FedNat Holding Company
Q1 2014 Earnings Call Transcript

Published: 2 May 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the Federated National Holding Company’s First Quarter 2014 Financial Results. At this time, all participant lines are in a listen-only mode. Later, we will be conducting a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. Statements in this conference call that are not historical facts are forward-looking statements. Without limiting the generality of the foregoing words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target or will or the negative thereof or variations thereon and similar words or phrases or comparable terminology are intended to identify forward-looking statements. The matters discussed on this call that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes and results may differ materially from what is expected or forecasted in forward-looking statements made on this call, due to numerous risks and uncertainties including, but not limited to the risks and uncertainties described in this conference call. Our press release issued today and other filings made by the company with the SEC from time-to-time. Forward-looking statements made during this presentation speak only as of the date on which they are made and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. With that, I would like to turn the call over to Michael Braun, CEO of Federated National Holding Company. Sir, you may begin.

[Michael H. Braun:]

Good morning and thank you for joining us today to discuss Federated National Holding Company’s first quarter 2014 financial results. I’m joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results for the quarter can be found in our earnings press release. I will go over some brief highlights from the quarter and then Pete and I will open up the line for questions. Highlights that measure against the same three-month period last year include 166% increase in basic earnings per share, 141% increase in net premiums earned, 127% increase in revenue, 100% growth in homeowner policy count to approximately 134,100 policies, 79% increase in gross premiums written. First quarter 2014 also included $1.3 million in realized gains from the sale of equities. We are off to a great start in 2014, thanks to our continued disciplined underwriting, expense control, and quality customer service to our policyholders and independent agents, who wrote $48.3 million of new homeowner voluntary business during the first quarter. The expense associated with our annual catastrophe reinsurance contracts, which became effective in July 2013, is allocated equally over the contract period, which runs through the second quarter of 2014. Our rapid growth in earned premium during the fourth quarter of 2013 and first quarter of 2014 has temporarily reduced our ceded premium “reinsurance expenses” to approximately 33% versus a more normalized range of approximately 40% of gross premiums earned. This trend will further continue through the second quarter of 2014 and then should return to a more normalized range with the new reinsurance contracts starting in the third quarter. Our plan remains focused on supporting growth strategies with disciplined underwriting, prudent risk management, exceptional customer service, maintaining strong capital ratios and enhancing shareholder value. Our overall performance this quarter reflected our ability to manage the business in a way that delivers bottom-line results With that, we are glad to open up the call to your questions.

[Operator:]

Thank you. (Operator Instructions) And the first question that we have is from the line of Ryan Byrnes from Janney Capital Markets. Your line is now open.

[Ryan Byrnes:]

Great, good morning guys, congrats on another nice quarter.

[Michael H. Braun:]

Good morning.

[Ryan Byrnes:]

I had a question on again, your upcoming reinsurance renewal. I know it’s still a few months away, but wanted to get maybe initial thoughts on where you think that that could go?

[Michael H. Braun:]

Well, last year, we bought approximately $425 million of cover; our book has for the most part doubled over the last year. So we anticipate buying approximately doubled. There’s a lot of numbers that continue to move. And then in terms of the costs, we spend approximately $68 million last year on Cat cover, and if you double that, that would be in a flat market what the expected cost is. But clearly, there’s a lot of capacity in the reinsurance market and it’s believed that rates could go down in excess of 10%. So we do anticipate having a savings on our reinsurance program in terms of what’s called the rate online. But we’ll also continue to be a big buyer of reinsurance to make sure that we’re protecting our policy holders and shareholders. So we’re looking at approximately double last year in terms of the cover. So it could be around $850 million dollars of cover.

[Ryan Byrnes:]

And did you – as you mentioned about what type of retention you guys will look to take for the new cover.

[Michael H. Braun:]

Yes. basically Florida carriers are expected to take no more than 20% of their statutory surplus. Our statutory surplus is approximately $85 million. So we could theoretically go aside 20%. So let’s say $16 million, I believe would be probably lower in the $10 million to $12 million range. Based on the capacity and the pricing, we prefer to have a slightly lower retention and/or more trouble on the top of the program. So those are general numbers, where we’re at now. We’ll know a lot more as we move forward, really in the month of June.

[Ryan Byrnes:]

Okay, great. And then could we just move into the expense side, obviously, there has been some benefit from the earned premium earning through, for this quarter and obviously, it sounds like second quarter as well, but in light of reinsurance cost potentially coming down 10% plus. I just wanted to see how that impacts, I guess your third and fourth quarter of 2014, I know that you guys mentioned 34% to 40%, but will that 40% be impacted at all by, how much can that be impacted by lower reinsurance renewals?

[Michael H. Braun:]

I’ll give you more general statement and we’re peaking going from greater detail. But generally, all companies that operate Florida the exact earned expenses. And those are three expenses, which is catastrophe reinsurance, ALP or non-Cat losses and acquisition and well regulated entities and really, you’re allowed to make that look basically as underwriting profit of around 4%. now it gets a little completed than that, because there’s other fee incomes and things like that. but generally 40% is where a lot of carriers tend to be, some can be 45%, 50% depending on different things in the marketplace. But you really fill out the rest with ALP, which can be low-20s and you had LAE to that, you can be in the high-20s in an acquisition can be made up low-20s as well. so basically, that’s we expect to make more normalized Q3 or Q4, but as our increase in the reinsurance expense is amortized in our book of business.

[Ryan Byrnes:]

Okay, great. And I’ll just squeeze in one more and I’ll hop off, just gross – growth in premiums, just want to see on a weekly basis where you guys were in the quarter and how you’re trending – how you guys trend in second quarter as well?

[Michael H. Braun:]

We wrote $48.3 million of new business in the quarter. so I could divide that by 13 weeks, you’re looking at around 3.7 a week, as it clears to underwritings, we might lose, let’s say 10% around. so let’s say roughly 3.3, 3.4. There are some weeks; we had close to $4 million, over $4 million. but we’re really not trying to write a lot of business work in and dated with volume of the quotes. we only mind about 10% to 12% of the quotes we give out, and we do over 200,000 quotes in the fourth quarter and into the first quarter, another 200,000 quotes and that’s how the second of 2013 was as well. There is just an incredible amount of business that we’re looking at, that’s because of the service that we provide our agents, agents are very comfortable placing business with us. so I don’t see anything changing in the future. the market can change on a moment’s notice; competitors can change their pricing in more aggressive, there’s a lot of things that could impact it. But we anticipate the volume to sake steady at this point, but we’re not specifically targeting that number, we’re writing the business that we’re comfortable with and it’s just still happens to be in that range right now.

[Ryan Byrnes:]

Okay, great. Thanks for answering, guys.

[Michael H. Braun:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jon Evans from JWEST LLC. Your line is open.

[Jon R. Evans:]

Can you talk a little bit about your success out of Florida, so you talked about going out of Florida a little bit, and I was hoping to hear some more insights about that?

[Michael H. Braun:]

We’re clearly a Florida company. we are branching out of Florida very, very slowly. On the firm believer, because we know Florida and do a very good job here, that really – we can’t assume in our other states in the same way. there’s a lot of peculiar markets, within states, you have to be wise in what you’re doing, in many often, many cases when you have a dislocated market that, it can be easy to write premium, which can come back to our view. So we’re very slow in terms of the expansion, Louisiana has lower writing property outside of Florida, that’s coming in at about 100,000 of weaker premiums, that’s going to – that’s going to be immaterial for the foreseeable future. I anticipate that we’ll be in South Carolina by the end of the year with homeowners and we’re looking at the some other states as well into 2015. but that will all be in a very slow rollout, in terms of our – we do have private passenger auto, which we ride in Florida and Texas that will grow slightly as well perhaps, in other state, but immaterial insurance of our whole book of business and CGL which is approximately $10 million book of business and that’s primarily for Florida. but we do write some in Texas, Louisiana and Georgia. Once again, I anticipate bulk of that, but when you compare it to homeowners, when we wrote $48 million in quarter of just new, those numbers are going to be in the terrible for the foreseeable future.

[Jon R. Evans:]

And then just a follow-up. Last year, because reinsurance was relatively and expensive for you. You took a different strategy and you wrote pretty aggressively in Q3, relative to your normal seasonality. Could you talk a little bit about your thought process about this year’s third quarter and which where pricing is, do you think potentially you have the same strategy or…

[Michael H. Braun:]

Yes. Generally, reinsurance impacts the third quarter, more difficult than the other quarters, because you are essentially paying for covers that you are not earning out on your premium as quickly, but as long as we’re buying the reinsurance at more reasonable rates, which we did last year and what we’re doing this year. You don’t have that penalty of writing business in the third quarter as much. So I’d like to clarify, we always believe what we’re writing is profitable, but sometimes can hurt in the short-term. Last year, we rolled through the third quarter and this year, we’re going to be writing through the third quarter as well, as long as the reinsurance comes true as we anticipate. So I don’t see it slowing down in the second or the third quarter in terms of writing the business. But once again, market conditions can change based on other competitors, actions and we would only write the business we’re comfortable with.

[Jon R. Evans:]

Got it. And then the last question I have for you is, as you talked about the tremendous amount of quotes that you’re putting out. Can you just help us understand the competitors dynamic going on in Florida, you have the – I mean I understand it’s always competitive, has it got more competitive, less competitive, the same or can you talk about pricing et cetera?

[Michael H. Braun:]

Yes. In pricing, we have a rate file ending with the state of actually, pretty close to zero. So, we haven’t said, we said rate in 2012 of 4%, zero in 2013 and I anticipate zero in 2014. Now that’s an overall, so there is movement behind that, some areas, some lines of business and so on, but the overall, zero. Generally, speaking our rates were competitive, and we have a preferred career and as I say a lot, a lot of times to the people when you fly in an airline or you take the hotel, when we say as they’re preferred company, they’d like to deal with and as on with the prices competitive, that’s where you’re going to go. What it’s an airline hotel, whatever it may be. If the prices aren’t lack, you’re not going to do it. So as long as we’re completive, we have a great relationship with our partner agents. We are nothing about our partner agents, and that’s how we treat them, and we feel that they were segregated that by – in trusting their businesses with us. and with that, we typically get the pick of a letter; we get a quote on a lot of business. And I think that we’re competitive throughout the state, I don’t see anything significantly changing in the foreseeable future, some carriers may go up, some may go down, some may stay flat. but in the current market, prices are very competitive.

[Jon R. Evans:]

Thank you.

[Michael H. Braun:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of William Meyers from Miller MAG. your line is open.

[William Meyers:]

Hi, thanks. I would just like to – I think you already answered this, but I’d like to separate out and make sure I understand, you said you’re going to be writing business at the some level more or less in Q3 and related that to actual reinsurance. But in past years, you had talked about sometimes writing less during the wind season and you’ve also talked about the quality that you’re able to pick at this time is better. So I just wanted to check specifically on the wind season, are you not – are you going to continue to write policies, despite that question. Thanks.

[Michael H. Braun:]

Yes. I mean that’s a good question yet again. Basically, to answer yet a different way is, we’re projecting let’s say one and 100 to be where we’re buying the reinsurance to be approximately $850 million at September 30. So when we buy just to say for just simplicity that our book is at $700 million or $750 million in June and July. We’re buying additional reinsurance that cost us money. So writing during the season kind of penalizes, because you’re incurring 90 days of expense. Yet periodically, you may only be – you may write a policy on September 28, then you only got two days of premium. So once again, that policy, by itself there’s a problem in policy in that quarter can be punitive. But the answer to that is we believe that our, the reinsurance out there is ample and we believe the pricing to be fair. So right now we anticipate writing through the third quarter, not selling it down at all.

[William Meyers:]

Okay, that’s all from me. Thanks.

[Michael H. Braun:]

Thank you.

[Operator:]

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

[Doug S. Ruth:]

Mike and Pete, you’ve done an absolute fabulous job, I congratulate both of you.

[Michael H. Braun:]

Thank you.

[Peter J. Prygelski:]

Thank you.

[Doug S. Ruth:]

I’ll ask Pete a question. Could you talk a little bit about the stock and bond portfolio and what changes you might be making towards?

[Peter J. Prygelski:]

Well, over the last six or nine months Doug, we’ve reduced our exposure to equities pretty significantly. I think we were at maybe year ago 20% in the equity, asset class and that we’re down to 12%. We continue to move out of equities into fixed income. We also now have a sizable $60 million to $70 million annuity portfolio within the fixed income. So we’re going – starting to move more heavily towards tax exempts.

[Doug S. Ruth:]

And what duration are we buying in the bond portfolio for the most part?

[Peter J. Prygelski:]

The durations – the duration right now is at about 3.74 years, down from about 5.5 years and again that was eventually here rates are going to move up and we didn’t want to be caught, taking hit to comprehensive incomes. So we’ve shortened the duration, we are sacrificing yields, however, I think we’re protecting the principle a lot better.

[Doug S. Ruth:]

I think you’re doing the exact right thing.

[Peter J. Prygelski:]

Thank you.

[Doug S. Ruth:]

Could you talk a little bit about the, Allstate all relationship and what’s happening with that?

[Peter J. Prygelski:]

Allstate is a great partner of us, of ours I should say. Their agents produce a good amount of our business and there’s really nothing new to report until last quarter. We’re committed to all of our agents. The majority of our business comes through independent agents and Allstate is our largest captive forces in that regard during the tenants come up but they are part of the Allstate Corporation obviously. But there’s a good relationship and continues to go on.

[Doug S. Ruth:]

Okay. And could you talk a little bit about what you’re hearing from Citizens, maybe, what’s the size is and what any kind of?

[Peter J. Prygelski:]

Well, they peak at around 1.5 million, 1.6 million policies about a year and a half or so ago. They are under 1 million policies now. The de-pops are still possible net effect is probably doing one in June. I believe we’re targeting about 10,000 policies. You can still do de-pops, but really the clearing house is slowly coming online and I think the clearing house is a great idea for the citizens, the corporation as well as the citizens on the State of Florida. But the truth is Citizens is dominated by Tri-County’s, which is Dade, Broward, or Palm Beach and Tampa-St. Pete (indiscernible) and the two counties north of that, which is Pasco and Hernando, which have significant exposure to sinkholes. So we haven’t participated in de-pops, because that business that we are very comfortable writing on the voluntary basis where we underwrite each risk very carefully. And the rest of the states, you just don’t get that exposure considers in this much, so you don’t see the value of de-pops there, and that’s why we’re so committed to our partner agents. This is to ensure that we quality business that we can review one at a time. So I think Citizens has seen their policy count decrease significantly and will probably trend more in that direction going down. How long can I get? That’s a guess, I’m on a guess maybe 750,000 policies, that’s probably around just rough numbers, maybe $250,000 were that are challenged that would probably not get picking up by anyone for ALP reasons and probably another 500,000 that may not work from the win perspective. So I don’t know if you can go below 750,000 or not, but that’s just a rough number that I’ve got in my head.

[Doug S. Ruth:]

Okay. That’s helpful. And what about your, the employee count, are you hiring additional people in 2014?

[Peter J. Prygelski:]

Oh yes, yes. We’re up to – the last count I have is 182, but I know it’s higher than that. We had six people start this week as well. So we’ve got open positions if you know anyone in South Florida, Doug. We’ve got a lot of great people and we’ll continue to expand to service the business.

[Doug S. Ruth:]

And the people that you’re hiring and what capacity are they generally working?

[Peter J. Prygelski:]

Well, really everything primarily underwriters and adjusters, but all parts of the building have expanded from, including IT for every function really just because of the amount of volume that we’re handling. So I anticipate probably at the end of the next quarter, we may have another 20 people on board.

[Doug S. Ruth:]

Wonderful and are you keeping that Tri-County policy count below the 19%?

[Peter J. Prygelski:]

Yes. We’re right at around 19% still. Correct.

[Doug S. Ruth:]

Wonderful.

[Peter J. Prygelski:]

Yes.

[Doug S. Ruth:]

Okay. I just think you folks have done just a beautiful job and it’s a real customer need to use, you Mike and you Pete in the whole organization. And thank you for doing what you’ve done?

[Peter J. Prygelski:]

Well yes. Doug, this is a little group here and everyone works very hard. So thank you for the recognition.

[Operator:]

Thank you. Our next question comes from the line of Pat O’Brien from Fox Asset Management. (Operator Instructions) Mr. O’Brien, your line is open.

[Patrick O’Brien:]

Hi, guys, the 10% or 12% that you’re actually buying the comment you made earlier. can you tell me about the other 88% to 90%, why are they going away, they don’t like to price or you refuse to quote?

[Michael H. Braun:]

Basically, we have around 50% that we believe our price is inadequate and we’re not comfortable putting a policy out there. And then the other 38% to 40%, as I said, we’ve quoted. But that hasn’t come to us, maybe it’s a renewal with another carrier and it’s not much of the savings that they’re willing to do the paperwork in the underwriting to move it all over, or maybe they can get a cheaper policy elsewhere, either in the admitted or maybe with citizens or even in that market whatever it may be. But we consistently, as we’ve been tracking this for the last four years or so, we typically bind, it really kind of doesn’t move up by the range of 10% to 12% in that range, some months, it’s a little bit lower, but 10% is where it tends to hover.

[Patrick O’Brien:]

Okay. The description of the citizens, you said $1.5 million or a $1.6 million could go to $750,000, because no body would take the $750,000, that sounds like they’ve reduced the policy by half, but they haven’t really reduced the risk, have they?

[Michael H. Braun:]

Well, I think (indiscernible) has done a phenomenal job of citizens. And I think downsizing it was the right thing to do. So in terms of their aggregate, in terms of their PML, it terms of their exposure, it’s definitely down. But there is of course, policies that are difficult to work in the admitted market or even the E&S market and always being in the insurer of last resource, which is what citizens’ role in. Those are just rough numbers that I’m pointing out. It could be if the rate environment improves, I guess that could be a much lower number that citizens will have or – but those are just rough numbers that I’m giving you.

[Patrick O’Brien:]

Okay, thank you.

[Michael H. Braun:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Samir Khare from Capital MAG. your line is open.

[Samir Khare:]

Good morning, guys. how are you doing?

[Peter J. Prygelski:]

Good.

[Michael H. Braun:]

Good morning, Samir. Thank you.

[Samir Khare:]

I missed some of your opening comments, forgive me. I just wanted to talk about how you go about setting your initial ALP loss ratio? Just given the trend has been a growth. Are you taking a conservative steps, can you just talk about that today?

[Peter J. Prygelski:]

Yes, Samir, it’s Pete. We basically, I mean just giving an approximate here. So on our armed business; we are reserving around 30%, that’s probably trended up the last year to a 3 percentage points, because of the rapid growth, right. so to be conservative as we’ve doubled the book now almost two years in a row, we’ve taken a slightly more conservative approach to our reserving.

[Samir Khare:]

Okay, great. and is there any additional timing that you are targeting right now and actually planning agents and again that I may have missed it, but are you guys have been running with the clearing house?

[Peter J. Prygelski:]

We are part of the clearing house, but the clearing house – excuse me has rolled out a little bit slower than expected, they wanted to roll out January 1 and ultimately, has only two or three carriers that went live. And I believe we went live and I’m going to say roughly April 1, and that’s our new business, and then on renewals. So I believe a total of maybe 20 carriers are going to roll into that our new business and maybe 20 on renewal. But what I don’t anticipate that to be a big impact at our business and the reason for that is, as I said earlier, citizen’s business is really concentrated in the Tri-County, which is Dade, Broward, or Palm Beach and Tampa-St. Pete (indiscernible) and also just north of Pasco and Hernando, which has sinkhole exposure. So writing in the other parts of the state is much more competitive and we really concentrate in our partner agents throughout the entire state. So it’s not as difficult to write in those areas where citizens is, so we are participating, we’re looking for opportunity to work with citizens and help them reduce their exposure. but I really don’t think that’s going to have a material impact on our business.

[Michael H. Braun:]

Samir, the number I quote – that 30% I quoted you was for homeowners, if you blend in and wait CGL, it’s probably 35, but the homeowner thing is clarity. Yes.

[Peter J. Prygelski:]

Yes.

[Samir Khare:]

okay. And then a question on if you guys are targeting any additional counties and putting agents that over there?

[Michael H. Braun:]

We’re all over the entire state. ironically now, where we have exposures in 66 or 67 counties and Latvia County has 8,000 people in Florida, but a reason we can own the homeowner policy there yet, I’m not avoiding it. But we’re all over the state. But really, Tri-County’s are on 90% of our exposure, a significant one of exposures on the West Coast, which is Tampa-St. Pete down (indiscernible). And then also more for (indiscernible) we have a lot more exposure up in Orlando and Jacksonville, as well and then obviously in the Pan Handle, we’ve got a significant – our book is really very well diversified throughout the entire state.

[Samir Khare:]

Okay. And just on the Pan Handle, are you guys expecting flood markets from the – well, I guess you guys don’t cover flood, but just on the flood?

[Michael H. Braun:]

Yes. to answer that right now, we have around 50 claims in. There are two types of policies, we do right flood and that’s a 100% ceded to NFIP, which is the federal government. So there is exposure there, but it’s 100% ceded. And that’s basically, what is right in water. Separate from that, on a homeowner policy, water intrusion that typically comes from a rule, or perhaps the windows, that would be the exposure that we will have on a lot of rein like that may have around 20 inches of rein. So we’ve got around 50 claims and so far typically in that situation, you had dry wall and things like that that need to be replaced inside the house. So I don’t once again, I think though having an immaterial impact on the quarter, but that’s where we’re at right now, it’s around 50 claims.

[Samir Khare:]

Okay. And the – you talked about your 12% bond rate; you just talked about the 88% turndown rate that Doug was asking about. Do you get policy request for – of course, you kind of closed down at this point, or deal with your agents pretty much that they don’t run from here, so they don’t send them to you. Is that part of part of your 8%?

[Michael H. Braun:]

Clearly, agents kind of learned – you kind of learned, in the sweet spots, right. I said earlier that people like their airline and as long as their airlines come back, if they’re going to fly in and I’m assuming at some of that was in, New York, they get that aside in Atlanta, that’s going to typically fly delta, because you learned a lot and so on. So a lot of agents know where we’re competitive and the type of risk where we’re most completive, but we always sell them, go and put it in. We’ll take a look at, if there’s no harm in taking a look at it, we’re very happy to do so. On some areas, it’s tougher to get a policy than others, because we need, we get exposure and aggregates and things like that. But we’re happy to look at any quote that an agent will share with us.

[Samir Khare:]

Okay. And then finally do your policies currently sublimate water damage that’s kind of been a problem in the state and if not, is that something you’re seeking to do?

[Michael H. Braun:]

Yes. we’ve had that for a number of years, and that’s not on all policies, but basically, there’s a sublimit that you can have and then there’s endorsement that you buy. Yes there is our number one loss as is I would assume most carriers as water losses and water losses is primarily attributed to pipes whether it’s a washing machine, a dishwasher, hot water heater, covered sink whatever it maybe. And we have very proactive response when we get those type of claims in to facilitate remediation as quickly as possible, we want to insure there’s a as minimal disruptions to our policy holder and that’s the most frequent client by far.

[Samir Khare:]

Okay. Great. Thanks guys, congratulations, again.

[Michael H. Braun:]

Thank you Samir.

[Operator:]

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

[Arash Soleimani:]

Hi thank you. I just got couple quick questions, just looking at some of the TIV and policy enforce data, I think it shows you guys have about on average to homes insured about $450,000 is that accurate?

[Michael H. Braun:]

Well, you’re talking about in total exposure, I mean it really varies at the end, right now we have different types of policies. So we have HO3, which is a single family and worldwide a lot sort of those homes are in the 300,000 coverage day that’s the structure range, let say 250,000 to 300,000. And then other coverages double that basically. So when you look at what’s called BCD which is the detain structure contents, as well as AOE you can double that. So your statement could go up to 500 or 600 on average. We do write homes in access of TIV which is some of all coverages $6 million, $7 million, $8million. But now we only retain no more than $500,000 on those, we see that offered to one of our reinsurance partners, so we had a $6 million, $7 million, $8million fire on a nice house, we would basically be reimbursed in our exposures cap to $500,000. But then we have other lines of business, we have what’s called an HO4 which is a renter policy and that’s just contents. We have an HO6 and those limits are significantly less than an HO3. Those can be $25,000 to $50,000 and that’s basically a condo where you drive well in and you’ve got some contents liability exposure. And our DP3 which has generally lower limits as our HO3 and that’s much more that basically unit rents it to others in most cases or trust to LLC may own it. So your numbers kind of right but there’s a lot pieces behind that.

[Arash Soleimani:]

All right. As I guess I’m looking also Pasco and Hernando and it looks like that TIV per pit there is significantly lower than the other counties so is that because you’re doing more condos or renters there or is that?

[Michael H. Braun:]

Yeah, we do with more HO6s up there absolutely.

[Arash Soleimani:]

Okay.

[Michael H. Braun:]

Our HO6 is a condo unit, yes.

[Arash Soleimani:]

Okay, thanks. And my next question I just wanted to ask in terms of capital structure why is that you have chosen to have little debt in the capital structure?

[Michael H. Braun:]

Well, basically you know we raise capital during 2013 and that was surprisingly $30 million. And we believe that we always work as board, as management team consulate reevaluate the capital needs of the company. But as an insurance company you can increase leverage with that, but you can also increase your exposure specifically on the market turns. So that’s just something that to Board has been very comfortable with.

[Peter J. Prygelski:]

Yeah, I think that and basically in the recent we got away from debt for the reason we needed to raise the capital last year, was to grow the – in our insurance companies’ growth. But once you put, once you raise debt and you put that debt into surplus, you’re not – the Department of Insurance is not going to let you pull that money back out to repay that notes. so we have a five or seven-year balloon, you might have interest rate risk, because you’re going to potentially refinance that if you have been generating a fee income outside the insurance committee to pay the debt back. so, if we’re raising money for M&A, that’s certainly a possibility. But when you’re raising money to fuel the growth of the insurance company, as Mike said that gets a little risky to have interest rate risk and the site.

[Michael H. Braun:]

And to go a little farther that there’s two things you can do, you can really do quota share and you can take on debt and those things can get out of hand very quickly, and I’ll say that was great fly, our board, our management team believes that we’ve got probably the cleanest balance sheet in the state. now we could ramp up returns by doing quota share and debt, but we’re very comfortable where we’re at. we believe it’s safer and we’re still able to generate the returns that our shareholders are expecting, but we believe it’s a safety way to protect our policy holders.

[Arash Soleimani:]

Okay, thanks guys. Please go ahead.

[Peter J. Prygelski:]

I will just say, dimensionally, equity that we raised last year was extremely accretive and as a board and as management, we would not raise the equity if we did not think it’s going to be accretive.

[Arash Soleimani:]

Okay, great. Thank you so much for the fair answer.

[Peter J. Prygelski:]

Thank you.

[Operator:]

Thank you. And I have a follow-up question from the line of Pat O’Brien from Fox Asset Management. Your line is open.

[Patrick O’Brien:]

Currently, you had a lot of operating leverage in this quarter versus last year. I see 34% expense ratio versus the 47% last year, how far can that go?

[Michael H. Braun:]

Pat, I think that last year, when we look at the ratios where I do it is we say, we look expenses over revenue, but we exclude lots of dropping expense. So if you just look at operating and underwriting, salaries and commissions last year same quarter we were 40% this year same – this year we’re at 30.49%, as Mike said, a lot of that leverage that you’re seeing in Q1 and – that you will see in Q2 is because of business we’ve returned since October. We have about reinsurance on that business yet. so our own premium is higher, because we’re ceding a little less until we get to our new reinsurance contract. We said on previous calls that we target somewhere between somewhat 36% and 40%, you’re seeing great leverage in the first and second quarter. but as we said, as Mike said in the press release I think that that 30% is going to inch back in the third and fourth quarter to 35%, 36% which is a more normalized rate for 36%.

[Peter J. Prygelski:]

And Pat, to dig a little deeper on that as well, we run our business under the assumptions of normalized expenses. We’re not trying to gain the system, we’re trying to run the business correctly, which don’t happen with this rapid growth is giving us additional leverage. however, that’s not our intent, our intent just to write the business that we believe is correct and we’re just in – experiencing tremendous growth at this point, which is definitely giving us additional benefit.

[Michael H. Braun:]

Yes. And as far as the ratio goes, the 40% from the last year, I think that we’ll say below that 40% I think what we are leveraging as much hover now, we’re operating more policies to leverage better than it was last year, right capacity?

[Patrick O’Brien:]

I can assume why you a get thought to, during the year, because of the timing of the reinsurance and then growth of new insurance without additional reinsurance cost by about, still as the year-to-year numbers are working at, not the seasonality, but whatever, how about a premium to surplus, how far can you go, how much more room do you have deployed out to rate more equity?

[Michael H. Braun:]

It is the – you have a couple of questions there, in terms of gross return premium, generally, we’re at three to one, you could really be at five to one, or six to one, more in a flat book, because there is a lot of penalties and what’s called RBC risk-based capital with growth. So we’re generally at three to one. And then, in terms of, as we need additional capital, that’s something, our Board looks that on a continuous basis. We don’t want to deploy raise capital that we would not be able to deploy and use efficiently. so that’s something we always evaluate, and we were happy that we raised $30 million that we did year, because we’re able to put it to work.

[Patrick O’Brien:]

Okay. Is that statutory surplus in the note that you guys…

[Michael H. Braun:]

Yes. There wasn’t another – there was $30 million of equity that we raised and then of that, we put $16 million into the insurance companies. The insurance company ended the year with approximately $77 million of statutory surplus and ended the quarter, the first quarter of approximately $85 million of statutory surplus.

[Patrick O’Brien:]

Okay. But you have the option of downstreaming some cash from parent?

[Michael H. Braun:]

There is additional capital that could be downstreamed, yes.

[Patrick O’Brien:]

Got you, okay. Thanks guys.

[Michael H. Braun:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) And I’m showing no further questions at this time.

[Michael H. Braun:]

All right, well. We just – Pete and I would like to thank everyone who is dialed in or clicked in online to hear the call. I appreciate the callers and the questions as well. We’re very proud of what we do here. We have an incredible team that’s very proud of what they do day in and day out. And our goal is to do more of the same, which is writing good business and writing excellent customer service to our agents and to our insurers. So, if there’s further questions in the future, you can always reach out to Pete or myself. And thank you very much and have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This now concludes the program. You may all disconnect. Everyone, have a great day.