FedNat Holding Company
Q4 2014 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Welcome to Federated National Holding Company's Fourth Quarter and Year-End 2014 Financial Results Conference Call. My name is Andrew and I will be your operator today. [Operator Instructions]. Statements in this conference call that are not historical fact 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 other variations thereon, and similar words or phrases or comparable terminology are intended to identify forward-looking statements. The matters discussed on this call that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes and results may differ materially from what is expressed or forecasted in forward-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 Federal National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements reflecting new information, future events or circumstances, or otherwise. Now at this time, I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of Federated National Holding Company. Please go ahead, sir.

[Michael Braun:]

Good morning. Thank you for joining us today to discuss Federated National Holding Company's fourth quarter and full year 2014 financial results. I'm joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results can be found in our earnings press release. I will go over some brief highlights and then we will open up the line for questions. 2014 full year highlights as compared to the 2013 full year include 192% increase in net income to $37.2 million, 106% increase in fully diluted earnings per share to $2.99. 57% increase in Florida homeowner policy count to $182,557, 55% increase in gross written premiums to $377.2 million, 42% increase in book value per share to $14.13. Net income of $37.2 million includes $2.5 million of income accrued in accordance with the quota share agreement that became effective July 1, 2014 and $700,000 charge in accordance with the profit share agreement that became effective July 1, 2013. The cumulative income and charge we will ultimately recognize under these agreements. Our each contingent upon certain criteria is specified within the agreement and each could be reversed under certain circumstances. Solid results his past quarter will reflect the underlying themes that have characterized our performance throughout 2014, 100% of our business is written on a voluntary basis with our partner agents. Disciplined underwriting and exposure management and expense control, during the fourth quarter while remaining true to our underwriting principles we wrote 42.6 million in New Florida homeowners business. This run-rate has continued in January producing additional 14.7 million in New Florida business. Focused attention on expense control allowed us to invest in growth opportunities which positions us well for the future. While the Florida property insurance market is becoming more competitive we see continued opportunities for growth as we enter 2015. With that we’re glad to open up the call to your questions.

[Operator:]

[Operator Instructions]. Our first question today is from the line of Arash Soleimani from KBW. Your line is open.

[Arash Soleimani:]

Just had few questions here, first just the numbers question, could I get a gross premiums earned for the quarter and prior period development please?

[Pete Prygelski:]

I get that in few seconds, if you have a question for Mike you can ask that right now and I will get that number for your.

[Arash Soleimani:]

And one question I had with the FHCF, you put out, is the rate online different this year versus last year just when I took the cost by the limit it looked it was around 7.5% this year versus 8.5% last year?

[Michael Braun:]

There is a slight movement in the FHCF but you rather remember we’re projecting out our FHCF which is a difficult thing to do. So we do put that 8K to project out not only what we think our retention is and how much coverage we’re going to get. But it's rather far out and there is a lot of moving pieces to it. The FHCF has a very informative website that can go into greater detail but ironically and that’s the pricing in the private market is approaching of that FHCF which allows us the opportunity if the private market matches that price that we can actually reduce the FHCF. So it's just goes to show how soft the reinsurance space has become, but those are just projections with the FHCH. It's really determinant on not only how business we write but also how much business there is the industry, so there is multiple dates and other things that can impact the ultimate cost and coverage.

[Arash Soleimani:]

And I think some of the stuff I read you mentioned that there is certainly private coverage is upside like even 20% lower than FHCF does that seem consistent with what you’re seeing or is this more in-line with what you say at this point--

[Michael Braun:]

It's a more complicated answer that what you may be looking for because it depends based on your portfolio how well low FHCF goes or how high, so let me say it this way. When it goes up higher in your cat book, you get a taller coverage more coverage, more vertical coverage and as you push your whole limit down based on your book where it's located in other features, you actually compress the amount of coverage you get but you lower your attachment point. So there is a lot of moving pieces to it but depending on where it is within the book, clearly the private reinsurers are reaching the point where the FHCF is in terms of pricing so as a possibility we may reduce our selection with the FHCF where a 90% we’re statutorily allowed to go down as well the 45% because the FHCF has paid off the bond. So more will come out as we enter the reinsurance renewal which really will know a lot more in May really is going to be a big into June.

[Arash Soleimani:]

So you’re saying FHCF has a possibility for the 2015, 2016 reinsurance program?

[Michael Braun:]

Absolutely. Based on information that we get from the private sector, absolutely.

[Arash Soleimani:]

And on the quota share, I know there is a 1.7 million profit sharing but I look like there was like a modest charge that partly offset that, what was that charge?

[Pete Prygelski:]

The number you were looking before by the way, gross premiums earned in the quarter were 90.9 million. We had a contract that we signed in 2013 with an MGA [ph] that produces home owners in other states and with that agreement we share some of the profit with them. In 2013 the program just launched there was the profit was not -- there was not much profit there in 2014, their share of the profit was $700,000. So we combined all contingent income into one line meaning that $700,000 that we shared with our partner could be reversed, if the program -- it's inception to-date so if the program turns negatively you can get some of that money back but so we combine those lines.

[Arash Soleimani:]

But that charge is, is there anything we should kind of think about going forward of the recurring?

[Pete Prygelski:]

Yes, so what we’re doing if you look at the way the program works now we’re monitoring or we’re forecasting the profitability of that program for 2015 and we’re charging quarterly what we think it's going to be at the end of the year. So yes I mean I think.

[Michael Braun:]

Arash, based on how the contract is written, it's really just another commission to the production. It's just kind of awarded differently so that’s why you’re seeing a pop-up on a different line but basically as long as we’re writing good business we hope to have more profit shares going out there, it's just how the contract is awarded.

[Arash Soleimani:]

So how much should we think about kind of quarterly in our models for that and I know you guys do the 1.7 million that you record an income for the quota share with Everest but what about the [Multiple Speakers] $700,000 charge quarterly or?

[Michael Braun:]

No that charge, you could expect about -- in 2015 and we haven't predicted our past 2015, in 2015 you can expect the charge of about $250,000 a quarter.

[Pete Prygelski:]

But Arash, obviously if the program runs better that needs a bigger profit, that number will go up right? If the program doesn’t run as well that number could go down.

[Arash Soleimani:]

So that makes sense, and the other thing obviously with the loss and expense ratios, they have been improving over the last few quarters here. So wanted to know kind of how to think about that going forward, is that something where favorable reinsurance should continue to expand those margins or are we getting to a point where rate pressure on the primary side might pressure that a bit just trying to kind of see how think about that?

[Michael Braun:]

Arash, I can answer more globally than the technical side for Pete. But you’ve a couple of different questions there. Reinsurance, rumor is it's going down another 10% this upcoming year. Once again we don’t know until we get there. We have had three consecutive years, where reinsurance has come down significantly; we have a pending rate decrease with the state in Florida of about 2.5% rate decrease. So we’re happy that we’re able to share that savings with our policy holders. Ultimately we don’t know what that the department or the office of insurance regulation will ultimately approve. But clearly there is some, the reinsurance is headed it down continuously year-after-year and it appears to do so again in 2015 and the market within Florida is moving down. So I think Arash, we have said on the last couple of calls, you know on the net basis we’re targeting between 48% and 52% and I think that’s where I see it continuing.

[Arash Soleimani:]

On the loss ratio?

[Michael Braun:]

Yes, well loss in LA around 48 to 52.

[Arash Soleimani:]

And my last question is just in terms of obviously your growth for January is a strong, you reported your growth for the fourth quarter in terms of new business in Florida was strong and obviously since monarch [ph] isn't up this is all preferred business and I'm wondering what's kind of driving even now I guess the better than expected preferred growth and how much run-way is there left within the preferred market?

[Michael Braun:]

Well what we hear from agents is people prefer to do business with us. Insurance from the insureds perspective is really I would say in Florida commodity. Lot of the insureds don’t understand the difference between different companies, the agents clearly do. So, agents tend to put preferred business with preferred carriers and then there is carriers that they are not so interested in putting business with. So these independent agents they are our partners and they are running a business and they are going to place the business where it's serviced correctly in many ways in terms of operational proficiency, in terms of quality of service, answering the phone quickly and being helpful and paying clients. So agents are looking to place business with us, the irony is that the market continues to soften. We still have the number one concern from agents saying wish we could put more business with you guys. So that’s why we’re anxious to get Monarch up and running but people, our partners our independent agents and they are going to do what's in the best interest of their insurers but also they are running a business so they are looking for that partner as well.

[Arash Soleimani:]

And that’s three million per week of new business, that’s just preferred policies right? -- Monarch of 3 million of new with an 88% retention roughly?

[Michael Braun:]

Let me say that differently in terms of Federated National, there is no magic number to 3 million. If it's 3.5 million or 4 million that’s great, if it's 2 million or 2.5 million that’s great, whatever it is so what we’re going to do is we’re going to write what we believe to be the business we’re looking for. So we have no reason to believe it's going to change at this point but competitive pressures could increase it or could decrease it and there is no magic number of the 3 million but at Federated National, we tend to get more preferred business not only that the agents prefer to place business with us but the way our algorithm works, homes that lot of mitigation features and higher value homes clearly is our sweet spot in the marketplace and we get first look on most of the business we have, absolutely. The agents will place it with us, I believe in most instances as long as we’re going to accept it.

[Operator:]

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

[Doug Ruth:]

To both of you on a beautiful report, what is the -- could you give us sort of what the status is, where you’re with Monarch, when do you think you will be ready to sort of start accepting business?

[Michael Braun:]

Sure. We announced that in the middle of last year and we really have gone with the department of insurance or actually say off the insurance regulation, they have been fantastic and really just the challenges is that we have three public companies that have created a joint venture and it's a bit technical. So we’re still undergoing that process. I think we’re near, once we’re there and we have a certificate of authority we absolutely be announcing that, but I can't stress enough the department has been fantastic, the OIR -- the rating agency Demotech, everything has been fantastic, it's just us working technical structure over the joint venture which is obviously a little bit more complicated than if there was just a standalone subsidiary within our company. So we’re hopeful that we will be announcing that in the very near future but once until we have a certificate of authority we’re still in the pending status.

[Doug Ruth:]

And do you think the first or second quarter is still a realistic goal here?

[Michael Braun:]

I think we’re very close, absolutely. So, here it is late February, I'm hopeful that we have this wrapped up in the next couple of days, maybe weak or so and then the department has to review our final the paper work and that could take a couple of days, it could take a week. So hopefully we announce something in a couple of days or a couple of weeks but I can't say until it's complete. And then once that’s done, I mean, yes the software is loaded, the agents are ready and waiting and we’re ready to go.

[Doug Ruth:]

What is your status now with Allstate?

[Michael Braun:]

They are great partner, they are very happy with I believe with our partnership as well. Their management team has been in our building as well their auditors to make sure we are doing everything that we have said and I believe they are happy with us and we are very happy with them, I think they are great organization and I think their agents are fantastic just like our independent agents. So I think it's a very healthy relationship that’s both benefiting both organizations.

[Doug Ruth:]

And is there a level of production, is that stable, is it increasing? Is it decreasing?

[Michael Braun:]

It's fairly stable, so once again under the generic statement of about 3 million a week Allstate is at about a million a week. We have been within the for just about two years and at year-end I believe it's about a $70 million of our 335 million homeowners book is with estate agents.

[Doug Ruth:]

That was my next question, is that, how much insurance is in force at this point?

[Michael Braun:]

Yes, at year-end our total book was 335 for homeowners in Florida and like I said I believe they were approximately 70 million.

[Doug Ruth:]

And what market share do you think that gives you with the 335?

[Michael Braun:]

Well you know under the generic statement of 10 billion, I mean we reported 9.6 billion, so really you can say we’re at around 3.5% but the current answer would be 335 over 96 [ph] I don’t have a calculator handy but generally speaking I would say we’re about 3.5%.

[Doug Ruth:]

And then could you talk a little bit about the investment portfolio?

[Pete Prygelski:]

There has been really no change over the last four quarters expect that it's growing slightly, it's total portfolio is about 371 million, 80% is in fixed income, 10% is in cash and 10% in equities, no change to the average duration, it's about 3.7 years that was at the end of '14 and strong A - minus average rating.

[Doug Ruth:]

And then do you see any change happening with the duration of the portfolio?

[Pete Prygelski:]

No I think we’re going to keep the duration right where it is for now, we’re focused on investing new monies into fixed income and lessening the equities even further but I think the duration is going to stay, we’re going to keep the duration where it is for now.

[Doug Ruth:]

And did you calculate the combined ratio for 2014?

[Pete Prygelski:]

Yes on the stat or are you looking for stat basis or GAAP basis?

[Doug Ruth:]

I will take both of it, if you’ve it.

[Pete Prygelski:]

Okay on the stat basis for 2014, it was 82% combined ratio and on a GAAP basis for the year it was 83.9%

[Doug Ruth:]

So what is the employee count at this point?

[Pete Prygelski:]

Well last count I have is 230, I'm sure we’re few above that but it's 230 [inaudible].

[Doug Ruth:]

And have we hired some new people in 2015?

[Pete Prygelski:]

New hiring is non-stop absolutely. We’re able to attract a lot of qualified quality people, one of the challenges is finding enough good quality people with experience and something that we have kind of really taken a concerted effort to is to developing more and more talent in-house. We have always promoted from within I think, fairly aggressively that’s always been our style to promote within because we think our culture is a bit unique and very valuable. We have had to bring in obviously more skills from the outside but a lot of our underwriting, a lot of those folks are starting out of underwriting assistance. People that come from agencies are always a good fit and also what we have been incorporated in the last year or so is adjusting assistance that can move up into adjusting positions. So, it's a continuous process bringing in more people. I'm sure the headcount is going to be higher on the next earnings call. Absolutely we’re growing.

[Operator:]

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

[Samir Khare:]

I was looking at the policy acquisition cost, there that’s decreased two quarters in a row, reflecting the benefit of the ceding commission. Should we expect Q3 or Q4 to be the run-rate for this line item?

[Pete Prygelski:]

So we had [inaudible] as you mentioned was positively impacted by the ceding commission, two parts of the ceding commission, right, so we’re getting -- we’re got a ceding commission on what we’re ceding as part of the quarters on a monthly basis, and then when the program started in July 1, we ceded 30% of our unearned premium which we got a big ceding commission. Now that ceding commission was basically run through the financials over a seven month period because that was the life of that unearned. So I think what we report first quarter that’s going to be the new run-rate. So you can really look at third and fourth quarter because we were recognizing the benefit of ceding $24 million at the start of the program. So when you see the impact for Q1 that’s your normalized run-rate between now and when the quota share ends.

[Samir Khare:]

Okay and will we expect that to be just trying to get all the moving parts in my head, will expect that to be lower or higher than Q4?

[Pete Prygelski:]

I think it is going to be -- it will be a little higher because we will no longer, we will have received all the benefit from the original portfolio transfer in July. So it will be a little higher than fourth quarter.

[Samir Khare:]

Okay and maybe somewhat related then, it's more of a conceptual question just to make sure I understand the moving parts. I'm trying to reconcile a few data points from the press release, so last quarter you guys had disclosed there is $4.1 million benefit to the acquisition cost from ceding commissions and just with the 25% ceding commission that was consistent with the $16.5 million ceded to the quarter share that you guys disclosed. This quarter you guys disclosed 8.2 million of ceding commission benefit to the acquisition cost and by the same math that would imply 32 million as ceded to the quota share but you guys said that you guys only 18 million. So I'm just trying to figure first if the maths right.

[Pete Prygelski:]

Let me give you a real quick answer and then we could finish this discussion offline but the real answer is when we originally started the accounting for the quota share in July of '14 we were the original benefit from the -- original portfolio transfer we had originally thought we were going to recognize that benefit over a 12 month period assuming that all the policies would take, there was a year of unearned left. We have then later we find that to say really how quickly will those policies going to earn out, we determined it was seven months. So had a catch up in the benefit in the fourth quarter. So that was -- so the fourth quarter reflects a catching up of the recognizing the benefits. So we can go through that later but basically that’s what you saw that, that’s why there is a slight difference.

[Samir Khare:]

And then the $14.7 million run-rate, did you guys quoted for January, is that pretty much the same as last January?

[Michael Braun:]

It's pretty similar. We’re averaging like I say it's about 3 million a week, some weeks it's an over it, some of it's little under it. Yes it's fairly consistent with last year. In terms of the dollar amount it's slightly off but the policy count is much closer. So yes I can look it up here in a moment but it's pretty similar.

[Samir Khare:]

Okay. And then what you have seen so far in February and would you expect that to go up, the run-rate or?

[Michael Braun:]

Actually here I'm looking at my production report right now. I mean year-to-date new business, we’re at 14,500 policies versus last year year-to-date 15,300. So policy [inaudible] that’s through today. Last year new business found at this point was 29.4 million, this year it's 24. So the policy count is down a little bit and the average premium is down slightly more. Where is it going? We don’t know specifically but I believe it should stay at maybe 3 million a week and all indications are at that at this point.

[Samir Khare:]

Okay and iVantage business is primarily associated with more preferred risks that lend itself well to your current insurance subsidiary. Do you guys anticipate iVantage to contribute significantly to the Monarch?

[Michael Braun:]

What we’re going to do is as we launch Monarch, Monarch is going to be launched I would say a little bit slower than the market they want it. I think there are strong demand for Monarch, so once we assuming we get all of that documentation together with our joint venture partners and get a 40 from the ORI certificate of authority, we’re going to launch it with the 20 agents and another 20, so it's really kind of grow out slower in the first let's call it 10, 13 weeks of the quarter and then we will expand at a much faster cliff. In terms of iVantage which is Allstate, they specifically won't look at this until we have a certificate authority. So we don’t know what their answer, I’ve no reason to believe they would not be interested in it. But I think there is a lot of demand for the product and we’re going to roll it controlled and slowly and whether or not Allstate likes it we will know at a later date but we may not know that for six weeks after certificate of authority or six months or even longer, we just don’t know.

[Operator:]

Thank you. Our next question comes from the line of Ryan Byrnes from Janney Capital Markets. Your line is open.

[Ryan Byrnes:]

Just wanted to get, I realize it's very early in the process but with reinsurance pricing looking to be soft again this year, just want to get maybe sense of where you guys are thinking about leaving the company, retention for this upcoming year's wind season. Your capital has grown but pricing looks pretty attractive again.

[Michael Braun:]

Sure. I mean there are so many moving parts but in terms of retention we finished the year with approximately 125 million of statutory surplus. So we’re anticipating a retention around 15 million that could move a few million up or down depending on a number of variables and last year programs single event was a 1.16 billion and 1.6 billion all-in just rough numbers writing, 3 million a week over 50 weeks, 150 million which we write 3 to 1 [ph]. So it's possible. The single event will increase by about 450 million, it's possible that FHCF may be at the 90% option, 200 million of that 225 million. So we may be buying in the private market 250 million, 275 million additional coverage. However there is a lot of moving pieces to that. As we go into May, we project out that we anticipate our portfolio at September 30, and that’s where we try to build our reinsurance program around.

[Ryan Byrnes:]

And then just my last one, I think you guys mentioned you guys have filed for rate decrease of 2.5% for this year. Just trying to get a flavor as to where the rest of the market the primary market in Florida is going. I realize you guys have strong relationship with your independent agents. But just want to get a better sense of where the other players are pricing, are potentially pricing their product heading into next year or this year, sorry.

[Michael Braun:]

Well in 2014 we saw believe or not we saw some people still taking rate up as they were still catching on some of their rate action from whatever it may be even with the reinsurance savings and we saw people with rates go down and lot of those rates that went were low single digit and I think there is one or two that was high single digit. In 2015, I don’t see rates going up from our competitors but obviously depends on their book of business. But I would anticipate the market as a whole, it may move down mid-single digits but once again that’s a very macro statement. There is -- I'm not actuary and there is so much more information that’s needed but I would anticipate that probably people might be taking their rates down low, mid, high single digits and there is just so many variables there. But clearly the reinsurance savings we’re excited to share with our policy holders and I think you’re going to see that throughout the industry.

[Operator:]

Thank you. Our next question comes from the line of Adam Klauber from William Blair. Your line is open.

[Adam Klauber:]

How is the outlook for business outside of Florida?

[Michael Braun:]

Yes. While we’re gradually expanding outside of Florida, I think you know that we’re pretty cautious. Each state is rather unique, so Florida dominates our book. Non-Florida year-end we have approximately 10 million, approximately 9 million to 9.5 million in Louisiana and the other 0.5 million is in Alabama roughly. I think those two states may go to 20 million at the end of '15. We anticipate bringing South Carolina online, sometime in the middle of 2015 and we will just gradually expand from there. We see other opportunities in other states but just to be very clear we’re in no rush to go anywhere quick. We think there is ample examples of rapid expansion that hasn’t always worked well for companies both in the insurance sectors and others. So we’re very aware of that. So I think you’re going to see the majority of our growth coming inside of Florida.

[Adam Klauber:]

How is your retention in Florida in 2014 versus 2013?

[Michael Braun:]

What we’re seeing in the marketplace is there are some -- like I said there is competitive pressures, we tend to run at about 88% in terms of what we’re offering renewals that are taking up. It remains fairly level, we can always get into more detailed numbers on a much more granular level with Pete offline, but generally speaking it's fairly stable.

[Adam Klauber:]

Okay. And what's your average policy duration, how long typically do your policy stick?

[Michael Braun:]

Well you know that’s interesting because that’s one thing we pride ourselves on is writing sticky business and it's so easy to write business that’s not sticky that can come in and out on an annual basis. We have got policies with -- on the policy numbers 10 years plus. We feel lot of policy happening much more in 8,9 and 10 but the preferred business that we’re writing I think, I don’t have a specific number how long each of those policies will stay with us but I believe what we’re writing is probably some of the stickier business in the market and the policies that really will leave someone else to come to us for a dollar, well they could leave us and go elsewhere for a dollar as well. So we really don’t target our business as a commodity like that. We really push our service and I think that our team does an exceptional job from the underwriting claims and everyone else to doing that. So I don’t have definitive numbers on that but we tend to write business that I think is more sticky, absolutely.

[Adam Klauber:]

Yes, high-80s retention is very good. Sorry if you said this but, what sort of growth are you looking for in your agency floors [ph] and have you being hiring more marketing people?

[Michael Braun:]

We have agents that want our appointment is where we’re at. So we’re not going to appoint every agent. We really believe in partnerships, we have seven area managers throughout the State of Florida and they facilitate relationships with agents to write quantity and quality. So we’re not looking for new agents, we just want partner agents that will be committed to being a partner and I can tell I believe there is agents out there that are still trying to get that appointment with us. So you’re not going to see an expansion of that, you may actually see a bit of contraction meaning if you’re not producing there is always that pressure to our agents if you’re not giving us the quantity and quality that we’re looking for we do full binding authorities from agent periodically. So you’re not going to see our growth coming from the addition of more agents in Florida. It's just getting the same amount of business for preferably more business from those existing agents.

[Adam Klauber:]

Okay and then staying with agency distribution, do you plan any technology upgrades, are you pretty happy with your system as it is?

[Michael Braun:]

No we’re happy with where we’re at today, but you can't be complacent, technology moves lighting fast. So you have got to move forward. So I don’t think we’re lacking where we’re at today but the challenge is you got to keep investing in what you’ve and keep moving forward, that’s a continuous process.

[Adam Klauber:]

Any specific major upgrades or is it just continuing to add to the platform?

[Michael Braun:]

Our platform works well and we continue to adjust based on technology, people want to do everything on their phone. We’re aware of that. I mean you can see that on the commercials right, don’t call for pizza ordered via your phone. I mean the world of apps is here and it appears to be getting bigger and bigger. So we’re going to respond to whatever our agents and insurers need, absolutely. So nothing significant that we have in the work other than just continuous improvement in the technology that we deploy for our partner agents.

[Operator:]

Thank you. [Operator Instructions]. And we will be taking a follow-up from Arash Soleimani from KBW. Your line is open.

[Arash Soleimani:]

Did you mention already the tax rate this quarter what benefited that?

[Michael Braun:]

I didn’t Arash, but I will now, two main things, one we have about close to 28% or 30% of our fixed income portfolio in municipal bonds, so there is tax exempt interest and the biggest thing is there was a estimation variance between the 2013 provision and the 2013 tax return, the tax returns filed in September 14, so the true-up effects Q4 and the obviously effects the effective tax rate for the year. So the true up between the provision and the actual return the '13 return was filed in September '14 that difference got to be booked in the fourth quarter, so that’s the main difference.

[Arash Soleimani:]

I mean it looks like your effective rate in '13 was around 34% and then 35% in '14. So I mean is 35 kind of the fair run-rate for you guys?

[Michael Braun:]

I think that the normalized going forward is about 37%, 35% Federal, 2% State, so 37% is what we budget if I comes in a point lower great, but 37% is the number we budget.

[Arash Soleimani:]

And then on your ceded premiums earned, so I guess obviously 30% of that goes to the quota share. On the remaining 70% that you keep, what's the way to kind of think about how reinsurance cost on that 70% so will that 70% have like a 35% reinsurance cost, as a percentage of gross earned? Like what's--

[Michael Braun:]

I mean I don’t know if we really look at that way, I know that our current treaty, the expense of the $117 million, $117 million expensed over the 12 months beginning July 1 of '14 ending June 30th, 2015 plus the 30% quota share. Now there is other stuff that goes through that line too like flood insurance in and out and we have other reinsurance, facultative reinsurance that’s in there. So Arash on a more global statement, I think low 30s, those are great numbers. I don’t think typically if you were to look at a 10 year run that that’s where they will stay so in a flat market where reinsurance is flat and the growth is flat. I think you’re looking at high 30s really. I mean I can tell you I mean in the past I made statements that I would anticipate, our IR is always looking for us to be at around 4% underwriting profit and to get there generally reinsurance maybe a 40 to 42. AOP maybe it's 28, and acquisition and other expenses of 26, that gets you to the 96. Our growth is helping suppress that reinsurance expenses as a percentage of premium absolutely as well as the reinsurance pricing being very favorable for the last few years. So those are working to our benefit.

[Arash Soleimani:]

But that 4.1 that’s on a statutory basis right? Not a--

[Michael Braun:]

Yes, and so generally what we write is roughly 3 to 1 and then it's 1.5 on top of that, so let's say 401 plus 1.5 you’re looking at 5, 6 times 3 to 1 plus the MGA model that Florida is that’s where we get to a [inaudible] of around 20. So that’s kind of where we anticipate being. But clearly the market is favorable for us right now.

[Arash Soleimani:]

And then on the net expense ratio, I know you said on the loss [inaudible] ratio it's somewhere in the ball park of a 48 to 52, is there, you know on the net expense ratio is it somewhere I guess, I know you said fourth quarter was not the right quarter to look at kind of as a run-rate it would be probably a bit higher than on the policy acquisition side but I mean is estimating that what kind of run in the 38% range as a percentage of net earned?

[Pete Prygelski:]

Right, I mean last year without the quota share the expense ratio GAAP wise was 38% and this year we came in at 34%. So I mean I think 36% - 38% is a fair number and again we have said before when you’re looking at expenses over total revenue net earned premium, our goal is that 38% to 40%. Obviously we have done better than that this year as Mike as alluded to reinsurance has alluded to reinsurance being benefiting from cheaper reinsurance basically. So but I do think to your question 38% is a fair number to model.

[Arash Soleimani:]

As a percentage of net earned?

[Pete Prygelski:]

Yes as a percentage of a net earned.

[Operator:]

Thank you. That’s all the questions that we have. So I would like to turn the call back over to the speakers for closing remarks.

[Michael Braun:]

While we appreciate everyone's participation today and for those that had the questions that’s great and then those that were able to get the information we always like it that information also. Thank you. We’ve an incredible team here and like said we have around 230 people, and we have got an amazing business that we run. So we’re grateful for all of our team members inside the company and our partner agent. So our plan is to continue that we have done in 2014 which is good service and working with our agents and do that again in 2015. So thank you for the support. Anyone who has got follow-up questions, Pete and I are always available, so thank you and have a great day.

[Operator:]

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