Heritage Insurance Holdings Inc (HRTG) 2015 Q4 法說會逐字稿

Good morning, and welcome to Heritage Insurance Holdings' fourth-quarter and full-year 2015 financial results conference call. My name is Mike, and I will be the operator today.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Ms. Melanie Skijus. Ms. Skijus, the floor is yours, ma'am.

Good morning. The fourth-quarter and full-year 2015 earnings release can be found in the Investor Relations sections of heritagepci.com. The earnings call will be archived and available for replay. Today's call may contain forward-looking statements. These statements, which we undertake no obligation to update, represent our current judgment, and are subject to risks, assumptions and uncertainties.

For a description of the risks that could cause our results to differ materially from these described in the forward-looking statements, please refer to our Annual Report on Form 10-K, and other filings made with the SEC from time to time. With us on the call today are Bruce Lucas, Chairman and CEO, and Steve Rohde, Chief Financial Officer.

I will now turn the call over to Bruce.

Thank you, Melanie. I would like to welcome all of you to our fourth-quarter and full-year 2015 earnings call. Before we address our quarter results, I would like to take a moment to thank all of our employees for their dedication and commitment to the Company. I'd like to start by addressing the acquisition of Zephyr Insurance Company. I'm very excited to announce that the Form A acquisition filing with the State of Hawaii Insurance Division has been approved, and we expect to close the Zephyr Insurance transaction very soon.

We expect the acquisition to be immediately accretive to the second-quarter numbers, but not to have any material impact on our first-quarter results. To provide a quick recap, the acquisition provides Heritage with an immediate presence in the State of Hawaii, and we expect it to produce some reinsurance synergies within a year. As we have previously stated, we expect net income contribution of roughly $13 million, before reinsurance synergies. The Zephyr team understands the Hawaii market, and we are thrilled to welcome aboard such a solid team, as we work together to drive new opportunities with the Zephyr brand.

Now on to the quarterly and annual results. We have continued to post solid financial results, while we focus on growing our voluntary book of business, assuming new policies from Citizens and expanding into new states.

We achieved record voluntary production in commercial residential premium in the fourth quarter, and added $20.4 million in new business in this line. Premiums and policy count also increased significantly year over year in the fourth quarter, and some of our key fourth-quarter metrics include: a 34% increase in gross premiums earned, as compared to the fourth quarter of 2014; a 253% increase in voluntary commercial residential premium, as compared to the fourth quarter of 2014; a 23% increase in total policy count, compared to the fourth quarter of 2014; and we declared the Company's first dividend of $0.05 per share in the fourth quarter.

And for the full-year 2015, the Company had another record year. We were able to grow gross premiums earned by 68%, and more importantly, grew net operating income by an incredible 96%. Some metrics for the full year are: gross premiums written were $586.1 million, which represents an increase of 34%; gross premiums earned were $524.7 million, an increase of 68%; net income for the full year was $92.5 million, an increase of 96%; the combined ratio, on a gross basis, was 74.9%, compared to 79.4% in 2014; and stockholders' equity at December 31, 2015 was $356.5 million, an increase of 40% compared to December 31 of 2014.

We were fortunate to have a quiet hurricane season, but work has already begun to enhance our reinsurance coverage for the 2016 season. We recently closed on a $250 million catastrophe bond that will drop our Florida hurricane catastrophe fund participation to only 45%, and will lock in favorable rates for the next three years. We anticipate a reduction in our reinsurance rates, but it is too early to determine the amount of the reduction in 2016. With respect to daily claims activity, we continued to have success in handling claims, by using our water mitigation division and BRC restoration specialists.

Our internal divisions have responded well to a series of six extreme weather events in the first quarter, five of which were tornadoes. While these events could add as much as 8 points to our first-quarter 2016 loss ratio, as compared to the fourth quarter, the impact would have been substantially higher without our vertically integrated mitigation and construction divisions. We believe that our rapid response to these events is a great example of our unique ability to capture losses and reduce claims after a severe weather event.

For 2016, we're focused on streamlining our platform and resources to serve new markets. We are encouraged in North Carolina, as we sign on new agents and work with our trusted partner, National General Insurance, to penetrate that market. We are pleased with the progress we're making in North Carolina, which is ahead of schedule. We are also licensed in South Carolina, and have been approved in Alabama and Mississippi, and we plan to roll out these states later this year. We intend to hit the ground running with Zephyr, and we are working toward a seamless integration with their team.

I look forward to answering your questions at the end of our prepared remarks, and I will now turn the call over to Steve Rohde to recap our financial results. Steve?

Thank you, Bruce, and good morning. Gross premiums written for the fourth quarter were $167.5 million, a decrease of 8% year over year. This was made up of approximately $136 million of direct premiums written, and $32 million of assumed premiums written. Assumed premiums written experienced a sharp decline in the quarter, from $103 million in the fourth quarter of 2014, related to fewer Citizens' take-outs, while our direct premiums written grew 72% year over year.

Related to our assumed business, we participated in Citizen take-outs during October, November and December, resulting in approximately 22,000 personal residential policies, and 500 commercial residential policies assumed. We netted approximately $50 million of annualized premiums from these three assumptions. As a reminder, we only record the unearned premium that is transferred from Citizens as assumed written premium. The opt-out rate during the quarter was 67%, reverting back to the higher opt-out rates we experienced earlier in 2015.

Commercial residential assumption opportunities from Citizens were limited this year, as expected. While in the fourth quarter of 2014, we assumed approximately $85 million of commercial residential annualized premium, we assumed only $8 million of annualized premiums during the fourth quarter of 2015. Last year, we disclosed that we did not expect there would be a significant number of commercial residential policies in Citizens that would be attractive to us, after such a large assumption during the fourth quarter of 2014, and that has proven to be the case.

And the commercial policies that we did assume in the fourth quarter of 2015 were smaller in size, with an average premium of approximately $15,000, compared to $35,000 for the average premium for our total commercial residential book of business. Regarding personal residential for the full-year 2015, we assumed approximately 68,200 policies from Citizens, representing $139 million of annualized premiums from 10 take-outs throughout the year. In 2014, we assumed approximately 57,600 policies from Citizens, representing $120 million of annualize premiums, from seven take-outs throughout the year.

In 2014, however, approximately 71% of the policies were assumed in the fourth quarter, while in 2015, the take-outs were spread out more evenly, with only 32% assumed during the fourth quarter. Our total personal lines policy count increases during the quarter to approximately 254,000 policies, an increase of approximately 16,000 policies from last quarter. Our voluntary personal lines policies increased by almost 3,500 policies during the quarter.

Our total premiums in force at December 31, 2015 were $591 million, an increase of almost 20% from the same quarter one year ago, an improvement of 9% from the end of the third quarter. Commercial residential premiums in force were approximately $113 million, an increase of almost $23 million from the end of the third quarter. This level of in-force premium resulted in $143 million of gross premiums earned in the fourth quarter of 2015, compared to $107 million for the fourth quarter of [2014].

Our ceded-premium ratio was 32% for the fourth quarter of 2015, compared to 23.5% for the fourth quarter of 2014. The increase in the ceded-premium ratio was primarily attributable to the inclusion of commercial residential and our 2015 reinsurance program, which has a higher cost of reinsurance, and the smaller amount of premiums assumed from Citizens during the quarter, relative to the fourth quarter of 2014. $32 million of assumed premiums written versus $103 million written in 2014.

A good measure of the impact of the fourth-quarter Citizens' assumptions on the ceded-premium ratio is to compare the fourth-quarter ratio to the third-quarter ratio. The third quarter has the best matching of gross premiums earned and ceded premiums earned, due to the timing of the annual renewal of our catastrophe-reinsurance program on June 1. The fourth-quarter 2015 ceded-premium ratio was 3.8 percentage points lower than the third quarter of 2015, while the fourth quarter of 2014 ceded-premium ratio was 7 percentage points lower, resulting from the larger fourth-quarter assumptions in 2014.

Our loss ratio, as measured against gross premiums earned, was 27.2% for the fourth quarter of 2015, compared to 25.7% for the fourth quarter of 2014. The loss ratio was favorably impacted by the inclusion of commercial residential business, but was unfavorably impacted by the increase in frequency of losses reported in personal residential business, primarily water-related claims. Frequency was particularly high in Broward and Miami-Dade counties during the quarter.

Commercial residential continues to perform well, and after one year of being in the business, our reported loss ratio of commercial remains in the low single digits. During the quarter, we increased IBNR, our incurred-but-not-reported reserve, by $6.4 million, to $46.9 million. IBNR represented approximately 56% of our total-loss reserves at December 31, and accounted for 4.4 points of the loss ratio for the quarter, compared to 5.9 points for the fourth quarter of 2014.

Our expense ratio as a percentage of gross earned premiums was 20.3% for the fourth quarter of 2015, compared to 25.1% for the fourth quarter of 2014. The year-over-year improvement in our expense ratio is primarily related to two items. The first is the Sunshine State Insurance Company policy acquisition fees that amortized during the fourth quarter of 2014. All the fees associated with the SSIC were fully amortized as of June 30, 2015, thus there was no impact to the fourth quarter of 2015 ratio, while it increased the fourth quarter of 2014 gross expense ratio by 2.8 points.

Second, stock-based compensation accounted for 0.5 points of the expense ratio in the quarter, compared to 3 points for the fourth quarter of 2014. Also impacting the expense ratios for both the fourth quarter of 2015 and 2014 were assumed earned premiums from Citizen take-outs, where there are no acquisition expenses associated with the premium. This improved the Q4 expense ratios for 2015 and 2014, by approximately 2.8 points and 3 points, respectively.

Our combined ratio as a percentage of gross premiums earned was 79.5% for the fourth quarter of 2015, compared to 74.3% for the fourth quarter of 2014. There were several items I previously mentioned in the ceded-premium and expense ratios that resulted in about 3.7 point unfavorable net impact on the combined ratio. The most significant was the impact of the larger Citizens' assumptions during the fourth quarter of 2014. In addition, we had approximately 1.5 points unfavorable result from our loss experience, when compared to the fourth quarter of 2014.

Our fourth-quarter combined ratio of 79.5%, when adjusted for the timing benefits of Citizens' assumptions, resulted in an underlying combined ratio of approximately 86%, 1 point higher than the guidance we have given in the past of an expected combined ratio, on a gross basis, of 85%, in years in which we have no hurricanes. Net income for the fourth quarter of 2015 was $20.2 million, compared to $19.7 million for the fourth quarter of 2014. Net income for the full year of 2015 was $92.5 million, compared to $47.1 million for 2014.

On the balance sheet side, stockholders' equity increased to approximately $357 million, compared to $255 million at December 31 of 2014, an increase of approximately 40%. Statutory surplus in our insurance company subsidiary at December 31 was approximately $216 million. Our invested assets at December 31 were $400 million, with approximately $364 million invested in bonds with an average credit quality of A, and a duration of approximately 4.1 years.

Our cash position increased to $235 million, in anticipation of the closing of our acquisition of Zephyr Insurance Company, as well as reinsurance payments due in the fourth quarter. Our total assets were $837 million at December 31. We reported a solid quarter and year, and believe we're well positioned as we enter 2016.

And with that, Bruce and I are now available to take your questions.

(Operator Instructions)

Mark Hughes, SunTrust.

This is actually Kevin Alloway on for Mark Hughes today. You mentioned that you were enthusiastic about your North Carolina production so far. Is that -- if I could get a little more color on that, if you could, please? Maybe distribution, is it pricing? And then the future trajectory of this?

This is Bruce Lucas. We just rolled out the North Carolina program in early to mid February. We beta tested our system, with a handful of agents. And as of the end of February, we had just signed up over 100 agents, with probably 150 to 200 more to go.

We wrote approximately 100 policies in the month. We were expecting to write about 10 to 20. We are definitely seeing an increase in quoting activity, and an increase in bound policies on a daily basis, as we continue to roll out the North Carolina initiatives.

And we are excited about where we are on that front. We think there is a huge market opportunity there, particularly as it relates to our partnership with National General Insurance. Just for your edification, National General has a large auto book of business in North Carolina, of approximately $300 million in annualized premium.

They do not have a companion homeowner product to go with the auto policies, and that's something that we stepped in, at Heritage, and worked with them to solve. And we are their exclusive homeowners carrier in the state. So we're very excited about the opportunity that cross-selling and increased retention can bring to the table with this partnership.

Okay, great. Thank you. And then, at this point, I know you're not really in other states yet, the ones you're looking at. But do you have any outlook on some good prospects with those, that you are hoping to enter before the end of the year? Anything in particular?

Yes, definitely, the next state that we will roll out is South Carolina, and we already have a ground game in process there, as well. We are finalizing forms and rates with the South Carolina Department of Insurance. We're looking for roll-out there probably in the next 90 days or so.

After that, we will move to some of the Gulf Coast states where we've been approved, mainly Mississippi and Alabama. And we are also pending right now in Georgia and Massachusetts.

Okay, great. Thank you. And then one more, if I can. Are you talking about the strong growth, so far as commercial residential, I guess, can you give a little bit more color on that? Why it's ticking up? What you think the prospects there are for the rest of the quarter, rest of the year?

Yes, so commercial residential has definitely been increasing for us. We came into the market originally, if you go back to the IPO days, we saw this great opportunity, at Citizens, to do what we thought was mainly a one-time opportunity to de-pop, post-IPO, in the fourth quarter. We did that.

We've had some success in taking policies there. There isn't a lot left in Citizens, in terms of commercial residential, that are attractive to us. We've said that since day one.

It's mainly a one-time opportunity there. But we've been building up our commercial residential division. We have easily the deepest bench in the State of Florida.

We have approximately 15 people in that division. We are very active now on quoting. We've had some time to get through growing pains, make sure the system works appropriately, understand the market, and where our reinsurance structures fall into place. So we've seen a large increase in our commercial residential voluntary premium.

It is well ahead of our internal expectations. It's something that we're very proud of. We are running, right now, an attritional loss ratio there of less than 5%.

So it's very profitable business for the Company, and we're excited that the growth prospects that commercial residential affords.

This is Steve Rohde. For the first quarter of 2016 through February, we had added an additional close to $13 million of premium, as well.

Great. Thanks. That's it for me for now.

John Barnidge, Sandler O'Neill.

I have a few questions here, just housekeeping. You said 8 points on the loss ratio, from those events you had cited that have already occurred in the first quarter. Did you say that was 8 points, as compared to the fourth quarter of 2015, or as compared to the first quarter of 2015? And is that on a gross premium earned basis, or a net premium earned basis?

That would be on a gross premium earned basis, and that was compared to the fourth quarter of 2015.

Okay, so that would put you at around a 35% gross loss ratio, which is the highest since you've gone public. Am I correct in thinking that?

Right now, that's what we are thinking.

We've had -- and just so you know, John, we have had five tornado events in the first quarter. And then we had another severe rain event that took place for several days, down in South Florida. The weather in the first quarter has been not the greatest.

It's probably an impact of El Nino. I'm sure that every other insurance carrier in the State of Florida is going to experience the exact same results.

So then, would you anticipate disclosing catastrophe losses, then, when you report?

No. I don't think so, because they would go beneath our retentions.

Yes, these are more -- we're calling them weather-related claims at this point. And through February, it amounted to about 10% of the loss ratio. And in the fourth quarter, it was a little over 2%.

So that's, again, the guidance we're giving at this point -- and these aren't fully developed yet. We're still getting claims reported, and so forth. So -- and not sure, again, what the rest of the quarter is going to look like.

Yes, one thing that's been great from this, John, is that we've been able to really test BRC, and get them out to the disaster sites quickly, tarping roofs, signing up homeowners, doing repair work. No doubt that type of effort will help to mitigate the losses that we experience versus our peer group. So we're excited to actually be able to take that asset, and deploy them after some severe weather events, with great success.

Okay. And then as we think about the ceded premium ratio, prospectively, do you think it will be closer to, say, 32% that you reported in the fourth quarter, on an ongoing basis? Or how should we think about that?

I would think it would be -- when we renew our reinsurance program, it will be in the mid 33% range. And in the second quarter, I think we will see some -- I think it would be in that -- again, similar to what was for the first quarter of this year.

So -- which was about 20%?

No. The premium ratio?

Yes, you're talking about 33%? Or the first quarter of last year?

No, the first quarter of this year. So about 32% for the second quarter, and then going up a little bit the third quarter, when we increase our -- buy our new reinsurance program.

Okay. And as we think about your expense ratio, as you build out more states, where do think that would settle in? And then also, you -- one of your great selling points, as you mentioned, Bruce, was BRC, your vertical integration on claims process. How do you see that developing, as you expand out of states, given the fragmentation in the contractor market?

Yes, I think as we go out of state, John, the number one thing that we think to look at is policy concentration, if we are going to internally scale that model outside of Florida. So you need to have a certain policy concentration, and a -- in one geography, in order to justify having the vertically integrated services.

Until we reach that threshold, that saturation threshold, so to speak, what we need to do is rely on third-party vendors that go through our contractors alliance network. When those vendors go through CAN, we're able to sign them up, use standardized pricing, and get a 10% discount on the work that they perform there. That's what we did early on in the history of the Company, and until we acquired BRC last year, that's what we did on build-back in the State of Florida, which worked very well.

We'll continue with that model outside of the state. Once we hit a large enough policy concentration, we can look to them, go ahead, and deploy some resources in those areas, so that we have true vertical integration in new markets.

And regarding the expense ratio, John, I see our expense ratio, on a go-forward basis, with no benefit of take-outs, being about a 23% expense ratio, of which about 14 points would be on policy acquisition, and about 9 points on G&A expenses.

Okay. And my last question would be, M&A has clearly been a part of your strategy for growth, prospectively. You have Zephyr that you're going to be closing this quarter. How do you think of M&A, going forward, as you digest Zephyr?

Yes, we are definitely still involved in some M&A opportunities. We're going to be selective about the companies that we acquire. Not all of them are going to meet our profile, and it's an issue of, are you getting proper reinsurance synergies?

Do they have a good management team? What does the profile of that Company look like? How can we scale their operations, and increase their top and bottom line?

Those are all things that, at the end of the day, probably knock out 90% of the companies that you look at. We're not going to just spend money on M&A just to do it. It has to make sense and be strategic for us.

There are opportunities out there in the market. We continue to evaluate them. I think where we are right now, between now and, say, storm season, we are focused on locking in our probable maximum loss, locking in our reinsurance ratios and treaties.

If we'd look to do another M&A transaction, that transaction will probably be something that closes, say, at the end of wind season, into the first quarter of next year. That would be an ideal timeline for us.

Thank you, and good luck on the year.

Thank you.

Arash Soleimani, KBW.

Can you -- I don't think I understood before. You say that 8 points of weather losses, that was in the fourth quarter, or year to date in the first quarter?

It's first-quarter loss ratio, we think, will increase as much as 8%. We haven't had -- it's not fully developed yet. We're just giving an estimate through the end of the quarter, but these are events that happened in the first quarter of this year.

Okay. And so can you talk about the fourth quarter? Because the loss ratio did increase, year over year, in the fourth quarter. And in the press release, you said there was higher frequency.

So can you just give a bit more detail around what happened there?

Sure. Our frequency of losses for personal lines was 5.3% in the fourth quarter of 2015. And that compared to 3.6% in the fourth quarter of 2014, so a significant jump there. And severity was very close -- pretty much unchanged from one quarter to the next, both around $10,600.

Frequency in -- particularly in Broward and Miami-Dade Counties, were particular high in the fourth quarter. Miami-Dade was a little over 9%, and Broward was 8.3%. And so that's where we've really seen -- saw the uptick, in particular.

We did have -- Arash, this is Bruce. We did have a severe rain event, in the fourth quarter, in southeast Florida. It lasted several days.

That caused a lot of claims. Some of those claims are coming in now, in the first quarter, and they are included in the six extreme weather events. But a portion of those claims also came in, in the fourth quarter, as well, so that helps to explain some of the uptick there.

Okay. So was any of this -- so was it mostly rain claims? Or were there -- was it just water claims, in general or -- you know what I mean? Was it something specific?

Yes, if you look at the -- our loss ratio for water claims, excluding water coming through the roof, which we put those into the weather-related claims. The loss ratio of -- quarter over quarter, increased about 3.5 percentage points from water, and about 1.5 percentage points from weather events.

Okay, so it seems like the water losses, not from weather, were the -- I guess the bigger culprit. So is that something that would be attributable to assignment of benefits? Or is that not related to this uptick?

I think there's definitely a correlation to assignment of benefits. There is no doubt that, in the State of Florida, every homeowners' company is being hit with assignment of benefit fraud. That's something that, as a Company, we identified back in 2012, before it was even a problem.

Our entire business plan, since inception four years ago, was designed to combat what we thought would be a growing assignment of benefit problem in the state. That's why we went our early and acquired our own internal water division. That's why we acquired BRC.

We've been way ahead of the curve on that. But there's no doubt that, if the legislature does not take action, you're going to see an increase in AOB. That's why we're really watching what we're taking down in Tri-County.

We're credit scoring our book of business on the voluntary front. No doubt that -- we call it insurance scores here, to be clear. No doubt that there is a correlation between better insurance scores and lower loss ratios. So we're very diligent on what we're taking there.

We use predictive [AOB] modeling on all of our Citizens assumptions, so we're very careful what we take out of Citizens from the Tri-County area. But it is a growing problem down there.

And in fact, it's a growing problem throughout the state. I do feel like we are handling it probably better than anyone else, because of the vertical integration of our water mitigation contractors and claims department.

And I know a couple of your competitors have reported already. So I think there was some loss ratio pressure there, as well, but it seemed like you had a bit more. Is that, do you think, attributable to Citizens policies specifically? Or just geographic mix? I'm trying to get a sense of what, in your book specifically, was more pronounced?

Yes, looking at -- all regions were up generally, year over year, but it was more pronounced in the Tri-County. But we're seeing up-ticks all over. Our best area, Pinellas County -- or counties -- but Pinellas County, and it performs very well. It has a loss ratio in the teens, but last year, in the fourth quarter, it had an 8% loss ratio.

This year, it was at 16%, but a 16% loss ratio is extremely good, but it had an unusually low loss ratio in the fourth quarter of 2014. So I think we had an extremely good fourth quarter 2014. And then also, the impact of the -- as Bruce mentioned, the AOB, and so forth, had some pressure on it.

I think -- and overall, it looks like our loss ratio is about 3 points higher for 2015, compared to 2014. If you look at it quarter by quarter, it's about a 3 percentage point difference, quarter over quarter, and it's pretty consistent. In the third quarter, weather-related claims seem to overshadow our water losses, and this time, the water losses overshadowed the weather-related claims.

Yes. And Arash, our historical numbers, when we look at loss ratios by Citizens assumptions and voluntary policies, actually, we've been performing pretty much the same, across the board, voluntary or Citizens assumptions. And I think that's a real testament to the way we underwrite policies on the front end. We use predictive modeling for the [AOP] loss ratio.

We are avoiding the worst of the worst policies at Citizens. We're not going to denigrate that underwriting. And we've got pretty sound underwriting on the front end, as well, especially now that we're credit score -- or insurance scoring the book of business.

(multiple speakers) One thing we had seen, I think, that is also impacting us somewhat on the frequency is, there's an increased lag in reporting of claims now that we're seeing. I think it goes back to the AOB issue.

For the last four quarters, our average reported lag time was 28 days. In 2014, it was 17.5 days. So there's been a significant lag in reporting of late claims.

And I do think, Arash, in terms of rate environment in the state, I think that homeowners' premium rates are going higher. There's no doubt in my mind that that's happening. I know Citizens came out and told the public yesterday that they anticipate 10% rate increases across their book every year, for the foreseeable future.

We do monitor what our competitors are doing in the state, in terms of their rate filing activity, and everybody is taking rate. Some companies are taking double-digit rate, but I think the average of the last batch of, say, 25 companies that we follow, the average rate increase was somewhere around 7%. So rates are going higher, as claim activity goes higher, and we make it back in the higher premiums.

So would you -- and for Heritage specifically, for 2016, do you anticipate putting through rate increases in your book? And if so, how would, I guess, Tri-County compare to the state overall?

Yes, we are anticipating rate increases. We recently went live with our voluntary rate filing, and that happened in February. Overall, that was about a 4% increase statewide.

It was a double-digit increase in a lot of the areas in Tri-County. And then we had other areas of the state, like Pinellas County, where we took a double-digit rate decrease. So we are pricing the book of business to go along with the increased risk, just like everybody else in the market is doing.

And so if we are going to take a policy in Tri-County, it's going to have a higher rate attached to it, and we are insurance scoring that book of business, so we know are getting better risks. And when it comes to areas where we have better loss ratios, such as Pinellas County, we are giving big decreases, and shifting the concentration of the book of business more toward the West Coast. And if we are going to take it in Tri-County, it is going to have a good insurance score, and it's going to have a higher premium.

We're right now in the process of working on our take-out filing. We have two separate rating plans, one for our voluntary business and one for policies that we assumed from Citizens.

We will be filing that by the end of March. And we are just starting to work on it right now, but we would expect there would be a rate increase associated with that.

That's right.

So the 4% overall rate increase for the state, was that on the Citizens side, you said, or the non-Citizens side, or for everything?

That was what the voluntary production. And then our Citizens rate filing, as Steve mentioned, that is in progress right now. So we don't have any filing that's been publicly made with away OIR.

We're still doing the actuarial analysis, but I do anticipate a fairly substantial rate increase on that book of business.

Okay, and given the losses, and the AOB frequency issues we've seen, is the -- I think in the past, you've, I think, guided an 85% run rate on the combined ratio, assuming those Citizens subsidies. Is that something that you still think you can hit? Or do you think that now, that we should assume that target is a bit higher?

I think 85% is still a reasonable target for us. Like this quarter, if you take out the timing benefits, it was an 86% combined ratio. First quarter, obviously, will be higher than that, but I think second quarter and beyond, I think an 85% is still a reasonable target for us.

Yes, I would agree with that. In fact, we've had -- it's weird, in the El Nino year, you're definitely getting a lower frequency of Atlantic base and cat activity. So that's very helpful for us, for obvious reasons. But we've also seen more one-off extreme weather here in the state.

We have a 1-in-100 rain event in -- over the summer. That contributed to the loss ratio in 2015. We've had a lot of tornado activity in the first quarter.

To give you an example of how rare, and how unique, this tornado activity is, since our inception, through the fourth quarter of 2015, we only have paid out about $120,000 in tornado claims. Right? And then for first quarter, we get hit with five tornadoes. So --

And we are over $4 million on those claims, at this point.

(multiple speakers) How much?

About $4 million so far. And so it is a -- it definitely is a one-off event, and that just happens sometimes. You have odd weather. I would certainly expect every other insurance carrier to reporting similar results.

So you mentioned Citizens put out that report last night. And I think they used the term -- at the loss of their crisis levels, due to AOB.

So I guess my question is, I saw you guys did a decent number of take-outs, also, in the first quarter, and it seems you still have an appetite. I guess my question would be, what's driving that appetite, if Citizens seems to be struggling a lot with the policies that it has?

Arash, a couple of things to note here. We have said now for the past -- I don't know -- over a year that our focus is on new business coming into Citizens. New business comes in at an un-capped rate.

So when Citizens talks about their policies, particularly in the Tri-County, and the need for large rate increases there, a lot of those policies have a rate capping mechanism on them, because they can only raise their rates there 10% a year. And so if a policy has been there for five years, it could be massively under-priced versus the market. We don't look at those policies.

We are primarily focused on new business coming in, because it comes in at a higher rate. It's got newer underwriting attached to it, and we look at the predictive modeling that we use for AOP loss ratios, and it has been pretty accurate for us, since we started this years ago. And those are the policies that we are really looking at.

We're looking at the creme de la creme policies that are going into Citizens. A lot of these policies are coming in from State Farm and Allstate, and other captive writers, and it's very good premium. But if you're a State Farm customer, you have two choices.

You can either take a homeowners product from State Farm. If their belly is full, in terms of their concentration in Florida, it automatically goes into Citizens. And so we look at those policies, in particular, as really good customers, very well underwritten.

Loss ratios have performed quite well on them. Those are the things that we are looking at. And we shifted that business plan over a year ago, to do smaller, more frequent take-outs, to mine new business activity as it comes in the front door.

That's why you get some odd looking stats, such as fourth quarter, our premium decreased 8% year over year. That makes sense, because we did our large take-out in September, not [in depth] in the third quarter, and then -- compared to 2014, in the fourth quarter. And we actually netted more policies from Citizens, throughout the year, in 2015, than we did in 2014.

So we actually grew the number of assumptions we did. And I think the other glaring thing, as to why you saw a slight decrease in the fourth quarter, year over year, was because we took a large commercial residential assumption in the fourth quarter of 2014, which we told everyone was essentially a one-time opportunity.

So overall, I think that we've done a really good job of identifying the market conditions in advance, being ahead of the curve, executing on the business plan, being nimble, and it's produced phenomenal results. And you see it in the increase in net operating income, year over year, it's up 96%. So we're pretty proud of the results we have.

We're going to be very focused on what we do, in terms of new business activity in Tri-County, as mentioned, what we do on the take-out side. But what we've been doing has been working.

And the loss ratio on assumed business -- so the assumed losses against assumed earned premium for the quarter, that was about a 26% loss ratio. So the assumed business had actually slightly lower loss ratio than policies that had renewed under our paper, as well as the voluntary. So the recent assumptions, there's been no deterioration on our loss ratio from those policies.

Okay. And I think commercial residential is 19% of your earned -- or your annualized policies of premiums in force, as of the end of the fourth quarter, how should we expect that to trend through 2016?

Let me grab my --

[Should that] be stable? Or should we --

See -- (multiple speakers).

Are you asking for top line growth in that sector? Is that what you're looking for?

I guess, yes, I'm more just looking for the mix of business.

So I think right now, you have 19% of your premiums in force are from commercial residential. I just wanted to know if that's something that would increase? Or if that will stay stable, around 19% or 20%?

I think around 20% is a good, stable number for now, because we are setting our PML's right now for wind season. So we had great opportunities in the fourth quarter, and we had record production in the fourth quarter. And January was a record month for us, compared to any other month we've done.

So we've done a great job of identifying those market opportunities, getting them at very attractive combined ratios. They have larger TIV's to them. The [AOP] is extremely small.

And so we're in the mode now, in March, as we sit here, wind season is in three months, and we're trying to lock in our reinsurance tower. So we're going to be selective on what we take between now and the end of wind season, to mitigate risk, keep our reinsurance costs low, protect the franchise, et cetera.

And then we'll look, in the fourth quarter, to continue to increase production as more opportunities come on line. And that's the big renewal season, is fourth quarter.

Okay. (multiple speakers) And that commercial residential loss ratio, you said it was, I think, around 5% or low single digits. Is that -- what's the loss ratio, when you include IBNR? So I guess on a GAAP basis?

It's about 5%, maybe slightly higher than 5%.

Even on the GAAP basis, okay.

[Inception] date, it's in the 5% range.

And that is -- just to put that in context, Arash, that is half of what we projected when we launched this line of business at the IPO.

Okay. And then last two questions. One, can you just remind us what -- I think you may have said this -- prior-period reverse development was in the fourth quarter? And then second, just what percentage of your personal residential policies are wind only?

Regarding wind only, it's small. I'm grabbing the numbers here. It's about [11% -- 8%] -- bear with us here. We have to manually calculate that.

18,000, 19,000-plus -- about 19,000 policies out of our 250,000 personal lines policies.

Okay. And then, the prior-period development in the fourth quarter?

I don't have that information at hand right now. I know for the year, we had a favorable development of $5.3 million from prior year, at the end of this year. But on a quarter basis --

Okay, $5.3 million favorable for the whole year, you said?

Yes.

Okay. If I can just --

And Arash, in terms of a percentage, wind only, it's approximately 7% of our overall policy count.

Of overall. So including everything, you're saying, whether it's the personal, commercial, it's 7% of everything. Okay.

That's personal lines. Yes. We don't have wind only coverage on commercial residential.

Right. Okay. I know I asked a lot, so thank you very much for all of the thorough answers.

You're welcome.

Matt Carletti, JMP Securities.

Just had a couple questions. One, to follow up on the frequency in the quarter, particularly in Broward and Dade.

When you take out weather, and look at the non-weather frequency, have you seen a change, as we've gotten into Q1, now that we're two-thirds of the way through the quarter? Has it gotten better, worse or unchanged?

I'd say it's unchanged.

Okay. And then just a numbers question, if you happen to have it. But do you have what assumed premiums were in 2015, for the first three quarters? And if not, I can follow-up off-line.

Assumed premiums earned for the --

The first three quarters of 2015.

Yes, they were -- 2015. The first quarter was -- this is written. You want written or earned?

Written is fine.

Written is fine? Okay. $32.5 million for quarter one, $800,000 for quarter two, $33.1 million for quarter three, and $32 million for quarter four.

Wonderful. Thank you very much.

This concludes the question-and-answer portion of the call. I would now like to turn the conference call back over to Mr. Bruce Lucas for any closing remarks. Sir?

I would just like to thank everyone for participating in our fourth-quarter 2015 and full-year conference call.

And we thank you, sir, and to the rest of the Management team for your time, also, today. The conference call is now concluded.

At this time, you may now disconnect your lines. Thank you, take care, and have a great day, everyone.