American Coastal Insurance Corp (ACIC) 2014 Q1 法說會逐字稿

Greetings and welcome to the UPC Insurance first-quarter 2014 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, Mr. Adam Prior with The Equity Group. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. You are also welcome to contact our office at 212-836-9606, and we'd be happy to send you a copy.

In addition, UPC Insurance has made this broadcast available on its website, as well.

Before we get started, I'd like to read the following statement on behalf of the Company. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends and the Company's operations and financial results and the business and products of the Company and its subsidiaries. UPC's actual results may differ materially from the results anticipated in those forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the US Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments, or otherwise.

With that, I'd now like to turn the call over to Mr. John Forney, UPC's Chief Executive Officer. Please go ahead, John.

Thank you, Adam, and good morning to everyone participating in the call. This is John Forney, President and CEO of UPC Insurance, and with me today is Brad Martz, Chief Financial Officer.

I want to thank you all for your interest in UPC Insurance, and we look forward to answering any questions you may have at the completion of our remarks.

Before we begin our discussion of the quarter, I want to take a minute to say that our thoughts and players are with all of those affected by the tornadoes this week in the southern United States. It seems that this sort of thing is becoming a tragic rite of spring in our country, and it reminds us that we insure people just as much as we insure houses, and that for those people, the rebuilding process is an important part of the healing process.

So while our Company did not have any incurred losses as a result of these storms, we hope that the people whose homes and lives were affected can begin the rebuilding and healing process quickly.

Now to the quarter. We had some momentous events during the quarter, beginning with an equity raise that brought in many new investors and over $54 million of fresh capital. For those of you on the call who participated in the offering, thanks for your support.

During the quarter, we also hired Kim Salmon as the Company's first General Counsel. Kim brings a wealth of relevant experience to her role, and with this hire, our executive team is complete. The six members of that team that report to me all joined since I started at the Company in June 2012. And I believe they represent the finest, most unified leadership team at any comparable company. It's a real competitive advantage for us.

From a financial results standpoint, this was a record quarter for UPC Insurance. We posted more net earned premium, more total revenue, and more net income than in any quarter since the Company became a publicly traded entity in 2008.

More importantly, at least from my perspective, we continue to build the Company in the direction we want to go in our quest to build a major national insurance enterprise, writing business in coastal states from Texas to Maine.

During the first quarter of 2014, we wrote approximately the same number of new policies that we wrote in the first quarter of 2013, about 15,000. But last year over 12,000 of those 15,000 policies came from Florida, over 80%, whereas this year only about 6500 of those policies, about 43%, came from Florida. We are really happy with this changing mix of new business and are pleased with the way our book is evolving.

We currently write in seven states and are licensed in three others where we intend to begin writing soon. Of note in this group is Louisiana where we received our Certificate of Authority just this week.

While the independent agent network is our primary source of growth, we also have lumpier growth avenues available to us, and we're actively seeking opportunities in all these areas. These include takeouts from residual market entities both in Florida and elsewhere; partnerships with other carriers like the ones we currently have with Allstate in Florida and Arbella in new England; and potential acquisitions of companies or books of business.

In this regard, I wanted to update you on our takeout initiative at the Texas Windstorm Insurance Association where we presented a 40,000-policy takeout proposal earlier this year that has been favorably received by the board, staff, and other constituencies. TWIA has been working to formalize the process for takeouts since they had no such mechanism in place when we presented our plan, and they are making good progress. At a meeting last week, they deliberated on various aspects of the process and agreed to bring the issue back to a meeting next month hopefully for final approval.

While it appears unlikely that this timetable will enable us to assume policies from TWIA prior to the start of the 2014 hurricane season, we are optimistic that the process they are putting in place will allow us to move forward with the takeout sometime this year.

We evaluate our Company's progress using four primary metrics: our premium growth; our seasoned insurance ratio; our loss costs; and our expense ratio. This quarter for the first time in my tenure here we were pleased with the results we produced in all four of those areas.

At this point, I would like to turn the call over to Brad Martz for a more detailed discussion of the specific results in each performance category. Brad?

Thank you, John. Good morning, everyone.

Before we get to the financial highlights, I would also like to encourage everyone to review our press release, earnings release, and Form 10-Q that we plan to file today after the market close.

The highlights of UPC's strong quarter include earnings per share of $0.65, a 140.7% increase year over year; return on average equity of 25%; an increase in the book value per share of 26% to $8.33 per share; and continued organic revenue growth and direct premiums written year over year.

So let's start with UPC's revenue growth. Total revenues grew 53% from $44.2 million last year to $67.5 million in the current quarter. Included on page 2 of our earnings release is a table that breaks down the Company's growth in direct premiums written in the first quarter of 2014 compared to the same period a year ago by state. Of the roughly $91 million of direct written for the quarter, Florida was $73 million or roughly 80% of the total, and our operations outside of Florida equaled $18 million for the remaining 20%. Overall the growth in direct written business increased 23% year over year.

However, our growth strategy remains focused outside of Florida, which is evidenced by Florida being $7.1 million or only 42% of the year-over-year growth with non-Florida business representing almost $10 million or 58% of the growth in direct written premium.

Also included in the earnings release is a breakout of the assumed written premium. Takeouts are nonrecurring transactions, and since UPC did not assume any business from Citizens or any other carrier in the first quarter of 2014, but it did complete a takeout from Citizens in the first quarter of 2013, and it obviously impacts the comparability of gross written premiums.

Our direct written results are clear evidence UPC's organic growth story is alive and well, but this is in spite of some portfolio optimization work and some underwriting rules changes in Florida that were designed to reduce underperforming segments of our book.

In addition, the Company has received approval for a 17% rate increase in Rhode Island and is also implementing a 6.9% rate increase in South Carolina. UPC has also made some rate and rule modifications to its products in New Jersey and Texas that are expected to significantly improve competitiveness and market positioning in these important territories.

I will now shift gears and discuss reinsurance. During March and April, John and I had the pleasure of meeting with many of our reinsurance partners to update them on the great progress UPC has made since last year and lay the groundwork for this year's renewals. We anticipate purchasing somewhere between $1 billion and $1.2 billion of total limit on June 1, 2014, which will be a significant increase from the $788 million of limit purchased last year.

The structure is likely to be very similar to last year's program, but that will likely take our first event protection to slightly higher return periods. The limit acquired from the Florida Hurricane Catastrophe Fund will increase year over year, but it will shrink as a percentage of UPC's overall program as we buy more open market coverage for our exposures outside of Florida.

Risk retention is also likely to increase modestly given UPC's improved capitalization, but is expected to decline as a percentage of total capital year over year.

Pricing has not yet been finalized, but it is safe to comment that market conditions remain very favorable, and this should allow UPC to buy better protection while also realizing some level of cost savings year over year. For the current quarter, ceded earned premiums as a percentage of gross earned premiums fell from 39.5% a year ago to 32.6% in the current quarter, which is clearly having a meaningful positive impact on our operating results.

Next, I will touch briefly on UPC's loss results. For the quarter, net loss in LAE increased $7.1 million or 35% year over year, due primarily to exposure growth and water-related losses in Florida, as well as losses stemming from severe winter weather in New England. Our gross loss in LAE ratio is 29.1% versus 29.4% a year ago, and the underlying gross loss in LAE ratio was 29.3% versus 24.4% a year ago.

We feel good about reserves, and development was a nonissue for us this quarter. We continue to watch the accident years of 2010, 2011, and 2012 that have challenged us in previous quarters very carefully given the adverse experience in the previous four quarters.

On the expense side, the Company solutes nonloss operating expenses increased approximately $1.7 million or 32% year over year. They continue to be driven primarily by variable policy acquisition costs or commissions, premium access and processing fees, as well as personnel costs required to support the Company's growth.

UPC's gross expense ratio was down 0.4% from the prior year, but the net expense ratio declines 4.5 points due solely to lower reinsurance costs.

On the balance sheet, UPC ended the quarter with just under $174 million in shareholders equity, an increase of $66 million or 61% from year end. Our liquidity also improved with cash and investment holdings increasing $71.1 million or 22% to just under $400 million at the quarter end.

With that, I'd like to turn it back to John Forney for some closing remarks.

Thank you, Brad. I was in Rome last weekend for the canonization of Pope John Paul II and Pope John 23, and while I was there, I had the chance to see the unbelievable art and architectural accomplishments of the former inhabitants of that city. One of the greatest of those was Michelangelo, and we saw a lot of his incredible works. So I wanted to share with you a quote I saw from Michelangelo while I was over there.

He said, the greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.

That quote resonated with me because at UPC Insurance we are aiming high. Our vision is to be the premiere provider of property insurance and catastrophe-exposed areas, and that means we need to be excellent in everything we do. I believe during this quarter we took some steps down that road, and I'm excited about the journey ahead.

Thanks very much for your time this morning. At this point, we would be happy to answer any questions that you might have.

(Operator Instructions). John Hall, Wells Fargo.

I just wanted to start off with a question on growth and competition in Florida.

I think the growth that we saw in the quarter was toward the lower end of the range that you outlined, and I wondered if you could just talk about the competitive environment in Florida, what impact that is having on your ability to grow, and then perhaps whether there is an impact on pricing broadly as well in Florida?

Sure. Back to your question, John, this is John Forney. I will take a stab at that.

We certainly have seen a change in the competitive environment in Florida as new entrants have come into the market and other companies have grown their capital base and their activities. And so there's increasing competition for policies in Florida, no doubt about that, and there's increasing price competition in Florida. Some of the companies are less disciplined at least in our view in terms of pricing than we are and have less available opportunities for growth and so seek to grow the only way that maybe new, unproven companies can, which is by cutting price.

And so we have seen some of that. We don't compete on price. As you know, that is not part of our value proposition. We're trying to compete as a company that is known for five things, price being only one of them. We want to be a company that is known as a financially stable company that offers good products; has great claims service; is easy to do business with; and oh, by the way, charges a fair price for its products, and that is how we compete.

So when we see the price competition, we're happy to cede some of those policies to other folks and to grow more slowly in Florida. Certainly, in this quarter, we grew at a rate that was about -- a little over 100 -- 110 policies or so every day in Florida as in the same quarter last (technical difficulties) 200 policies a day in Florida.

So part of that is due to price competition. Part of that is due to some intentional underwriting changes that we made in Florida to try to reorient our book away from areas where we felt we had enough exposure and towards areas of the state where we need more exposure.

And so we are starting to see the fruits of that come into play. The last 30 days our policy growth in Florida has been up to over 130 policies a day from 100 in the first quarter. So we're starting to accelerate that growth into other areas of the state, and we like where we are positioned in the state.

John, this is Brad Martz. I will add one more thing to that.

The change in the environment really hasn't impacted our quoting activity much either. Last year we were averaging right around 30,000 quotes a month, and we saw similar activity in the first quarter. And we did produce over 17,000 new business policies in Florida during the first quarter, and retention of our renewal book is holding strong, as well.

I think the primary challenge for us is that we are being very disciplined on the pricing side and on the underwriting side. So we did tee up some policies for nonrenewal for exposure management purposes, as well as change some underwriting rules to reduce and target our non-CAT loss ratio where we were seeing problems with homes built prior to 1995 in certain zip codes, low value. So coverage A less than 175,000 in certain territories.

So things like that are -- we are underwriting out a lot of the potential losses that could be a drag on the bottom line, and that does have an impact on top line. But we feel good about what we're doing from an underwriting perspective, and our ability to grow is certainly there.

Great. And staying on the topic of premiums and states, nice growth outside of Florida, but things seem a little bit slow in both New Jersey and Texas, two states of focus for you guys. I was just wondering if you could identify what is going on there.

Well, Texas is really a brand-new state for us. This was our first quarter in Texas, and we're in the process of getting our products positioned properly in the market and getting agents signed up. We have an awesome state marketing director on the ground in Texas, a gentleman named Tony Gonzalez who spent his entire career there and is very well regarded. He has signed up over 300 agents.

And, as Brad mentioned, we are making some tweaks to our product positioning in the market, and we expect Texas to be a very important contributor going forward.

New Jersey is a state where, again, we had some problems I guess is a good way to put it in the way that we entered the state in terms of our product positioning and some reaction to our entry to the state by some competitors who cut rates in response to our efforts to try to ward off the competition that we presented. And so we are dealing with a competitive response that introduced some pricing levels in the state that we weren't comfortable with in certain markets. We've made some revisions to our product offering in New Jersey, and we expect that that state will get on track.

So we definitely have not hit our targets in that state by any stretch of the imagination, not even close. We have learned some lessons, and we are course correcting, and we're going to be very successful in New Jersey.

Great. And then I just have one question on the earnings results before I pass the baton. The $0.65 was substantially higher than what we had had out there and were expecting. Of that number, could you identify what you think is the underlying, ongoing earnings, and what portion of that $0.65 is attributable to the assumed business?

John, this is Brad. I can take a stab at that one.

So for the first quarter, we actually had total assumed premiums earned of roughly $9.6 million and assumed losses incurred of about $3.1 million. So that produced an underwriting margin on our assumed business of about $6.6 million. So, obviously, we want to allocate some of our G&A and overhead to that. But if you just look at roughly that pretax underwriting profit contribution to the overall earnings before income tax of $17.7 million, it was roughly 37% of the pretax earnings for the Company. So the balance would represent the organic growth.

And one thing I would point out is that Q1 of 2013 also had a pretty significant contribution of profit from takeout or assumption activity. So about $4 million of the $7.1 million of pretax profits in the prior year or almost 56% was driven by assumed business. So I think that speaks volumes about the fact that our core organic and direct voluntarily underwritten business is actually contributing more to the Company's bottom line year over year.

Great. Thank you very much.

Dan Farrell, Sterne, Agee.

I was wondering if you could give an update on the Clearing House in Florida and how you think that functions correctly?

Sure. As you know, Dan, we were one of the pilot companies for Citizens in terms of the Clearing House initiative, which we think is a great public policy initiative to try to keep policies out of Citizens that should not be in there. And since we have experience with the technology provider, both through our arrangement with Allstate, which also uses that technology provider for their [iData] platform in Florida, we volunteered to be one of the pilot companies, even though we did not believe that the Clearing House would be a significant source of business for us because the Clearing House typically produces policies in South Florida and tri-county area with characteristics that aren't our sweet spot for the type of home that we typically insure and because our rates are typically significantly higher than Citizens. And so if you're not within 15% of new business, you are not going to qualify under the Clearing House.

So we were doubtful that we were going to get a significant amount of business, but we wanted to contribute to the effort, and we have done that. And we have been very careful about how we've quoted things in the Clearing House because you want to be cautious that you are not quoting thousands of policies and not writing any of them because there are costs associated with each one of those policies that you quote. And you could quote yourself right into unprofitability if you're not careful.

So we put lots of screens and filters into what we've done. And, as a result, our Clearing House activity has been minimal. We've really just written a minimal of policies with the Clearing House. And I think overall, I can't speak for other carriers and I don't know that Citizens has published overall numbers, so I certainly don't want to speak for them -- I think it has been relatively modest so far. But this is really the ramp-up phase and the technology testing phase and the get-the-bugs-out phase. And as they add more carriers who don't have other sources of business, who don't have the robust agent independent distribution network that companies like UPC do, I think you will probably start to see more policies go out of Citizens or not get into Citizens and go to some of these newer carriers via the Clearing House process.

Thank you. That is helpful.

And then just a numbers question with regards to some of the earnings and expense ratio. Can you talk about how you think the trend of the acquisition ratio will flow given the changing mix of Florida versus non-Florida business and the addition of some new states coming through? And I realize that gross and net can also be affected by the change in reinsurance, but what we're seeing right now this quarter is that a reasonable run rate to think about?

Dan, this is Brad. I do think it is relatively reasonable. So you've got a couple of things going on with expenses. Obviously, the G&A line is being driven by personnel additions in claims and marketing and now with our Chief Legal Officer.

On the operating underwriting side, obviously we are paying more for business outside of Florida. So, as our mix changes, I would expect that to have some pressure on expense ratio, but it really depends on the rate of growth and what we're able to do in Florida and how we grow.

It's really hard to say. We can't really give you that forward-looking guidance. Our desire, obviously, is to continue to drive down the gross expense ratio. One difference between the gross and net being the reinsurance cost, which we actually analyze separately. So gross is the way to look at it, and the benefits of scale will be offset somewhat by higher acquisition costs.

Okay. Thank you very much.

Arash Soleimani, KBW.

I just wanted to touch also on the expense ratio. Is that something -- obviously, as you said, when you gain scale, that will benefit the expense ratio, but as you are growing and expanding that will have some offsetting pressure. I am just trying to not necessarily quantify, but understand, in the near-term, should we expect that it would perhaps get a bit worse as you grow, and then maybe over the next 24 months as you gain more scale, it would offset it? I'm trying to see what the best way to think about that.

Well, we're really trying to hold the line on the G&A. That is the key, right? So if we can hold the line and really tightly control the discretionary expenditures included in that line, I think we can keep the overall gross expense ratio flat.

But, again, we do hope and expect it to trend down over time, but slowly. But in the short term, I think what I can tell you is our first-quarter 2014 results are probably indicative of what we will see as we continue to change our mix and really increase production outside of Florida.

Okay. Thanks. And my next question is a bit more general. I know a lot of the growth opportunity both inside and outside of Florida is basically related to the larger national carriers backing out and that opening up some policies. But my question is, over the last few years, we have seen quite a bit of them backing out. So how much more do you anticipate that it will back out again both in Florida and in other coastal states along the eastern sea board or Gulf Coast, and to what extent will that obviously impact your growth as you try to grow in those areas?

Sure. This is John Forney. I will answer that question.

I think that there will definitely be some cyclicality to the participation, but not to the underlying fundamental paradigm that drives business in these coastal areas, and that simply is that the laws of insurance, the law of large numbers, and the benefits of scale that help make these companies so large and so successful in other parts of the country. And I think you probably know that if you just look at the top 10 writers of homeowners insurance in 2002 and the top 10 in 2012, it is the same 10 companies writing the same percentages of the business. Not a lot of changes. Huge market share: 65% to 70% of the business are in the hands of those 10 companies. With the exception of the fact that Citizens in Florida is a top-10 company in 2012, wasn't even in existence at the beginning of 2002.

And therein lies the point that I am trying to make, is that that scale and concentration doesn't work in coastal areas and never will. So whatever cyclicality that there is as a result of hurricane amnesia and then retrenchment when hurricanes occur won't change the fact that those companies don't want to have a combined 65% market share in those states or in those coastal areas.

So it is a permanent shift that has taken place gradually really since Andrew and Northridge, but it has been accelerating in recent years as everyone has become more sophisticated in how they analyze and appreciate the magnitude of the potential risk.

And so the opportunity that we're taking advantage of isn't created by any storm events or events in the short term. It is created by a fundamental change in the risk paradigm that all companies have, I think, realized at this point. And so whatever small changes and cyclical participation there are in these companies, we think the opportunity for us is long term, and it will enable us to build a company of great scale just by not taking risk necessarily that those companies don't want, but by filling in the gaps here and there from Texas to Maine.

There is room for other companies as well to similar sort of strategies because this market lends itself to more companies taking smaller bite-size amounts of risk. That is what we're trying to do. We think it adds up to a big amount of premium opportunity permanently.

All right. Thank you for that thorough answer. My next question I think you touched on this earlier with John's question a bit, but I was also a bit surprised on the gross written premium growth I think was 1.4%. And I know you had assumed I think it was $13.7 million in 1Q 2013, but then the Florida premiums increased by about $7 million.

So is that related to what you were saying with trying to cede some of the homes that were built before 1995? I'm just trying to understand the growth -- that Florida growth. So if you could drill down a bit more into it.

Yes, it is definitely part of the story. We had some return premium obligations. That explained the negative assumed premium for the quarter because we have seen policy counts and premium related to the takeout of the client, as well.

But we have got in Florida an opportunity to grow as fast as we really want to grow, but we want to grow responsibly. It's a big state. There's loads of opportunity. I mentioned the quoting activity we have gotten. But we were not happy with our non-CAT loss ratio last year, and we identified the causes of some of those challenges for us, and we took action that had an impact on the quarter.

Is it something that we recognize maybe we over swung? Maybe. There is some of it. John mentioned that the new business growth activity toward the end of the quarter and now what we're experiencing in Q2 is much better than the earlier part of Q1.

So we have made some slight changes, and obviously we have got a big pending rate filing with the Florida office of insurance regulation that we think once approved, and we do expected it to ultimately be approved, we don't know when, but hopefully soon, will absolutely enhance our competitiveness throughout the state and allow us to grow at a reasonable rate, which I think is probably somewhere between 10% and 15% year over year.

If we are going to change the mix and the balance in our portfolio, it's going to be hard to continue growing Florida at 20%, 30% a year because we would have to grow the non-Florida portion at really high, really aggressive rates, which can potentially be done, but we are conservative risk managers and underwriters. So we want to be careful and cautious as we pursue growth.

Definitely. I think that makes a lot of sense.

And then just lastly, you mentioned I think the last couple of quarters, increased frequency and severity in terms of water losses. Can you just provide a bit more color on that and what specifically those losses are?

Mainly pipes, related to pipes. Pipes is definitely the largest cost of our 15 different classifications of water-related losses. Pipes dominate the headlines. So the freeze-related losses and with the severe cold temperatures in the Northeast, were significantly higher than they were last year, about $2.4 million or additional incurred losses year over year just in New England, an 800% increase year over year. Not a big absolute number, but percent of change, it was pretty huge. It represented about half of the increase in the gross underlying combined loss ratio.

In Florida, that really is part takeout driven. Tri-County still continues to challenge us. We have implemented a water supplement that I think will help control some of this loss activity, but it remains a challenge for most carriers throughout the state. But us in particular, we're doing as much as we can to mitigate the water damage we're seeing.

Okay. Great. Thank you and congrats on the quarter.

Samir Khare, Capital Returns Management.

Congratulations on the quarter.

I just had a few questions. First, Brad, the rate change that you said you had into the [OIR], did you say what that was, what percentage that was for?

Yes, the overall is 4.3%. I don't know how much of that at this time will actually be approved, and part of the intent again is we recognize [rates] in the state are falling. Overall indications is really not a good number to use. You really have to break down each and every rate filing by rating territory, right?

So we have got a variety of different reasons and underlying factors that we're using, including mostly the non-CAT loss experience. So our wind indications are down across the board in all rating territories given the lower costs for insurance capital. But the non-CAT piece varies from territory to territory, and we're using that to strategically make changes to help our positioning and help us grow in the areas where we want to grow and slow down growth by taking rates up where we can, where it is actuarially justified and prudent to do so in areas where maybe we feel our risk exposures are adequate.

And the water supplement that you mentioned, is that something that is already in your policies, and is that something that competitors of yours are doing, as well? I'm just trying to get a feel as to that is something that (inaudible) will push back on.

Yes, on the policy -- it's not in the policy. A lot of carriers aren't doing it. We expect some pushback from regulators as it is their duty to ask good, tough questions. But there other carriers that have gotten similar limits approved and are in use in the state.

All right. And then the other states that you guys are growing in, are you guys competing with any of the national carriers, or are these markets similar to Florida where they are considered dislocated where capacity might be a problem?

I think in general -- Samir, this is John Forney -- they are similar to Florida in that they are dislocated incapacity is a problem. They are dissimilar to Florida in that there is not a plethora of smaller, single-state entities competing in these markets. And so the number of competitors I think is almost always less in these other states. It doesn't mean it is less robust -- less a number. Some of the bigger companies have more of a presence in some of these coastal areas than they do in Florida. But in general, the dynamics are pretty much the same.

These markets are dislocated. There is a dearth of capital and a dearth of good, quality companies seeking to do the business. As a result, we have been welcomed with open arms by both regulators and agents in all the states that we have entered.

All right. And these other states, are you currently participating in the Allstate Advantage program? I like to know how you guys do in Florida.

Now, we are only on the Advantage program with Allstate in Florida right now.

Great. And then I noted that a competitor of yours is scheduled to do a takeout of 10,000 policies from Florida Citizens in July. I just wanted to get your opinion if you guys think there are still opportunities to do takeouts with the policies that remain in there, and would you guys contemplate doing another takeout from Florida Citizens?

Well, everybody has different underwriting criteria and different goals in how they are trying to build their book. So I can't speak for any other company.

I will just say that last year when we did our takeout, which ended up being 15,000 or so policies, something like that, we started out by getting a takeout approved for 100,000 policies. And after applying all of the various filters that we applied and trying to make sure that the business fits with what we are trying to do, we were down to 15,000 policies at that time.

And so there have been a lot of other takeouts since then. We haven't looked at the book of business at Citizens since that last takeout last fall. So it would stand to reason that there's less opportunities now for a company like us that has different standards than for other companies that might not and might not have other ways to grow other than takeout. Some of these companies just if they are going to grow, that is their only way to do it because they don't have an agent network.

So we are fortunate to be in the position that we could do takeout if we want to, not if we have to, and we will certainly evaluate the opportunities there as the year goes on. We would never rule it out that we would not do another takeout, but it is likely that the opportunities are smaller for a company like ours than they were before.

Great. Okay. And on the takeout you guys did in Q4, of the policies that opted in or agreed to stay in, how many of those policies can be retained?

At the end of Q4, that number was 11,716, so roughly about the change, roughly 35%.

And we -- I think our model was based on about a 40% opt-out or attrition rate.

Okay. And that was at the end of Q4 you said?

At the end of Q1.

Q1.

We had 11 -- yes.

Okay. Got it. And sorry, I don't know if you guys had this in the press release. Did you guys disclose what your total PIF is at the end of Q1?

I don't know if we did, but our total PIF at the end of Q1 was just over 206,000 policies. Premium in-force was about [$380] million.

206,806, yes. And those numbers will be in the Q we will file today.

Okay. And then just regarding the TWIA conversation, if everything is approved eventually in the month, would you guys do a takeout during wind season, or is that something you would wait until after wind season to figure out?

I wouldn't rule anything out, but it is likely that it will be something we would wait until after wind season just because of the reinsurance considerations.

Okay. And then what is your stat surplus as of now?

Stat surplus, if I recall, was close to $86 million at the end of the quarter.

All right. And then how much of the capital that you guys raised at the end of February was pushed down to the --?

We did not push anything -- we have not pushed any of it down. That is something that will require Board approval. We have a Board meeting next week where we will discuss various strategies on how to deploy some of the capital. But today it is still sitting in that ultra-short-term duration, highly stable net asset value bond mutual fund, providing us some return, but pretty paltry to speak of. So we want to put it to work as quickly as possible, but we can't make a contribution until we've got some of the corporate formalities taken care of.

Well, just ahead of the board meeting, is that something that you guys plan to do? Push some of it into the sub?

And then the other question is, what might be the plan for the rest of it? Is it to support the remarkable growth you are seeing in other states, or can we expect a bigger deal like a takeout or another transaction that will ramp you up much quicker?

Obviously, we are in one line of business, writing homeowners' insurance. So the capital is there to support that. In fact, exactly how we deploy and support that in support of what growth opportunities I outlined earlier, the kind of lumpy growth opportunities we evaluate on a continuous basis, we haven't committed to any specific course of action other than that we are happy we have the capital. We see opportunities to deploy it to earn good returns on it for shareholders, and we will make those decisions as opportunities present themselves.

All right. Great. And just a quick question of the claims people that you have. What is your plan to deploy claims people in other states as needed if there is a storm, say in Texas or Massachusetts? Do you guys have plenty of people on the ground there, or are they all centralized in Florida? Do you outsource them? What is the plan there?

We do not have claims people on the ground in other states. We utilize independent adjusters in other states to do the field inspection work. But the actual claims adjustment is always done by UPC employees here at our headquarters. And so the inspection work is outsourced, but the claims adjustment and capital commitment is always insourced here -- in other states.

Okay. And then just one last question because I know I have exceeded my limits here.

I don't know really how to word this. Should we expect that given your growth in other states and how that diversifies your book, that the amount of ceded premium as a percentage of your gross written premium would be less than if you were a standalone company in any of the other states outside of Florida?

I'm just trying to figure out how reinsurers look at the diversification benefit versus if you were a standalone in any of those other states.

Well, reinsurers look at it differently. There are some reinsurers that like the diversification. There are other reinsurers that for purposes of their own portfolio management want to have single-state entities so that they can build a diversified book and not have you do it for them. So we see all sorts of different things from reinsurers, but there is a diversification benefit. There is no doubt about that.

The question is, who is going to get it? Is the Company going to get it? Are the reinsurers going to try to capture it? If there's a diversification benefit, probably it ends up being split. So it's the bottom line. But yes, we benefit from that.

And just looking at pure expected losses, which really drives rates online and multiples of the expected losses are one way we evaluate cost, it is clear that on a standalone basis a state like New Jersey has lower pure reinsurance costs than a state like Florida. But when we're talking -- it depends on how much you buy, right?

So in Florida, if we are just using a Demotech rating to support our growth and operate our business, but in New York we are pursuing an A.M. Best rating, which requires you to buy substantially more reinsurance, you could end up in a situation where your stated as a percentage of your earned is actually higher than in Florida, even though the pure rates online are lower.

So that's a difficult question to answer. We have modeled it, and we have done lots of exercises. But that is proprietary information.

Great. Thanks for the complete answers, and congratulations again on the quarter.

(Operator Instructions). [Dan Harvey], [Southeast Company].

Dan Harvey here. Seeing a lot of talk about the robust growth. Do you see a need to go back to the capital markets to do an add-on offering? This is a follow-up question I asked last quarter to tap into an add-on offering again.

Well, Dan, we did it this quarter. And with the $54 million plus of capital that we raised, we feel we are at a really comfortable operating leverage standpoint. We feel we can earn good returns on the capital that we have, and we don't have any plans existing right now to reenter the capital markets. But, as I said during my opening remarks, we see lots of potential opportunities out there, some of which could be big, and circumstances could change. But we are comfortable with our capital position right now.

All right. Thank you and congratulations on a good first quarter.

[Mike Surinski], [BAM].

One follow-up in the prepared remarks regarding the reinsurance program. So if I heard correctly, you are going to buy $1 billion to $1.2 billion of limit, and you expect to pay maybe less than you did last year. And if that is correct, is that because you guys are just retaining more risk, or is pricing on a risk-adjusted basis down a lot? Thanks.

I think it is a combination of both. We will retain slightly more risk, so retentions will go up, as they should, as the capitalization of companies improve.

Retained risk as a percentage of total capital actually would go down year over year, so I could make an argument the other way, as well.

There's significant pressure on rates because of the excess capitalization being deployed from the capital markets. I mean it is pure and simple. There's appears to be more supply than demand, and it's good for pricing. But we want to be prudent and take advantage of some of that cost of capital relief and buying more reinsurance. We do have plans to pursue an A.M. Best rating at some point in the future. That is not a short-term initiative. That would be very long term, and we know we desire more protection. And we're also looking at things like retention buy downs in various geographies as a way to use some of the cost savings to better align some of our risk retentions with how we're actually using our capital state by state.

So, for example, a $20 million retention on Florida might make sense, but a $20 million retention in New England may not make sense for us, considering we just don't have the same risk exposure capital being deployed based on the premiums written.

So we are exploring all kinds of things. We're not committing to any of that. That was just some insights from the initial planning and structuring meetings we have had internally, as well as with Demotech and the annual reinsurance data call that was required to be filed by all Florida carriers with the Florida Office of Insurance Regulation.

Got it. And as a follow-up, is the savings coming largely from third-party capital? Are going to buy more from those type of structures, or it is coming from both the traditional and third-party capital capacity?

Well, the market price is going to be the market price, right? So the third-party capital that has come in has forced everybody to reevaluate their pricing parameters. So I don't necessarily see a pricing differentiation. The price overall in the market has been driven down, and if people want to write business, that is the price they write at, whether they are traditional carriers or whether they are collateralized capital market carriers.

Got it. Thank you for the color.

Thank you. At this time, we will turn the call back over to management for closing comments.

Well, we certainly appreciate the robust participation and all the questions that you had on the call. It is our pleasure to do it, and we look forward to continued interaction with all of you. We appreciate your interest in and support for our Company.

So, at this point, we will wrap up the call. Thank you, again, very much for your participation.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.