FedNat Holding Company
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Good morning and welcome to the Federated National Holding Company's Third Quarter 2015 Financial Results Conference Call. [Operator Instructions] 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 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 Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statement to reflect new information, future events, 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 and thank you for joining us today to discuss Federated National Holding Company's third-quarter 2015 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. Highlights as measured against the same three-month period last year except where noted. 46.6% increase in net income to $10.6 million; 41.1% increase in gross premiums written to $129.8 million; 38.3% increase in Florida homeowner policies to approximately 230,000; 24.1% increase in book value per share including non-controlling interest to $17.53; and a 14.8% increase in book value per share excluding non-controlling interest to $16.22 as compared with $14.13 at December 31, 2014. Our strong performance in the first half of the year continued in the third quarter with us continuing to increase our Florida homeowners market share through organic growth. For the quarter, we bound $56.3 million in new homeowners premium and renewed 92% of the policies in which renewals were offered. The continued organic growth and the high retention rates are a testament to our dedication to the Florida market and the trust that our partner agents have in our entire team. We will continue to focus on delivering the best possible customer experience to our policyholders and agents while optimizing our balance sheet in order to generate a prudent yet sustainable return on equity over the long-term. With that, we are glad to open up the call to your questions.

[Operator:]

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

[Arash Soleimani:]

Thanks and good morning. Just had a few questions here. Obviously you guys have a bit of excess capital now. I'm just wondering what your plans are, is there any plan for potentially a buyback?

[Michael Braun:]

Well, the Board looks at the capital position every quarter and we evaluate if they are going to retain it for future opportunities, dividend and buyback and we will continue to do so. There is nothing that we are in a position to announce today. We believe that we have a long runway ahead of us. We are about 4% of the Florida market. As we continue to grow that, that takes capital so there is nothing pending. But we have recently as you know increased our dividend and we think that adds value to our shareholders that we want to bring that capital back to them.

[Arash Soleimani:]

Okay. My next question is in terms of Monarch, now that the OIR issue with I guess the optimization is resolved and you guys are in the clear on that front, I guess does that affect how fast you plan to ramp up Monarch and what are your plans in general for Monarch premiums?

[Michael Braun:]

Sure. The first thing is optimization. That is absolutely not the right word. We would never accuse them of being optimizing. So just to clarify, it was a use of our analytics to understand our book of business. In terms of the analytics, they have been filed and approved and that goes live, our new analytics on November 16. So that is coming up pretty quick and we are very excited about that. In terms of Monarch, once again, this is a very deliberate launch of a company and a product. It is going according to plan but just to refresh, we specifically as I continue to say over cut the wood. So we needed a four foot piece of wood, we over cut it meaning we came in with rates that we thought were very adequate but we knew that the danger was that they were a bit high in the marketplace. So the product came out in the market and we are in the process of reevaluating opportunities where we can adjust those rates and we anticipate a rate filing going in the fourth quarter and I think those rates are going to come down quite a bit perhaps 10%. So we are in that process right now. During the review of the analytics with Federated National, we did lose time in terms of adjusting the rates on Monarch National because of the analytics will be deployed and anticipated in both companies. So we have high expectations for Monarch. I believe that will come with the new -- hopefully with the new rates in the first quarter of 2016 and I think that you will see a much bigger penetration into the marketplace with that.

[Arash Soleimani:]

Okay, so I guess do the analytics being improved imply that Monarch can be ramped up faster now?

[Michael Braun:]

The big thing that we need from Monarch is we need to adjust the rates so they are more competitive in the marketplace. We are writing business, we are getting great data in terms of where it is competitive in the marketplace but also where there's opportunities. So that will come online and it is anticipated in a much bigger presence during 2016.

[Arash Soleimani:]

And in terms of -- I know you said you are going to adjust the rates in Monarch, what about the rates on the legacy Fed Nat business? I guess what is the trajectory there?

[Michael Braun:]

We are actually going to be putting a filing in with the state sometime during the fourth quarter. Our last indication was approximately 2% rates down. That is old, that is fail data. I would anticipate our rates may be mid-single digits that they would be coming down. A big part of that is the reinsurance expense that we have realized that savings that we have realized will be passed through to our policyholders.

[Arash Soleimani:]

Okay. My next question is about the 92% retention that you have talked about. So can you just clarify was that 92% retention across the board what you saw in the quarter? And I guess is that sustainable or is 88% still the longer-term run rate?

[Michael Braun:]

Well with that, I'm going to answer that question but then I'm going to have you circle through the queue again because I know you have a lot of questions and we want to answer all of them. To that, it varies quarter over quarter 88%, 90%, 92%. There is a lot of different variables in there but I think generally in the high 80s, low 90s from quarter-to-quarter is generally where you are going to see us. But with that if you don't mind, let me go to another caller and then circle back please.

[Operator:]

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

[Greg Peters:]

Good morning, congratulations on the quarter. You know, I'd prefer just to circle back to the pricing discussion and just talk about the core Fed Nat book of business. Having listened to a number of these other conference calls for other Florida homeowners companies, we hear commentary about how competitive the market is and how intense pricing is and how there is downward pressure there. And then you come along and post really phenomenal results in terms of growth and gross written premium. So Mike, I thought maybe you could spend a couple of minutes and just provide us color behind how you are getting to your pricing because the result would imply that your pricing may be lower than your peers. And I'm not sure that is the case and it might be more just an agent relationship issue that is helping to drive your top line. But perhaps you can provide some additional color on this area?

[Michael Braun:]

Well, Greg, I think that the Florida market place is very competitive and our secret sauce is the 280 employees that work for the Company that do their best every day for our policyholders and our agents. And I think our agents look for the opportunity to place business with us. So we don't have to be the cheapest policy every time. We need to be in the ballpark. So we work very hard at that. Our business model has always been based on voluntary organic growth. We have invested heavily in that model. I think there was clearly other opportunities in the marketplace that have been hugely profitable, far more profitable than the business model that we chose. However, our business model that we have chosen and will be staying with for as long as I'm with the company which is going to be hopefully for a very, very long time is we are going to write organic voluntary business with our partner agents and we are going to service that. So it is a commitment to the Florida market. I think some of the ratios in Florida have been more than impressive for some of the results that you may be seeing and that is what you call the free market. When you see people making inordinate profits, people come into steal that business and I think our business model is much more modest and sustainable.

[Greg Peters:]

Was there a change in the ratio of submissions that were bound in the third quarter relative to historical experience?

[Michael Braun:]

Normally I would give you that exact number but the third quarter was unusual because we had the analytics turned off. So with that, the third quarter is irregular. So as you know, we were writing around $3 million a week when we had the old analytics. When we removed the old analytics, it ballooned up to in excess of $6 million a week so what we did was we had to turn off business, slow it down. So we turned off 76 ZIP Codes across the state where business was coming in unprofitably and was not sustainable to our capital and that brought our ratio or I should say our weekly premium back down to about $3 million. We are at about $3 million now but you will see that Q3 was higher than that and that is because when the analytics were turned off, we wrote an extra $10 million or $15 million that we really didn't anticipate. With the deployment of the new analytics which is very technical in terms of what is different about the analytics, I think that you may see our premium creep back up to $3.5 million, maybe $4 million, maybe more per week and then we will recalibrate with the business that comes in and assess what is coming in and determine how we want to manage that exposure. But we are very excited about the new analytics and those go live on November 16.

[Greg Peters:]

So just when you get to this $3.5 million or $4 million number of weekly sales, when you come back to us, are we going to see a reversion back to some lower level of bound relative to the number of submissions or is it still going to be elevated?

[Michael Braun:]

Ultimately our old analytics we were basically binding about 12% of a quote, doing around 65,000 to 70,000 quotes a month. I believe that our quote volume will pick up again and I believe that our ratio is hard to determine what it is going to be but it may be pretty close to 12%, maybe it goes up a few points. I don't know and we won't know that until we have a good 60 or 90 days of data under our belts and then we continuously reevaluate. Our number one expense is reinsurance, the number one way to manage reinsurance is to manage our exposure and it is very easy to grow and write business in unprofitable manner and we are hypersensitive to that so we will recalibrate continuously to ensure that what we are writing is sustainable.

[Greg Peters:]

Perfect. I will ask one last question and the re-queue. Can you just talk about within your core book of business if there is any seasonality to the AOP loss ratio as we think about the fourth quarter and we think about the results you have posted this year? And again thanks for your answers and I am going to re-queue with follow-ups.

[Michael Braun:]

Thank you, Greg. To the AOP, it is not like we have freezes as you see up north in the winter. Obviously the wet season tends to be over the summer which is the third quarter but nothing really sticks out in a glaring manner. So I think as we have indicated, we have been running at close to 50% of net premium and about 28.5% of gross for our AOP and I think that has been fairly consistent.

[Operator:]

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

[Samir Khare:]

Good morning, guys. Just have a quick question. The $56 million in the quarter, do you have the split of that of Fed Nat verses Monarch?

[Michael Braun:]

The vast majority of that is Federated National. Monarch has been very slow. In force, we are under $200 million as we sit here today. We are talking about maybe it varies from week to week but let's just call it around $75,000 a week in Monarch and that is a low number and that number needs to come up, but we need to do it correctly. And as I indicated, I think that will happen more in the latter half of Q1 into Q2.

[Samir Khare:]

And you were throwing a lot of numbers around there with Greg's question, Mike. Can you just maybe reiterate are you guys seeing the continuation of these higher level of premiums coming in Q4 thus far?

[Michael Braun:]

Right now we are still averaging approximately $3 million a week in premium. I think once we launch the new analytics which will be the 16th which I believe is a week from Monday, I think you are going to see it tick up. So I think next week will take up as well because anytime you make a change people rush the business in before the change goes into effect. So maybe we do 3.5 or 4 next week. I don't know but there will be some type of push there. And then with the new analytics basically the marketplace will determine how that impacts and the agents will find the new sweet spot and they will start submitting the business and I anticipate that it will tick up over $3 million, it might be $3.5 million or $4 million. There is no specific goal that we are trying to write $3 million or $3.5 million or $4 million a week, we are trying to write profitable sustainable business.

[Samir Khare:]

Okay. I just have a few questions to better understand the accounting change. And Pete, maybe can help me with this. Pete, how do you think the EPS would have been different if at all if you had stayed under the old per share accounting treatment?

[Pete Prygelski:]

That is a good question. I think that as we have said publicly, or I said publicly and Mike and I have said while we have been on the road that under the old methodology we were basically estimating what the balance was going to be the end of the contract and then we were also putting a probability weighting on storms. So had we not changed and adjusted to 944, we would have at the end of the third quarter, had to take a look at what we projected the balance to be in the experience count plus the likelihood of a storm. Third quarter being over, the likelihood of a storm basically dropped to 5% let's just say so I believe that the third quarter under the old methodology in the third quarter under the new methodology would look exactly the same give or take a couple hundred thousand dollars be about the same amount of money. Because we had only accrued $7 million under the old methodology and we were projecting that account to be net of unpaid losses almost $21 million, $22 million so we were going to have to make an adjustment to the $1.7 million we were booking so long story short, the quarter would have been pretty close to the same.

[Michael Braun:]

Just to add a little bit to that, that is Federated National's profit that it is able to book so just want to clarify for everyone's benefit however you look at that, that is a profit that was generated by the insurance company and unfortunately accounting can be rather complicated that we are able to realize. So there is nothing really unusual about it other than this is the book of business that we have and we are able to realize those underwriting results.

[Samir Khare:]

Okay, great. Just maybe two more clarifying questions. So five quarters into the 2014 quota share we will call that quota share to date, is the profit share recognized to date under both systems the same?

[Pete Prygelski:]

I would say what we have done is we have recognized through five quarters the actual balances as of 9-30. The actual premiums that we are owed back minus the reinsurer's margin and all unpaid losses as of 9-30 are back in our net reserves. So we brought everything back as if we commuted it on 9-30. All the premiums that wrote us minus their margin, all the unpaid losses are back on our books so that is what is recorded right now, the actual balances in the experience account.

[Samir Khare:]

Okay. Just on the competition front, the question about pricing, do you guys have a pricing advantage because of your cost structure and your size or is that --?

[Michael Braun:]

Clearly no matter what business you are in you need some scale and when you look at the Florida market place, you look at companies with over $100 million of statutory surplus and it is very few, let's say no more than half a dozen. So I think there is a competitive disadvantage to a lot of our competitors that have $25 million of surplus and there is many or $50 million of surplus. So we absolutely have a benefit to economies of scale, no doubt about it. But you are right, we have a great advantage as it relates to what is called our MGA, Florida is an MGA model so our insurance carrier pays their MGA to manage the business and this is the model that is prevalent in the state of Florida. With that we keep the profit in the insurance company so we have an MGA with our agent acquisition that is extremely beneficial to our insurance company. We are long-term committed to the Florida marketplace so our acquisition expense is under 20% when many of our competitors are in the 25 to 30 range and there is actually some in excess of 30. So we are not trying to pull profit out of our carrier. The way I usually explain it to people is would you fly in a plane if the captain had a parachute? And we are keeping our capital where it needs to be, we are committed to the Florida marketplace, we have always paid claims, we will always pay claims. And whether that is AOP, whether that is catastrophes on the horizon that may occur because of storms, our business model is very long on Florida. We are committed to it.

[Samir Khare:]

Great, that is it for me. Thanks.

[Operator:]

Our next question comes from the line of Ryan Byrnes with Janney. Your line is open.

[Ryan Byrnes:]

Good morning, everybody. So some of your Florida competitors have been involved in M&A recently to diversify outside of Florida. Just want to get your thoughts on that as well as kind of I guess the M&A environment currently down in Florida.

[Michael Braun:]

Sure. We will absolutely look at any opportunity that will create value for our shareholders, no dou0bt about it. However, we are very disciplined on our approach and not as opportunistic as others may look at the marketplace. So we are growing outside of Florida, we are in three states writing property outside of Florida. I believe it will be approximately $20 million. So $20 million may be -- you are talking single digits, you are talking maybe 4% or 5% of our total exposure. We are absolutely pushing non-Florida those opportunities but very, very slow. We are in no rush to compete with the All States and the State Farms and the USAAs and the Eries and there is so many companies out there that write property in many states. There is opportunities in coastal markets all along the Eastern Seaboard as well as in the Gulf but we are in no rush to rush to any decision or any type of growth that is not sustainable. So we will go in these markets and we are, we are currently in Louisiana, Alabama. We are in South Carolina and we have recently been licensed in Texas but it is going to be very slow and very deliberate. In terms of M&A, there is opportunities out there. We will look at opportunities and if we think there is something that will create value for our shareholders, we will do it. But once again, I think the biggest concern with an acquisition is the culture. Our culture is what really makes us different as a company and the idea of integrating another company into our culture has a lot of challenges. So if we can do it and we can do it accretive, we are going to pursue it but we are not chasing growth for growth sake.

[Ryan Byrnes:]

Great, thanks for that. My last question, if I look at the expenses, the ratios look pretty similar to what they were last year but then on an absolute basis they are significantly higher. Just want to figure out what is going on there. Is that a result of the quota share that you are getting -- it looks like earned premium ticked up pretty significantly in this quarter. Just want to make sure I understand the mechanics of that transaction?

[Pete Prygelski:]

Ryan, it is Pete. I think that we target, we look to target operating underwriting to be around 13%, 14% of revenue out of premium. The quota share didn't really have one impact. I will just give you the flavor of a couple of things. Remember we have an agreement with SageSure which helps us as an MGA helping us write property out of the state of Florida. We pay them a profit-sharing contingency which we were offsetting against the quota share income we were booking. We no longer are using that line item as we discussed. So that fell into [O&U] [ph], the amount that we are paying -- SageSure fell into O&U. And one of the other items just to give you a flavor of two of them. One of the other items is we received commission income from AON Brokerage income from AON, which we were receiving on a net basis before meaning they would pay one of our partners for our underwriting systems and give us the net amount. Instead we are now getting the gross amount. That is what you see other income is higher than it has been. And then we are paying one of our underwriting partners ourselves. So those are two main things. I know that the O&U was about 16% of total revenue in this quarter but year to date it is around 13% and I think that 13%, 14% is your number, not 16%.

[Ryan Byrnes:]

Awesome. Great. Thanks for the color there, guys.

[Operator:]

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

[Doug Ruth:]

Hi, congratulations on a beautiful report. I was wondering do you have the amount of insurance in force and like what you think the market share is now?

[Michael Braun:]

Generally speaking the marketplace has been approximately $9.6 billion so call it $10 billion. As we sit here today, you see how we ended the quarter. As we sit here today, I think we are at around 415 so that would tell you we are about -- let's just say in simple math we are roughly 4% still. So we are moving the needle very slowly so I would say we are about 4% and I think in that trend we may end the year at $430 million within the Florida space. Once again, let's say that is around 4%, 4.5%.

[Doug Ruth:]

Okay, that is good. I've got a question for Pete. Could you talk about the bond portfolio, how much is municipal and how much is corporate and what the duration is?

[Pete Prygelski:]

Sure, Doug. We have not really changed duration since we have been discussing duration for the last year. It is around -- it is approximately 3.8 years in duration and the municipal portfolio, our portfolio was $421 million. 14% of that $421 million is cash but 26% of our portfolio is in municipal bonds. And I don't know if you saw on the front page of the C section of the Wall Street Journal today talked about munis being the star of 2015. And I think that has on an after-tax basis or tax adjusted basis has helped the increase in investment income. Also helping the increase in investment income is obviously more assets under management but also on a tax adjusted basis, the muni portfolio is doing very well and like I said it is about 26% of the portfolio right now.

[Doug Ruth:]

That sounds terrific, and Mike, will the Monarch, will it do more business you think in the fourth quarter, will it be at a higher run rate than what you did during the third quarter?

[Michael Braun:]

I don't see anything that would lead us to that conclusion. Once again, the rates are a bit high, we are trying to address that, that takes a lot of work. So we are undergoing that review right now and hope to get that filed. So if we get that filed in the fourth quarter I hope it is approved in the first quarter and I hope it is out in the marketplace April 1. Until that happens, I don't think you are going to see a material change one way or the other within Monarch. We are eager to do it but we we're going to do it correct which does take a little bit longer but very eager to get that implemented so we can continue to penetrate the market.

[Doug Ruth:]

Okay. Thank you for answering my questions. It is a beautiful job and congratulations to the whole Federated team there.

[Operator:]

[Operator Instructions] Our next question comes from the line of Adam Klauber with William Blair. Your line is open.

[Adam Klauber:]

Good morning, thanks. You have sort of talked about this a bit but how much of the -- gross premium growth was much higher this quarter than it has been the last couple of quarters. How much of that was due to the better retentions and how much is just new business volume?

[Michael Braun:]

If you say that we do $3 million a week and there is 13 weeks in a quarter, that is $39 million and here we came in at approximately -- I'm looking for the numbers here -- $50 million. So you are seeing that the analytics really kind of brought more of that in. When we had no analytics, it brought in more business as I say probably around the $15 million that gets you up to around $54 million. So it does help us. It was $56 million that we wrote. So the biggest variance on that is that we had no analytics in place and we are wide-open so we wrote $56 million instead of a $39 million. But let me clarify, the goal is not to write $39 million. New business may climb to $4 million, it may drop to $2 million. We are going to write what we believe is profitable.

[Adam Klauber:]

Okay, thanks. And then Progressive bought out ASI earlier this year, has that had any impact how ASI acts in the market?

[Michael Braun:]

I think ASI is a great story of Florida. I think it is a homegrown company that really kind of grew up to the big leagues and before they were acquired, I believe they were in 26 states and I think that is what most of our competitors aspire for. I think ASI was pretty special. They are not real big in Florida, we don't run into them a lot in Florida. They are very niche-y in what they write, they write very good quality business. But I think they were pretty unique. I know a lot of people are trying to replicate that but we don't see them a lot in the marketplace. I think they know their space and it is a small piece of the space and I can't speak on their behalf but I think their growth intention is really to augment their auto business in all the states that they are at.

[Adam Klauber:]

Okay, thanks a lot.

[Operator:]

And we have a follow-up from the line of the Arash Soleimani with KBW. Your line is open.

[Arash Soleimani:]

So just a couple of follow-ups. So on the accounting change so I get that -- I guess there was no impact to EPS versus doing it the old way. The one thing I just want to ask going forward will it cause any changes for example in 4Q and 1Q of 2016? I guess with that said, what is the right way to look at ceded premiums as a percentage of gross premiums going forward? Is the ratio going to be different?

[Pete Prygelski:]

I think that I tried to -- we tried to quantify that in the press release. I think if you look at the quota share that we entered into in 2014 which as you say has three quarters remaining, I think that the net impact to our bottom-line is going to be somewhere between -- is going to be around $2.5 million pretax. So you might have in that case maybe $3 million or $4 million in less ceded and then you would have $1.5 million in unpaid losses coming back, something like that. But I think it is $2.5 million approximately and let me say that the $2.5 million that we are estimating is based on us continuing to write at the levels that Mike has mentioned and also the claims activity remaining consistent. As it relates to the quota share that we entered into in July of 2015, the 10% quota share, I think that is going to add to add to bottom line approximately $800,000 a quarter pretax. So we can talk off-line about what I think that does to ceded premium as a percentage. If we can get into the different components of losses coming back and reduction in ceded premium but I wanted to put in the press release the bottom line is two quota shares combined for about $3.3 million pretax favorable to the income statement for the next three quarters.

[Arash Soleimani:]

But I guess is that $3.3 million -- what I'm trying to understand is in prior quarters under the old accounting you also had I think I guess you would basically have that chart where you would say okay, the quota share is breakeven with –

[Pete Prygelski:]

We didn't put that chart in there -- that chart, so what we did in the past is we were comparing if we didn't do quota share and it was a straight XOL program, so we keep all of our profits, we don't give the reinsurer his margin of 6.75 because it is all on our books and then we have to buy more XOL. So if you look at it on that basis, inception to date, inception to date, the 10% quota share and the 30% quota share inception to date, the true economic benefit of doing the quota share is about $3.5 million to $3.7 million as we sit here at 9-30.

[Arash Soleimani:]

Okay, so the $3.3 million you quoted in last night's press release, that is the benefit you see on the income statement accounting but only -- that is only an accounting issue, that is not about quota share versus no quota share, that is just about we have this accounting change. This accounting change will increase EPS by $3.3 million over the next few quarters?

[Michael Braun:]

Yes, it is not the economic impact of XOL versus quota share, yes.

[Arash Soleimani:]

So basically 3Q 2015 there was absolutely no EPS impact from the new accounting but 4Q 2015 through 2Q 2016, positive $3.3 million impact from accounting?

[Michael Braun:]

Well, that is interesting because under the old system, we would have still had money, monies in the experience account to recognize. However, I do think what we are doing now and the way we were doing it, we are getting to the same answer. The geography on the financial statements has changed, that is all. But we are getting to the same answer.

[Arash Soleimani:]

Okay. So EPS is basically completely unaffected by this?

[Michael Braun:]

I would say that under either method, we would be at the same place today, yes.

[Arash Soleimani:]

And in terms of on a net basis, should loss and expense ratio stay consistent under both methods?

[Michael Braun:]

Yes, because when we bring back the losses, we are also bringing back the premium associated with it. The net loss ratio is going to be in the same range it has been in for the last 16 quarters which has basically bounced around between 45 and 50 with maybe a couple of blips here and there below 45, maybe 1 blip above 50. But it would remain in that range. As long as the claims activity stays the way it has stayed over the last 12, 16 quarters.

[Arash Soleimani:]

Okay, okay that makes sense. And when you say the analytics coming on should sort of take you up to the $3.5 million to $4 million range, so why is it that the weekly estimate if you will is higher under the new analytics than under the old analytics?

[Michael Braun:]

To clarify, I don't want to say should but it is possible that it is going to trend up. So right now we have 76 ZIP Codes closed across the state because we don't have the analytics in place. With the analytics, we can be more granular so I think when we are more granular we are going to reopen those ZIP Codes but we are going to do so carefully. So we are going to reopen those ZIP Codes, more business will flow in and then we are going to be hypersensitive to the business that we are getting in there to make sure that it is consistent with our objective which is long-term sustainable profitable business. So as we open up those ZIP codes, volume will most likely increase.

[Arash Soleimani:]

Okay. Pete, sorry to go back once again so 2Q 2015 ceded premiums earned were about 52% of gross. This quarter it was up out 44.5%. So is that kind of 45% range the new normal for ceded premiums under the new accounting?

[Pete Prygelski:]

To be honest with you, I have not done the math. Let's talk about that off-line. I would be glad to go through it with you and we can look at it together.

[Arash Soleimani:]

Okay, thanks. That is all for me. Thanks for the answers and congrats on the quarter.

[Operator:]

Thank you. And we have a follow-up question from the line of Greg Peters with Raymond James. Your line is open.

[Greg Peters:]

One cleanup question for you guys. Can you give us an idea of how you think the reinsurance market is going to shape up going into next year's renewal and specifically as it relates to your 30% quota share? I know it is a couple of quarters early but how is your temperature to renewing that quota share and are pricing conditions comparable, better or worse? Are you getting any indications on pricing I guess at this point on that quota share?

[Michael Braun:]

Yes, it is purely speculative at this point. Here we go about seven months out but obviously on a macro level, the world is awash in cash. And a lot of that cash has found the reinsurance space, primarily Bermuda. And I find it hard to believe that the cash will leave that space. You've got a lot of cash looking for opportunities so the market is very soft in terms of the world of reinsurance and among the beneficiaries of that are the companies that are in Florida and I believe the policyholders associated with those companies. So I think that markets continues to be soft. I think that the variation, the variance between a good company and a not as good company, that variance is a lot tighter than it probably should be in terms of the cost of reinsurance. The rumors are reinsurance rates are going down, maybe another 5%. I doubt 10% but the reinsurers are clearly stating that they don't want to see rates go down and I can appreciate that after four or five years of those rates tightening up. So we are going to have a big cat program next year. If we continue to write $3 million a week over 50 weeks, that is $150 million of premium and at 3 to 1 on P&L premium, you are talking another $450 million of potential reinsurance that we may need. If the FHCF provides $200 million, I can tell you I am already having meetings for next year. I have already had 21 meetings talking to our reinsurance partners for next year to secure that $250 million of additional capital that we need for next wind season. So we are very proactive, the reinsurance market is very receptive. You know we don't have cap ons, have no interest in cap ons. But the bigger we get we may have to explore that. But I think the capital is more than adequate in the market. It is just a matter of how much the pricing will change. I think the pricing may go down but we really won't know that until we get into really May and into June.

[Greg Peters:]

And Mike, just on the quota share, the 30% quota share expires I believe June 30 next year. I know this is well out in advance but what is your temperature to renewing the quota share versus going straight to excess of loss?

[Michael Braun:]

Sure. You know, I know I have given a lot of people a lot of headaches with this quota share including the analysts. I get that but I am here for our policyholders, I am here for our shareholders. Absolutely if we have the opportunity to do a quota share that benefits our policyholders and shareholders over excess of loss, we will do it. If the economics don't work and we need to shift back into excess of loss, we will do it. So I hope those partners which are incredible partners have the appetite to renew the program under similar terms and I believe those similar terms relative to the market appear to be still competitive. So we are excited to explore those options.

[Pete Prygelski:]

Greg, I was just going to say I mean analysts and accounting headaches aside, it was the right thing to do. As I answered Arash's question, if you look at as XOL as compared to quota share and the cost it would have cost to buy XOL at those lower levels on the tower, this has worked out to be inception to date with still three quarters to go a $3.5 million economic advantage Fed Nat and the shareholders and policyholders so absolutely the right way to go with the terms that we have.

[Greg Peters:]

I can certainly from where I sit validate your comments about causing headaches to the analyst community. But moving from quota share back to XOL, there are some capital considerations and I know you have said before that you never intended or expected or wanted to use quota share to sort of rent out capital. Has your perspective changed on that or do you still have the same traditional approach?

[Michael Braun:]

Let's assume Federated National grows at $3 million a week. That is clearly not sustainable forever so -- but even if it is, the denominator who is getting bigger against the numerator so the numerator of $3 million a week means that we will stress the capital that much less which means that barring any unforeseen events, the need for additional capital or the need as you are inferring that quota share may provide to us, decreases as the book gets bigger. So I know there is a lot of math there so it is another benefit that we received from it. We've got capital in the insurance company. It is a profitable book of business that is generating a nice underwriting profit. So I think the need for additional capital within Federated National Insurance Company will decrease in a flat world as all information that we have today. Yes, we are getting that benefit from the quota share but I don't know, I really don't think that is a big part of our calculation because we have adequate capital not only in the insurance company but in the holding company that we could downstream as needed.

[Greg Peters:]

Perfect. Thank you again for all of your answers.

[Operator:]

I'm showing no further questions at this time. I would like to turn the call back to Mr. Braun for closing remarks.

[Michael Braun:]

Just want to thank everyone for their time today. Any follow-up questions please do not hesitate to give myself and Pete a call. We really enjoy sharing the success of the Company with everyone that has any questions on it. So thank you and have a great day.

[Operator:]

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