Fednat Holding Co (FNHC) 2008 Q4 法說會逐字稿

Good day, and welcome everyone to the 21st Century Holding Company 2008 year-end financials conference call. This call is being recorded.

Statements in this conference call or in documents incorporated by reference that are not historical fact are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein.

Without limiting the generality of the foregoing, words such as may, will, expect, believe, anticipate, intend, could, would, estimate, or continue, or the negative other variations thereof, or comparable terminology are intended to identify forward-looking statements.

The risks and uncertainties include but are not limited to the risks and uncertainties described in this conference call or from time to time in our filings with the SEC. Furthermore, the unaudited, consolidated financial statements of 21st Century Holding Company for the year end, December 31, 2008, have been prepared in accordance with [General] Accepted Accounting Principles for the interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X.

These financial statements do not include all information or notes required by GAAP for complete financial statements and should be read in conjunction with the audited, consolidated financial statements and notes thereto, included in the Company's annual report on Form 10-K for the year ended December 31, 2007 and the Form 10-K for the year ended December 31, 2008, to be filed on or before March 16, 2009.

(Operator Instructions). With us today is the Chief Executive Officer, Mr. Michael Braun; and Chief Financial Officer, Mr. Peter Prygelski.

At this time I would like to turn the conference over to Mr. Peter Prygelski. Please go ahead.

Thank you. Thanks for joining the call today. Before Mike goes through his opening remarks, I just wanted to go through some of the financial highlights for those of you who haven't had a chance to review our release.

For the three months ended December 31, the Company reported a net loss of $2.8 million, or $0.35 per share, on approximately 8 million average shares outstanding as compared to net income of $8.1 million, or $1.02 per share, on approximately 7.9 million average shares outstanding in the same three-months period last year.

For the 12 months ended December 31, the Company reported a net loss of $2.5 million, or $0.31 per share, on 8 million average, undiluted shares outstanding as compared to net income of $21.3 million, or $2.69 per share, on 7.9 million average, undiluted shares outstanding in the same 12-month period last year.

On a diluted basis, the Company reported a net loss of $0.31 per share based on 7.97 million average, undiluted shares outstanding as compared to $2.65 per share based on 8 million average, diluted shares outstanding for the 12 months ended December 31, 2007.

Realized investment losses of $800,000 net of $500,000 income tax benefit were reported by the Company for the three months ended December 31, 2008. Excluding these losses, the net loss would've been $2 million for the same three-month period.

Realized investment losses of $6.6 million net of a $4 million income tax benefit were reported by the Company for the 12 months ended December 31, 2008.

Excluding these losses, the net income would've been $4.1 million for the same period.

With that, I will turn the call over to Mike for some opening remarks.

Thank you everyone for listening in today.

Obviously the results of 2008 are disappointing, and as we look at those -- the numbers to summarize them, investments had a big impact on us. It was a rough year for a lot of equities obviously in general, and that included equities that our Company has owned.

Separate from that, we feel that our homeowners book is very stable. We feel that the premiums were down in 2008, but as it stabilized in the latter half of the year, we anticipate that we are in a good position now to start growing that book.

And what I mean by growing that book is, primarily the biggest thing is the Citizens depop. I think on the last call we had mentioned -- spoke in detail actually about the Citizens depop and how it can impact us.

We were originally approved for up to 30,000 policies with 15,000 of those occurring on the first round. The first round we did take about 4,400 policies, short of the 15,000. That number is not a hard number in that the insureds can still decide to reject our offer to assume their policy. I am anticipating that the final number is going to be around 4,000 and approximately $6 million of in-force premium. That's for January.

We also planning on attending the March assumption as well as May. Our anticipation is that we will probably have similar results, so about $6 million perhaps in March as well as in May.

As we go through the wind season which starts in June, we'll go ahead and reevaluate what we can do based on the cost of reinsurance if we want to go ahead and take more policies during the wind season, or wait until later in the year, which would be in December.

Something else that we're doing with that, our homeowners program, is -- I feel that the market is definitely changing and we are becoming -- our rates, which have been fairly -- have been stable, are becoming more attractive due to some of the other carriers being less aggressive in rate and in their marketing techniques, their desire for property, as well as cutting back on capacity in certain areas. I think those both bode well for us in 2009 where we're not overly aggressive when we could not support that.

Something else that's happened in the State of Florida recently has been State Farm, where they have announced that they plan on leaving the state in certain lines of business. They have put a request into the State of Florida to leave, which would be about 1.2 million policies, about 800,000 property policies. We have put a request in to the State of Florida and in to State Farm that we would like to assume up to 50,000 of those policies.

That -- we do not have a response back from either one. The OIR has given tentative approval to State Farm to leave, with certain assumptions, one of which being that the policies do not go from State Farm into Citizens but rather goes out into the private market, and also that the agents have the ability to broker -- their State Farm agents -- broker, which would mean that they would be able to sell independent carriers like ourselves.

I think that's a great opportunity for us. I think that 50,000 is a number that we feel very comfortable that we could absorb in terms of our surplus -- thanks to that. We think that we have great growth opportunities for the homeowners product in 2009.

Something else that we are looking at in 2009 with homeowners is utilizing the other company, which is American Vehicle, for some homeowners. I don't anticipate that generating a large premium in 2009 but having a sister program to Federated in certain areas of the state where we are looking for different -- where we feel limited based on our Federated program, and that would be in the more northern parts of the state.

We sell Federated homeowners direct to our agents throughout the state, but we've also recently started working with a general agent in Florida, who I think that can also help with distribution in certain areas where we have high expectations of them. And this could lead to possibly other states -- nothing that we are ready to announce, but they have distribution in other states, which I think would be beneficial to us as well.

In terms of American Vehicle -- American Vehicle, the premium's been down. That's primarily a result of the economy. The main line on that once again is the artisan general liability, and obviously the real estate market has been not positive, has been negative. Construction industry followed, and the need for insurance for those contractors has decreased.

The program is running higher than it has in the past, and we feel we can solve that issue with the surplus route that we're going. Currently American Vehicle is sold in Florida, and most of the premium that we have in the states is on an admitted basis. [When] you have -- run into issues with losses and things like that on an admitted basis, it's very hard to raise rates, it's time-consuming. When you are surplus, you are much more flexible. So currently we would cut back or be a lot tighter to make sure that we're not getting hit hard on our losses. On a surplus basis we could just raise our rates immediately and move forward.

The other benefit to that is that we anticipate having the A rated paper on that. The A rated paper has been something that we've been working on for quite a while. We have an agreement in place with a A rated company, so it would be an A rated product that we're selling. And when I say A -- meaning AM Best rated.

We also have a reinsurer that would be participating on this program and probably take -- which would be taking 50%. The only thing pending on that that we have, and not released yet, is because we do not have final approval from the State of Florida. That's something that we have been waiting on for a period of time, and we've made some modifications to it over the previous months, but we feel very close on that.

Also what we're working on with American Vehicle is some other products to -- that would make the artisan liability more attractive, and that's the commercial auto and an inland marine -- other things just to be sold alongside of that.

One other thing that we've been doing with American Vehicle is we utilize general agents in multiple states. In our home, which is south Florida, we started selling direct in the last -- back in December, and I can tell you the results in the first 90 days are positive. We feel that we've got better control of the underwriting because this is our market and I think we know the market very well, but also because of our marketing initiatives, selling that direct, we feel very good.

In the rest of the state we have two general agents that we feel do very well for us, but we saw an opportunity that we could do better in Tri County ourselves.

With that I think I've given you a broad overview of a lot of different things that we're working on. Pete had received an e-mail from somebody just asking a couple of questions, so I'll go ahead and read that real quick. There's three there.

The question is asking about Citizens and how -- it's says, Michael mentioned competitors were extremely loose with their underwriting. Can we get an update on that situation and also describing Citizens and the process?

In terms of our competitors, I think I touched on that. I think that some of the aggressive nature out there I think is slowing down significantly. So I feel that as it returns to a more disciplined market, I think that that's going to work for us well.

In terms of Citizens, we've identified -- Citizens has approximately 1 million policies. We had approval for up to 15,000 on the first round and up to 30,000 total. We only took about 4400 policies, and the reason for that is because we want to insure that the policies that we take work well with our existing book. We're in the State of Florida. The number-one item that we need to look at is really our wind exposure.

There's a third question on there so I will turn that one over to Pete.

Yes. One of the questions that we received was just the outsourcing of the management of our investment portfolio.

Just to go back maybe six months, during last year we hired a investment adviser to help us hire money managers both on the equity and on the fixed income side of the house. We spent a good five to six months going through some pretty aggressive due diligence looking at various performances of different money managers across different asset classes.

Beginning January -- the 1st of January basically, we've turned the money over to these professional money managers, and they've been managing it basically beginning this year.

Just to go through the current portfolio -- because I know somebody might ask that question -- currently we have a $150 million investment portfolio, of which $95 million is in cash, $51 million in bonds, and about $4 million in equities. Our projected portfolio over the next six to 12 months might look a little different, might be -- just rough numbers -- $35 million in cash, which is 23%; probably $100 million in bonds, which would be about 67%; and potentially up to $15 million in equities.

And right now we are comfortable with going up to 5% in equities right now. I mean, that -- we will see what the market does in the next couple of quarters. So that's where we stand with the investment portfolio.

I think that we developed a pretty robust investment policy on the equity side where we are diversified amongst asset classes and economic sector diversification. In the fixed income portfolio we are well diversified with tax-free bonds, taxable both corporate and -- basically corporate bonds and some treasuries. So I feel like the -- like I said, the program just basically started on January 6, but I feel that it's going to prevent some of the losses that we had in '08, given the market's cooperation.

Before we go ahead and open up to questions, the one other item that I'm sure people are -- have some questions on is the dividend. And unfortunately, that's something that we did cut. We think that's in the best interest of all of our shareholders as for the Company, and we did that primarily just to insure that -- we want to make sure that the dividend that we're paying is what the Company can support, and in 2008 we -- obviously it was not a good year. We do expect 2009, as I've indicated, to be a lot of growth initiatives with the premium, and we anticipate those to kick in.

So the other piece of that is that if we were to need additional cash, raising cash in this current environment -- it appears to be next to impossible. So I think it's the prudent thing to do to retain some of that cash on hand for the Company. That's something that the Board will look at every quarter -- the dividend. So we will review that. Our next Board meeting on that would be in June.

With that, we'll go ahead and open up to questions.

(Operator Instructions). Gregg Hillman, First Wilshire Securities.

This is actually [Dmitri Cornasofskia]. I'm here with Gregg.

On the investment realized losses, could you give us a little bit more detail of sorts of where that came from? Like what securities?

Well yes, I can answer that. This is Pete. Basically I'm just going to -- I'm not going to talk specifically about the fourth quarter but just in general for the year, mostly equities. We did have some -- we did own $750,000 worth of Lehman bonds. We wound up selling those for -- I believe that was $0.29 on the dollar. That was third quarter, Lehman bonds.

On the equity side the major losses came from the financials -- Bank of America, Citi, AIG, Merrill. So that's basically where all the losses came from -- the financial sector.

The current weighting of our equity portfolio -- like I mentioned before, we basically have 3%, or a little more than that now, but maybe up to 5% of our portfolio in equities, and out of that $5 million there's probably -- right now 5% of the $5 million is in the financials in good names. Again, that's about what -- we are right at almost a benchmark on the financials. So we've lessened our exposure in that area greatly.

And then on the -- what's the unrealized loss position in the portfolio right now?

The unrealized losses -- well, I'm not going to comment on the unrealized losses for the first quarter, what we're looking at now. We look at that pretty much on a monthly basis, but you know the -- we just got invested, so it's hard to predict. Like I said, the money -- that we've basically just started investing the money towards the end of January in the equities, so it's really not a good indicator now.

I can tell you that it's a broad diversification of stocks. We -- large cap growth, small and mid cap value -- broad diversification.

This is Gregg. In terms of the depop at Citizens, did Sunshine bid on any of those?

I don't know who bid on any of the policies out there. You could probably get that from either the state's website or Citizens.

Okay. And then in terms of the materiality of the depop, I mean, in terms of like the end of 2009, what percentage of your policies will have come from Citizens do you think, what percentage to your premium for your property company?

I can't give you a specific percent, but I can tell you that currently we have in force about 30,000 to 31,000 policies, approximately $58 million of premium. I think voluntary in this competitive market can have some growth, I would say maybe in the 10% range.

I've indicated earlier that I anticipate that January will be probably -- January that has just occurred -- about a $6 million in-force depop, and I'm anticipating March and May to be $6 million. So let's just use rough math of $60 million. That alone right there is $18 million. It's a significant amount of growth.

In terms of depop'ing during the wind season, we will look at that very carefully to see if there's opportunities for us. The quality of the risk may be greater during that time of year, and we need to balance that out with the reinsurance in our current portfolio.

But in that math I've just given you, I would say that you are looking at let's say 31,000 if we get 3,000 each time -- I'm sorry -- we get 4,000 each time, that's 12,000. You're talking 42,000, 43,000 policies. Whatever might happen with our other marketing initiatives on that, I think that we could have a higher policy count -- maybe 45,000, maybe 50,000. There's a lot of variables there that will unfold in the coming months.

In terms of the risk in these policies, are you going to earn normal profitability and expect normal loss ratios on these policies? Or are you going to increase the risk to the Company? Then you are going to be able mitigate that with reinsurance so you keep expected earnings at the same level?

Our current portfolio of property is primarily the Tri County, which is Dade, Broward, and Palm Beach. All the policies that we're taking out are non Tri County, so that in itself is a good thing for the diversification of the book.

In terms of our rates, our rates in these territories where we are taking policies from the depop is actually lower than what we're taking in the depop. So basically whatever the rates are for Citizens, we're taking -- we have assumption rates -- like me too of Citizens less 2%. So let's say the Citizens is -- let's just say is $1,000 and we are 2% below that. Our voluntary rates -- if we were to write it voluntary -- are actually lower in those areas. So these assumed policies are at a higher rate than our voluntary but at a lower rate than they are currently at with Citizens.

I (multiple speakers) that the policies that we're taking, I think that, once again, out of 1 million policies -- approximately 1 million policies -- at the end of the day we're only taking -- whether it's 4,000, 4400, whatever that number might be, I would say that we're looking at those policies to ensure that we're taking what works for us.

So the answer is, yes, I think that we would expect similar results in those policies then, consistent with our voluntary book.

If we got very aggressive and took 30,000 in one month, then I would say, no, it's not going to be the same. But what -- the way that we're doing, it I do feel confident.

So you could go back to normal profitability without the investment losses?

In terms of earnings projections, that's not something that we're going to put out there. In terms of profitability of the homeowners book, I feel good about that book. Absolutely. 2008 we had some unusual events that occurred in the investments and things like that with -- that we got hit on. I feel very good about the homeowners book of business. I feel very good on what we're doing with the book and where we're going.

I would say we've been a bit conservative versus others in the market. I think we've done the right thing and for the long-term protection of our shareholders, and it's a hard spot we're in right now because we've got those write-downs that have impacted us and our premium's down. But I stand by my statement that we're doing the right thing long term. I guess that's a little bit of the conservative underwriter that's in me. That's what we do.

Gregg, just to follow up there with the investments, the second half of '08 we really made some hard decisions and really cleaned up the portfolio so we could give these money managers a fresh start. I definitely believe that we are headed in the right direction now as long as the market cooperates.

But our exposures -- our exposure right now to equities is so small percentage-wise to the total, like I said, you're talking about 5%. And the only reason we're exposed 5% is I -- nobody knows when the market is going to recover, but I feel like by investing that 5% -- or we feel by investing that 5%, we have some exposure to the equity market when the rebound occurs. So I think it's definitely the right thing to do and the right direction.

And finally guys, could you just touch on the regulatory risk at the state level? You know, whether Citizens or the governor will reverse himself or anything weird will happen? What's your take on that?

It's a very fluid situation in the State of Florida. When you say regulatory with Citizens, the two big entities that are in the market is Citizens and the Florida Hurricane Catastrophe Fund. Those have a big impact.

Citizens' rates have been deemed to be insufficient for quite a period of time. There was a rollback in '07 which hurt us very hard, and due to our concentration in the Tri County perhaps hit us harder than most carriers -- perhaps all -- not all, but most carriers.

I don't know what's going to happen with Citizens. I don't think that Bill today would pass. What I mean by that is HB 1A that was passed in early '07. The state is taking on an inordinate amount of risk, and a lot of people didn't fully understand that risk, and people not -- a lot of people not living on the coast in Florida feel as though the other people in the state, they're subsidizing those people. I don't know that that would have passed.

There's been a Citizens task force talking about raising those rates perhaps on a glide scale where they'd go up perhaps 10% or no more than 20% per year. I anticipate Citizens' rates will go up at some point. The freeze is through the end of '09. The legislators can extend that freeze. I don't know that they -- I don't believe that they will, but I don't know that.

The other is the Florida Hurricane Cat Fund. That's another state entity which -- that you touched -- that has risk associated with that. Their liquidity is a concern, and I don't know what the state is going to do in regard to that. Apparently, FHCF is talking to the federal government to see if there can be liquidity either through the purchase of their bonds, something to that effect. I don't know.

The legislators just started I believe March 3rd -- I want to say -- through the -- maybe May 1, roughly. I don't know what they're going to do. But I think they are going to -- they have to do something to correct those two entities.

How is the Hurricane Cat Fund -- or the Hurricane Cat Fund affect you? How much do you have with them.

A significant amount. I don't know the exact amount, but I would say maybe about $130 million of our reinsurance is with the Florida Hurricane Catastrophe Fund. In terms of their liquidity, there's concerns.

There's different layers within the Cat Fund. There's a limited apportionment layer that's expired. It's set to expire. There's a -- what they call TICO, which really there's been no one interested in those because of the rates; the traditional, which is the FHCF -- is mandatory; and then there's something called TICL, which is an extra layer above the mandatory.

All about being said, they could have liquidity issues on that. Their funding is about $10 billion, and their maximum liability could be about $28 billion.

So they might not be good. They might not pay out if you get hit bad?

There is a risk associated with the Florida Hurricane Cat Fund. Yes there is. If something was to happen, do we think someone would step in? We don't know. We believe that, yes, something -- if the federal government stepped in to purchase some of those bonds, but yes, there is a liquidity issue with the FHCF.

Richard Carlson, RCS Asset Management.

You probably looked at Warren Buffett's letter on Saturday. It's pretty interesting. And he kind of looks at book value. He is an insurance guy. He's one of your competitors. He focuses on growth of book value. Do you think that's a fair way to look at an insurance company?

Well, some people look at it as earnings and some people look at it as book. Obviously we're trading well below book, and I think that has to do with that our book has not been growing in the last really two years. And the reason for that, which I've touched on, is really the HB 1A, when that came about, that really brought a reduction in our premiums, significant reduction. So I would say that's up to the personal investor to decide how they want to value our Company -- or any insurance company for that matter.

If you think about book value in an insurance company -- and in some ways it's liquidation value, but if you put that aside -- if you sort of theoretically thought about your book value and how you could double it -- so it's 9.50 and to get it to 19 you'd have to earn $72 million, after-tax; okay? You would have to earn $9.00 a share, after-tax.

So you -- but if you took $8 million -- I'm not saying you could do this. If you took $8 million and you bought back 4 million shares, your book value would double overnight with very little risk.

Now, you can't buy your stock at 2. You certainly can't buy half of it. But if you didn't pay a dividend at all and you took that $2 million and you bought your stock back at 2, do you know what happens to your book value? It goes from 9.50 to 10.60.

Now does that -- is that a better use of your funds than paying out $0.24? Well, the leverage is about 4 or 5 to 1 over paying a dividend. And you've said in the past that you have better use of your funds than buying your shares back, but I don't see how you could.

Well, that's something that is something decided by the Board of Directors, and that has been -- that has come up in previous conference calls, and we don't have anything new to report on that on this conference call, but we understand what you're saying.

Yes. We've -- in the third-quarter call we addressed that. The two points that I will remake -- that obviously increasing our book value share is important, but at the same time we can't ignore our aggregate capital. As we expand our lines of business, we need to maintain the adequate capital levels.

But why would you expand your business when you can double your book value with an $8 million investment?

Well, the opposite side of that is that -- to the dividend point -- is that we feel right now with the -- paying out the dividend will reward our shareholders instead of the few who sell while we are buying the stock back. And we feel that, like you said, we can't buy the stock back at -- whatever it's at -- $2.00 a share right now.

Like I said, it's something we (multiple speakers)

Sure you can. You can go in the market and buy stock at $2. It's selling there.

I don't think we can buy $4 million worth at $2.

No, of course you can't. But you could take the dividend, which is $240,000 -- $480,000; is that right?

Yes.

No, it's more than that. It's $1.9 million a year, if you continue to pay it for the year. And you could use that money to buy shares back. You could retire a million shares, maybe 7 million instead of 8 million and book would go from 9.50 to 10.57.

If you presented that to the Board of Directors, I cannot imagine how they could reject that logic. How can you reject that logic?

Well, I think you bring up a good argument, and that -- like I say, that's something that we've looked at numerous times back when the stock was higher. And I (multiple speakers)

Well, I know. You made the right decision because the stock's down 80% or so.

And let me ask you another theoretical question. At what price does it make sense to buy the stock back?

That's a good question. You know, I think -- I don't know the answer to that question, but I think it depends. I mean, if you're just looking at a stock price, it depends on a lot of things. It also depends on our position and our growth plans for the Company too, and what the Board feels is the best use for the capital.

Well Pete, I mean I'm a shareholder and Wilshire is a shareholder and others are. We are interested in making money for the stock. We don't care about the insurance business. I mea, that's -- you guys are insurance guys. I've been in the investment business for like 35 years, and I watch steel guys build steel mills because they are steel guys, right? They didn't care about the stock price. They didn't even understand it in most cases. Maybe the CEO did.

So I think you guys need to focus on the price of the stock and book value. Book value is going to follow the price of the stock probably. It seems to. Warren Buffett thinks it well. He's a pretty smart guy. So you guys need to focus on that.

The insurance business is what you do to generate book value. But you can generate book value other ways. I mean, I can't imagine that your Directors are addressing this issue, because it doesn't sound like you're presenting it to them.

Well, we will bring it up again, but we have had the stock buyback, the dividend conversation, and the growth of the Company conversation. We do present it. We do discuss it. And we will bring up your concerns in the next Board meeting -- or your suggestions, I should say.

Well Pete needs to build the model it seems like and show them what the effect is of just buying certain amounts back -- $2 million, $4 million, whatever -- and what happens to book value and what happens to profits if you go forward with the purchase of these policies.

We can do that. And I (multiple speakers)

And I can't believe you haven't done that.

I think you bring up a good point, and I think with the stock at $2 it's a considerably different exercise than it was on our last call.

Right. Okay. I just -- I think you should address it. I think it's very important, and I think probably you guys would get a lot more bang for your buck than, A, paying out a dividend, or B, buying policies. But it's just my opinion. Thank you.

Dan Harvey, private investor.

I have a question on a macro level, what's being tossed around in the Florida Legislature and a couple of bills that -- they want to take the wind portion of the premium and let the state take that over, kind of nationalize that or socialize that portion of it. And I was wondering if you guys have an opinion on if you think that will gain any muster in the new session here?

Well, I can tell you, Dan, my opinion on that is that I think the free market works better than the government intervening. I think a case in point is Louisiana. If you look at their property market, a few years ago they were in bad shape and Florida was in better shape. With the capital that they've been able to attract to Louisiana, I think they are in better shape than we are and than Florida, because Florida has been -- there's been a lot of involvement.

Do I think the state is going to assume wind? I think currently the state has concerns that they can't shoulder the risk -- their current risk of the wind that they've taken on, and if you're going to increase that exponentially, I think that's pretty aggressive. I don't know what the legislators are going to do, but that's pretty scary for the state. I think the state, it could bankrupt estate.

I think traditionally government programs don't always work in this. If you look at the Florida -- I'm sorry -- the flood program, that program has been actuarially wrong for years, and it hasn't been corrected. I believe they still have some $20-odd billion of debt that I think the federal government only in the last year or so went and wrote off.

If you look at how Citizens is being run, and FHCF, when there is no wind, they look pretty good. I should -- I don't know if I -- maybe that's an exaggeration, but they don't look so bad. When there is wind coming through, it's a different situation.

I don't know what the legislators will pass. I don't think it's a good idea personally.

Okay. And one other question. If the wind does blow, how much does your Company -- how much are they on the hook for for the first layer, I would say?

Our current program that runs through July 1 is a 3 million retention, and that runs up to our one in 100, which you know we are just in the process now of starting for the '09 season. We anticipate that we would like -- our intention is to stay at the 3 million retention, but that will be determined by what the market will bear -- the reinsurance market.

Do you consider that kind of conservative, only retaining 3 million or --?

Do I think that's conservative? That's about 10% of surplus. I like conservative. But based on what the reinsurance market will support, perhaps it could be lower. Perhaps it needs to be higher. Only as we get into negotiations on those treaties will we know what we can do. But we've been -- I think we've had 3 million for maybe two or -- at least two -- I think three years running now.

Ron Bobman, Capital Returns.

I was curious if your reinsurance brokers had given you any sort of guidance or estimation as to what the increased renewal costs would be for the reinsurance program?

Well, just like that -- as us as an insurance Company have taken hits on investments, the reinsurers have taken hits on investments, and their surplus -- most companies' surplus has been reduced. Two events really hurt our reinsurers in '08 and one is Wall Street and the second was Ike.

Ike is a big storm that hit Texas, and insured losses, they are all over the place, maybe $18 billion to $25-plus billion. So you have less capacity. Due to the laws of supply and demand, we have less capacity. We believe that the rates might go up. We're being told they could go up 5%, maybe 10%, 15%. We don't know specifically until we really get in.

We think we're a better Company than most, and we think that we should do well on our reinsurance contract. What we're being told is a lot of the newbies that don't have -- the new carriers in Florida that don't have a track record would be the first ones to get pinched on lack of capacity or more aggressive pricing.

So I would say perhaps in the 10% to 15% range is general statements that are being given out there from the brokers. And that's in publications. That's not specific to our Company. Those are general statements.

Got you. And then is there some portion of the FHCF that you are now going to have to buy in the private market, and that will have a significant bump-up in rate for that tranche of the program? Or am I mistaken?

In terms of the FHCF, there's a mandatory level, so that has no point -- we have no ability not to buy that. In terms of something that is expiring, we bought at just $1 million of coverage last year. I believe it was $1 million. [Actually] it was just like 9.67 -- roughly 9.7 million of (technical difficulty) so that is set to expire.

In terms of the optional coverage, there's two optional coverages on the program -- TICO and TICL. TICO is cheaper in the private market. We anticipate the private market being cheaper this year as well.

In terms of TICL, TICL is the top on the FHCF. We anticipate that being cheaper, not in the private market but with the FHCF.

Things can change during legislation. The legislators are in for eight to nine weeks. Things can change, but our current plan is to buy the maximum coverage afforded by the FHCF because of the pricing. If you were not to buy the FHCF coverage and instead buy it in the private sector at a higher rate, it's not believed that you can get that rate increase recovered from your policyholders. So our intention is to buy the traditional plus the TICL, which is a higher layer.

But the TICL right now is appearing to be problematic; am I right? That may go away. You may have to buy it privately?

It is problematic. It's -- they are talking about possibly cutting it back, possibly reduce -- reducing it or getting rid of it. You're talking about -- I believe it's about $18 billion, which I don't think the market could support. So I don't think that -- meaning it would be too much of a shock and -- which would lead to dramatic increases in premium to policyholders, which I don't believe that's what the state wants to do.

It's set to expire next year -- the TICL layer that is -- and I would anticipate some type of -- they're using the word glide -- for Citizens' rates to go up. I'm anticipating there might be some type of glide path for the FHCF exposure to contract, maybe over a period of at least one year, perhaps two, three, four or five years; I don't know.

Ray Dirks, Dirks Brothers.

Just wondering about your methodology in the last year or so. Has it changed much in terms of the loss ratio, expense ratio, and the reserves -- the reserves that you set? And who is setting the reserves these days?

Our reserves are handled independently, and they are done -- and every month they are reviewed by Merlinos & Associates out of Atlanta, Georgia. That being said, they had us increase our ID&R throughout the year, specifically in the fourth quarter on the liability artisan book. The homeowners has been much more consistent.

Right. Just another general question here. If we had had a situation let's say in '09 where the combined loss and expense ratio were to be say 95% -- just to take a number -- and there were no realized gains, no realized losses, and the investment income would pretty much be at the same rate -- or the return on it on the investment income side would be about the same, what kind of -- what earnings per share do you think you would be?

Well, we don't put projections out there for earnings. In terms of premium, I think we discussed about a lot of different things such as our current in-force book, some of the things we're looking to do with the Citizens' book (multiple speakers) that (multiple speakers)

Okay. Well, I was just wondering, without any significant changes from where you are today, would you -- you would show a pretty healthy profit, wouldn't you, with a 95% combined ratio?

Like I say, we can't -- we're not putting projections (multiple speakers) [on] earnings, but we feel that our business plan is solid. If we don't have a repeat of '08 in terms of write-downs in the stock market, yes, that will absolutely help us. We think '09 is going to be better than '08. But we can't give you specific projections on earnings.

Carl Dorf, Dorf Asset Management.

Let me identify myself. I'm a Director of the Company. I normally don't get on this call, but because of the long discussion that we had relating to the buyback, I wanted to give a little bit of a feel as to where I'm personally coming from -- and to some extent the Board.

First, the mechanics that the individual who brought up that issue speaks about are absolutely correct. You would get very substantial appreciation in terms of your book value. The problem with that is when looking at it only from that point of view, is that the Company -- if you -- and the approach that the individual took is very pertinent if you want to liquidate the Company. We're not in the business of liquidating the Company. We want to stay as an ongoing Company -- and you've heard some of the plans that we have in order to make this Company grow and become a very healthy Company and do very well.

If you just attempt to increase the book value, you are doing two things. The first thing that you're doing is you are depleting capital at a time -- if anybody looks at what's going on in the marketplace, this is not the time to do it.

Second, is as a shareholder in the Company as well as being a Director, I believe that you should try to maximize whatever you can do for the shareholders of the Company. There are two ways to do that. You can increase the book value, which in theory improves the value of the stock. However, in this market nobody seems to care. What actually is being put in the shareholders' pocket though is hard cash that the Company can generate from its business and pay the shareholders.

The optimum way of treating the issue that was discussed would be a buyback and a cash dividend, both of which, if they could easily be afforded out of the capital position of the Company, would benefit all shareholders.

We as a Board address this issue on a regular basis, as Management said before. It doesn't mean that at some time in the future we might not choose to do that. In the past it was brought up before, as the caller mentioned. We made the right decision by not buying back the stock. All that would have happened is we would've depleted our capital at a time when it's capital is king. Everybody in the investment business knows that.

So we've held onto that capital, we've paid a good return in cash during that period of time to shareholders, which they've realized. And even though the price of the stock depreciated substantially at one time on the basis of the cash that we were giving shareholders, they were getting an 18% return.

And last but not least, I think the most important point is, in any business that you have, there's an infrastructure in the business. If you attempt to pay out your capital and do not maintain enough capital in the business to grow that business, you are painting a scenario where the company won't be able to earn enough money because you're going to shrink the revenue. This is not what we intend to do.

So all that said, I just wanted to clarify that issue a little bit, give some of our thinking. Perhaps this helps. And this comment does not mean that at some time in the future the Board might not decide to buy back stock as well as pay a cash dividend.

I hope this helps everyone.

Richard Carlson, RCS Asset Management.

I appreciate the Director's comments on the thinking on the buyback. I was Director of Crum & Forester for many years, and we sold our company, and when we sold the company, we sold on a basis of multiple to book value plus earnings and some other metrics. And on many, many occasions we would go in the market when it was selling below book and buy shares back, and the insurance cycle is of course up and down. It just depends what the discount is to book.

And you don't have to use all your capital. You only have to use what you are paying out in dividends. That grows book by $1.07 just using your dividend money for one year.

So I understand where you are coming from, but there's nothing to say you can't do both.

And you also mentioned that nobody would care about your stock price. I'm not -- we don't care about the stock price. We only care about fundamentals of the business and book value. The stock price will take care of itself.

You probably have the lowest price to book right now of any insurance company in North America. I think you're selling at 20% of book, just a little above 20% of book.

I have a question though. The question is, I noticed your operating expenses were up in the fourth quarter quite a lot over last year. Could you deal with both the salary and wage line, and also the operating and underwriting expenses?

In terms of salaries, I can tell you that we have expanded in the last -- primarily in the last six months of '08 in terms of staffing. We have about 105 total staff here. And a lot of these initiatives that we're working on take time. And not only do you have to develop them and then get regulatory approval, and then you put them out there, and then you write it, and then you earn it -- unfortunately there's a long process there.

I can tell you we have hired staff in the latter half of the year primarily for some of these new things that I think are going to come to fruition in '09.

And in defense of strategy, we could -- we were leaner in the beginning of the year, but I think we may have been -- that's the leanest we've been in years, and that was leaner from -- really when we saw our premium decreasing in '07, our staff count was probably as high as -- I would say 135, and it went well below 100 down to 90 some odd. But right now we're at about 105, and we are planning growth.

We're in a -- in a hard market unfortunately these expenses, they hit you, but we think we're doing the right thing with these people with our marketing initiatives. We're actually paying more commission to our agents than we ever have. We are paying what we think to be very -- more than competitive. I shouldn't say more than competitive. Very competitive in the marketplace.

We -- on our homeowners we were paying as low as 8%. We're paying 12%. So I feel that we're in a good place there. We're spending money wisely to build the business.

Are you still there? Do you have another question?

No, I don't. I don't think anybody is going to fault you for losing money in the stock market last year. Everybody has lost money in the stock market. And the fact you've lost less than some insurance companies -- so I don't think that's really an issue. That's something that's pretty much out of your control.

Hiring a money manager I of course take issue with, but that's your policy. Your chances of finding a money manager who's going to add value is probably one out of three.

All right. Thanks a lot fellows.

[Brian Freeman], Deacon Investments.

A quick question. Just really briefly looking over just the $15 million total market value of your equity with a book value of $9.50 per share and what seems to be a (technical difficulty) going forward, do not see yourselves as the ideal takeover candidate for somebody?

Well, I can tell you I think that we have got a great business here. We've had a tough '08, and I think that a lot of what happened in '08 is behind us. I think that we don't anticipate some of those problems to occur again in '09. I think we are built for growth. We have the infrastructure to support what we're doing. I think we're a strong Company with a strong future.

I can tell you the Board of Directors and the Management work for the shareholders at the end of the day, and we will do what's best for our shareholders. But that's -- we think we've got a strong plan, and we're going to implement it.

I mean, I couldn't agree with you more. And I see a lot of growth going forward. But at the current state right now, if I'm looking outside, if I'm a private equity firm looking from the outside, I see such a small value of the equity and I see such positives going forward, what is there to stop somebody from coming in and liquidating and basically not driving as much of a shareholder return as most shareholders think should be necessary?

It's a free market. People are out there, can purchase shares in the market. They can -- obviously if someone had interest in the Company, the Board reviews that. So we feel strong on our business plan on a go-forward, and we're going to do what's right for our shareholders, regardless, at the end of the day.

We have no further questions.

In closing, I appreciate -- we appreciate everyone calling in and those questions asked. It's been challenged -- we've been challenged in '08. We feel very good about '09. A lot of these premium initiatives as they come online, you know, it can be frustrating that we haven't been able to get some of them online quicker.

And actually I'm just thinking here, the one thing I didn't touch on was our condo program. That's another premium initiative that we're working on, that we've been going back and forth with the state. That can generate a significant amount of premium. That's through a different general agent, and that has very good marketing and underwriting that we anticipate -- it could do $1 million to $2 million a month as it ramps up, after it has a period of time to ramp up.

We feel strong about the future of the Company. We feel that 2009 will be a good year for us, and we appreciate everyone's support. Thank you.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may disconnect at this time.