Heritage Insurance Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good morning, and welcome to Heritage Insurance Holdings Third Quarter 2016 Financial Results Conference Call. My name is Dennis, and I will be the operator today. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note this event is being recorded. I would now like to turn the conference over to Melanie Skijus. Please go ahead.

[Melanie Skijus:]

Good morning. The third quarter earnings release can be found in the Investors section of heritagepci.com. The earnings call will be archived and available for replay. Today's call may contain forward-looking statements. These statements which we undertake no obligation to update, represent our current judgment, and are subject to risk, assumptions and uncertainties. For a description on the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our Annual Report on Form 10-K and other fillings made with the SEC from time to time. With us on the call today are Bruce Lucas, Chairman and CEO; and Steve Martindale, Chief Financial Officer. Also on the call is Steve Rohde, Financial Consultant to the Company. I will now turn the call over to Bruce.

[Bruce Lucas:]

Thank you, Melanie. I would like to welcome all of you to our third quarter 2016 earnings call. Before we begin a discussion of the quarterly results, I'd like to take a moment to reflect on the last few months and thank our employees for their unwavering dedication to our policyholders and the company. After 11 years without a hurricane, Florida endured two hurricanes, Hermine and Matthew in little over a month's time. Our claims and remediation service teams worked tirelessly to reach out and respond the policyholders impacted by the storms. I am proud of our team's response times and the execution we provided policyholders during and after both of these storms. Our vertically integrated claims department has responded to roughly 3000 claims in total, many of which were addressed within hours and days of the storms. We believe our unique approach to managing and resolving claims benefits our customers and help's to deter fraud from assignment of benefit schemes. Heritage has received 523 claims related to Hermine and we have recorded 4 million in projected losses from these claims in the third quarter. I wanted to get out early on Hurricane Matthew with an estimate on projected losses as the media was inciting panic in the days leading up to the storm's landfall in the U.S. and estimated industry project the losses were fluctuating hourly given ships in Matthews projected path. I am happy to report that Heritage's losses for Matthew have materialized significantly less than we had previously estimated. As this storm track move further east, projected losses diminished. We have had approximately 2500 Matthew claims to-date and we anticipate approximately 30 million in incurred losses. Aside from our hurricane activity, our core business operations have been good. We received a 9.9% rate increase on our Citizens policies that will be effective on December 15. The primary driver of the rate increase is assignment of benefit and attorney represented claims. I will now turn to the third quarter 2016. Despite Hurricane Hermine, which resulted in loss and loss adjustment expenses of $4 million, we posted net income of $10.9 million and return on average equity of 11.7% in the third quarter. Other highlights in the third quarter are as follows; gross premiums earned increased 28% year-over-year to $165 million, policy count increased 36% year-over-year to $327,000 policies, stockholders equity of $377 million increased 14% year-over-year, we repurchased 284,377 shares of common stock for a total of $4 million, growth continued in voluntary personal lines aided by expansion in North Carolina with 4899 policies in-force at September 30, 2016. We began writing policies in South Carolina with production showing steady growth month-over-month. Zephyr continues to perform well and the integration into Heritage has been seamless. I will now turn the call over to Steve to provide more detail on our financials.

[Steve Martindale:]

Thank you, Bruce. Good morning. Gross premiums written for the third quarter were $147.2 million down 1% compared to a year ago, approximately 13% of the gross premiums for the quarter were written outside of Florida with 11% coming from Hawaii and 2% from North Carolina. The decrease in premiums written can be attributed to an absence of Citizens assumption activity in the third quarter of 2016 versus $33 million in assumed premiums written in the third quarter of 2015. Voluntary business written by Zephyr in Hawaii and by Heritage in Florida and North Carolina offset most of the decrease in policies assumed from Citizens. New business in North Carolina continues to show strength with $3.3 million in direct premiums written during the quarter. Our total policy count at September 30, 2016 was approximately 327,000. The Heritage personal lines policy count was approximately 249,000. Heritage voluntary personal lines policies increased by 4300 policies from last quarter largely due to new business written in North Carolina. Zephyr policies in-force stood at 74,000 bringing us to consolidated personal lines of policy count of approximately 323,000. Our commercial lines policy count was approximately 4000 at September 30, 2016. Our total premiums in-force at September 30, 2016 were $646 million, an increase of 19% from a year ago and an increase of 9% for the year - for the end of 2015. Commercial residential premiums in-force were approximately $122 million. Gross premiums earned were $165 million for the third quarter of 2016 compared to $128,000 million for the third quarter of 2015. Our ceded premium ratio was 38.4% for the third quarter of 2016 compared to 35.8% for the third quarter of 2015. This is in line with 37% to 39% guidance range we provided during last quarter's earnings call. The increase in ceded premium ratio is attributable to shift in our mix of business to more commercial residential and wind-only policies which have a higher catastrophe reinsurance costs in a lower attritional loss ratio. Our loss ratio as measured against gross premiums earned was 32.7% for the third quarter of 2016 compared to 27.9% for the third quarter of 2015. The increase can be attributed to weather claims associated with Hurricane Hermine of $4 million, coupled with reserve strengthening and adverse development totaling approximately $2 million related to litigated prior-year claims. Hermine added about 2.4 points to the growth loss ratio. On our first quarter earnings call we provided guidance that our loss ratio excluding hurricanes will be in the 29% to 32% range for the remainder of 2016. Excluding Hermine our loss ratio for the quarter of 30.3% was within our guidance. IBNR represented approximately 58% of our total loss reserves at September 30 and a change in IBNR accounted for 2.1 points of the loss ratio for the quarter compared to 0.8 points for the third quarter of 2015. Our expense ratio as a percentage of gross premiums earned was 22.3% for the third quarter of 2016 compared to 20.1% for the third quarter of 2015. The year-over-year increase in our expense ratio is primarily related to the larger benefit realized a year ago from assumed earned premiums from Citizens take-outs were there were no acquisition expenses associated with the premium. We provided guidance on last quarter's earnings call, the expense ratio ranging from 23.5% to 24% was reasonable going forth without the benefit of assumed earned premiums from Citizens. The benefit to our expense ratio from take-outs was 7/10 of a point in the third quarter of 2016 compared to 2.8 points in 2015. Our combined ratio as a percentage of gross premiums earned was 93.4% for the third quarter of 2016 compared to 83.8% for the third quarter of 2015. Net income for the third quarter of 2016 was $10.9 million compared to $16.8 million for the third quarter of 2015. On the balance sheet side stockholders equity increased to $377 million, an increase of approximately $21 million from December 31. During the quarter the company repurchased $4 million of its common stock for year-to-date total of $20.6 million resulting in approximately $1.4 million shares repurchased so far this year. Statutory surplus in our two insurance company subsidiaries September 30 was approximately $205 million and $72 million for Heritage and Zephyr respectively. Our invested assets at September 30 were approximately $550 million, an increase of roughly $150 million from December 31 with about half of the increase attributable to the inclusion of Zephyr's invested assets into our consolidated balance sheet. At September 30, our cash position was $131 million and our total assets were $1.1 billion. Regarding Hurricane Matthew, we received approximately 2500 claims and we have set initial reserves for virtually all of these claims. To date we've closed over 75% of Matthew claims, paid loss and loss adjustment expenses of more than $6 million and incurred approximately $12 million on a reported basis. Based on our historical loss development factors, we could expect to report incurred losses from Hurricane Matthew of approximately $30 million in the fourth quarter of 2016. With that Bruce and I are now available to take your questions.

[Operator:]

[Operator Instructions] And your first question will come from Arash Soleimani of KBW. Please go ahead.

[Arash Soleimani:]

Thanks. Good morning. So two questions, I think you had mentioned that $2 million of adverse development was from AOB, there was about $3.2 million total of development I was just wondering what the incremental amount over the $2 million is?

[Steve Martindale:]

Yes, there is $2 million total about $3.2 million is prior year, so there's some favorable development on first couple of quarters this year and that's $2 million but it is all AOB related.

[Arash Soleimani:]

Okay. So there was some development -- favorable development on prior quarter this year that would have benefited. But then - okay, go ahead.

[Steve Martindale:]

I think we're talking about really small amounts on a large reserve the development is less than 1%.

[Arash Soleimani:]

Okay, okay. But the $3.2 million of adverse from prior years - now from this - from prior so that was all AOB related or was there anything else in there?

[Bruce Lucas:]

It's mostly AOB related and about half of it is actual results coming in a little higher than expected results and then the other half is that was actually increasing our loss development factors and strengthening reserves a little bit to make sure that we got and handle it going forward.

[Steve Martindale:]

I think overall our saving the take away from my perspective is that really our loss development and adverse development from prior quarters has been pretty flat. You look at the size of our reserves, the size of our policy count et cetera a $1 million or $2 million movement overall is extremely small as Steve mentioned less than 1% development.

[Arash Soleimani:]

Okay. I guess the thing I was trying to back into so if I take your gross loss ratio and I back out $4 million of losses for Hermine I back out the 3.2 of adverse I get - like a core gross loss ratio of 28.4% which is better than 3Q '15 core gross loss ratio by about 140 basis points. So I guess I'm also trying to determine what's driving that 140 basis point year-over-year improvement especially just given that AOB this year is probably more of an issue than it was last year at this time?

[Bruce Lucas:]

Yes, that's right. It really did the better loss ratio this year is due to our mix of business, which includes more commercial residential and more wind-only business which has much lower attritional loss ratio.

[Steve Martindale:]

I'd also just add that our loss ratio in North Carolina have been very good. And we got a quite a bit policy count there in premium and as mentioned previously I think we're on track for a $9 million to $10 million a year in North Carolina and that book of business so far has performed incredibly well.

[Arash Soleimani:]

Okay. That's great to hear. And then just kind of going building on to that comment on new business, so can you talk about the new business volumes were both in homeowners and commercial residential, and how that compared to last year?

[Bruce Lucas:]

So I can talk about - yes, the volume is up this year compared to last year.

[Steve Martindale:]

We are pulling over underwriting reserve

[Arash Soleimani:]

Sure, no problem.

[Bruce Lucas:]

So I can tell you our in-force business is up even quarter-over-quarter on the voluntary side. We look at our option and say on commercial residential for example, you really want to look at dollars that you - that in terms you write you can't really look at the cat count and I'd think that the third quarter of this year in commercial residential was less than the third quarter of last year. And that really just reflects our view of risk in some of the pricing that we've seen in the market from some of the other players. We want to make sure that we're approaching that business at the right combined ratio. Definitely I'd say personal line side. Obviously our policy count is pretty flat there year-over-year which is in line with our expectations.

[Steve Rohde:]

This is Steve Rohde. Our sales for the third quarter 2016 on a voluntary personal lines sales were consistent with last year, but the difference is that we have more business being written in North Carolina and rest in the Tri-County. So we shipped mix of business away from AOB Tri-County and move it into North Carolina and rest of the state is pretty flat from year-over-year.

[Bruce Lucas:]

And just to add to Steve's point there, I mean a big reason why you see voluntary production fairly flat as you mentioned increase in North Carolina, but there are just wholesale areas in the Tri-County on a personal lines basis that we think are at this point in time uninsurable. And so therefore we have really curve that voluntary production down there quite significantly for I'd say the last six months until we see a fix on the legislative level to the assignment of benefit of uses taking place down there, we're really not interested in doubling down the Tri-County at this point in time.

[Arash Soleimani:]

All right. So basically if we understand the key reason why growth premiums written were down modestly over year that primarily just stems from your caution in Tri-County?

[Bruce Lucas:]

That's right.

[Arash Soleimani:]

Now that makes sense. And just on the same line, what was retention in the - in each of your sub segments including organic business, Zephyr and take-out business?

[Bruce Lucas:]

Yes, Zephyr is averaging a probably around 93% retention ratio, you guys got the number for Florida?

[Steve Rohde:]

Florida voluntary is running just under 80% and then Florida take-out is I mean just above 80%, residential for the quarter was lower because of some risk – derisking that we did in the Tri-County. So it was running closer to 70%.

[Arash Soleimani:]

The 70?

[Bruce Lucas:]

70% on commercial residential.

[Arash Soleimani:]

Okay, all right. And when you said derisking you just mean policy that you yourself choose to either non-renew or?

[Bruce Lucas:]

Correct. We kind of look at it and said looking the pricing on these policies should be higher. Our belief is different from some of our competitors, I'm not really interested and expanding the top line and sacrificing profit, I don't think that makes sense. I mean we're operating in Florida, we all know the perils in Florida especially with the cat risk. I believe you have to have a certain underwriting margin and order to operate year and to justify the risk that you take on our hurricane retention basis. So we're not interested in adding top line and running on 99 or 100 combined ratio. That doesn’t fit our business model. So we're going to make sure that we priced the business to maintain a healthy and justify profit margin and if we're not able to get that margin then roll up somebody else to take that risk and make little to no profit on it done that's not business we're interested personally.

[Arash Soleimani:]

Okay, great. Now that makes a lot of sense. I think you mentioned already, but how many Matthew claims did you have from the total claims how many have you closed?

[Bruce Lucas:]

Yes, right now. We have about 2,500 Matthew claims about I'd say - I think the last report was 76% of the claims have been closed. We've adjusted almost all of those claims. Right now if you want to look at our incurred and reserves I'd say about 13 million or so. Yes, that roughly - that's an approximate number in terms of where we are in losses. So obviously we've come out and said losses could get as high as 30 million, but we're going to use management's best estimate in the fourth quarter once we see what the actual pays are and see how many claims continue to come in. But right now claims are not really coming in at a big volume, they're kind of tailing off. And so there was a chance that we may do significantly better than the 30 million reserves and so I'd like to highlight that, because right now based on what we're seeing I mean that's very probable. But I think 30 million is a good outside number for what ultimate losses could look like.

[Arash Soleimani:]

Okay. You said we have 13 million in case reserves now?

[Bruce Lucas:]

13 incurred on a reported basis, so we paid a today it's about 7 million. So and then about 6 million in case reserve, so again - so for a reported incurred is 13.

[Arash Soleimani:]

Okay. Then how much more do you have in IBNR then?

[Bruce Lucas:]

We have not set the IBNR for it yet. But I mean the difference between the 30 and the 13 would be what we’re thinking IBNR would be.

[Arash Soleimani:]

Okay. And then my last question, I just wanted to know, we talked about this a bit last - on the last earnings call for Q2. Just want to update on rate increases and I think last time you also mentioned that in addition to the potential rate increase, there was an alternative you were working on with the OIRs as one of the - an update on the items?

[Bruce Lucas:]

Yes, so obviously our big policy counts segment is the Citizens HO3 policy form and that’s a big component of our overall Florida policies in-force. We did receive a 9.9% overall rate increase in the Tri-County that’s about 15% rate increase there. One of the alternatives that we were looking at with OIR is capping water claims at $10,000, that is particularly true on older homes, say 40 years and over. We were able to get that approved. So that is a - I think a real benefit. I mean policyholders go have a lot of coverage there, but on older homes, 40 years are not just like many other of the Florida carriers, there is a $10,000 cap for a current song for water and we have a pretty high percentage of our overall takeout portfolio in terms of HO3 is that over 40 years old. In that number, I believe is north of 50% I would say. So this is going to have a meaningful impact on the loss ratio and that helps us to curve additional rate increases on innocent policyholders that would otherwise get a rate increase because of assignment of benefit fraud that is taking place in that area. So this is a win-win for the consumer. It’s a win-win for the company, help us to control our loss ratios and we are very thankful for the OIR for all their help and working with us on a good solution, to help to address the assignment of benefit issues.

[Arash Soleimani:]

And you said - I heard a 9% - 9.9% of that 15%, can you just clarify what were those numbers again?

[Steve Martindale:]

Yes, so the overall rate increase is 9.9%. And in Tri-County, the rate increases kept at a maximum of 15% and pretty much most of the policies down there will generate roughly a 15% rate increase.

[Arash Soleimani:]

Okay. So 9.9% that’s the overall - is that across your entire personal residential portfolio of the 9.9% average…?

[Steve Martindale:]

The Citizens HO3 policy form.

[Arash Soleimani:]

Okay. And then what percentage of your business is that?

[Bruce Lucas:]

Takeout rate, yes.

[Steve Martindale:]

It's about 75% of the takeout book is Citizens HO3 policy form.

[Arash Soleimani:]

Okay. And this 10-K cap so is that basically language that gets applied at renewal or is that kind of affective out of the certainty for all the policies?

[Bruce Lucas:]

It is available and it gets put on automatically at renewal. The other thing that we are able to do is we are able to offer our policyholders a $10,000 cap on their water claim and the exchange for roughly a 25% decrease on their AOP premium and we think that is extremely important. So we can go to houses that are under 40 years old. We can approach the consumer and let them know that we can actually reduce their premium. And in exchange they take a $10,000 cap on underwater coverage. And so that is an effort that we have ongoing now, where we’re reaching out to agents and consumers to try to save them some money on their premium and cap the dollar amount of the claims. And since the vast majority of our policyholders are fairly honest people and do the right thing, we do think that the response rate there will be pretty significant.

[Arash Soleimani:]

And so you said this cap…

[Bruce Lucas:]

$10,000 cap along homes 40 years and older and there is an optional cap of $10,000 for a home 39 years and under.

[Arash Soleimani:]

Okay. And this is new language is this specifically for the Tri-County or for the whole…?

[Bruce Lucas:]

No, it's for all policyholders.

[Arash Soleimani:]

Okay. Are you seeing any impact positive from the new Citizens language that you had implemented?

[Bruce Lucas:]

Yes, it’s too early to tell you, I mean the language certainly does help to cap the emergency restoration component of the claim until we have a chance to go in and adjust it. We were unique and that we were able to get language included that stated that there was on reasonable delays in terms of letting us into adjust the claim that the cap continues indefinitely. So that language definitely helps our claims department address some of the abuses we’ve seen in the past where the contractor will go in, go report the claim, will be in there doing demo and remediation and they refused to let us in to inspect their house. That's not an unreasonable delay and we’re going to apply the caps. And that’s fair, and it’s in our policy language, it’s in our endorsement language so that will definitely help us to curb some of the abuses that are taking place. But it’s too early to tell exactly what the impact of that will be because in my opinion the language should go a lot further and despite the language there is nothing to stop the lawyers in coming in and filing the suit. So I think it will have some impact but it’s too early to tell really what the extent of that impact will be but it is definitely a useful tool.

[Arash Soleimani:]

All right. And so, what was the effective date of the 9.9% increase in the 10-K count?

[Bruce Lucas:]

12.15.

[Arash Soleimani:]

Okay great. All right, thank you very much for all of those answers.

[Operator:]

The next question will be from Mark Hughes of SunTrust. Please go ahead.

[Mark Hughes:]

Thank you good morning. Could you give me some general thoughts when we think about the gross premiums written in the fourth quarter with Zephyr coming online, your takeout activity, the potential year-over-year change when we think about your new business production. How should we think about the gross premiums written in the fourth quarter you are essentially steady in the third quarter, how is the either fourth quarter shaping up or what are some of those dynamics we should consider?

[Bruce Lucas:]

Just on the general basis and I’ll let Steve chime in. Definitely on the takeout side we are not doing takeouts right from Citizens and we've telegraphed that for quite some time now. Until we see assignment of benefit reform we are not going to be assuming policies from Citizens. In fact, we had approval for example to take some wind only policies and about 2,000 of them in October. We ran the numbers on that portfolio, it didn't make sense. We didn't select one policy. I believe that anybody that's assuming policies right now particularly from the Tri-County which is where a lot of the policies are of Citizens, I think that they’re just going to lose money on everyone of them. Until we see bigger rate increases at Citizens and/or assignment of benefit reform, meaningful reform, I would not advocate assuming policies out of the Tri-County and Citizens and that’s were a lot of the policies are. We've been focused on our voluntary side of it. That’s why we diversified and bought Zephyr Insurance. So obviously that has worked out well year-over-year. We’ve seen an increase in gross premiums of about 28% year-over-year. We’ve seen a 36% increase in policy count year-over-year. It’s worked out well for us. We’re continuing to expand our voluntary production outside of Florida and the voluntary premium that we’re writing in Florida is directed away from the Tri-County and areas of the state where we are profitable. And that's going to be the overall thesis going forward. But I would think kind of fourth quarter numbers we'd see to be barely flat to my guess.

[Mark Hughes:]

Okay. Thank you for that. And then in North Carolina you said on track for 9 million or 10 million this year. Will South Carolina ramp up at the same pace? I know you’ve got some partnership in North Carolina that helps. Anything is South Carolina?

[Bruce Lucas:]

Yes Mark we do not have a strategic partner in South Carolina. I would expect that production growth there would be much more modest. I think right now in terms of South Carolina we don't really have a lot of premium there compared to North Carolina. About 200,000 was written in the quarter in South Carolina. North Carolina obviously the strategic partnership with National General has been instrumental to our market penetration there. So we are incredibly appreciative of the partnership that we’ve developed over the last two years with National General. We are looking at expanding partnership in other states. It’s been very symbiotic for both companies and we do think that there are additional opportunities in the future to grow with National General and augment their need for a good homeowners carriers in other states. So that's a process that we’re undertaking right now.

[Mark Hughes:]

The G&A in the quarter was little lower than we had looked for, lower than it was in the first six months. Was that anything unusual there or is that kind of 8% to 9% is that sustainable?

[Steve Rohde:]

Yes, that’s about where we’re at now. We’ve just having reached some scales of economy here we’re able to kind of just stay flat on the expenses.

[Mark Hughes:]

And then the tax rate as I think about that going forward what's a good number.

[Steve Rohde:]

38.5.

[Mark Hughes:]

And then with the rate hike for Citizens are you anticipating that you might see some loss of policies there, your retention might drop or nowhere else to go?

[Bruce Lucas:]

In my opinion I - it’s hard to say Mark but I would not expect a meaningful movement in terms of policy count down there and the reason for that - and especially if you are looking on a premium basis, I mean if you had a little higher attrition there because you are getting a higher rate increase they kind of balance one another out. I firmly believe that you have to price for the risk and we are doing that. We are pricing for the risk and it’s either going to be a profitable book of business or we will not write it. So if there is attrition in that book of business because there is a roughly 15% overall rate increase in the Tri-County then there is attrition. And somebody else can pick it up at a lower price and lose money on it. That would be great for them and that's something that we’re just not willing to do. So there's a little bit of attrition there. We’re okay with that. It's about bottom line profits, it’s about making money and pricing for the risk and that's something that we've had at the core DNA of our business mentality since day one. So that's okay with us. If we have fewer policies there it will actually - if we’re not getting the right rate you actually have fewer policies and make more money than you would having more policies and not getting enough rate and that's really the focus that we have.

[Mark Hughes:]

And then a final question. Capital management, are you seeing M&A opportunities out there and if not what's your view on the share buyback at this point?

[Bruce Lucas:]

Yes, there are definitely M&A opportunities out there but I'm also looking at this Mark and saying our share price right now is 10% below our book value and we're not losing money around here, we’re making money. So we’re accreting to book value every quarter. So the shares right now from our standpoint they’re cheapest they’ve ever been and I don’t know if that’s just a reactions to two hurricanes and what that does to our book value but we’re not seeing erosion in book value. And so at 0.9 times book that's incredibly attractive point from our standpoint to increase the share repurchase program.

[Mark Hughes:]

Thank you.

[Operator:]

And the next question will be from James [indiscernible] of Citi. Please go ahead.

[Unidentified Analyst:]

Yes, thanks guys. My first question relates to the rate increase here. So if you look at that the Citizens HO3 business, what sort of core loss trend has that business been producing this year? So particularly like if you strip out the cats for the year what's been the core loss trend there?

[Bruce Lucas:]

The loss ratio has been about 38.

[Unidentified Analyst:]

Okay. But how about the loss trend that would sort of be comparable to the 9.9% rate increase you are going to get?

[Bruce Lucas:]

Go ahead Steve.

[Steve Rohde:]

We're looking at year-over-year right now we’re running like I see to it like a 38% loss ratio for our personal lines homeowners business in Florida. If you go back to the second quarter of 2015 before we started seeing the increase in AOB that was running at 34% type loss ratio and then prior in 2014 we were running in the - I think 28% loss ratio. So we’ve gone from a 28% loss ratio in 2014 to now like a 38% loss ratio in 2016. And that really started changing in that second quarter of 2015 when AOB became an issue and again we didn’t realize that at the second quarter of 2015 is really - got into development and fourth and first quarter of 2016.

[Bruce Lucas:]

Yes, so if you look at it it’s probably 10 points or so in term of the increase in what loss ratio over a two-year period. If you average it out maybe it’s a 5 point per year average and we’re getting 15 point rate increase there. And we’re just looking at this and saying we got be ahead of the curve. And until the legislature into South Florida decides to get their act together and do something to curb the abuse, rates are going to go up on their constituency and I see that some of these guys had a little trouble in their reelection last night. And I know that the rising insurance premiums were a part of it and maybe they shouldn’t have locked AOB last year they’d probably still be in office. So we’re really looking at some substantive changes out of the legislature to address this. I can tell from the speaking off the record to several leaders at both the House and with Senate. They are very, very much in support of comprehensive AOB reform this session. So I am glad to see that and we are cautiously optimistic that we may actually see a fix this session but it’s still a happy politics and until you get up there and settle things you never know what’s going to happen.

[Unidentified Analyst:]

Got you. Thanks for that. And when you think of your pricing strategy you are targeting some sort of combined ratio. So would it be - should we be assuming that there could be as much as a 10 point improvement in the combined ratio next year to something in the low 80s, is that realistic or do you think that there is still going to be issues and it will be more like - it will improve but not by that much?

[Bruce Lucas:]

Yes, we’ve ran combined ratio in the past in the upper 70 to low 80s because of the economic benefit of Citizens depopulation and the way that works with the zero seeding commission and no expense ratio, and no reinsurance cost et cetera, it does move that number down and on a normalized basis you are probably upper 80s, low 90s, if I say guys, what do you think.

[Steve Martindale:]

Our target is an 85 combined ratio when you look at all our products. This year we’re closer to the 90 because of the AOB issues as well as little hurricane issues as well but with this rate increased we'd expect us to get back down to the assuming no hurricanes in 2017 we’re about 86%, 87% combined ratio.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

And ladies and gentlemen that will conclude our question and answer session. I would like to hand the conference back over to Bruce Lucas for his closing remarks.

[Bruce Lucas:]

I would like to thank everyone for joining our third quarter earning call.

[Operator:]

Thank you. Ladies and gentlemen the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.