Fednat Holding Co (FNHC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Federated National Holding Company's first-quarter 2014 financial results. (Operator Instructions). As a reminder, this conference is being recorded.

Statements in this conference call that are not historical fact are forward-looking statements. Without limiting the generality of the foregoing, 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, or the negatives thereof or other variations thereon and similar words or phrases or comparable terminology are intended to identify forward-looking statements.

The 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 expected or forecasted in 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 today, and other filings made by the Company with the SEC from time to time.

Forward-looking made during this presentation speak only as of the date on which they are made, and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statement to reflect new information, future events or circumstances, or otherwise. With that, I would like to turn the call over to Michael Braun, CEO of Federated National Holding Company. Sir, you may begin.

Good morning, and thank you for joining us today to discuss Federated National Holding Company's first-quarter 2014 financial results. I'm joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results for the quarter can be found in our earnings press release. I will go over some brief highlights from the quarter, and then Pete and I will open up the line for questions.

Highlights as measured against of the same three-month period last year include: 166% increase in basic earnings per share; 141% increase in net premiums earned; 127% increase in revenue; 100% growth in homeowner policy count to approximately 134,100 policies; 79% increase in gross premiums written. First quarter 2014 also included $1.3 million in realized gains from the sale of equities. We are off to a great start in 2014 thanks to our continued disciplined underwriting, expense control, and quality customer service to our policyholders and independent agents whom wrote $48.3 million of new homeowner voluntary business during the first quarter.

The expenses associated with our annual catastrophe reinsurance contracts, which became effective in July 2013, is allocated equally over the contract period which runs through the second quarter of 2014. Our rapid growth in earned premium during the fourth quarter of 2013 and first quarter of 2014 has temporarily reduced our ceded premium, quote-unquote reinsurance expenses, to approximately 33% versus a more normalized range of approximately 40% of gross premiums earned. This trend will further continue through the second quarter of 2014 and then should return to a more normalized range with the new reinsurance contract starting in the third quarter.

Our plan remains focused on supporting growth strategies with disciplined underwriting, prudent risk management, exceptional customer service, maintaining strong capital ratios, and enhancing shareholder value. Our overall performance this quarter reflects our ability to manage business in a way that delivers bottom-line results.

With that, we are glad to open up the call to questions.

(Operator Instructions). Ryan Byrnes, Janney Capital Markets.

Congrats on another nice quarter. I had a question on, again, your upcoming reinsurance renewal. I know it's still a few months away, but wanted to get maybe initial thoughts on where you think that could go.

Well, last year we bought approximately $425 million of cover. Our book has, for the most part, doubled over the last year, so we anticipate buying approximately double. There's a lot of numbers that continue to move. And then in terms of the costs, we spent approximately $68 million last year on cat cover, and if you double that, that would be in a flat market what the expected cost is. But clearly there's a lot of capacity in the reinsurance market, and it's believed that rates could go down in excess of 10%.

So, we do anticipate having a savings on our reinsurance program in terms of, let's call it the rate online, but we will also continue to be a big buyer of reinsurance to make sure that we're protecting our policyholders and shareholders. So, we're looking at approximately double last year in terms of the tower. So it could be around $850 million of cover.

And could you guys just mention about what type of retention you guys would look to take for the new tower?

Yes, basically Florida carriers are expected to take no more than 20% of their statutory surplus. Our statutory surplus is approximately $85 million, so we could theoretically go as high as 20%, so let's say $16 million. I believe it'd be probably lower, in the $10 million to $12 million range. Based on the capacity and the pricing, we prefer to have a slightly lower retention and/or more cover on the top of the program. So those are in general numbers where we're at now. We'll know a lot more as we move forward really in the month of June.

Okay. Great. And then quickly moving to the expense side. Obviously, there's been some benefit from the earned premium earning through for this quarter, and, obviously, it sounds like second quarter as well. But in light of reinsurance costs potentially coming down 10% plus, I just want to see how that impacts the third and fourth quarter of 2014. I know you guys mentioned 34 to 40, but will that 40 be impacted at all by the -- or how much can that be impacted by lower reinsurance renewals?

I'll give you more general statement. Pete can go in far greater detail, but generally, all companies that operate in Florida have the exact same expenses. And those are three expenses, which is catastrophe, reinsurance, AOP or non-cat losses, and acquisition. And we're all regulated entities, and really you're allowed to make what's basically an underwriting profit of around 4%.

Now, it gets more complicated than that because of there's other fee incomes and things like that, but generally 40% is where a lot of carriers tend to be. Some can be 45%, 50%, depending on different things in the marketplace, but you really fill out the rest with AOP, which can be low 20s. And you add LAE two that you can be in the high 20s. And then acquisition can be mid to upper 20s as well.

So, basically that's -- we expect a more normalized Q3 or Q4 as our increase in reinsurance expense is amortized in our book of business.

Okay, great. And I'll squeeze in one more and then I'll hop off. Growth in premiums, just wanted to see, on a weekly basis, where you guys were in the quarter and how you were trending -- or how you guys can trend in second quarter as well.

We wrote $48.3 million of new business in the quarter, so if you divide that by 13 weeks you're looking at around $3.7 million a week. As it clears through underwriting we might lose, let's say, 10% of that. So let's say roughly $3.3 million, $3.4 million. There are some weeks we get close to $4 million, over $4 million, but we're really not trying to write a lot of business. We're inundated with volume of quotes. We only bind about 10% to 12% of the quotes we give out, and we did over 200,000 quotes in the fourth quarter and into the first quarter another 200,000 quotes. And that's how the second half of 2013 was as well.

There's just an incredible amount of business that we are looking at, and it's because of the service that we provide our agents. Agents are very comfortable placing business with us. So, I don't see anything changing in the future. The market can change on a moment's notice. Competitors can change their pricing, be more aggressive. There's a lot of things that could impact it, but we anticipate the volume to stay steady at this point. But we're not specifically targeting that number. We're writing the business that we're comfortable with and it just so happens to be in that range right now.

Okay, great. Thanks for the answers, guys.

Jon Evans, JWest, LLC.

Can you talk a little bit about your success out of Florida? So you talked about going out of Florida a little bit, and I was hoping to hear some more insights about that.

Sure. We're clearly a Florida company. We are branching out of Florida very, very slowly. I'm a firm believer -- because we know Florida and do a very good job here, that really you can't assume you know other states in the same way. There's a lot of peculiar markets within states. You have to be wise in what you're doing. In many cases when you have a dislocated market, it can be easy to write premium which can come back to haunt you.

So, we're very slow in terms of expansion. Louisiana is where we're writing property outside of Florida. That's coming in at about $100,000 a week of premium. That's going to be immaterial for the foreseeable future. I anticipate that we will be in South Carolina by the end of the year with homeowners, and we're looking at some other states as well into 2015. But that will all be in a very slow rollout.

In terms of our -- we do have private passenger auto which we write in Florida and Texas. That will grow slightly as well, perhaps in another state. But immaterial in terms of our whole book of business. And CGL, which is approximately a $10 million book of business, and that's primarily Florida. But we do write some in Texas, Louisiana, and Georgia. Once again, I anticipate growth of that. But when you compare it to homeowners where we wrote $48 million in a quarter of just new, those numbers are going to be immaterial for the foreseeable future.

And then just a follow-up. Last year, because reinsurance was relatively inexpensive for you, you took a different strategy and you wrote pretty aggressively in Q3, relative to your normal seasonality. Can you talk a little bit about your thought process about this year's third quarter? And with where pricing is, do you think potentially you'll have the same strategy?

Yes, generally, reinsurance impacts the third quarter more difficult than the other quarters because you are essentially paying for coverage that you're not earning out on your premium as quickly. But as long as we're buying the reinsurance at more reasonable rates, which we did last year and what we're doing this year, you don't have that penalty of writing business in the third quarter as much. So, to clarify, we always believe what we're writing is profitable but sometimes it can hurt you in the short term.

Last year we wrote through the third quarter and this year we're going to be writing through third quarter as well as long as that reinsurance comes through as we anticipate. So, I don't see us slowing down in the second and the third quarter in terms of writing new business, but once again, market conditions can change based on other competitors' actions and we would only write the business we're comfortable with.

Got it. And then the last question I have for you is, is you talked about the tremendous amount of quotes that you're putting out. Can you just help us understand the competitive dynamic going on in Florida? I understand it's always competitive; has it gotten more competitive, less competitive, it's the same? Can you talk about pricing, et cetera?

Yes, the pricing -- we have a rate file pending with the state of actually pretty close to zero, so we haven't -- we took rate in 2012 of 4%, zero in 2013, and I anticipate zero in 2014. Now, that's an overall, so there is movement behind that, some areas, some lines of business, and so on. But the overall, zero. Generally speaking, our rates are competitive and we are a preferred carrier and, as I say a lot times to people, when you fly on an airline or you pick a hotel, everyone has their preferred company they like to do with. And as long as the price is competitive, that's where you're going to go. Whether it's an airline, hotel, whatever it may be.

If the price is out of whack you're not going to do it. So as long as we're competitive -- we have a great relationship with our partner agents. We're nothing without our partner agents, and that's how we treat them and we feel that they reciprocate that by entrusting their business with us. And with that we typically get the pick of the litter. We get to quote on a lot of business. And I think that we're competitive throughout the state. I don't see anything significantly changing in the foreseeable future.

Some carriers may go up, some may go down, some may stay flat, but in the current marketplace we're very competitive.

Thank you.

William Meyers, Miller [MAG].

I would just like to -- I think you already answered this, but I'd like to separate out and make sure I understand. You said you're going to be writing business at the same level, more or less, in Q3 and related that to reinsurance. But in past years you had talked about sometimes writing less during wind season. And you've also talked about the quality that you are able to pick at this time is better. So, I just wanted to check specifically on the wind season. Are you not -- are you going to continue to write policies despite that question? Thanks.

That's a good question yet again. Basically to answer it a different way is, we're projecting, let's say, our 1 and 100 to be -- where we are buying the reinsurance to be approximately $850 million at September 30. So when we buy -- let's just say for just simplicity, that our book is at $700 million our $750 million in June and July. We are buying additional reinsurance that costs us money, so writing during the season penalizes you because you are incurring 90 days of expense, yet theoretically you may only be -- you might even write a policy on September 28 and you only got two days of premium.

So, once again, that policy by itself is a profitable policy; in that quarter it can be punitive. But the answer to that is we believe that the reinsurance out there is ample, and we believe the pricing to be fair, so right now we anticipate writing through the third quarter, not slowing it down at all.

Okay. That's all for me, thanks.

Doug Ruth, Lenox Financial Services.

Mike and Pete, you've done an absolute fabulous job. I congratulate both of you.

Thank you.

Thank you.

I'll ask Pete a question. Could you talk a little bit about the stock and bond portfolio and what changes you might be making to it?

Well, over the last six or nine months, Doug, we've reduced our exposure to equities pretty significantly. I think we were at, maybe a year ago, 20% in the equity asset class, and now we're down to 12%. We continue to move out of equities into fixed income. We've also now have a sizable, $60 million to $70 million, muni portfolio within the fixed income, so we're going -- starting to move more heavily towards tax exempts.

And what duration are we buying in the bond portfolio, for the most part?

The duration right now is at about 3.74 years, down from about 5.5 years. And, again, that was -- eventually here rates are going to move up and we didn't want to be caught taking a hit to comprehensive income. So we've shortened the duration. We are sacrificing yield; however, I think we are protecting the principal a lot better.

I think you're doing the exact right thing.

Thank you.

Could you talk a little bit about the Allstate relationship and what's happening with that?

Allstate is a great partner of ours. Their agents produce a good amount of our business, and there's really nothing new to report since the last quarter. We are committed to all of our agents. The majority of our business comes through independent agents, and Allstate is our largest captive force in that regard. They are independent from us, but they are part of the Allstate Corporation, obviously. But it's a good relationship and continues to go well.

Okay. And could you talk a little bit about what you're hearing from Citizens? Maybe what the size and any kind of --?

Well, they peaked at around 1.5 million, 1.6 million policies about a year and a half or so ago. They are under 1 million policies now. [De-pops] are still possible. As a matter of fact, there's a company doing one in June, I believe, targeting about 10,000 policies. You can still do de-pops, but really the clearinghouse is slowly coming online, and I think the clearinghouse is a great idea for Citizens, the corporation as well as the citizens of the state of Florida.

But the truth is, Citizens is dominated by tri-counties, which is Dade, Broward, Palm Beach, and Tampa-St. Pete, which is Pinellas-Hillsborough. And the two counties north of that, which is Pasco and Hernando, which have significant exposure to sinkholes. So, we haven't participated in de-pops because that's business that we are very comfortable writing on a voluntary business where we underwrite each risk of very carefully. And the rest of the state, you just don't get that exposure from Citizens as much. So we don't see the value of de-pops there. And that's why we're so committed to our partner agents, is to ensure that we get quality business that we can review one at a time.

So I think Citizens has seen their policy count decrease significantly and will probably trend more in that direction, going down. How low can it get? That's a guess, I'm going to guess, maybe 750,000 policies. There's probably around, just rough numbers, maybe 250,000 [risks] that are a challenge that would probably not get taken out by anyone for AOP reasons, and probably another 500,000 that may not work from a wind perspective. So, I don't know if they can go below 750,000 or not, but that's just a rough number that I've got in my head.

Okay, that's helpful. And what about the employee count? Are you hiring additional people in 2014?

Yes, yes. We're up to -- the last count I have is 182, but I know it's higher than that. We had six people start this week as well, so we've got open positions if you know anyone in South Florida, Doug. We've got a lot of great people and we're continuing to expand to service the business.

And the people that you're hiring, in what capacity are they generally working?

Well, really everything, primarily underwriters and adjusters, but all parts of the building have expanded, including IT. Every function really, just because of the amount of volume that we're handling. So, and I anticipate probably at the end of the next quarter we may have another 20 people on board.

Wonderful. And are you keeping that tri-county policy count below the 19%?

Yes, we are right at around 19% still, correct.

Wonderful. Okay. I just think you folks have done just a beautiful job and it's a real testimony to you, Mike, and you, Pete, and the whole organization. And thank you for doing what you've done.

Well, yes, Doug, there's a whole group here and, yes, everyone works very hard so thank you for the recognition.

Pat O'Brien, Fox Asset Management. (Operator Instructions).

The 10% or 12% that you actually bind, the comment you made earlier, can you tell me about the other 88%, 90%. Why are they going away? They don't like the price or you refused to quote?

Basically, we have around 50% that we believe our price is inadequate, and we're not comfortable putting a policy out there. And then the other 38% to 40% is business that we've quoted but that hasn't come to us. Maybe it's a renewal with another carrier, and it's not much of a savings that they're willing to do the paperwork and the underwriting to do move it over. Or maybe they can get a cheaper policy elsewhere, either in the admitted or maybe with Citizens, or even in the E&S market, whatever it may be.

But we consistently, as we've been tracking this for the last four years or so, we typically bind -- and really doesn't move up by the range of 10% to 12%, in that range. Some months it's a little bit lower, but 10% is where it tends to hover.

Okay. The description of the Citizens, you said 1.5 million or 1.6 million could go to 750,000 because nobody would take the 750,000. That sounds they reduced the policy by half, but they haven't really reduced the risk, have they?

Well, I think Mr. Gilroy has done a phenomenal job with Citizens, and I think downsizing it was the right thing to do. So in terms of their aggregates, in terms of their PML, in terms of their exposure, it's definitely down. But there is, of course, policies that are difficult to work in the admitted market or even in the E&S market, and there will always be in the insurer of last resort, which is what Citizens role is, those are just rough numbers that I'm putting out.

It could be, if the rate environment improves, I guess that could be much lower number that Citizens would have -- but those are just rough numbers that I'm giving you.

Okay, thank you.

Samir Khare, Capital MAG.

I missed some of your opening comments, forgive me. I just want to talk about how you go about setting your initial AOP loss ratio. Just given the tremendous amount of growth, are you taking a conservative stance? Can you just talk about that a bit?

Yes, Samir, it's Pete. We basically -- and I'm giving you an approximate here. So on our earned our business we're reserving around 30%. That's probably trended up the last year 2 or 3 percentage points, because of the rapid growth. Right? So to be conservative, as we've doubled the book now almost 2 years in a row, we've taken a slightly more conservative approach to our reserve.

Okay, great. And is there any additional counties that you are targeting right now and actively putting agents in? And, again, I may have missed it, but are you guys up and running with the clearing house?

We are part of the clearing house, but the clearing house has rolled out a little bit slower than expected. They wanted to go live January 1, and ultimately there was only two or three carriers that went live. And I believe we went live in, I'm going to say, roughly April 1. And that's on new business. And then on renewal -- so, I believe a total of maybe 20 carriers are going to roll into that on new business and maybe 20 on renewal.

But I don't anticipate that to be a big impact on our business, and the reason for that is, as I said earlier, Citizens' business is really concentrated in the tri-county, which is Dade, Broward, Palm Beach, and then Tampa-St. Pete, which is Pinellas-Hillsborough. And also just north of that, Pasco-Hernando, which has sinkhole exposure. So, writing in the other parts of the state is much more competitive, and we really concentrate on our partner agents throughout the entire state. So it's not as difficult to write in those areas where Citizens is.

So we are participating. We are looking for opportunity to work with Citizens and help them reduce their exposure, but I really don't think that's going to have a material impact on our business.

Samir, the number I quoted -- the 30% I quoted you was for homeowners. If you blend in and weight CGL, it's probably 35%, but the homeowners is 30%.

Okay. And then a question on if you guys are targeting any additional counties and importing agents actively there?

We're all over the entire state. Ironically enough, we have exposures in 66 of 67 counties. Lafayette County has 8000 people, and for whatever reason we don't have a homeowner policy there yet. Not avoiding it. But we're all over the state, but really tri-county is around 19% of our exposure. A significant amount of our exposure is on the West Coast, which is from Tampa-St. Pete down to Lee-Collier. And then also north from Martin up through Volusia. We have a lot more exposure up in Orlando and Jacksonville as well, and then obviously the Panhandle, we've got a significant -- and our book is really a very well diversified throughout the entire state.

Okay. And just on the Panhandle, are you guys expecting flood losses from the -- well, I guess you guys don't cover flood, but (multiple speakers) just from the flood?

To answer that, right now we have around 50 claims in. There are two types of policies. We do write flood, and that's 100% ceded to NFIP, which is the federal government. So there is exposure there, but it's 100% ceded. And that's basically -- flood is rising water. Separate from that, on a homeowner policy, water intrusion that typically comes from a roof or perhaps windows, that would be the exposure that we would have on a lot of rain like that. And they had around 20 inches of rain. So, we've got around 50 claims in so far.

Typically in that situation you're going to have drywall and things like that that need to be replaced inside the house. So, once again, I don't think that will have a material impact on the quarter, but that's where we're at right now is around 50 claims.

Okay. And you talked about your 12% bind rate. You talked about the 88% turn down rate like the other gentleman was asking about. Do you get policy requests for zip codes that you've closed down at this point? Or do your agents pretty much know that -- they don't want them here so they don't send them to you? (Multiple speakers).

Well, clearly agents -- you learn the sweet spots, right? I said earlier that people like their airline and as long as their airline is competitive they are going to fly them, and I'm assuming you have someone who lives in New York -- I'm sorry, in Atlanta, they're going to typically fly Delta because you learn the routes and so on. So a lot of agents know where we are competitive and the type of risk where we're most competitive. But we always tell them, go ahead and put it in, we'll take a look at it. There's no harm in taking a look at it. We're very happy to do so.

In some areas it's tougher to get a policy than others because we -- exposure and aggregates and things like that. But we're happy to look at any quote that an agent will share with us.

Okay. And then finally, do your policies currently sub-limit water damage that's been a problem in the state? And if not, is that something you are seeking to do?

Yes, no, we've had that for a number of years. And that's not on all policies, but basically there's a sub-limit that you can have, and then there's endorsement that you buy. Yes, there's -- our number one loss, as is, I would assume, most carriers, is water losses. And water losses is primarily attributed to pipes, whether it's washing machine, a dishwasher, hot water heater, toilet, sink, whatever it may be. And we have a very proactive response when we get those type of claims in to facilitate remediation as quickly as possible. We want to ensure there's as minimal disruption to our policyholder. And that's the most frequent claim by far.

Okay, great. Thanks, guys. Congratulations again.

Arash Soleimani, KBW.

Just had a couple quick questions. Just looking at some of the TIV and policy-in-force data, I think shows you guys have about, on average the homes you insure, about $450,000. Is that accurate?

Well, you're talking about in total exposure? It really varies. Right now we have different types of policies, so we have a HO-3, which is a single family, and we'll write -- most of those homes are in the $300,000 Coverage A; that's a structure range. Let's say $250,000 to $300,000. And then other coverages double that, basically. So when you look at what's called B, C, D -- which is detached structure, contents, as well as ALE, you can double that. So your statement could go up to $500,000 or $600,000 on average.

We do right homes in excess of TIV, which is the sum of all coverages, $6 million, $7 million, $8 million. Now, we only retain no more than $500,000 on those. We cede that off to one of our reinsurance partners. So if we had a $6 million, $7 million, $8 million fire on a nice house, we would basically be reimbursed and our exposure is capped at $500,000.

But then we have other lines of business. We have what's called an HO-4, which is a renter's policy, and that's just contents. We have an HO-6, and those limits our significantly less than an HO-3. Those can be $25,000 to $50,000, and that's basically a condo where your drywall in and you've got some contents and liability exposure. And then our DP-3, which has generally lower limits than our HO-3. And that's much more -- that's a basically unit rented to others in most cases or a trust or LLC may own it.

So, your number is kind of right, but there's a lot of pieces behind that.

(inaudible) I'm looking also at Pasco and Hernando. And it looks like the TIV per [pit] there is significantly lower than the other counties, so is that because you are doing more condos or renters there, or I just wanted to --?

Yes, we do. We have more HO-6's out there, absolutely. I'm sorry -- HO-6 is a condo unit, yes.

Okay, thanks. And my next question I just wanted ask -- in terms of capital structure, why is it that you've chosen to have no debt in the capital structure?

Well, basically, you know we raised capital during 2013, and that was approximately $30 million. And we believe that -- we always -- well, us as a Board, as a management team, constantly reevaluate that capital needs of the Company. But as an insurance company you can increase your leverage with debt, but he can also increase your exposure, specifically when the market turns. So that's just something that the Board has been very comfortable with.

I think that -- and basically the reason we've shied away from debt for the reason we needed to raise the capital last year was to grow the -- is for -- our insurance company's growth. Well, once you raise debt and you put that debt into surplus, you're not -- the Department of Insurance is not going to let you pull that money back out to repay that note. So if you have a five- or seven-year balloon you might have interest rate risk because you're going to have to potentially refinance that if you haven't generated enough fee income outside the insurance company to pay the debt back.

So, if we're raising money for M&A, debt is certainly a possibility. But when you're raising money to fuel the growth of the insurance company, as Mike said, that gets a little risky because you have interest rate risk and such.

And to go a little farther on that, there's two things you can do. You can really do quota share and you can take on debt. And those things can get out of hand very quickly. And I will say that with great pride. Our Board, our management team, believes that we've got probably the cleanest balance sheet in the state. Now, we could amp up returns by doing quota share and debt, but we're very comfortable where we're at. We believe it's safer and we're still able to generate the returns that our shareholders are expecting, but we believe it's a safer way to protect our policyholders.

(Multiple speakers). I was going to mention the equity that we raised last year was extremely accretive and as a Board and as a management team we would not raise equity if we did not think it was going to be accretive.

Okay, great. Thank you so much for the thorough answer.

Pat O'Brien, Fox Asset Management.

You had a lot of operating leverage in this quarter versus last year. I see 34% expense ratio versus 47% last year. How far can that go?

Pat, I think that last year -- when we look at the ratio, the way I do it is we take -- we look at the expenses over revenue, but we exclude loss and loss adjusting expense. So if you just look at operating and underwriting, salaries and commissions, last year same quarter we were 40%. This year we're at 30.49%. As Mike said, a lot of that leverage that you are seeing in Q1 and -- that you will see in Q2 is because the business we've written since October, we haven't bought reinsurance on that business yet.

So, our earned premium is higher because we're ceding a little less until we get to our new reinsurance contract. We've said on previous calls that we target somewhere between 36% and 40%. You are seeing great leverage in the first and second quarter, but as we said -- as Mike said in the press release, I think that that 30% is going to inch back in the third and fourth quarter to 35%, 36%, which is a more normalized rate for us. 36%.

And to add -- to go a little deeper on that as well, we run our business under the assumptions of normalized expenses. We're not trying to game the system. We're trying to run the business correctly, which just so happens with this rapid growth is giving us additional leverage. However, that's not our intent. Our intent is to write the business that we believe is correct. And we're just experiencing tremendous growth at this point, which is definitely giving us additional benefits.

Yes. And as far as that ratio goes, the 40% from last year, I think that we'll stay below that 40%. I think what we are -- our leverage is much better now. We're operating -- we have more policies. The leverage is a lot better than it was last year. We're at capacity now.

Right, right. I can see why you get a sawtooth during the year because of the timing of the reinsurance and then the growth of new insurance without additional reinsurance costs, but still it's the year-to-year number of that I was looking at, not the seasonality. But whatever. How about a premium to surplus? How far can you go? How much more room do you have before you have to raise more equity?

You have a couple questions there. In terms of gross written premium, generally we're at 3 to 1. You could really be at 5 to 1 or 6 to 1. More in a flat book because there's a lot of penalties in what's called RBC, risk-based capital, with growth. So we're generally at 3 to 1. And then in terms of -- if we need additional capital, that something our Board looks at on a continuous basis.

We don't want to deploy -- raise capital that we would not be able to deploy and use efficiently, so that something we always evaluate. And we were happy that we raised the $30 million that we did last year because we were able to put it to work.

Okay. Is the statutory surplus in the note that you guys (multiple speakers)?

It wasn't a note. It was $30 million of equity and that we raised, and then of that we put $16 million into the insurance company. The insurance company ended the year with approximately $77 million of statutory surplus and ended the first quarter with approximately $85 million of statutory surplus.

Okay, but you have the option of downstreaming some cash from parent?

There's additional capital that could be downstreamed, yes.

Got you. Okay. Thanks, guys.

(Operator Instructions). And I am seeing no further questions at this time.

All right. Well, Pete and I would like to thank everyone who has dialed in or clicked in online to hear the call. Appreciate the calls and the questions as well. We're very proud of what we do here. We have an incredible team that's very proud of what they do day in, day out. And our goal is to do more of the same, which is writing good business and providing excellent customer service to our agents and to our insured. So, if there's further questions in the future you can always reach out to Pete or myself. And thank you very much and have a great day.

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