Fednat Holding Co (FNHC) 2018 Q1 法說會逐字稿

Good morning, and welcome to Federated National Holding Company's First Quarter 2018 Financial Results Conference Call. My name is Michelle, and I will be your operator today. Please note that today's call is being recorded (Operator Instructions).

Statements in this conference call that are not historical fact are forward-looking statements. 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 and other similar words or phrases are intended to identify forward-looking statements. These matters discussed on this call that are forward-looking statements are based on current management expectations involving risk and uncertainties that may result in these expectations not being realized. Actual events, outcomes and other results may differ materially from what is expressed or forecasted in the forward-looking statements made on this call due to numerous risk and uncertainties, including, but not limited to, the risk and uncertainties described in this conference call, our press release issued yesterday and other filings made by the company with the SEC from time to time. Forward-looking statements made during this conference call speak only as of today's date. The Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. Now I'd like to turn -- I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of Federal National Holding Company. Please go ahead, sir.

Good morning, and welcome to our 2018 first quarter investor conference call. We are off to a strong start to the year as our efforts to improve our operational efficiencies while retaining the high-caliber service that we are known for have resulted in improved financial results. I will start by discussing our first quarter highlights and then provide an overview of our ongoing focus to ensure that FedNat remains well positioned for continued success. Ron will then provide a more detailed review of our financial results.

Turning to the highlights, our results show that the momentum we established in prior quarters has continued in the first quarter, and we believe it will accelerate further with each new quarter. We continued to execute on our strategy of focusing on our strengths to build on our high quality book-of-business in the homeowners market within Florida and the other select coastal states. We have also taken action to improve our overall profitability by exiting Auto and commercial liability, 2 non-core business lines that were a drag on earnings over the past year and added volatility to our performance.

For the first quarter, we reported $7.5 million or $0.58 per share and $93.1 million in revenue. This is a significant improvement over the $0.18 we reported in last year's first quarter and close to matching the $0.60 that we reported for the full year 2017.

Return on equity before investment losses was 15.7%. Net income at Homeowners, our core operation, was $6.9 million, more than double the $3.1 million that we reported in last year's first quarter. Our overall net loss ratio was 56.1%, much lower than it has been in the past 5 quarters as a result of the efforts of our entire team, along with a 10% rent increase that went into effect last August and continues to roll on to more of our new and renewal policies resulting in increased earned premium with each additional quarter through this year.

Our net loss ratio on Homeowners improved to 54.2% in the quarter compared to 63.5% in the first quarter of 2017. Our premium revenues reflect a solid performance in Homeowners, once again our core business, though, this growth is massed by intentional declines in Auto and CGL as we exit those lines of business. Gross written premiums of $134 million in the quarter included $123 million of Homeowners premium of 1% year-over-year, primarily due to sustained growth in our non-Florida states. Overall, our net earned premiums also increased slightly to $82 million year-over-year, driven by almost 10% growth in Homeowners but once again offset by intentional declines in Auto and CGL. Our net expense ratio moved up to 44.2% due to some seasonality and our profit share expensing in our non-Florida homeowners markets, some payroll cost and professional fees. We continue to focus on expense control and operating efficiency, and we made further strides on that in the quarter. We reduced our staff level by approximately 50 people during the quarter, which will drive annual savings in excess of $3 million.

Overall, our combined ratio was a lowest that we've reported in the last 8 quarters. Our exit from the Auto program is progressing well, and Auto had a negligible overall impact on the quarter's results as compared to a loss of $1.5 million in the prior year's quarter. We currently have 2 Auto programs in place that are generating premiums. And average to nonrenew, the remaining business are moving forward on the timely basis in accordance with statutory guidelines and regulatory approvals. In addition, we executed an assumption treaty on our book in Texas and if approved by the Texas Department of Insurance, will apply -- provide us with a clean exit on new and renewal business on June 1. Book value per share excluding noncontrolling interest grew to $16.36 from $16.29 at year-end 2017, and Ron will delve into the math a bit further in his remarks.

Traveling to our forward-looking business strategy, we have a clear focus on improving our leading market position within the Florida homeowners market and prudently expanding our book in neighboring coastal states. More specifically, we have 3 key areas of growth. First, as one of the largest players in the Florida market and given our strong partner-agent relationships and underwriting expertise, we have room to grow. Second, the consolidation of Monarch earlier this year is targeted at building a similarly strong operation into risk-adjusted class, which compromises -- comprises the largest segment of the $9 billion Florida homeowners insurance market. We are excited about Monarch as an excellent long-term growth vehicle for FedNat and are busy setting the stage for accelerating its growth in 2019. And finally, we continue to build our book in neighboring Gulf and Atlantic states, with a focus on Texas, Louisiana, South Carolina and Alabama. In these markets, our focus is on coastal zones where we've identified the greatest need for our expertise, leveraging our capabilities that we've developed in 20-plus years of leadership in Florida. A key differentiator for FedNat is our strong relationship with our panel of more than 80 highly rated reinsurers. Due to our stringent underwriting, we expect that our need for excess of loss reinsurance from major events, such as hurricanes, will reduce the size of our upcoming reinsurance program by approximately $150 million from $1.5 billion to $1.35 billion or about 10% less. We also expect that integrating the reinsurance program for Monarch into Federated National's program will further reduce our upcoming reinsurance costs. This will result in significant savings that will immediately flow to our bottom line starting in the third quarter, all by utilizing the same methodology that we've used in the past to determine our reinsurance needs and while projecting the earn-out similar gross premiums over the next 12 months as we have in the past 12 months. We are in the market now, negotiating our reinsurance renewals and are confident that we will get the most competitive terms based upon our proven track record and the availability of capital competing for our business within the space.

In the first quarter, we were actively opportunistic in repurchasing our stock, buying 323,000 shares for about $5 million in capital. This investment is roughly a four-fold increase over the fourth quarter and demonstrates our belief that our stock remains an attractive investment opportunity and best use of company funds. We will continue to utilize our repurchase program when we believe the opportunity represents a good use of corporate proceeds and an appropriate return for our shareholders.

In summary, we believe we are very well positioned to continue to improve our performance and drive profitability by leveraging our core strengths in the Florida homeowners market and other select coastal states. I would now like to turn the call over to Ron for a closer look at our financial performance, and then we will look forward to taking your questions. Ron?

Thanks, Mike, and good morning to everyone on the call. Our strong first quarter earnings reflect the early benefits of initiatives we've put in place to improve our operating efficiency and underwriting profitability. We believe that we have a solid financial platform and capital structure to support the longer-term growth strategies that Mike outlined in his remarks. I'll walk through our first quarter financial details and provide a few comments on our balance sheet.

Net income in the quarter was $7.5 million or $0.58 per share, a significant increase over the first quarter of last year and a sequential improvement of $0.10 per share from 4Q '17. Investment income in the quarter was $2.9 million, while realized and unrealized investment losses in our earnings were a loss of $1.1 million. Excluding these losses, earnings came in at $8.2 million. Total revenue for the first quarter was $93.1 million, essentially flat with last year's comparable quarter. Homeowners, our core operating business, drove the overall strong performance with earnings of $6.9 million compared to just $3.1 million in the year-ago first quarter. Total net premiums earned were $82.1 million, slightly above last year's first quarter with Homeowners up almost 10%, driven by non-Florida growth but offset by intentionally lower Auto and CGL premiums. We are pleased with our loss and loss adjusting expense results this quarter as compared to 1Q '17, which included $4.8 million of net storm losses. Our 1Q '18 overall net loss ratio of 56.1% reached to slower level in -- lowest level in the last 9 quarters and showed strong improvement over the 69.7% and 67.3% reported in the first and fourth quarters of 2017, respectively. Homeowners net loss ratio improved to 54.2% compared to 63.5% in the first quarter of last year and 58.9% in the fourth quarter of 2017. Excluding cat losses in all periods, the Homeowners net loss ratio was 55.4% in this quarter, down from 60.5% in 4Q and 57.7% in 1Q '17.

In the first quarter of 2018, we earned $700,000 pretax in incremental catastrophe claims handling revenue, down from the $1.6 million in 4Q '17, and those of course relate to Hurricane Irma. Those revenues appear in our consolidated financial statements as a reduction to net losses in the Homeowners line of business. Our net expense ratio increased to 44.2% in the quarter due to higher profit share costs on our strong results in our non-Florida homeowners book, professional fees, and seasonally higher payroll cost. Payroll cost in the quarter included $380,000 of severance and other exit costs related to our expense reduction initiative. Even with the profit share and severance costs, our combined ratio, overall, of 100.3% was the lowest reported since the first quarter of 2016. Excluding the severance impact, the combined ratio was just under 100%, and the combined ratio in our core Homeowners business was just over 95%.

Turning to our noncore operations. Our Auto business line had gross written premiums of $6.3 million, which is a healthy 2/3 drop from $19.3 million in the 2017 first quarter as a result of our decision to shut-down unprofitable programs, ultimately leading to our fourth quarter '17 decision to exit this line altogether. We're well into the process of exiting the Auto business line subject to statutory and regulatory constraints and have significantly reduced our exposure in this area, including reductions in staff levels in the Auto area of our claims function. In addition, the Texas assumption treaty Mike mentioned, if approved, will shorten the runoff horizon on our largest Auto block, Texas, by several months. So the historical headwinds and impact to our earnings from Auto have diminished and are expected to have little impact on our future results. This was evidenced by our first quarter in which Auto had a negligible impact as compared to a loss of $1.5 million in last year's first quarter and $2.2 million in the fourth quarter of 2017.

Our other line of business, which includes our commercial general liability operations, contributed $1.3 million of net income before investment losses as compared to $0.9 million in the first quarter of '17 and $1.1 million in the fourth quarter of '17. And that's despite the $1 million increase in interest expense this quarter due to our senior debt offering in December. We include all our investment income and interest expense in this line of business, the other line of business. Our quarterly net investment income has shown strong growth, coming in at $2.9 million in the first quarter of '18, up from $2.3 million last year and $2.8 million in the fourth quarter of '17.

Our CGL, commercial general liability, business line contributed $2.5 million in both gross written and net earned premiums, down from comparative periods, in keeping with the actions we've taken to shrink this program, culminating in our March 2018 decision to exit this line of business. The net loss ratio for other was 75.4%, down 8 points from first quarter of last year and 67 points from the fourth quarter, which included a $1 million large loss, CGL claim and some prior year reserve development.

Before I turn to the balance sheet, just a few more comments on the earnings front. It's worth noting that 1Q '18 was a pretty clean quarter in terms of the lack of weather or notable prior development or other notable normalization adjustments and is a good depiction of our current-state earnings power on a no-whether and no-development basis. While I don't have a crystal ball on those two topics, I do know that we have some positive earnings developments ahead of us. Number one, net earned premiums in of our Homeowners line of business will benefit from the continued earn-out of our August 2017 10% rate increase, which won't reach its full fruition in terms of the monthly and quarterly run rate until the end of this year. That represents an additional $3 million of gross earned premium in 2Q and another $2 million in 3Q on top of the first quarter run rate. The second item in the second half of 2018, net earned premiums in Homeowners will also enjoy a boost from lower seeded premiums. As Mike mentioned, as a result of rigorous exposure management in our Homeowners book, we anticipate being able to purchase a smaller reinsurance tower for the '18, '19 cycle. Taking pricing completely out of equation and based solely on our need for less reinsurance on our improved book of business, we believe that our cat reinsurance spend will decrease by 10% percent for the '18, '19 cycle. Such a decrease would take our Homeowners, cat seeded premium percentage down from the 34%, 35% range to the 30%, 31% range, representing $16 million to $20 million pretax of savings versus the '17, '18 cycle, net of related brokerage revenue impacts. Of course, half of that amount would benefit the second half of 2018. And then the third item, our senior management team across the company is pursuing operational efficiencies related to processes and technology, and these efforts are bearing fruit. In the first quarter, we reduced our staffing by approximately 50 positions, which will generate annual savings of approximately $3 million. Due to the severance costs in our results in this current quarter, our 1Q results don't reflect much of any benefit from these reductions just yet. So clearly, we have some positive earnings momentum moving toward the second half of 2018, and we are excited about our prospects.

So turning now to the balance sheet. Our debt position at March 31 was $44 million, net of debt issuance costs, down from 12/31 due to the payoff of $5 million of debt that was associated with our Monarch joint venture. As a reminder, our debt consist of $20 million of fixed-rate debt payable in five years and $25 million floating on three month LIBOR due in 10 years. For the floating portion, in terms of second quarter '18, that interest rate has been pegged at 2.31% roughly. That's 61 basis points higher than first quarter, representing roughly a $40,000 pretax increase that we'll experience in our interest expense for 2Q compared to 1Q related to the floating rate on that debt. Mike mentioned our $16.36 per share book value as of March 31, which increased $0.07 from year-end despite the impact of rising interest rates on our bond portfolio. The unrealized gain/loss position on our bond portfolio slung by $5.7 million unfavorable after tax from an unrealized gain position of $1.8 million to an unrealized loss position of $3.9 million. Excluding that impact, our book value per share as of March 31 came in at $16.66 a share. That's up 3% from the comparable $16.16 measure as of year-end and that represents a 12% annualized growth rate.

Our investment portfolio is conservative and continued to perform well with the carrying value of $451 million at quarter end. The large majority of our portfolio is invested in fixed-income securities that carry a composite S&P rating of A-. We had $56 million in cash at March 31 for a total cash and investments position of just over $0.5 billion. As Mike mentioned, we used $5 million in the quarter to repurchase shares at an average price of $15.49. We have deployed $4.3 million of our most recent share repurchase authorization up through the end of last week, leaving $5.7 million of authorized but unused repurchase capacity. In terms of liquidity, as of March 31, our holdco and other non-insurance entities together had liquidity of approximately $50 million, consistent with the liquidity position we communicated on our last conference call after our full year 2017 results were reported. And with that, I'd like to turn the call back over to Mike for any further remarks and before we take questions.

Thank you, Ron. With that operator, if we could go ahead and take calls, that’d be fantastic.

(Operator Instructions) Our first question comes from the line from Arash Soleimani with KBW.

In terms of the reinsurance program, I apologize if I missed this in the beginning of the call, in (inaudible) will you continue to have a quota share or will it be all XOL starting July 1?

Yes, we're still evaluating that. We've got a great partner on our quota share program. So we're evaluating that. It's a current program of 10% that is set to expire in June. So nothing that we can commit at this point, but we're still reviewing it.

And did you have a sense, overall, in terms of the change in rate online across your renewal or that's so...

Are you referring to cat program, the excess of loss?

Yes.

Yes. I think the market's extremely competitive. There's a lot of capital out there. Last fall, at PCI, there was a lot of talk of substantial rate increases. Then that kind of became some moderate rate increases. So we're in the midst of it now and with our strong panel of 80 reinsurers and us needing with our -- us tightening up the book, with less exposure, meeting a smaller program, I think we're very well positioned for a strong renewal. As Ron stated earlier, we spent $180 million last year on our reinsurance program, and we're using exact same methodology. We're looking at a program that's 10% smaller. So we think that's going to translate to a substantial savings on our reinsurance spend. I'm not even addressing the marketplace in terms of the pricing will be. But just year-over-year, it's less need that we have.

So is it fair to assume that -- because Auto obviously is still a headwind on the seeded premium ratio. Is it fair to assume that I guess x Auto for the Homeowners book that the seeded premium ratio should improve, likely stay the same, once you have the new program in place?

Yes, the driver on that, as Ron stated, if you just look at excess of loss, you're looking at probably -- with the rate increase as well as a drop in the reinsurance needs, you're looking at probably a 4-point pickup where seeded were dropped. So clearly, Auto and CGL kind of make those numbers a little bit more confusing, but the lion's share of what we do is Homeowners and that's in terms of the cat program.

And another question I wanted to just to touch on, obviously, there are slides out there and there's -- you guys have received a bid from the competitor. Just wanted to get your thoughts on that. And what you think of the offer? I mean any additional color you can provide.

Yes. No, absolutely. It's well known that HCI has an interest in merging with our company. We absolutely understand their interest in our company. From our voluntary book of business that we've built over the years, the trust that these partner agents that we have, have they placed with -- placed their business with us, to the ease of use of our software that enables these agents to effortlessly place new business with us and service that business to the high-quality book that we not only have in Florida but Texas, Louisiana, South Carolina, Alabama. We are absolutely a destination for our partner agents. They want to place business with us. We have a very high quality book of business with a lot of homes that have mitigation features that hold out throughout the hurricanes very well. We've got a robust reinsurance panel. We've got great reinsurance relationships that ensures we get the most competitive terms at the best pricing. So we've got a great team in clients that gives peace of mind to everybody that when they do business with us. And our staff, top-notch staff that provides best-in-class service that makes it all happen. So we absolutely understand the interest that HCI has in our company. The challenges is, there's a valuation. We have actively looked at scale issues, growing the company organic, we're working with other companies for many years, and we haven't been able to find the correct opportunity. So whether it's some type of consolidation will occur in the Florida property market, I don't dispute that. I have no doubt that, that will occur. And we want to make sure that when that occurs that our shareholders are compensated correctly for that consolidation. We have a leadership role in this market. We've got a strong position. We're going to continue to do what we do, and if we can find the right opportunity to create value for our shareholders and create bigger scale and even better service, we're absolutely interested. The challenge is the valuation. It's not the desire to stay smaller and stay the current plan regardless. We're looking to create value.

And the combined ratio this quarter was 100.3%, and you had improvement in the loss ratio, the expense ratio went up. I mean, all things being equal though, if we assume Auto becomes a smaller headwind, and you mentioned Q3 is when the full rate effect takes place. So is it fair to assume that, that should sequentially improve the combined ratio in 2Q and again in 3Q on an x cat basis, obviously?

Yes, (inaudible).

Yes, absolutely. We expect improvement there for a number of reasons, both not just the denominator impact that you mentioned but also for numerator reasons as we've just described from an operating expense perspective and continued initiatives focused on our cost and operational efficiency.

And then just my last question. On the 50% profit sharing you had mentioned, is there any ability to negotiate that rate down? And is that kind of like a standard, industry standard commission amount on the profit sharing?

That's an MGU that we're partners with, Arash. We have no desire to change those terms at all. You could consider it to be rich. However, it's appropriate. They are fantastic, and I can tell you that it's full alignment of interest, and because they're performing so well, it's unfortunately making a little bit of noise in our expense where we've got a higher commission, contingent commission. And actually, we've talked about it in the -- among our team here, as you know, it's really in my eyes, in non-accounting perspective, it's a reinsurance. It's a 50% quote share is how I look at it. So it's a strong partnership. They're a very good organization, and we're thrilled with them.

And our next question comes from the line of Greg Peters with Raymond James.

I wanted to circle back on the reinsurance discussion. When we think about reinsurance for primary companies, actuaries are -- often speak in terms of a 1-in-100 year, 1-in-200 year 50-type of coverage. And I am curious, with the reduction in your reinsurance, what that does to that ratio. And also on the reinsurance, I am wondering -- I think last year structure was sort of a cascading structure where unused portions following an event were available for future events. Is that still going to be the case in 2018, '19?

Yes, Greg, great questions. In terms of the methodology that we've used in the past, it's the exact same methodology that we're using this year. And what that is, is there's models out there, AIR and RMS that we blend, and we want to ensure that we're covered for that first event as well as in aggregate. So same methodology, and really the reason why there is -- the tower can be shorter this year is we have less risk. We have less number of policies in Florida, slightly less. We have less, what's called, TIV, total insured value, and we also have less modeled output, meaning we have been more stringent on new businesses that's come in the company to ensure that it models correctly as well as we've been non-renewing those risks that are not performing in our book of business. What that does is it actually hurts us short term. So we've artificially hurt ourselves in this current quarter because the premiums would be lower than if we had kept those policies on board, and the same thing will occur in Q2. In terms of Q3, it is if we like 10% less program, and if the cost drops by 10% -- I'm not really commenting on pricing in the market, I'm just saying that if the need drops by 10% and the corresponding price drops by 10%, that's a significant amount of money that will be immediately felt in Q3. In terms of a cascading feature, you're absolutely right. So all these layers do interlock with one another, and those would cascade down for the first event as well as second, third. Whatever the number of events that we have, it would all cascade down. We're thrilled with our reinsurance panel. It's a pretty robust panel. We've got 80 folks on there, and the challenge for us is making sure that they can all have their -- maintain their piece of the pie as the pie is getting smaller. But we value those partnerships, and I think the pricing in the market is pretty competitive, and we feel really good about our reinsurance renewal.

Mike, just as a follow-up on the reinsurance piece. And can you give us an update on what the gross loss was from Irma? Has it -- has there been any creep in the estimates or is your initial pick held steady? Or provide us some color on what's going on, on the claims side there.

Yes, very good yet again. Right now, we originally said that we anticipated about a $300 million loss. We are revising that up significantly to around $450 million for Federated National and another $23 million for Monarch. So you're talking about $473 million. There's a movement on it without a doubt. So now in terms of our shareholders, just to remind everybody, we did take the first $18 million net as well as on Monarch, the next $3 million. And then we've got reinsurance up to approximately $1.5 billion. So the net cost to the organization has not changed, does not change. In terms of Irma, obviously people are well-versed on AOB and the litigation within the state of Florida. I think we do a very good job with our claims handling. And in terms of litigation, we've got about -- in the 200-plus range, under 300 of our files are currently in the litigation stage. And that's out of about 34,000 total policy -- I'm sorry, claim count that we have. We still are getting new claims that come in each and every week and giving those the appropriate care. So believe it or not, they still due to come in and they will continue to come in through the balance of '18. And they're going to come in, quite honestly, in '19 and probably '20. There's a 3-year statute on that. So it does move and -- but I do believe we're handling them very well, and we're closing them as best we can and paying those folks on their loss as appropriate.

So I guess -- I mean, that's an interesting development because with $500 million gross loss on Irma -- and you talk about your new reinsurance program, essentially you've positioned the company to withstand -- as we think about the '18, '19 storm season, three storms in -- on the fourth storm, you're going to have -- you're going to run out of limit. Is that the right way to think about this if we had 3 Irma-like storms in 2018?

Yes, so in terms of Irma. Irma -- there's 67 counties in the state of Florida. We have losses in 60 of the 67 counties. Our number one loss area is Marco Island in Southwest Florida. Our number 2 county for losses is Broward, which is over on the east coast about 200 miles away. That's how massive this event was. And basically, you just said we're going to utilize about 1/3 of our reinsurance tower. So now to your point, if there was more than one event in 2018, we did have an additional $1 billion dollars of limit for any future events that could have occurred. So on a go-forward basis, we believe in our reinsurance program, but one of the things that we're really pretty comfortable with is our trading relationship with our reinsurance partners. So those folks are great partners to have. We can always buy additional reinsurance. So in other words, if we have an event, and we think we need more limit for the remaining part of the season, those folks have capital, and they're ready to trade with us. And having in the panel of 80 people, that's of great value. These are things that you can't do when you have alternative-type reinsurance, IOWs and things like that. They're -- they not always operate in the same manner or even cap-ons for that matter. When you have a cap-on and an exhaust, you're done. So then you've got to go and figure out how to replace that. So having these relationships we think is of great value.

Perfect. The other question I had was around the comments Ron made around the loss ratio. I think he said in the first quarter x cat, it was running around $55 million. And he made a statement around and I don't want to put words in your mouth but something to be effective. That's a good run rate but then you also highlighted this new earned premium that's coming from the rate increases. If we were to take this first quarter '18 result and look at first quarter '19 with all the rate activity that's yet to earn out, what do you think that loss ratio might look like in the first quarter '19? Same type of experience in '18 and '19, what -- I mean how -- what's the impact there?

Yes, it would come down several points between the lower seeded losses that we just discussed on the XOL program and then the continued earn-out of the 10%. I have to admit I haven't done the math that far out to see where it would be. But it would -- I would say, it would come down several points, 3 or 4, 5 points.

Okay.

And Greg, to add to that, you got to remember also the amount that we've added to reserves over the last two years has really spiked our attritional loss ratio. We've moved it over 7 points in the last two years, and a lot of that sits in bulk reserves. So with the earn-out of premium over the last really couple of quarters, we have not realized or I should say we've continue to put reserves at the higher premium at the same level, at the same ratio and with the expectation that, that can stop at some point and should come back down to its normalized point. So in other words, if we've got a 10% rate increase, the attritional loss should obviously correspond so that, that the attritional loss would come down 10%.

Mike, on the bulk reserves comment, do you feel like you've -- you're bulk reserves have been built up to the point where you have redundancy in them or -- and if that's the case, when would that be realized? Or do you think it's adequate and you think that you're going to just keep the current level for the foreseeable future?

Our independent actuary is happy where they are. I can tell you all my blends. I think we've made substantial improvement in the program that need to be reflected in that. And that conversation takes place, however, the actuary is the one that sets the reserves. But I do believe that our improved claims handling, our communication with our agents, with insurers, and just really our rate increase, I think there's a lot of initiatives that have not been fully baked into the bulk reserves that I'm hopeful will translate into us stopping to reserve at the level that we are and back to a more admired perspective, a slightly lower more appropriate. But at this point, we absolutely believe the actuaries got the -- he believes in his number, and that's what we're booking.

And our next question comes from the line of Ron Bobman with Capital Returns.

Thanks for the added information with respect to expenses and the premium layout, et cetera. I had a question on the topic of HCI. On the date April 30 most recently when the company and the board corresponded back to HCI and basically said no thank you, it's unacceptable. The -- a half of share of HCI was worth approximately 24% more than FedNat's stock price on the same day. Obviously, 24% is a big number. How did the board justify the lack of any inquiry, any investigation and any sort of discussion with HCI over their proposal at that point in time?

Well, so to that Ron, I have talk into the (inaudible) over the years and over the prior months as well. And actually, Bruce and I had met with them. So I can tell you the board took the offer and considered it. We utilized the services also of a banker to assist in that analysis as well as legal overview. And we believe that offer is a low offer. We've looked at other opportunities in the Florida space, and we don't see anything near that level. So we thought it was a bit opportunistic, and that's why we passed on it.

So you founded a decision, but I mean 24% is a -- it's quite a material differential at the time. So obviously, you think the company's prospects -- the company's worth more, the company's prospects organically were superior to what was being represented in the stock market at the time, which I can understand that frame of logic and sort of the -- that thinking. But I think you owe it to the shareholders, given the magnitude of the difference, that 24% that I keep pointing to could be more specific -- and I recognize you did start on the prepared remarks with respect to the expense ratio and the premium earn-out, et cetera, but I think you got to set specific expectation that you have as a management team with respect to the P&L and with respect to setting the bar for what net earned premium is expected to be this year, setting the bar for what you expect the x cat loss ratio to be this year, what you expect the expense ratio to be this year. If you're not going to conduct discussions, then I think you owe it to the shareholders that own the other 90% of the shares to understand why you think the prospects are so much better than what this party's, not final presumed, not best presumed offer was but still, 24% from where you were. So that's the point I'd like to make.

Ron, understood, and once again, we try to be transparent, and we always look for opportunities to improve on that front as well. And we will do so. We do believe that the stock price has been depressed for a couple of different reasons over the last year here. And there's a lot of things that had temporarily, in our opinion, depressed the share price. So understood, and we will continue to communicate with you and all of our shareholders to that effect.

Yes, I think you need to communicate with all the shareholders and set the specific figures as to why you think there's a mismatch between what you expect profitability to be prospectively and why everyone else in the stock market, which is the scoreboard, is so much lower.

Sure, understood. We all -- yes, I appreciate that.

(Operator Instructions) Our next question comes from the line of Samir Khare with Capital Returns.

Bunch of my questions relating to the quarter. Can you quantify the three components of the Homeowners seeded premium, XOL, the seeded premium for the latest quota share and the -- I guess the adjustments from the preceding quota shares?

Samir, we're just pulling that up for you.

Okay.

Alright, so XOL reinsurance. This is talking first quarter 2018.

Just for Homeowners (inaudible)?

Yes, just Homeowners. $45.3 million of cat seeded premium, and then for the 2 old quota shares, we've got $1.7 million of seeded premium in the quarter. And then under the current 10% quota share that's currently in effect, $8 million of seeded Homeowners premium in the first quarter.

Okay. So for the 2 old quota shares that was -- was that a benefit to the seeded premium or a charge?

We seeded $1.7 million of premium under this tree.

And then going forward, will the adjustments on the older quota shares still occur or do you expect them to occur?

Yes, they will continue to occur until we recapture. Until we close those out, they should continue to decline over time.

Okay. And the Homeowners acquisition cost had incorporated some profit share with the non-quota business. Is that paid in Q1 of '18 in respect of 2017 results? Or is that an accrual real-time?

Samir, would you mind -- repeat the question, I missed the start of the question.

The elevated acquisition cost that incorporates some profit share with the non-quota business. I'm wondering, is that paid in Q1 in respect of 2017 results or is that an accrual for the plotted commission real-time?

No, that's a -- it's a real-time, current quarter accrual. So there's no significant lag there in terms of our accounting of accruals. It's a real-time, quarter-to-quarter basis.

Samir, more on that is once a year we do true up with those partners, and the program runs exceptionally well. It runs sub-80 and with that we -- that result's in a big number that we've got to set aside to true up with them at year-end. So that's where it sits.

Okay. So I'm just wondering is -- should we expect every Q1 there'll be a little bit of a bump in that expense ratio or should expense -- expect like a 20% acquisition ratio for the remainder of this year?

Yes. And now you should not expect an annual first quarter bump because we're accruing it real-time all throughout the year. So from a cash flow perspective, there's a true-up in 1Q but there shouldn't be an accounting reporting true-up. So as far as the go-forward expectations, what we have is the mix of our business is changing, right. We're less CGL, less Auto, more Homeowners and specifically, more Florida Homeowners. So there are those mix changes that are going to settle forward over time.

Okay. And what was the dollar amount for this? I'm a little surprised that it was running so high given that Florida is just about 10% of your earned premium -- non-Florida, sorry, 10% earned premium?

Non-Florida. It's a $50 million book. It's -- I think it's up to $60 million at this point. Do you have the actual dollar amount?

Yes, yes. We've got it. The profit share was $2.4 million in the first quarter.

Okay. On the alignment of the interest of the profit commission with respect to non-quota (inaudible), how they're structured? Is there a clawback if there's adverse development on this business?

The -- correct, it includes cats as well. So it's inception to date, all states, it goes from the beginning of time, forever. So yes, correct. If any program heats up, if any state gets hits, it's all incorporated into the same thing. To clarify, when you say a clawback, it's not that we -- they would be cutting us a check-back. I don't have the -- I mean, the contract's 5 years old. My recollection is that it would come out of the profit share, and the profit share is pretty significant. Once again, the book performs well. So -- and that includes, like I said, inception to date, all states.

Okay. And on new business production, how much premiums you guys are writing per week? And how much of that is from each of Geico and Allstate?

Yes. So in terms of Allstate, they're still about $120 million of our book. We're still about a $465 million Florida book. In terms of new business coming in, we're averaging about $1.5 million a week. It tends to tick up. We're seeing some ticking up on that as of late. In terms of non-Florida, we're writing about $750 million a week, and -- let me clarify, $1.5 million in Florida, $750,000 in non-Florida, a lot of that coming in from Texas. And once again, we're primarily focused at Tier 1, Tier 2 Houston area, and we're getting a little bit of San Antonio, but in terms of Louisiana we're -- good amount of business there, South Carolina as well. Alabama, we just don't see the opportunity there. It's coastal, but it's a small book. And we are looking to expand in some additional states, primarily, in the southeast, perhaps late '18, but I think that's more '19. We're just being cautious with how we do it.

Okay. And of that $1.5 million in Florida per week, how much of it is coming from each of Geico and Allstate?

In terms of Geico, it's -- between Florida and non-Florida, it's about $200,000 a week. And I would say, that's pretty well-distributed between, I would call it half Florida. So $100,000 for Florida, $100,000 for non-Florida. And then Allstate, once again, they're about 25% of our book, 20% to 25% of new business, pretty consistent. And then Monarch, once again, we just haven't really done much with Monarch. That's a little under $100,000 a week of new business on top of that.

Okay. And of the -- on the headcount reduction, were most of these done from the Auto and the CGL group?

Yes, absolutely. That was a heavy team in terms of payroll. We've been very quick to adjust our payroll. I can tell you the service level has not diminished in terms of that. And there's been some other opportunities in our property team as well but primarily, Auto and some CGL. You're going to see that we are actually down more staff count in Q2 and expense associated with that, but I think you're looking at another -- in Q2, I think we're down another 15 people on top of that. So we're pretty aggressive in terms of expense control. However, we're not willing to forgo the service that we're known for.

Okay. And then just so I'm allocating the cost in the right place, you guys are quoting that in the Homeowners line though it is seems right?

We're recording what? The expense for labor?

I guess in stage and...

I'm sorry, it's allocated to the right lines of business, so severance costs related to Auto or in Auto for example.

Okay. And then how much was spent in this quarter and last quarter on legal and financial advisory, please?

All right. We're going to have to get back to you off-line on that.

You're talking about claims or non-claims?

No, in terms of assesing the HCI proposal?

Yes. I just -- I would say we've got a couple of hundred thousand dollars in our legal -- in the beginning of the year here.

Okay. And then just on the reinsurance, Ron, could you say what you said, again, before how much savings do you expect to get from the new program?

Yes, what I -- so what I said is that our seeded loss ratio with respect to excess of loss cat, we'd expect to come down 4 points and -- but that's probably $16 million to $20 million net of the -- an offset related to the -- related brokerage. Because we do have some brokerage revenue on the program. So net of that offsetting reduction, $16 million to $20 million for the '18, '19 program year, just divide that by 2, half that amount with benefits, our 2018 calendar results.

Okay. And I apologize if you said this earlier, what are you guys thinking about your retention level?

We're looking at $20 million for FNIC and $3 million for MNIC.

Okay. And just on the comments on the exposure management that led to a lower reinsurance percentage of gross earned premium. Simplistically speaking, is that accomplished by reducing exposures in the Tri-County?

No, I would not say it's relative to Tri-County. A lot of people talk about Tri-County, how it's problematic. There's challenges, absolutely. But we have no intentional -- desire to reduce our exposures in Tri-County. We're at 25% roughly of our policies in Tri-country. We have no deposits. It's all a voluntary book. We're happy with that book. So it's not geographically centered, it's more on a policy basis. And once again, homes that don't perform well could be problematic in our program, and we're going to see a substantial benefit from that in the second half of this year, starting July 1.

Okay. And then how many claims -- with respect to Irma, how many new claims came in, in Q1 and Q2?

In terms of -- we're still averaging about 400 claims a week. I know -- one week we had a busy week of about 800 claims. So it continues to come in. I don't have it as an aggregate of the quarter, but I can tell you, in terms of total as of today, we're looking at 34,290. And they continue to come in, 10 to 20 a day, easily.

Okay. And how many reopened claims did you guys have?

We're at about...

(inaudible)

Yes, about 20%, 25% of our claims are reopened. But they could be reopened for a variety of reasons. A lot of people will continue to ask the question about litigation and so on. It could be a supplement, it could be small adjustment to the claim. In terms of litigation, you'll see that we tend to be lower than others in terms of litigation. And right now, we're looking at under 300 that are in litigation. It's -- and here's the interesting part, you say about Tri-County, the -- over 200 of those are -- that are -- of the 300 are in Tri-County that are being litigated. So there's challenges at Tri-county. We don't dispute that, but we're happy with our book there.

And our next question comes from the line of Doug Ruth with Lenox Financial Services.

What would it take to start to ramp up the Monarch book of business?

We've looked at that. We've had that book about three years. It's underperforming in the sense of we thought we could be more competitive in the space where you have homes that are less mitigated. It's a pretty competitive space out there. So we're retooling that and really what we're looking at -- I don't want to say too specific of what we're doing, but we're going to be retooling that. And I think that's a growth vehicle for us in 2019. Here we are in 2018, in May, couple of initiatives that we're working on that are going to roll out we think in the fall and should benefit us in '19.

And what are your thoughts about the dividend at this point?

Yes, Doug, I -- the dividend obviously is very important to you, and I enjoy the dividend as well, and the board is well aware of where we're at and we discuss that and have discussed increasing it. We have not made that decision as of this time. And we're continuing to evaluate that, but I know a lot of people like that dividend, and that yield's important to people. And that's well represented in our board discussions, and we will continue to be so.

In your prepared remarks that are part of the press release, you had talked about leveraging your relationship with your trusted agent partners. Do you have anything specifically in mind that you haven't told us on the call?

Well, I think we have a lot of goodwill with our partner agents. That's a fact, and I think agents are looking to place business with us, absolutely, for the peace of mind, for the ease of use. It's -- we are easy to work with. We're tough with our underwriting, and we adhere to it. But we make the user experience for our agents pretty seamless. And our claims reputation further benefits all. So we're looking for opportunities to provide more value to our agents, absolutely. Once again, nothing specific to give to you at this time. I think we've got a great reputation in the marketplace, and we're trying to enhance that.

And with that, we've been on the call for an hour. So we're going to go ahead and wrap up the call at this time, but anyone who's got any follow-up questions, whatever it may be, please do not hesitate in reaching out to myself, to Ron, to Eric, and we're always available.

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

Thank you.