Fednat Holding Co (FNHC) 2018 Q2 法說會逐字稿

Good morning, and welcome to FedNat Holding Company Second Quarter 2018 Financial Results Conference Call. My name is Nicole, and I'll be your operator today. Please note that today's call is being recorded. (Operator Instructions)

Statements in this conference call that are not historical facts 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 risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements made on this call due to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in this conference call, our press release issued yesterday and other filings made by company with the SEC from time to time.

Forward-looking statements made during this conference call speak only as of today's date, and FedNat Holding Company specifically disclaims any obligation to update or revise any forward-looking statement to reflect new information, future events or circumstances or otherwise.

Now at this time, I would now like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of FedNat Holding Company. Please go ahead, sir.

Thank you. Good morning, and welcome to our 2018 second quarter investor call. Joining me are Ron Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer. I will start with some highlights of the quarter and of the first half of the year, and then Ron will provide a detailed review of the financial results. After which, we will open the line and take questions.

We are pleased with our financial results in the quarter and the first half of the year, which reflect the continued success of our team's strategies to improve our profitability, including our underwriting results. We believe FedNat is well positioned for strong, sustainable growth on a go-forward basis.

Earnings per share for the second quarter of $0.69 was more than double the $0.30 reported in last year's second quarter. Revenue in the quarter totaled $95.7 million, relatively unchanged from the prior year's same quarter, excluding investment gain and losses. In the first half of 2018, we earned $1.26 per share, which is more than double the $0.60 per share reported for all of 2017. Our book value per share increased to $16.89 from $16.36 at the end of 2018 first quarter, representing a 13% annualized growth rate.

The second quarter was relatively quiet from a weather perspective, enabling our team to remain focused on doing a great job of blocking and tackling during the quarter. Second quarter results were driven by a solid performance in our Florida homeowners book and higher written and earned premium in our non-Florida homeowners book.

We are pleased we have lowered our loss ratio and reported our best combined ratio in 2 years. Our proactive exposure management and our loss and expense reduction initiatives are contributing meaningfully to the bottom line. We think this performance sets us up for a strong second half in what is turning out to be a transformative year for the company's financial results.

A highlight of the quarter was finalizing our reinsurance program for 2018 and 2019. As a result of our rigorous exposure management, we significantly reduced our hurricane exposure, allowing us to reduce the total dollar limit purchase while maintaining the same methodology and with a similar level of coverage on our exposures. In the next 4 quarters, we expect to realize approximately $30 million in savings, which began flowing through our income statement effective July 1. As a result of our reduced need for reinsurance, our net seeded premiums ratios related to our catastrophe reinsurance program will improve by approximately 5 points from 34% to 29%. The program's strength and favorable terms reflect the strong relationships we have with our panel of 80-plus high-quality reinsurers, our strong track record operating in Florida and our stringent underwriting discipline. The 2018-2019 reinsurance program also integrates Monarch National into FedNat's program, contributing to the overall save, as discussed above.

The results we are producing also reflect the benefits of focusing our resources on building on our leading market position in the Florida homeowners market and our gradual methodical growth in other select coastal states. We have strong partner agent relationships and underwriting expertise and a long runway to gain share in these fragmented markets. In Texas, Louisiana, South Carolina and Alabama, we are continuing to make good progress, with gross premiums written increasing over 50% on a sequential quarter and prior year quarter basis.

Turning to our exit from noncore lines of business, we are pleased to report that effective August 1, we have an executed agreement, transferring our Texas auto book to another carrier. This was our largest remaining book of auto business, so this transaction will meaningfully reduce the remaining runoff period. Ron will provide further information on this transaction in his remarks.

Let me touch on some of the financial highlights of the quarter. Our homeowners book generated revenue of $85.5 million, a $5.6 million increase over last year with a significant boost in profitability. Total cost and expenses, which includes loss and loss adjusting expenses, declined to $83.7 million from $92.5 million, primarily as a result of lower losses from severe weather, operating efficiencies and claims processing and a reduction in staff. We saw a strong improvement in our net loss ratio, which was reduced by approximately 10 points to 56.9% from 67.5% in last year's comparable quarter with a much improved total combined ratio, aided by an earn-out of 2017 rate increase, exposure management and other management initiatives. And of course, we are focused on getting that number even lower.

We are also very excited to have rebranded our holding company and our flagship insurance company to FedNat during this past quarter. This branding initiative aligns our business on the local level with the same name that many in the industry have known us by, including our staff, partner agents and reinsurers. We continue to provide best-in-class services to our policyholders and to our partner agents, and we continue to be a primary destination for them when wanting to place business within a competitive marketplace.

Shares repurchase were muted in the quarter. As we've done in the past, we will continue to utilize our reinsurance -- I'm sorry, our repurchase program when we believe the opportunity represents a good use of shareholders capital as compared to other opportunities that may be available. In June, we filed a shelf registration statement for up to $150 million in capital. Having such a filing in place represents good corporate governance and provides us with the financial flexibility to efficiently access the capital markets if and when opportunities arise that can add to our growth and benefit our shareholders.

In summary, we are pleased with our results in the second quarter and first half of the year and believe we are well positioned to continue this trajectory in the third quarter as we realize savings from the new reinsurance program and continue to operate more efficiently with a leaner cost structure.

I'll now turn the call over to Ron for details on our financial performance in the quarter.

Thanks, Mike, and good morning to everyone.

FedNat delivered solid financial results in the second quarter, continuing our recent momentum and reflecting our focus on improving our underwriting profitability and operating efficiency to drive earnings growth.

I'll walk through our second quarter results, comment on our balance sheet and finish with a few forward-looking remarks.

Net income in the quarter was $8.8 million or $0.69 per share. This represents a substantial increase over the second quarter of 2017's $4 million results, which was $0.30 per share. Excluding investment gains losses from both periods, 2Q '18 produced $8.7 million of earnings compared to $2 million in the prior year quarter, a fourfold increase. This result was driven by a $7.5 million increase in homeowners net income as well as lower drag on earnings due to the winding down of our noncore operations.

The quarter also represented solid growth on a sequential basis increasing 5% despite $1.6 million of losses from severe weather in the quarter, aided by the continued earn-out of our August 2017 rate increase and savings from management initiatives. Excluding investment gains in both periods, total revenue for the second quarter of 2018 of $95.5 million was flat versus the second quarter of 2017. However, this was primarily due to the fact that lower revenues from our wind down of auto and commercial general liability masked $5.5 million of revenue growth in homeowners as we continue to focus our resources on our core business.

Our non-Florida business contributed heavily to the increase in homeowners with gross premiums earned up 51% to $15.5 million in 2Q '18 as compared to the second quarter of '17. Total net premiums earned were $83.6 million, essentially flat from last year's comparable quarter. Similar to the story on total revenues, homeowners net premiums were up 6.3%, driven by non-Florida growth, offset by the planned reduction in auto and CGL premiums.

But the main storyline in the quarter was not the top line, rather, it was about losses and expense reductions and the resulting increase in profitability.

Our combined ratio declined by approximately 12 percentage points in the second quarter of '18 versus the prior year quarter, both in homeowners and in total. Our overall combined ratio of 99% and the 93% result in homeowners were our best result in over 2 years, demonstrating that the rate increases taken in '16 and '17 are proactive exposure management strategy, and our loss and expense reduction initiatives have gone a long way toward offsetting the impact of the assignment of benefits issue. The combined ratio improvement was driven primarily by lower loss and loss adjustment expenses, which decreased almost 16% year-over-year. Contributors to the reduction included $1.2 million lower losses from severe weather, $0.5 million of net favorable prior year reserve development compared to $4.5 million of adverse prior year development in 2Q '17 and lower losses from automobile driven by our decision to exit this line of business. The $0.5 million of favorable prior year reserve development in the current quarter consisted of $2 million of favorable development in our core business homeowners, driven by improved loss experience, lower claims adjusting expense, and Irma-related claims handling fees and $1.5 million of unfavorable development in our noncore businesses. Excluding the impact of the revision to our Hurricane Irma ultimate loss estimate, which I'll address later in my remarks, the homeowners gross loss ratio was 38.7% this quarter, down from 44.2% in last year's second quarter and up slightly from 37.5% in the first quarter of 2018, which did not include any severe weather.

Our operating expenses came down roughly $1 million and approximately 1 percentage point on both the year-over-year and sequential quarter basis down to 42.1% overall. Our expense control initiatives are progressing, and our total number of staff declined by another 20 positions in the second quarter. We incurred approximately $0.5 million of severance costs in the period, representing about 0.6% on the next expense ratio.

Regarding our noncore operations. Automobile had gross written premiums of $5.3 million, down 50% from $10.6 million in the prior year's second quarter and down 16% from the first quarter of 2018, representing strong progress toward our exit from this line of business. Due to the loss development mentioned earlier, we lost $0.2 million on auto in the quarter, down from a loss of $2.2 million in the second quarter last year, which included a higher level of adverse development.

As of last week, we have received approval of our withdrawal plan from all states. As Mike mentioned, we are very pleased to announce that we have executed a novation agreement, under which our Texas auto book was transferred to another insurance carrier, Redpoint Mutual Insurance company, effective August 1. The under and premium reserve on the in-force business and the claims handling responsibility for new claims with dates of loss after July 31 have transferred to Redpoint. As such, July was our last month of earned premium from our Texas Automobile business, which, as Mike said, was our single largest remaining block. Note that we retained all the net premiums earned up through July 31 and continue to be responsible for the runoff of all claims with dates of loss of July 31 and prior. This transaction represents a meaningful acceleration in the runoff period for automobile as we would otherwise have continued to recognize earned premium on the Texas block into early 2019. With the transfer of this block to another carrier, we will have only a de minimis amount or written premium from August 1 forward from our remaining programs. In addition, total net earned premium is expected to be less than $2.5 million from now through January '19, at which point in-force premium will, for all practical purposes, reach 0.

Now I'll turn to our other line of business, which includes all our investment and borrowing activities and our noncore commercial general liability operations from which we are exiting. Other contributed $0.4 million of net income before investment gains in the second quarter, lessened by the prior year reserve development mentioned earlier. CGL contributed $1.6 million in gross premiums written in the quarter, down 46% from the second quarter of '17 and 38% from the first quarter of this year, with net earned premiums trending down at a slower pace as one would expect.

To this point, my remarks have been focused on underwriting income, but our investment results merit a mention as well. We reported $3.3 million of investment income before expenses in the quarter, which is up 28% versus the second quarter of '17 and 11% on a sequential quarter basis. On an annualized basis, this growth represents an additional $2.8 million per year of predictable, steady pretax earnings as compared to the run rate as of the second quarter last year.

Now turning to the balance sheet. During the second quarter, we revised our ultimate loss estimate related to Hurricane Irma upwards to $630 million from $475 million. Because we have exceeded our retention on this storm, the change in estimate had no impact on our earnings but drove an increase in reinsurance recoverables and gross loss reserves in our balance sheet. Our book value per share was $16.89 as of June 30, up $0.53 from March 31, and that's despite $1.5 million after-tax loss or $0.12 per share in the value of our bond portfolio from the impact of rising interest rates. Excluding the impact of unrealized gains and losses, our June 30 book value per share of $17.31 was up 3.9% from March 31, representing 15% growth on an annualized basis.

As Mike mentioned, we filed a shelf registration statement in the quarter for up to $150 million in new capital. This filing provides us with financial flexibility and will enable us to efficiently access the capital markets if they need or an opportunity arises. The shelf is for a 3-year period and includes customary terms.

We continue to maintain a conservative investment portfolio, with a carrying value of just under $450 million at June 30. The vast majority of our portfolio is invested in fixed income securities that carry a composite S&P rating of A minus.

We ended the quarter with $84 million in total cash. And our HoldCo and other non-insurance entities together had liquidity of approximately $55 million.

I'll wrap up my remarks by circling back to earnings just for a moment. Stepping back to put our recent performance in context, the second quarter and the first half of the year were pretty calm from a weather perspective or free of any significant prior year development to the bottom line and delivered ROE of 16-plus percent despite a degree of continued drag from the noncore lines we are exiting.

We've had 3 conservative quarters of steady progress, so the trend line is encouraging. But even more encouraging is the fact that these results will receive a substantial boost in the third quarter and beyond from the decreased catastrophe reinsurance spend for the '18, '19 treaty year that Mike referenced, which is estimated at approximately $30 million.

Net of a corresponding reduction on the related brokerage income, the new cat program will benefit quarterly earnings by approximately $6 million per quarter, pretax, as compared to the second quarter of 2018 just ended. That represents an additional $9 million of after-tax earnings over the second half of the year.

And on that note, I'd like to hand the call back over to Mike before we open it up to Q&A.

Thank you, Ron. Nicole, with that, we'd like to go ahead and open up the call, please.

(Operator Instructions) And our first question comes from Greg Peters from Raymond James.

Can we just step back and can you provide some more color around reinsurance and your perspective around reinsurance given the substantial increase in the gross loss from last year's events? I'm curious -- we always felt like you had enough reinsurance to cover multiple events. And going up to $630 million of gross loss for last year of Hurricane Irma is a big bite, and I'm curious how you changed your perspective when you placed your reinsurance for this year.

Greg, in terms of Irma, it was big storm in the sense of the geographic footprint that it had. It was over the entire state. Once again, we had claims in about 60 of the 67 counties in the state of Florida. We have a lot of exposure in Southwest Florida, specifically Marco Island, Naples, that area, as well as Fort Myers. We've gotten a lot of claims out of Southeast Florida, but our second biggest county for claims is actually in Brevard County in terms of number of claims. So it was a very big storm. We do go ahead and incorporate a variety of things when we purchase reinsurance in terms of the modeling and so on. And also, we look at our exposures. So I think we're comfortable with our reinsurance program, but this storm was a big event that not only for FedNat and for Monarch but also for the industry, and I'm sure you've seen some of the industry numbers have moved up in the last 6 months as well.

Can you just take this moment to just go back and review the total limit of your new reinsurance program and how that compares last year and what your deductible is this year versus last year?

Yes, so last year's program was approximately $1.5 billion total, and this year's program is about $1.365 billion, so it's about $150 million less. And the reason for that is, is we're -- in terms of the number of units, we're down about 20,000 units in our program. However, you're finding the earned premium, the gross -- the in-force premium is staying relatively flat at about $465 million. And with less units and the rate increase, that's really is what's impacting us favorably from a reinsurance cost. The percentage is dropping significantly by about 5 points. In terms of retention last year, we had a retention on the one carrier of $18 million and $3 million on the other. At the time, we owned 42% of that carrier, and now we have $20 million retention plus a $3 million retention on the second carrier, and we own obviously 100% of that second carrier at this time.

Great. And I know you're probably happy with the reserve development in your core business. Maybe you could use this opportunity just to sort of -- I don't want to call an end to AOB, but it certainly seems like you've nailed the reserve issues behind AOB. And can you talk to us about how those reserve additions have sort of played out? Are they accruing favorably? Are they in line with expectations? Or just give some added perspective because there was a period of time when you were definitely taking several bites at the apples to get the right reserves for assignment of benefit issues?

Yes, in terms of AOB, it's an issue that's not been resolved in the state of Florida, but I would say it's an issue that's been mitigated. And we've done a lot of things to do that, meaning we've improved our operations, improved our forms, our claims handling, our communication with insureds and agents and so on. But unfortunately, the big issue is rate, and we have taken substantial rate over the last 2 years. So when we came out of 2015, looking for AOB and really not seeing it, it hit us very hard in 2016, and it continued to do so in '17. And ultimately, it moved our attritional loss ratio about 7 points, 7 points off the 29 that we had for a long period of time. That was very meaningful. We take great pride in how we handle claims and how we can remedy them as quickly and as efficiently as possible in a fair manner. But AOB is not just a South Florida problem. This is an issue that's not going away. We're seeing it in all parts of the state, and there's really nothing new to report on that. In terms of reserves, we've got a great process. Ron, Eric, the risk team and our independent actuary, go through and evaluate reserves on a continuous basis. We're comfortable with where we're at. But once again, in 2016 and '17, the numbers and the data, it change frequently because of new information and new practices that were occurring in the marketplaces on the claims side. So I think we're very comfortable where we're at.

Great. And then just if we could zero in on your relationship with -- your distribution relationships with Allstate and Geico in Florida, can you give us an update on where that relationship is? And that's my last question.

Sure. Greg, thanks. In terms of Allstate, we've got a great partnership. That book is relatively flat. It's a Florida book of about $120 million. I think we had -- I think it's a very strong relationship with them. And once again, I think they're very selective in who they work with, and we're proud of that. And in terms of Geico, we're -- it's a much smaller book. We're continuing to get about $100,000 a week of new business in Florida and $100,000 a week of new business outside of Florida. And once again, a good healthy relationship there, so we appreciate it.

And our next question comes from Doug Ruth from Lenox Financial Services.

Congratulations to the FedNat team. You did a wonderful job with that report. Could you explain a little bit more about how the -- you had initially projected that the reinsurance savings at $27 million, and now it's moved up to $30 million?

Yes. Well, thank you for the comment at the beginning there. In terms of the reinsurance, what we do is we go out to market, we start compiling our reinsurance spend, our program in early part of the calendar year, January, February, March. And then when we're in April when we visit the markets and in May, we project out our final projections, I should say. But it's all based on September 30. So September 30 is where our private reinsurance adjusts. June 30 is where our FHCF reinsurance adjusts. And what we're finding is, is yet again with our disciplined underwriting that we're finding that we're actually coming in a little better than anticipated on our September 30 projections, meaning that we're writing slightly less units and taxing the reinsurance program less than what we originally anticipated. Yet, once again, we're projecting the premiums are in line with what our projections were. So it does continue to move a bit, but I think, for the most part, the numbers we're at right now is where they should be, but we'll know for sure in October.

Okay. And when will you be ready to start to work with Monarch and start to sort of turn on your marketing machine and start to sell some of the sort of the middle market insurance?

Yes, that's a great question. So we're going very slow on that, and that's really something that's going to come online in 2019. There's a lot of things that we're working on. The risk team is working on right now in terms of the rules and the forms there. To roll that out, we reintroduced it. But I don't want you to think that, that's capital that's not being resourced. Just to refresh everyone's knowledge, our insurance company, FedNat Insurance Company, owns Monarch. So we are actively utilizing that capital of Monarch within FedNat Insurance Company that we stack them. It was absolutely a benefit to our shareholders than keeping them as affiliates.

Okay. And how is the relationship with SageSure at this point?

Yes. They're a great partner of ours. They write our non-Florida business. Last year, it was approximately a $50 million book, and we think that it will go up to $75 million this year. I think as you know, once again, Doug, I'm always cautious on getting into new markets. Unfortunately, a lot of times, you kind of get to burn your way into a market with lower rates than what the market may be at or lose their underwriting or higher incentives. And having that relationship with SageSure has been a great alignment of interest, and they've got that distribution to ensure that we're not burning our way into these markets. And the other challenge is, once again, once you've got the book, you've got -- there's no easy exit from the book. So once again, I'm very happy that we're going slow and methodical in our non-Florida business. Canceling out business, not renewing business, shrinking your business in a lot of these states is extremely difficult, and we're methodical on how we're going about it.

Okay. Did you give an attritional loss ratio? Have you got -- do you have that calculation? What do you think is that?

Yes, the figure I gave was 38.7% homeowners gross loss ratio. That excludes the provision to the hurricane estimates. That does include the $1.6 million of severe weather in the quarter. So if you're looking to pull that out, there is some easy math we can do off-line to deduct that.

Okay. And then can you comment some about the dividend with the rising earnings? Or how are we thinking of the dividend?

Yes. We know your view on the dividend, Doug, obviously. And the Board continuously looks at the capital position of the company and the opportunities that are available and wants to make sure that we're putting that to work for our shareholders' best interest. We're pleased with the buyback that we had in the last 2 years, which was in excess of $20 million, which I think was very good use of company proceeds. And we're evaluating that right now, Doug. There's multiple things that we're looking at doing with our capital, including making sure that we have sufficient capital on our Florida business as well as the -- funding the non-Florida. But trust me, we know your opinion on the dividend. Our board is well aware, and we continue to evaluate it.

Okay. And then -- I -- before the call started, I looked at the valuation. Both HCI and United are both trading at about 160% of book, and FedNat is only trading at 136% of book. It seems like your stock is low in relationship to those other 2. Can you offer some comments there?

Yes, I never really like to talk about the competitors. In terms of our company, we're really focused in on what we're doing both in Florida and non-Florida. We think that the quarter -- the last 2 quarters were pretty clean quarters from a valuation perspective that you can draw from, and now we have a reinsurance save coming in. And that's about $6 million, $7 million on a go-forward basis. So I'm curious to see how the market reacts to our earnings, just like you are. I think that we've made a lot of good moves with the company, and I think we've got a great trajectory on a go-forward basis.

Just to add on to that, Doug. This is Ron. Our view of it is if we deliver steady, dependable earnings and increase our ROE, that valuation is going to continue to improve.

And our next question comes from Arash Soleimani from KBW.

A quick question on the seeded premium ratios. So it looks like this quarter, it was 43.1% overall. I just wanted to get your thoughts on how to think about it next quarter because I know you have the savings on the XOL program. And then you also took the quarter share from 10% to 2.5%. And then auto also has a large quarter, so if that goes away, it'll also benefit the seeded premium ratio. So when you look it on a consolidated basis and take all that into account, what should that 43.1% from this quarter go to beginning in 3Q on a run rate basis?

All those things that you just said are accurate. I actually haven't done the math for to kind of pro forma that out. But in the long run, as we trend towards this 29%, 30% seeded loss ratio from the cat program, a couple percent on the quota share, and then we do have the flood program as well, which is 100% seeded. That's a small impact. So the trend is definitely towards the low to mid-30s. There are still a couple of the older quarter shares that are -- have not been -- they've been terminated but on a run-off basis. Until we completely recapture those, there can continue to be seeded premiums and seeded loss impacts from those. But perhaps, we could work with you off-line on a more specific answer for our 3Q.

Okay. And I know you mentioned in the $2 million of homeowners favorable development there was some Irma-related claims handling. How much of that spend from the claims handling the Irma fees?

Roughly half.

Okay. And can you just provide a bit more detail on what the weather event is for this quarter?

What have I might recall early on was tropical storm, Alberto, and then from there significant just heavy rains in -- across Florida.

Okay. And I know you have the 10% rate increase flowing through Florida now. Looking ahead, do you anticipate putting another rate increase in August of 2018. Just wanted to get your thoughts around that and if you think it would be close to 10%, closer to low single digits. Just what your thoughts are there?

Yes, Arash, it's too early to say. We are working on that and anticipate filing something with the office of Insurance Regulation here in the month of August or perhaps even September. Any rate increase that we do ask for would obviously be reviewed. It'll take some time. So that would not be rolled out into our books until next year, until 2019 because it does take about 90 days for their review. Plus also, we usually roll it out about 90 days out so that we can do our -- have enough time to program our systems; to generate the renewals, which go out approximately 50 days prior. So any rate that we do have would be in 2019. And I don't have a number for you, but I would say it's not going to be as significant as 10%. That's just my gut instinct. But once again, it's the actuaries that are still working on the filing, and it'll be a little bit of time before we have that number.

And I know you talked about Monarch. But in your legacy FedNat book in Florida, what's your appetite for growth there now that you have the rate increases coming through? Do you see it as a -- are you more inclined to try to increase the discount in Florida itself?

Yes, I would say that we are hungry for growth absolutely, but I would also stress that we're disciplined to the bottom line earnings. So you know a lot about our company and the history of the Florida marketplace. We saw opportunities -- we were flat for many years, and then we saw opportunities for growth back in '12, '13, '14, '15. And really, our growth has slowed since then, but we think there's a lot more profit that we can get out of the business, and that's where we focused in on. And if we can have meaningful growth in the same time, that would be fantastic. We're interested in that. But it's all about bottom line earnings in terms of what we're focused in on.

(Operator Instructions) And our next question comes from Samir Khare from Capital Returns Management.

You guys put a lot of information on the calls. I appreciate that. But I'd give some specific questions, one on the quarter share. What is the seeding commission on the quarter share? And what was it before exchanged this renewal?

Yes. Samir, yes so the seeding commission is a sliding scale. And it's -- so obviously, it slides with the loss ratio. It's typically in the 30% range.

Okay. Perfect. And who is that written with?

That's with Swiss Re.

Okay. And how much cat as a cover?

In terms of the cat allowance?

Yes.

Yes, there's a cat allowance. That's in the 30% range.

To be clear with what that is, is that's a recognition by Swiss Re that cat costs are significant for us in our operating model. So the seeding commission takes a haircut off the seeded premium of 30% -- roughly 30% in calculating the seeding commissions. The tree itself does not cover the hurricane, does not cover wind.

Okay. Got it. And then what do you expect the gross commission ratio to go up to from here with lowering the quarter share percentage?

Well, the gross commission ratio wouldn't change as a result of any change in the quarter share.

Oh sorry, maybe on the net commission ratio. I mean, isn't being benefited by the commission -- seeding commission right now?

Yes, absolutely. The net ratio will change somewhat.

Yes, Samir, yes, I think what I was going to say is I think there's 2 things that would impact it, right? Obviously, the seeding premium going forward with an increase to the net premiums earned number and then from just the expenses right. As the non-Florida book continues to grow, we'll see the expense ratio grow proportionally related to the 50% profit share costs. That is meaningful.

Okay. Got it. All right. And then once -- I guess, last August, rate increases are fully earned in, and I think that's going to be cleared in by 3Q. What would you expect the attritional loss ratio to be?

Well, so we think there's about $2 million a quarter left to go in terms of earn-out on the 10%. So doing that math, it's fairly modest reduction on the attritional loss ratio, but it would go down another on a relative basis, $2 million on $80 million a quarter is, what, 2% on a relative basis.

Okay. And then that loss ratio, if I'm not mistaken, it does not include a provision for non-cat weather losses. Is that right?

Correct.

Okay. I asked only because it seems in the last few years, we have experienced a couple of points or so of small weather losses every quarter, and I'm just wondering if it makes sense to take further rate increases to kind of dampen that volatility out.

Yes, philosophically, by the time we get to the end of the quarter, we know what storms have happened, and we step up those storms on a specific identification basis. So you're right. We don't have a storm estimate in our pic. We deal with them in a specific ID basis as they occur.

Okay. So I mean, I guess, that -- so the question, would it make sense to take further rate increases to kind of dampen the -- or take a provision for that volatility lifting?

Samir, well said, but you also have to remember we're operating in a very competitive marketplace. So we're mindful that we want to make sure the carrier's rate is priced correctly in terms of -- from our obligations to our policyholders. But also, we operate in a competitive marketplace. So there's other initiatives that we're doing as well to improve our underwriting and claims handling that we think is contributing to an improved loss ratio. But obviously, the proof is in the pudding, right. So there's multiple things. You can't just take rate to fix problems. You also have to improve your operations. And we're doing both.

Okay. And what's your policyholder retention in Florida?

In terms of Florida, we typically have about 90% that finished the policy period, an annual policy period. And those that are offered a policy renewal, it's again another 90% roughly. So you're talking about an 81% retention over consecutive years.

Okay. And you've been quite vocal that you're open for business in the Tri-County, and your order premiums have come down only slightly. But there's also a rate increase affecting that business as well. Can you just discuss any change you're seeing to your county mix?

Yes, I like Tri-County. I have -- I'm not -- I've no aversion to Tri-County at all. And we're seeing there's other parts of the states that are challenging, I would say more challenging than Tri-County. So once again, our big counties include Dade, Broward, Palm Beach, Pinellas, Hillsborough but also Brevard; big county, Lee, Collier. So we're mostly these coastal counties, I would say, from Daytona south and Tampa south. We've got a good exposure mix in the Panhandle. But in terms of the composition of the book, we're not seeing too much change. We're still at about roughly 25% of the policies for both carriers or in Tri-County.

Okay. And then on gross Irma loss increase, would love to get your take on what's causing -- what's causing the increase.

We're still getting claims. So we're still getting approximately 50 to 75 first notice of losses each week. We're getting a lot -- we're getting reopens, and we're getting represented claimants as well. So it's a combination of things. And unfortunately, that has moved the ultimate for both FedNat and Monarch but also the industry. And the industry, now it's approaching a $10 billion amount.

Okay. And then on the claims that you're getting right now with first notice of losses, are a lot of those attorney represented? Or could you give us some complexion on that?

Yes, a lot of them are attorney represented. Florida is a very litigious state, and the attorneys are well organized, and these claims can get complicated quickly. And the more people you have in the claim, the more expensive it gets, without a doubt. It's part of Florida. Nothing new, I should say. It's -- we -- it's really not much different than we saw when we had our storms in '04, '05, those Charley and Francis, all the way up through Wilmette. It's really not that much different.

Okay. And then the reopens that you cited. Is that a phenomena that's accelerating right now? Or is it kind of (inaudible)

No, I would say that's slowing a bit. We've got about 95% of the claims closed, but we've that percent closed for a while. So as we close them down, new ones tend to reopen or new ones are reported. I think the vast majority of the storm of Irma is way behind us, but there'll be some lingering effects clearly. You have 3 years to get your claim in, and we're coming up on the 1-year anniversary of it. But I think the vast majority is behind us.

Okay. And then any noticeable pickup in litigation trends that you've been seeing on your daily claims?

No, no change. Litigation has always been up there. We see it in Tri-County, but we see it see in other parts of the state as well. We're not really seeing much of a change in that regard.

And I am showing no further questions at this time. I would now like to turn the call back to Mr. Michael Braun, Chief Executive Officer and President of FedNat Holding Company, for any further remarks.

Thank you. I would like to thank each of you for joining us today for your ongoing interest in FedNat. I will be remised if I did not thank our employees, agents and other strategic partners for their tireless efforts to deliver excellent products and services to our customers.

FedNat is poised for a strong second half of 2018 and beyond, boosted by our focus on exposure management and operational efficiencies, and we look forward to discussing those results with you at the appropriate time. Thanks again, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.