the Company's financial results. A highlight of the quarter was finalizing our reinsurance program for 2018 and 2019. As a result of our vigorous exposure management, we significantly reduced our hurricane exposure, allowing us to reduce the total dollar limit purchased, while maintaining the same methodology and with a similar level of coverage on our exposures. In the next four quarters, we expect to realize approximately $30 million in savings, which began flowing through our income statement, effective July 1st. As a result of our reduced need for reinsurance, our net ceded premiums ratios related to our catastrophe reinsurance program will improve by approximately 5 points from 34% to 29%. The program’s strength in favorable terms reflects the strong relationships we have with our panel of 80-plus high quality reinsurers, our strong track record operating in Florida and our stringent underwriting discipline. The 2018-2019 reinsurance program also integrates Monarch National into FedNat’s program contributing to the overall save as discussed above. The results we are producing also reflect the benefits of focusing our resources on building on our leading market position in the Florida homeowners market and our gradual methodical growth in other select coastal states. We have strong partner agent relationships and underwriting expertise and a long runway to gain share in these fragmented markets. In Texas, Louisiana, South Carolina and Alabama, we are continuing to make good progress with gross premiums written increasing over 50% on a sequential quarter and prior year quarter basis. Turning to our exit from non-core lines of business, we are pleased to report that, effective August 1 we have executed an agreement transferring our Texas autobook to another carrier. This was our largest remaining book of auto business, so this transaction will meaningfully reduce the remaining runoff period. Ron will provide further information on this transaction in his remarks. Let me touch on some of the financial highlights of the quarter. Our homeowners’ book generated revenue of $85.5 million, $5.6 million increase over last year with a significant boost in profitability. Total costs and expenses, which include loss and loss adjusting expenses, declined $83.7 million from $92.5 million, primarily as a result of lower losses from severe weather, operating efficiencies and claims processing and a reduction in staff. We saw strong improvement in our net loss ratio, which was reduced by approximately 10 points to 56.9% from 67.5% in last year's comparable quarter with a much improved total combined ratio, aided by an earn-out of our 2017 rate increase, exposure management and other management initiatives. And of course, we are focused on getting that member even lower. We are also very excited to have rebounded our holding company and our flagship insurance company to FedNat during this past quarter. This branding initiative aligns our business on the local level with the same name that many in the industry have known us by, including our staff, partner agents and reinsurers. We continue to provide best-in-class services to our policyholders and to our partner agents, and to continue to be a primary destination for them when wanting to place business within a competitive marketplace. Shares repurchased were muted in the quarter. As we’ve done in the past, we will continue to utilize our repurchase program when we believe the opportunity represents a good use of shareholders’ capital as compared to other opportunities that may be available. In June, we filed a shelf registration statement for up to $150 million in capital. Having such a filing in place, represents good corporate governance and provides us with financial flexibility to efficiently access the capital markets if and when opportunities arise that can add to our growth and benefit our shareholders. In summary, we are pleased with our results in the second quarter and first half of the year, and believe we are well-positioned to continue this trajectory in the third quarter as we realize savings from the new reinsurance program and continue to operate more efficiently with a leaner cost structure. I’ll now turn the call over to Ron for details on our financial performance in the quarter.

[Ron Jordan:]

Thanks, Mike, and good morning to everyone. FedNat delivered solid financial results in the second quarter, continuing our recent momentum and reflecting our focus on improving our underwriting profitability and operating efficiency to drive earnings growth. I’ll walk through our second quarter results, comment on our balance sheet and finish with a few forward-looking remarks. Net income in the quarter was $8.8 million or $0.69 per share. This represents a substantial increase over the second quarter of 2017’s $4 million result, which was $0.30 per share. Excluding investment gains, losses from both periods, 2Q ’18 produced $8.7 million of earnings compared to $2 million in the prior-year quarter, a fourfold increase. This result was driven by $7.5 million increase in homeowners’ net income, as well as lower drag on earnings due to the winding down of our non-core operations. The quarter also represented solid growth on a sequential basis, increasing 5% despite $1.6 million of losses from severe weather in the quarter, aided by the continued earn-out of our August 2017 rate increase and savings from management initiatives. Excluding investment gains in both periods total revenue for the second quarter of 2018 of $95.5 million was flat versus the second quarter of 2017. However, this was primarily due to the fact that lower revenues from our wind down of auto and commercial general liability masked $5.5 million of revenue growth in homeowners as we continue to focus our resources on our core business. Our non-Florida business contributed heavily to the increase in homeowners with gross premiums earned up 51% to $15.5 million in 2Q ’18 as compared to the second quarter of ’17. Total net premiums earned were $83.6 million, essentially flat from last year's comparable quarter. Similar to the story on total revenues, homeowners’ net premiums were up 6.3%, driven by non-Florida growth, offset by the planned reduction in auto and CGL premiums. But the main storyline in the quarter was not the top line, rather it was about losses and expense reductions and the resulting increase in profitability. Our combined ratio declined by approximately 12 percentage points in the second quarter of ‘18 versus the prior-year quarter, both in homeowners and in total. Our overall combined ratio of 99% and the 93% result in homeowners were our best results in over two years, demonstrating that the rate increases taken in ’16 and ’17 are a proactive exposure management strategy. And our loss and expense reduction initiatives have gone a long way toward offsetting the impact of the assignment of benefits issue. The combined ratio improvement was driven primarily by lower loss and loss adjustment expenses, which decreased almost 16% year-over-year. Contributors to the reduction included; $1.2 million lower losses from severe weather; $0.5 million of net favorable to prior year reserve development compared to $4.5 million of adverse prior year development in 2Q 17; and lower losses from automobile, driven by our decision to exit this line of business. The $0.5 million dollars of favorable prior year reserve development in the current quarter consisted of $2 million of favorable development in our core business homeowners, driven by improved loss experienced, lower claims adjusting expense and Irma-related claims handling fees and $1.5 million of unfavorable development in our non-core businesses. Excluding the impact of the revision to our hurricane Irma ultimate loss estimate, which I'll address later in my remarks, the homeowners’ gross loss ratio was 38.7% this quarter, down from 44.2% in last year's second quarter and up slightly from 37.5% in the first quarter of 2018, which did not include any severe weather. Our operating expenses came down roughly $1 million and approximately one percentage point on both a year-over-year and sequential quarter basis, down to 42.1% overall. Our expense control initiatives are progressing and our total number of staff declined by another 20 positions in the second quarter. We incurred approximately $0.5 million of severance costs in the period, representing about six tenths of a percentage point on the net expense ratio. Regarding our non-core operations, automobile had gross written premiums of $5.3 million, down 50% from $10.6 million in the prior year second quarter, and down 16% from the first quarter of 2018, representing strong progress toward our exit from this line of business. Due to the loss development mentioned earlier, we lost $0.2 million on auto in the quarter, down from a loss of $2.2 million in the second quarter last year, which included higher level of adverse development. As of last week, we have received approval of our withdrawal plan from Allstate. As Mike mentioned, we are very pleased to announce that we have executed a novation agreement under which our Texas autobook was transferred to another insurance carrier Redpoint Mutual Insurance Company, effective August 1. The unearned premium reserve on the in-force business and the claims handling responsibility for new claims with dates of loss after July 31 have transferred to Redpoint. As such, July was our last month of earned premium from our Texas automobile business, which as Mike said, was our single largest remaining block. Note that we retained all the net premiums earned up through July 31 and continue to be responsible for the runoff of all claims with dates of loss of July 31 and prior. This transaction represents a meaningful acceleration in the runoff period for automobile as we would otherwise have continued to recognize earned premium on the Texas block into early 2019. With the transfer of this block to another carrier, we will have only a de minimis amount of written premium from August 1st forward from our remaining programs. In addition, total net earned premium is expected to be less than $2.5 million from now through January 19th, at which point in-force premium will for all practical purposes reach zero. Now I’ll turn to our other line of business, which includes all our investment and borrowing activities and our non-core commercial general liability operations from which we are exiting. Other contributed $0.4 million of net income before investment gains in the second quarter, lessened by the prior-year reserve development mentioned earlier. CGL contributed $1.6 million in gross premiums written in the quarter, down 46% from the second quarter of ’17 and 38% from the first quarter of this year with net earned premiums trending down at a slower pace as one would expect. To this point, my remarks have been focused on underwriting income, but our investment results merit any mention as well. We reported $3.3 million of investment income before expenses in the quarter, which is up 28% versus the second quarter of ‘17 and 11% on a sequential quarter basis. On an annualized basis this growth represents an additional $2.8 million per year of predictable steady pretax earnings as compared to the run rate as of the second quarter last year. Now, turning to the balance sheet. During the second quarter, we revised our ultimate loss estimate related to hurricane Irma upwards to $630 million from $475 million. Because we have exceeded our retention on this storm, the change in estimate had no impact on our earnings, but drove an increase in reinsurance recoverables and gross loss reserves in our balance sheet. Our book value per share was $16.89 as of June 30th, up $0.53 from March 31st and that’s despite $1.5 million after tax loss or $0.12 per share in the value of our bond portfolio from the impact of rising interest rates. Excluding the impact of unrealized gains and losses, our June 30th book value per share of $17.31 was up 3.9% from March 31st, representing 15% growth on an annualized basis. As Mike mentioned, we filed the shelf registration statement in the quarter for up to $150 million in new capital. This filing provides us with financial flexibility and will enable us to efficiently access the capital markets if they need or an opportunity arises. The shelf is for a three-year period and includes customary terms. We continue to maintain a conservative investment portfolio with the carrying value of just under $450 million at June 30th. The vast majority of our portfolio is invested in fixed income securities that carry a composite S&P rating of A minus. We ended the quarter with $84 million in total cash and our Holdco and other non-insurance entities together had liquidity of approximately $55 million. I'll wrap up my remarks by circling back to earnings just for a moment. Stepping back to put our recent performance in context, the second quarter and the first half of the year were pretty calm from a weather perspective. We’re free of any significant prior-year development to the bottom line and delivered ROE of 16 plus percent, despite a degree of continued drag from the non-core lines we are exiting. We’ve had three consecutive quarters of steady progress, so the trend line is encouraging. But even more encouraging is the fact that these results will receive a substantial boost in the third quarter and beyond from the decreased catastrophe reinsurance spend for the ’18, ’19 treaty year that Mike referenced, which is estimated at approximately $30 million. Net of the corresponding reduction on the related brokerage income, the new cat program will benefit quarterly earnings by approximately $6 million per quarter pretax as compared to the second quarter of 2018 just ended. That represents an additional $9 million of after-tax earnings over the second half of the year. And on that note, I’d like to hand the call back over to Mike before we open it up to Q&A.

[Michael Braun:]

Thank you, Ron. Nicole, with that, we’d like to go ahead and open up the call please.

[Operator:]

Thank you [Operator Instructions]. And our first question comes from Greg Peters from Raymond James. Your line is now open.

[Greg Peters:]

Can we just step back and can you provide some more color around reinsurance and your perspective around the reinsurance given the substantial increase in the gross loss from last year's events. I’m curious, we always felt like you had enough reinsurance to cover multiple events, and going up for $630 million in gross loss for last year Hurricane Irma is a big bite. And I'm curious how it changed your perspective when you placed your reinsurance for this year?

[Michael Braun:]

In terms of Irma, it was a big storm in the sense of the geographic footprint that it had was over the entire state. Once again, we had claims in about 60 of the 67 counties in the State of Florida. We have a lot of exposure in Southwest Florida, specifically Marco Island, Naples that area, as well as Fort Myers. We've gotten a lot of claims out of Southeast Florida. But our second-biggest county for claims is actually in Brevard County in terms of number of claims. So it was a very big storm. We do go ahead and incorporate a variety of things when we purchased reinsurance in terms of the modeling and so on. And also we look at our exposures. So I think we’re comfortable with our reinsurance program. But the storm was a big event that not only for FedNat and for Monarch but also for the industry. And I'm sure you've seen some of the industry numbers have moved up in the six months as well.

[Greg Peters:]

Can you take this moment to just go back and review the total limit of your new reinsurance program and how that compares to last year? And what your deductible is this year versus last year?

[Michael Braun:]

So last year's program was approximately $1.5 billion in total and this year's program is about $1.365 million, so it’s about $150 million less. And the reason for that is in terms of the number of units, we’re down about 20,000 units in our program. However, you’ll find that earned premium the gross -- in-force premium is staying relatively flat at about $465 million. And with less units and the rate increase, that’s really is what's impacting us favorably from a reinsurance cost. The percentage is dropping significantly by about five points. In terms of retention last year, we had retention on the one carrier of $18 million and $3 million on the other. At the time, we owned 42% of that carrier and now we have$20 million retention plus $3 million retention on the second carrier. And we own obviously 100% of that second carrier at this time.

[Greg Peters:]

And I know you're probably happy with the resource development in your core business. Maybe you could use this opportunity just -- I don’t want to call an end to AOB, but it certainly seems like you've nailed the reserve issues behind AOB. And can you talk to us about how those reserve additions has played out. Are they accruing favorably? Are they in line with expectations? Or just give some added perspective, because there was a period of time where you were definitely taking several bites of the apple to get the right reserves for assignment of benefit issues?

[Michael Braun:]

In terms of AOB, it’s an issue that’s not been resolved in the state of Florida, but I would say it's an issue that’s been mitigated. And we’ve done a lot of things to do that. Meaning, we’ve improved our operations, improved our forms, our claims handling, our communication with insurers and agents and so on. But unfortunately, the big issue is rate and we have taken substantial rate over the last two years. So when we came out of 2015 looking for AOB and really not seeing it, it hit us very hard in 2016 and it continued to do so in ’17. And ultimately it moved our attritional loss ratio about 7 points, 7 points off the 29 that we had for a long period of time. That was very meaningful. We take great pride in how we handle claims and how we can remedy them as quickly and as efficiently as possible and in a fair manner. But AOB is not just a South Florida problem this is an issue that's not going away. We’re seeing it in all parts of the state. And there's really nothing new to report on that. In terms of reserves, we've got a great process. Ron, Eric, the risk team and our independent actuary go through and evaluate reserves on the continuous basis. We’re comfortable with where we’re at. But once again, in 2016 and ’17, the numbers and the data it changed frequently, because of new information and new practices that were occurring in the marketplace on the claim side. So I think we’re very comfortable with where we’re at.

[Greg Peters:]

And then just if we could zero in on your relationship with -- your distribution relationship with Allstate and Geico in Florida, can you just give us an update on where that relationship is? And that was -- that’s my last question.

[Michael Braun:]

In terms of Allstate, we’ve got a great partnership. That book is relatively flat. It’s a Florida book, up about $120 million. I think it's a very strong relationship with them. And once again, I think they're very selective in who they work with and we’re proud of that. And in terms of Geico, it’s just much smaller book. We’re continuing to get about 100,000 a week of new business in Florida and 100,000 a week of new business outside of Florida, and once again a good healthy relationship there. So we appreciate it.

[Operator:]

Thank you. And our next question comes from Doug Ruth from Lenox Financial Services. Your line is now open.

[Doug Ruth:]

Congratulations to the FedNat team you did a wonderful job with that report. Could you explain a little bit more about how the -- you had initially projected the reinsurance savings of $27 million, and now it's moved up to 30 million?

[Michael Braun:]

Thank you for the comment at the beginning, there. In terms of the reinsurance, what we do is we go out to market. We start compiling our reinsurance spend, our program in early part of the calendar year January, February, and March. And then when we’re in April, when we visit the markets and in May, we project our final projections, I should say. But it's all based on September 30. So September 30 is where our private reinsurance adjust, June 30 is where are our FHCF reinsurance adjust. And what we're finding is, yet again with our disciplined underwriting that we’re finding that we’re actually coming in a little better than anticipated, on our September 30 projections. Meaning that we’re writing slightly less units and taxing the reinsurance program less than what we originally anticipated. Yet once again, where were projecting the premiums are in line with what our projections were. So it does continue to move a bit, but I think the most part the numbers we’re at right now is where they should be but we’ll know for sure in October.

[Doug Ruth:]

And when will you be ready to start to work with Monarch and start turn on your marketing machine and start to sell some of the middle-market insurance?

[Michael Braun:]

That’s a great question. So we’re going very slow on that and that's really something that come online in 2019. There's a lot of things that we’re working on. The risk team is working on right now in terms of the rates, the rules and the forms there, to roll that out, reintroduce it. But I don't want you to think that that's capital, that’s not being resourced. It’s just to refresh everyone's knowledge, our insurance company, FedNat Insurance Company owns Monarch. So we are actively utilizing that capital of monarch within FedNat Insurance Company that we stack them. It was absolutely a benefit to our shareholders and keeping them as affiliates.

[Doug Ruth:]

And how was the relationship with SageSure at this point?

[Michael Braun:]

They're great partner of ours, they write our non-Florida business. Last year was approximately $50 million book and we think that it will go up to $75 million this year. I think as you know, once again, Doug, I'm always cautious on getting into new markets unfortunately a lot of times you can burn your way into a market with lower rates than what the market may be at or solution underwriting or higher incentive and having that relationship with SageSure is it is been a great alignment of interest and then got that distribution to ensure that were not burning our way into these markets and the other challenges. Once again, once you got the book you got there is no easy exit from the book. So once again I'm very happy that were on slow methodical in our non-Florida business canceling our business no renewing business, shrinking our business. And a lot of these stages are extremely difficult and were methodical on how we’re going about it.

[Doug Ruth:]

Did you give the attritional loss ratio -- do you have that calculation like what you think that…

[Ron Jordan:]

The figure I gave was 38.7% homeowners gross loss ratio that excludes the provision to the hurricane estimates that does includes the 1.6 million of severe weather in the quarter. So if you're looking to pull that out there is some easy math we can do offline to deduct that.

[Doug Ruth:]

And then can you comment some about the dividend with the rising earnings or how are we thinking about the dividend?

[Michael Braun:]

We know your view on the dividend Doug obviously, and the Board continuously looks at the capital position of the company and the opportunities that are available and wants to make sure that we’re putting that to work for our shareholders best interest we’re pleased with the buyback that we had in the last two years, which was in excess of $20 million which I think was very good use of company proceeds and we’re evaluating that right now. There's multiple things that we’re looking at doing with our capital including making sure that we have sufficient capital in our Florida business as well as the funding the non-Florida but trust me, we know your opinion on the dividend and our Board is well aware and we continue to evaluate it.

[Doug Ruth:]

And then I would -- before the call started, I looked at the valuation both the HCI and United are both trading at about 160% of book. And I think that is only trading at 136% of book, it seems like your stock is low in relationships with others two. Can you offer some comments there?

[Michael Braun:]

I never really like to talk about the competitors in terms of our company we’re really focused in on what we’re doing both in Florida and non-Florida. We think that the quarter, while the last two quarters were pretty clean quarters from a valuation perspective that you can draw from and now we’ve a reinsurance state coming in and that's about $6 million, $7 million on a go forward basis. So I'm curious to see how the market reacts to our earnings just like you are. I think that -- I think we’ve made a lot of good moves with the company and we’re -- I think we’ve got a great trajectory on a go forward basis.

[Ron Jordan:]

Our view of it is if we deliver steady, dependable earnings and increase our ROE that valuation is going to continue to improve.

[Operator:]

Thank you. And our next question from Arash Soleimani from KBW. Your line is now open.

[Arash Soleimani:]

A quick question on the ceded premium ratio, so it looks like this quarter it was 43.1% overall just wanted to get your thoughts on how to think about it next quarter. I know you have the savings on the XOL program. And then you also took the quota share from 10% to 2.5% and then auto also has a large quota share, so that goes away it also benefit the ceded premium ratio. So when you look it on a consolidated basis and take all that into account what should that 43.1% from this quarter go to beginning in 3Q on a run rate basis?

[Ron Jordan:]

All those things that you just said are accurate. I actually haven't done the math to kind of pro forma that out, but in the long run as we trend towards this 29% to 30% seeded loss ratio from the cad program a couple percent on the quarter share. And then we do have the flood program as well, which is 100% seated that’s a small impact. So the trend is definitely towards the low to mid 30s, there are still a couple of the older quota shares that are that have not been they been terminated. But on a run off basis until we completely recapture those that can continue to be seeded premium and seeded loss impacts from those, but perhaps we can work with you off-line on a more specific answer for 3Q.

[Arash Soleimani:]

And I you mentioned in the $2 million of home receivable development was from related claims handling how much of that handling the Irma fees?

[Ron Jordan:]

Roughly half…

[Arash Soleimani:]

And can you just provide a bit more detail on what the weather events for this quarter?

[Michael Braun:]

What about mu urecall early on was tropical storm Alberto and then from there a significant just heavy rain in across Florida.

[Arash Soleimani:]

And I know you have the 10% rate increase going through Florida now. Looking ahead, you anticipate putting another rate increase in August of 2018. And you know just wanted your thoughts around that if you think it would be close to 10%, closer the low single digits just what your thoughts are there?

[Michael Braun:]

Arash, it's too early to say. We are working on that and anticipate filing something with the office of insurance regulation here in the month of August or perhaps even September. Any rate increase that we do ask for would obviously be reviewed. It will take some time, so that would not be rolled out into our books until next year until 2019 as does take about 90 days for the review. Plus also we usually roll it out about 90 days out, so that we can do our -- have enough time to program our systems to generate renewals, which go out approximately 50 days prior. So any rate that we do have would be in 2019. And I don't have a number for you, but that I would say it's not going to be as significant as 10%, that's just my gut instinct. But once again it’s the actuaries that are still working on the filing and it will be a little bit time before we have that number.

[Arash Soleimani:]

And I know you talked about Monarch within legacy FedNat book in Florida what’s your appetite for growth there. Now that you have the rate increases coming through, do you see -- are you more inclined to try to increase the discount in Florida itself?

[Michael Braun:]

I would say that we are hungry for growth, absolutely. But I would also stress that we’re disciplined to the bottom-line earnings. So you know a lot about our Company and the history of the Florida marketplace. We saw opportunities we were flat for many years and then we saw opportunities for growth back in ’12, ‘13, ‘14, ‘15 and really our growth has slowed since then. But we think there is a lot more profit that we can get out of the business and that’s what we’re focusing on. And if we can have meaningful growth in the same time that would be fantastic we’re interested in that. But it’s all about bottom-line earnings in terms of what we’re focusing on.

[Operator:]

Thank you [Operator Instructions]. And our next question comes from Samir Khare from Capital Returns Management. Your line is now open.

[Samir Khare:]

You guys put a lot of information out on the call today, I appreciate that. But I guess some specific questions, one on the quota share. What’s the ceding commission on the quota share and what was it before exchange of this renewal?

[Ron Jordan:]

So the ceding commission is a sliding scale and -- so obviously it slides with a loss ratio, it’s typically in the 30% range.

[Samir Khare:]

And who is that written with?

[Ron Jordan:]

That’s with SwissRe.

[Samir Khare:]

And how much cat does it cover?

[Ron Jordan:]

In terms of the cat allowance?

[Samir Khare:]

Yes.

[Ron Jordan:]

Yes, there’ a cat allowance that’s in 30% range.

[Ron Jordan:]

To be clear what that is that is, is that the recognition by SwissRe that cat costs are significant for us in our operating model. So the ceding commission takes a haircut off the ceded premium of roughly 30% in calculating the ceding commissions. But the treaty itself does not cover hurricane, it does not cover wind.

[Samir Khare:]

And then what do you expect the gross commission ratio to go up to from here with lowering the quarter share percentage?

[Ron Jordan:]

Well, the gross commission ratio wouldn’t change as a result of any change in the quota share.

[Samir Khare:]

Maybe on the net commission ratio, I mean, isn't it being benefited by the commission -- ceding commission right now?

[Ron Jordan:]

Yes, absolutely. The net ratio will change somewhat.

[Samir Khare:]

Can you give some guidance on that…

[Ron Jordan:]

Samir, what I was going to say is I think there’s two things that would impact it. Obviously, the ceding premium going forward with an increase to the net premiums earned number. And then from just expenses as the non-Florida book continues to grow, we will see the expense ratio grow proportionally related to the 50% profit share cost that is meaningful.

[Samir Khare:]

And then I guess, last August, rate increases are fully earned in and I think that's going to be fully earned in by 3Q. What would you expect the attritional loss ratio to be?

[Ron Jordan:]

So we think there's about $2 million a quarter left to go in terms of earn-out on the 10%. So doing that math is it’s fairly modest reduction on the attritional loss ratio, but it would go down one another on a relative basis, $2 million on $80 million a quarter is 2% on a relative basis.

[Samir Khare:]

And then that loss ratio, if I'm not mistaken, it does not include a provision for non-cat weather losses, is that right?

[Ron Jordan:]

Correct.

[Samir Khare:]

I asked only because it seems the last few years we’ve experienced a couple of points or so of small weather losses every quarter. And I'm just wondering if it makes sense to take further rate increases to dampen that volatility out?

[Ron Jordan:]

Philosophically, by the time we get to the end of the quarter, we know what storms have happened and we step up to those storms on a specific identification basis. So you're right, we don't have a storm estimate in our pick. We deal with them in a specific ID basis as they occur.

[Samir Khare:]

So the question would it make sense to take further rate increases to dampen or take provision for that volatility?

[Michael Braun:]

Samir, well said. But you also have to remember we’re operating in a very competitive marketplace. So we’re mindful that we want to make sure the carriers’ rate is priced correctly in terms of -- from our obligations to our policyholders but also we operate in a competitive marketplace. So there is other initiatives that we’re doing as well to improve our underwriting and claims handling that we think is contributing to an improved loss ratio, but obviously the proofs in the putting. So there is multiple things. You can't just take rate to fix problems. You also have to improve your operations and we’re doing both.

[Samir Khare:]

And what’s your policy holder retention in Florida?

[Michael Braun:]

In terms of Florida, we typically have about 90% that finish the policy period and annual policy period, and those that are offer the policy renewal that’s again another 90% roughly. So you're talking about 81% retention over consecutive years.

[Samir Khare:]

And you’ve been quite vocal that you’re open for business in Tri-County and your order premiums have come down only slightly. But there is also rate increase affecting that business as well. Can you just discuss any change you’re seeing to your county mix?

[Michael Braun:]

I like Tri-County. I have no aversion to Tri-County at all. And we’re seeing -- there is other parts of the state that are challenging. I would say more challenging than Tri-County. So once again our big counties include, Dade Broward, Palm Beach, Pennell Hillsboro but also Brevard is a big County, Lee Collier. So where mostly these coastal counties, I would say from Daytona South and Tampa South, we’ve got a good exposure mix in the Panhandle. But in terms of the composition of the book, we’re not seeing too much change. We’re still at about roughly 25% of the policies for both carriers are in Tri-County.

[Samir Khare:]

And then on the gross Ira loss increase, would love to get your take on what’s causing the increase?

[Michael Braun:]

We’re still getting claims. So we’re still getting approximately 50 to 75 first notice of losses each week, we’re getting reopens and we’re getting represented claimants as well. So it’s a combination of things and unfortunately that has moved the ultimate for both FedNat and monarch but also the industry. And the industry now is approaching $10 million on that.

[Samir Khare:]

And on the claims that you’re getting, right now, with first notice of losses, are a lot of those attorney represented or could you give us some complexion on that?

[Michael Braun:]

Yes, a lot of them are attorney representative. Florida is a very litigious state and the attorneys are well organized and these claims can be complicated quickly. And the more people you have in the claim, the more expensive it gets without a doubt. So it's part of Florida. Nothing new I should say, it's really not much different than we saw when we had our storms in ’04, ’05 those, I mean Charlie and Francis all the way up through Wilma. It’s really not that much different.

[Samir Khare:]

And the reopens that you cited. Is that a phenomena that’s accelerating right now, or is it…

[Michael Braun:]

No, I would say that's slowing a bit. We’ve got about 95% of claims close but we’ve had that percent close for a while. So as we close some down, new ones tend to reopen or new ones are reported. I think the vast majority of this storm of Irma is way behind us. But there will be some lingering effects clearly. We have three years to get your claim in and we’re coming up on the one-year anniversary of it. But I think the vast majority is behind us.

[Samir Khare:]

And then any noticeable pickup in litigation trends that you’ve been seeing on your daily claims?

[Michael Braun:]

No, no change. Litigation has always been out there. We see it in Tri-County but we see it in other parts of the state as well. We’re not really seeing much of a change in that regard.

[Operator:]

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Mr. Michael Braun, Chief Executive Officer and President of FedNat Holding Company, for any further remarks.

[Michael Braun:]

Thank you. I would like to thank each of you for joining us today for your ongoing interest in FedNat. I’d be remised if I did not thank our employees, agents and other strategic partners for the tireless efforts to deliver excellent products and services to our customers. FedNat is poised for a strong second half of 2018 and beyond, boosted by our focus on exposure management and operational efficiencies. And we look forward to discussing those results with you at the appropriate time. Thanks again and have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This conclude today’s program, you may all disconnect. Everyone, have a great day.