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Edited Transcript of FNHC earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 Fednat Holding Co Earnings Call

Lauderdale Lakes Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Fednat Holding Co earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Herbert Braun

FedNat Holding Company - President, CEO & Director

* Ronald Arthur Jordan

FedNat Holding Company - CFO

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Conference Call Participants

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* Charles Gregory Peters

Raymond James & Associates, Inc., Research Division - Equity Analyst

* Christopher Campbell

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Douglas Scott Ruth

Lenox Financial Services, Inc. - President

* Bernard Joseph Kilkelly

Darrow Associates Inc. - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the FedNat Holdings Company's Second Quarter 2019 Financial Results Conference Call. My name is Norma, and I'll be your operator today. Please note that today's call is being recorded. (Operator Instructions)

Now at this time, I'd like to turn the conference over to Bernard Kilkelly, Investor Relations. Please go ahead, sir.

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Bernard Joseph Kilkelly, Darrow Associates Inc. - MD [2]

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Thank you, Norma. Good morning, and welcome again to the FedNat Second Quarter 2019 Financial Results Conference Call. Our earnings release and prepared remarks include references to non-GAAP measures such as adjusted operating income. We use these non-GAAP measures to provide greater transparency and a more meaningful, efficient comparison to prior year's results. Our non-GAAP definitions can be found on Page 3 of our earnings release, and reconciliations from the GAAP measures to the non-GAAP measures begin on Page 12.

Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target, will and other similar words or phrases 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, what is expressed 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 yesterday and other filings made by the company with the SEC from time to time. Forward-looking statements made during this conference call speak only as of today's date, and FedNat Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise.

Now I'll turn the call over to Mike Braun, FedNat's President, CEO and Director.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [3]

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Thank you. Good morning, and welcome to our second quarter 2019 conference call. Ron Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer, are here with me this morning; along with Bernie Kilkelly from our Investor Relations team. I will provide an overview of the quarter's performance, and then Ron will give additional financial details on the quarter's results.

Before we discuss our second quarter operating results, I want to acknowledge that, as our recent public disclosures have indicated, we are actively engaged in conversations with one of our long-standing shareholders. We value and appreciate that input and the insights of all of our shareholders, but we'll not be commenting on those conversations at this time. We will focus today's prepared remarks and Q&A portion of the call on our quarter's results as well as our operating and growth strategy.

Now turning to our second quarter performance. Our core fundamentals are solid, with the second quarter showing strong rebound in earnings sequentially, though we did feel the impact of another unusual event. We continue to make substantial progress on our objectives, particularly with the acceleration of our diversification strategy and the results we are seeing from our non-Florida homeowners book.

Also, we completed our 2019 reinsurance program, unfavorable terms, given the tougher pricing market. And we're also working toward the completion of the Maison acquisition. During the second quarter, strong hail and wind-related storms produced catastrophic events across Texas, Louisiana and other states. These events reduced our pretax income by $9.3 million. Gross cat losses in the quarter were $17 million, with a great majority or $15.5 million coming from our non-Florida property business. The severe weather events during the first half of the year were unusually intense and have resulted in significant claims activity.

I'm proud to say that the dedicated FedNat's staff again rose to the occasion and provided quality service to our policyholders and the trusted agents in their time of need, which is always FedNat's #1 priority.

This level of best-in-class service has afforded us a sterling reputation in our market. Our reputation makes FedNat a highly sought destination for our partner agents in the broader insurance network. We believe that our strong internal team, paired with our long-term initiatives, provide policyholders the best possible experience and position us to create value for our shareholders.

In the quarter, we made strong progress in winding down our noncore auto and CGL business lines, including a significant reduction in open auto claims. The eventual elimination of these businesses position us to improve the profitability on our core Homeowners insurance business. Overall, our improving operating efficiency is contributing to better financial results, absent the weather events.

Net income in the quarter was $7.1 million or $0.55 per share, a big improvement over the first quarter loss of $3.9 million and below the $8.8 million reported in last year's second quarter. The progress we've made on our initiatives, combined with the earn rate increases in Florida and the recent legislation that effectively puts an end to the assignment of benefits, AOB headwind, has impacted our industry over the last several years. It represents catalyst for further improvement in our results as we move into the second half of the year.

AOB reform, which went into effect on July 1, marks a transformative time in our industry. AOB has been a disruptive force in the Florida homeowners market and one of the main reasons for the increase in our attritional loss ratio over the past 4 years. However, we've been able to mitigate its impact through our proactive exposure management, strong underwriting, claims management as well as the rate increases approved by the state to help insurers like FedNat compensate for AOB relief. We believe the new legislation is a win not only for the insurance ecosystem, but most importantly, for all Florida homeowners.

To that end, it's notable that Citizens recently lowered their homeowners multi-peril rate increase by nearly 6 percentage points on the heels of the implementation of the legislation. Over time, it will lead to lower premiums for policyholders and lower cost to insurers and our reinsurance partners. AOB relief also puts us in a much better position to write more new policies and renew existing policies that meet our strict underwriting standards. So in a more rational pricing marketplace, I see our Florida book growing, not shrinking.

Our latest rate increase of 4.6% for new and renewal policies went into effect early in the second quarter. Rates have now increased a total compounded rate of 21% in the last 3 years in response to the higher claim costs in the Florida market primarily to offset the challenges of AOB.

And looking outside of Florida, our diversification strategy is working well and paying off. We continue to grow market share in Texas, Louisiana, South Carolina and Alabama and believe we have a long runway for continued growth in these states.

In the second quarter, gross premiums earned grew to over $24 million, a 57% year-over-year increase led by the exceptionally strong growth in Texas, our biggest book of business outside of Florida, which more than doubled gross premiums earned and written.

We recently announced our new reinsurance program, which went into effect on July 1. In view of our pending acquisition of Maison Insurance Company, the new program includes Maison, thereby capitalizing on scale and spread-of-risk synergies within our reinsurance program. The strong program provides approximately $1.3 billion of single-event coverage in excess of $27 million and aggregate coverage of $1.8 billion for a total cost of $205 million, including Maison, which is scheduled to close in December. Excluding Maison, FedNat's coverage has a total net retention of $22 million and a total cost of approximately $162 million.

The severe and unusual events we faced over the past 3 year come home to roost in the form of former reinsurance pricing. While we absorbed some of the brunt of the pricing pressure, our strong relationships with our robust panel of reinsurers enabled us to land on competitive terms, giving their evolving view on risk in the region. We continue to appreciate those strong support we received from our reinsurance partners.

Let me provide an update on our Maison acquisition. We're now finalizing the approvals and the consent orders from the state regulators in both the Florida and Louisiana. In accordance with the equity purchase agreement, the closing date is anticipated to occur in December 2019 to reduce our downside risk associated with potential cat losses to our second half 2019 financial results. We are bullish on the benefits that Maison brings to FedNat and our shareholders. Maison accelerates our diversification strategy, and it's a great operating and financial fit. It increases our market share in Louisiana and Texas, markets we know well, and strengthens existing distribution channels in the local Florida market. We were encouraged by their significant rate increase in Texas, which will benefit our 2020 results, following the expected close in December of this year. Maison also provides important opportunities for us to provide our partner agents more product and to accelerate execution on our middle-market strategy within Florida. The acquisition is expected to be accretive to earnings and will provide additional scale, which will contribute to strong financial performance in 2020 and beyond.

In summary, we are continuing to make meaningful progress on our growth strategies, which position us to improve earnings as we head into the second half of the year and longer term, to significantly enhance the value-creation opportunity to FedNat shareholders. The new AOB legislation, combined with the recent rate increases, provides a much more favorable operating environment in the Florida market to grow our book and improve profitability.

Our non-Florida coastal business continues to capture profitable market share and contribute to overall profitability. We are experienced operators in these days and have developed strong relationships with agents and reinsurers over the years, which bodes well for future growth. The Maison acquisition will be a great addition to FedNat as we enter 2020, increasing our gross written premiums and delivering earnings accretion in the first year. Further, the December close time derisks our second half 2019 results from incremental hurricane risk.

Finally, the cost reduction measures we've taken over the past year gives us a lean and efficient operating structure to grow profitably and scale our business. We believe we are set for improved performance and sustained profitable growth throughout this year and excited about the future for FedNat.

With that, I'll turn the call over to Ron.

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Ronald Arthur Jordan, FedNat Holding Company - CFO [4]

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Thanks, Mike, and good morning, everyone. Our second quarter financial results improved substantially over the first quarter, with net income up almost $11 million and adjusted operating income up over $8 million. Excluding cat losses from both periods, adjusted operating income was up sequentially, demonstrating the underlying strength of our core Homeowners business. Based on our improved performance and the benefits we expect from the positive industry and company initiatives Mike discussed, we believe we are well positioned to continue this strong momentum into the second half of 2019 and beyond.

Net income was $7.1 million or $0.55 per share in the quarter. Adjusted operating income was $5.7 million or $0.44 per share. The primary non-GAAP adjustment this quarter was the exclusion of $2 million of pretax unrealized gains on the investment portfolio.

Similar to the first quarter, the headline for the second quarter was weather. 12 different weather events were cataloged by PCS during the quarter, resulting in $17 million of estimated gross losses for FedNat, all but $1.5 million of which pertained to our non-Florida business, predominantly Texas and Louisiana. Net of the 50% profit-sharing agreement in place with the third-party MGU that manages our non-Florida business, these storms impacted our 2Q pretax income by $9.3 million or $6.9 million after tax. Note that the profit-sharing offset flows through other underwriting expenses in our income statement. So while the impact on our combined ratio from these storms was 10 points corresponding to the $9.3 million pretax impact, the loss ratio was impacted by 18 points, corresponding to the $17 million of gross losses, and the expense ratio benefited by 8 points due to the profit-sharing offset.

Most of these storms were fairly small and typical at this time of year in the Gulf Coast. One storm, however, was a little more unusual. PCS Event #1927, gave rise to 2-inch and 3-inch hail in the Houston, Texas and the Lake Charles, Louisiana areas, further south than historical similar events. This single event resulted in almost $11 million of losses in the quarter, with an estimated bottom line impact of $4.1 million, representing almost 60% of the earnings hit from cat events in the quarter.

Absent this anomalous, Houston, Lake Charles storm, our adjusted operating income would have been approximately $9.8 million or $0.76 per share, representing an annualized ROE of just under 17%.

Adjusted operating revenue, which excludes gains and losses on the investment portfolio, was $103.3 million in the quarter, up 8.2% versus 2Q '18, with growth of almost 14% in our Homeowners line of business driven by strong growth in net earned premiums. Our net loss ratio was 71% in the quarter, a 450 basis point sequential improvement from 75%, but up year-over-year from 57% in last year's second quarter. The higher loss ratio was the result of the $17 million of gross catastrophe losses that I just updated you on.

The Houston Lake Charles storm added 11.5 points all by itself. Otherwise, the loss ratio would have come in at 59%, just 2 points above 2Q '18, which was a pretty clean quarter with less than $2 million in severe weather.

Second quarter's net expense ratio was 30.7%, an 11.4 percentage point improvement compared to the 2018 second quarter. The expense ratio benefited from our expense save initiatives, along with the profit-sharing impact of the non-Florida weather losses, as already described, along with the benefit of lower cat reinsurance spend in 2Q '19 versus 2Q '18.

Let's take a look at our lines of business, starting with our core business, Homeowners. Adjusted operating income swung to a resilient $6 million in the quarter, up from the $1.4 million loss we reported in Q1 driven by the reduced impact of cat losses in the second quarter. Compared to the prior year quarter, lower reinsurance spend in 2Q '19 limited the decline in earnings to just $2.8 million despite the current quarter including $8 million more in cat losses than 2Q '18 did. Total homeowners gross written premiums grew $8.6 million or 5.5% compared to the second quarter of 2018. Gross written premiums in the state of Florida were down $5 million or just under 4% and up a strong $13.6 million or 60% in our non-Florida business, offering a strong proof point for our continued portfolio geographic diversification efforts.

Our Homeowners combined ratio was 97% in the quarter compared to 93% in the comparable quarter last year. The combined ratio improved from 108.8% in this year's first quarter as a result of the weather impacts already discussed.

Turning briefly to our noncore operations. Auto is purely in claims runoff mode. Heavy claims settlement activity in the quarter resulted in $1 million of adverse reserve development, with open claim count down over 30% as compared to March 31. Commercial general liability, which is included in our other line of business, had earned premiums, a decrease of 55% in 2Q versus 1Q to less than $0.5 million. Our CGL unearned premium reserve will be fully earned out by September 30, and we recorded $1 million of reserve development in CGL in the quarter.

Overall, our other line of business generated adjusted operating income of $600,000 in the quarter, up almost $1 million sequentially from first quarter's adjusted operating loss of $300,000. The results of our investment portfolio are also included in other. Net investment income of $4.3 million was an increase of $550,000 over Q1 and represents a $16 million-plus contribution to pretax earnings on an annualized basis. Investment gains, which we exclude from our non-GAAP measures but which represent very real economics, were $2 million in the quarter primarily due to strong equity market performance.

Turning to our capital structure. Earlier this year, we strengthened the balance sheet and secured our long-term capital position in conjunction with the Maison transaction. Book value per share rose approximately 6% during the quarter to $17.96 per share. We currently have a $110 million plus of liquidity at our holdco and nonregulated subs, which, of course, includes $41 million of funds earmarked for closing of the Maison transaction later this year. The roughly $70 million of liquidity that will remain after closing on Maison puts us in a comfortable position for hurricane season and has us poised to execute on share buybacks when appropriate. We're looking forward to having the opportunity to reenter the repurchases marketplace as we believe that, at its recent trading range, using some of our excess liquidity to repurchase our own shares is the best investment we can make for our shareholders.

Our fixed income portfolio remains short term with an average duration of 3.8 and a high-quality composite S&P rating of A-, with a total carrying value of $456 million. We ended the first half of the year with a $134 million in cash and cash equivalents, which, of course, includes the undeployed Maison funding.

To wrap up, we're confident that our core underlying business remains strong and showed steady sequential improvement amidst turbulent weather-related headwinds. We're in a great position to deliver improved fundamentals in the second half of the year from earned premium rate increases, which will add $4 million of second half incremental gross earned premium; and the benefits of AOB reform in our local Florida market, combating a severe legacy headwind to profitability. Our diversification strategy is working, and we're building momentum from the strong first half of the year in Texas and Louisiana, 2 states that we know well.

The earnings drag from our noncore business will also continue to wind down in the third and fourth quarters of this year. Our past initiatives to reduce staff and increase our use of technology have provided greater efficiencies and position us to leverage operations and scale our business as we grow.

And with that, I'll turn the call back over to Mike.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [5]

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All right. Thank you, Ron. Operator, with that, we're ready for questions, if you can open up the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Greg Peters with Raymond James.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [2]

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I have -- I'm going to focus just on 3 questions for you, guys. First of all, I was looking at your policy count numbers, particularly in Florida. And it's down 6% to -- over 6% on a year-over-year basis. I was wondering if you could give us a sense of what you're doing on a re-underwriting basis and tie that into a discussion on how your distribution partners and the relationships are proceeding with.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [3]

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Yes. Greg, yes, in terms of the Florida policy count, we're down meaningful amounts from the prior year and actually back 3, 4 years. I believe we peaked at about 285,000, and we're down to about 240,000. And that's a direct result of underwriting new business as it comes in, re-underwriting existing business as it renews and ensuring that we have rate-adequate premium on those policies. In a typical month, we -- in these raters that the industry uses, we'll do about a 100,000 quotes, and we're only binding about 5,000 policies, about 5%. Back about 5 years ago, we were in the high single digits, about 8%, 9%, 10%. We're at 5%.

I do believe the market's competitive. Periodically, we see certain competitors make certain moves, but really nothing too disruptive. And now, obviously, with that, we do have additional rate that went into effect in April. That has helped us open up more business. And now with AOB reform taking effect July 1, we believe that there's some more room for us to grow the book. However, we're remaining cautious, and I don't really see that happening in the third quarter so much. But if we see what we think we're going to see, which is positive trends, I think that you could see our book growing in the fourth quarter within Florida. But I would say, in terms of our PIF count, I think the 240,000 is probably our low point, and I don't see it shrinking any further.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [4]

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Okay. So a couple of your competitors -- or one in particular, commented in the second quarter about the accelerated claim filings to get in before AOB reform became effective. And there were some reserve adjustments on prior years. Can you give us an update as it relates to your prior year development? And I'd like you to extend it just beyond the homeowners and AOB issue, but also talk about it in the auto segment because your auto segment was a little worse than expected.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [5]

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In terms of the second quarter, it was clearly a rush to get claims in with AOB associated with it. But I'll tell you where I think we saw the majority of it was definitely on Irma, definitely on Michael. And Brevard, the hailstorm that went through there, where we're one of the largest riders up in that market, it really happened at a very opportune time. So these vendors, I would say, stormed those areas. And once again, I think that will definitely impact us and that's -- those are items that are in the rearview in terms of hitting us on a net basis. The attritional loss, I absolutely believe there's a headwind that's behind us, and now we have some benefit on a go-forward basis.

In terms of auto, I'm switching gears. The challenge with auto was, you go back 2, 3 years ago, when we were -- we had about 50 to 60 people on the auto team. We're down under, ballpark, half a dozen that are working on these claims. And they're our most talented adjusters and the best folks that we've got that are working on them. So we're seeing really a significant reduction of policies that had claims associated with them, though, unfortunately, we do see some reopens from prior years on that auto program, claims that we thought we had closed down that has since reopened.

So once again, it's the auto program -- as you may recall, our last policy that we had in force was last July, as in 12 months ago. And the most challenging program that we had has ended 24 months ago. So I think that's going farther and farther behind us.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [6]

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And so just to follow on your comments there, Mike. This reopen process, I mean, when does that window close completely? Or I mean, is this something that is going to be a drain or a headwind for you guys for the next couple of years?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [7]

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No, I don't think it's going to be a headwind as it relates to auto for the next couple of years. I absolutely believe it's mostly behind us. It's frustrating to see the number for you, just like it is for us, for all of our shareholders. But in terms of -- once again, just the sheer number of open claims that we have today versus what we had at the end of Q1 and the end of Q4 and even the reopens that we see, everything is dwindling pretty quick on those programs. And really, what you're seeing when we put the development out there is really us putting numbers up there for bulk because we want to make sure we've got bulk reserves beyond what we're seeing in the case reserves on those individual files.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [8]

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Okay. The final question I'll ask is around reinsurance. So I think you said in your prepared remarks, the reinsurance costs for -- including Maison, was $205 million; ex Maison, it's a $162 million. So I'm trying to figure out what the ceded premium expense will be on a quarterly basis for the next 4 quarters. And if I -- in the Homeowners line, if I use the $162 million, it's $41 million; if I use the $205 million, it's $51 million. So maybe you can connect the dots for me and sort of give me a sense of how that might look for the next couple of quarters.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [9]

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Yes. What I would say is slightly different. It's $162 million divided by the 12 months, so if you take that for July, August, September, October, November. And then in terms of Maison with that included, it'd be the $205 million divided by the 12 months that are remaining, the other, let's call it, 7 months in the contract period.

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Ronald Arthur Jordan, FedNat Holding Company - CFO [10]

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Yes. So if you compare the new treaty year to the prior treaty year and just look at the nominal dollars, our annual cost has gone up $13 million or so. So divided by 4, you're looking at $3.3 million a quarter of higher ceded cat expense pretax. I think it's going to work out to about a 36% ceded ratio on an earned premium basis.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [11]

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That's in the Homeowners line, correct?

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Ronald Arthur Jordan, FedNat Holding Company - CFO [12]

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That's an -- I'm looking at overall with that.

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Operator [13]

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

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [14]

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Congratulations on the improved sequential results. Could you talk some about the steps that you talked to further wind down the noncore auto and commercial liability expenses?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [15]

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Yes. Basically, once again, those are 2 lines that we've exited. In terms of auto, we have not had a policy in-force for a year since last July. And once again, there were multiple programs that we've had. The most challenging program that we had were 2 years out.

In terms of CGL, we're down to an in-force of less than $1 million. And in terms of the overhead, once again, there's -- we've significantly cut back on that staff. As you may recall, Doug, over -- in 2018, we downsized to about a 100 people total. We're at about 320 total today. We peaked at about 431, I believe. So we've significantly shrunk the team.

In terms of the claims handling, that's what remains open on auto and CGL, and that's on the liability side. And as you know, we have liability within a homeowners program. So really, that's all been consolidated into one team. And we're very happy with the team that we have over there and those individuals that are with us. So we think that we've got the strongest folks with us. And I think they're doing a great job on it.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [16]

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Okay. As far as the -- getting the approval from the Department of -- the Louisiana Department of Insurance, is there anything that you folks need to do to satisfy them? Can you clarify that a little bit? I thought...

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [17]

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Yes. We believe that we've satisfied everything with the Louisiana Department of Insurance as well as the Florida Office of Insurance Regulation. We have not yet received signed documentation back to us. But we believe, for the most part, that the approvals have been granted to us, at least we believe so verbally. We signed off on the documentation, and we're just waiting for that to be returned back to us.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [18]

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Okay. You had made the announcement about the hiring of the Monarch manager, who sounds like a terrific person to bring on to the team. Is there any update since this person has started working for the company?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [19]

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Yes. Mel Russell is a great addition to the team. He's well known in Florida. He attended our agents conference with us in June and was well received by a lot of the agents who have known him for many years. So we're excited to have him on the team. He's only been with us for a little bit of time, a few months now. So he's still digging into it, but we have high expectations of Mel as well as our whole team. He is working well with the rest of our team, communicating with our agents. And we've launched our revamped Monarch program effective July 1. We're intentionally keeping it very small, keeping it very slow to make sure that we're happy with what we see before we ramp it up more. So we're happy where we're at with the addition of Mel and the relaunch of the program.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [20]

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Okay. With the Maison acquisition, one of the things that you told us was that there were -- Maison was putting through fairly large rate increases in Louisiana and also in Texas. From what you can see, how do you think the rate increases had been working for the company?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [21]

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I think Maison has done a great job of growing over the years. They were formed in 2012. They grew to a $100 million. I think Doug Raucy and his team have done a good job. But I do think that they needed some rate on some of those lines of business. In Louisiana, they took some rate in 2017. Then in 2018, they took an additional 10 points. I believe it was November. They have a ballpark of a $50 million program. And I think that, that 10 points goes a long way in Louisiana. I think that's a quality book.

In terms of Texas, they did take a lot of rate in that program. So statewide average in January of '19, it was 10 points and then an additional 30 points effective August here. So that will start gradually rolling through. That's a book that's in the 30s -- $30 million range. And that rate will absolutely have a material impact on the underwriting profitability.

So the total gross written on that program is about a $100 million. Once again, our intention is to let Doug and his team continue doing what they do, which is I think they've got good distribution, good underwriting and then just really incorporate our efficiencies in terms of our claims and our operations, some of the functions that they contract out. So we're real excited about the closing on that and hope to be able to do that the beginning of December.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [22]

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Okay. And my final question is now with the AOB reform in place, has FedNat started to offer a policy that offers lower rates that people sign a AOB waiver? You had talked about that possibility.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [23]

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Sure. That has not yet occurred. Right now, the department is working on the language that works for them, and you're going to see that most carriers will have very similar language. So let me clarify. There's 2 components to the AOB reform. And number one, July 1 is a meaningful date. And basically, that changed the rules of the game or air some of the abuses, I think, the lion's share of the abuses are going to be eliminated.

The second function is allowing companies to exclude AOB, not allow it. And with that, the policyholder will be getting a corresponding credit. I anticipate that going in shortly and, let's just say, perhaps going live roughly January 1. But I think that would be neutral for the most part, meaning the corresponding credit with removing that coverage will be neutral as it incorporates into an underwriting profit.

Citizens have just modified their rate increase back in December. They were looking for an 8.5% increase on their homeowners multi-peril. After AOB reform, they modified it to a 2.6% increase. That's 5.9 points lower based on their presumed AOB benefit. So let's just call that 6 points.

I believe that's very real. But I also believe that the folks were -- that are in our industry that we're up against are going to -- that we already see them changing their game. However, this AOB reform is very real and will have a meaningful impact on the underwriting results.

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Operator [24]

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And our next question comes from Christopher Campbell with KBW.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [25]

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I guess first question is did you guys have any loss creep on Irma, Michael or the hailstorm estimates?

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Ronald Arthur Jordan, FedNat Holding Company - CFO [26]

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Yes. So in the quarter, across all those storms, including Brevard, a grand total of $14 million. So very, very negligible.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [27]

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Okay. Great. And then just looking at the expense ratio improvement after backing out the profit share impact, like how should we think about this without the noise going on this quarter? What would be a good run rate expense ratio?

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Ronald Arthur Jordan, FedNat Holding Company - CFO [28]

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Yes. Good question because there's a lot of moving parts in there. The profit share took the ratio down this quarter. The net expense ratio took it down about 8.5 points. So if you just add back -- that back, you're at 39%. I think that with non-Florida growth happening as well as the new cat program kicking in, in the second half, that 39% probably is in the 40 range going forward, 40%, 41%.

And actually, look, if I could just take a second, Chris, to just clarify. Earlier, I mentioned the 36% ceded premium ratio. Let me just clarify that, that includes not just cat, but also our 10% quota share, our property per risk. So that was an all-in ceded premium percentage at 36%, to answer your question.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [29]

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Okay. Okay. Awesome. And then a question on Maison. I guess what drove the difficulty in getting that regulatory approval?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [30]

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Well, I think that our time schedule to try to get it done before July 1 was a bit aggressive. We did have -- the hearing that was delayed in part because there was questions on our Form A application. So in our equity purchase agreement, it was very clear that I said if we did not complete all this by July 1 that it would go to December. So we're always aware that, that could occur. And that's why the agreement was written as such.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [31]

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Okay. Great. And then a question on the repurchases. I guess when can you guys buy back? And then, how much excess capital would you have to buy back shares?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [32]

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We don't have any update in terms of the buyback. In terms of the excess capital, we've got a lot of liquidity in the holding company, both pre-close on Maison and post-close. So we have no update for you on that at this time on the buyback.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [33]

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Okay. Great. And then Annual Shareholder Meeting, I guess, when are the plans to have that?

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Ronald Arthur Jordan, FedNat Holding Company - CFO [34]

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We anticipate announcing that shortly. Obviously, that's part of an ongoing conversation that we're having with one of our shareholders. So we anticipate announcing that shortly.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [35]

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Got it. And I guess why would that one shareholder be holding up the -- I guess why was the meeting delayed from May to begin with?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [36]

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Well, you got to remember, we were pending an acquisition here on Maison as well as -- once again, I don't want to get too into the weeds on this, but we've had ongoing conversations with the shareholders who has got some thoughts. And we have been very receptive to that dialogue, and that dialogue continues. So it's all interwoven and what -- we should be announcing that shortly.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [37]

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Okay. Great. And then just a very, very high-level last question. I guess your shares are down 40% year-to-date. You guys are at 67% of book, which I guess would imply some dissatisfaction with existing investors. I mean is FedNat opening to -- or is FedNat opening -- open to having a strategic review or potentially considering a sale on lot value?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [38]

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I think we're always trying to create value. We always work on Plan A, which is growing the business organically and being best-in-class in our service. So our share price is extremely disappointing to our peer group. All industry has been down in terms of the Florida 5 -- the 5 Florida companies. The whole industry has been down. And it's -- without a doubt, our prices have been materially impacted throughout the year. And we need to perform and generate the earnings so the share price is more accurate of the value of the company.

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Operator [39]

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And at this time, I'm showing no further questions. I'd like to turn the call back to Mr. Michael Braun for closing comments.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [40]

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Thank you, everyone. We appreciate your interest in FedNat, and thank you for being on the call. We believe we are well positioned to continue executing in the second half of 2019 and beyond. We continue to enhance our profile through geographic diversification and the eventual closing of our acquisition, Maison.

With the backdrop of the new AOB legislation enacted, we're experiencing a more favorable operating environment than the local Florida market. We continue to progress in pushing forward the multiple positive developments in the near term, which we believe will result in stronger profitability for our business.

As we look to the second half of the year, our focus remains on execution as we maximize long-term shareholder value through our growth strategies. So thank you, and have a great day.

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Operator [41]

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Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.