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Edited Transcript of FNHC earnings conference call or presentation 10-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Federated National Holding Co Earnings Call

Lauderdale Lakes Mar 10, 2017 (Thomson StreetEvents) -- Edited Transcript of Federated National Holding Co earnings conference call or presentation Friday, March 10, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Braun

Federated National Holding Company - President, CEO

* Erick Fernandez

Federated National Holding Company - Interim CFO

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Conference Call Participants

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* Arash Soleimani

Keefe, Bruyette & Woods, Inc. - Analyst

* Sam Hoffman

Lincoln Square Capital - Analyst

* Samir Khare

Capital Returns Management - Analyst

* Greg Peters

Raymond James & Associates, Inc. - Analyst

* Doug Ruth

Lenox Financial Services - Analyst

* David Seer

Needer Capital - Analyst

* Ron Bobman

Capital Returns Management - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Federated National Holding Company's fourth-quarter and year-end 2016 financial results conference call. My name is Andrew and I will be your operator for today. Please note that today's call is being recorded. (Operator Instructions).

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 negative 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, therefore, with forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized.

Actual events, outcomes, and results may differ materially from what is expressed or forecasted in the forward-looking statements made on this call, due to numerous risks and uncertainties, including, but not limited to, the risks and certainties described in this conference call, our press release issued yesterday, and our 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 the date on which they are made and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise.

(Operator Instructions). Now at this time, I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of Federated National Holding Company. Please go ahead, Sir.

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Michael Braun, Federated National Holding Company - President, CEO [2]

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Good morning and thank you for joining us today to discuss Federated National Holding Company's fourth-quarter and full-year 2016 financial results. I'm joined on the call by Erick Fernandez, our Interim Chief Financial Officer. Our financial results can be found on our earnings press release. I will go over some brief highlights and then we will open up the line for questions.

Q4 2016 highlights are, as measured against the same three-month period last year, except where noted, a 9.5% increase in gross written premiums to $137.1 million; a 9.8% increase in Florida homeowner policies to approximately 279,000; a 39.3% increase in total revenues to $88.6 million; a $47.6 million increase in gross written premium on our personal automobile line of business to $69.5 million in 2016, compared to $21.9 million in 2015; $47 million of gross claims from Hurricane Matthew, which impacted Florida and South Carolina, a decrease from the initial estimate of $77.5 million; $21.4 million of claims net of reinsurance from Hurricane Matthew; a $30.6 million increase in our total loss reserves during the quarter, which increases our total loss reserves at December 31, 2016, to $158.1 million; net loss of $12.1 million, or $0.89 per share; book value per share, excluding noncontrolling interest, of $16.26.

The quarter's results were impacted by $21.4 million in losses net of our reinsurance programs related to Hurricane Matthew, which impacted Florida and South Carolina in the month of October. The $21.4 million impact was made up of an $18.45 million retention from the excess of lost property catastrophe reinsurance, $2.3 million related to the reversal of a profit-sharing balance on a 10% Florida-only property quota share, which was previously recognized as income since the exception of the reinsurance treaty; $400,000 in losses from Monarch National Insurance Company; and $250,000 from the 10% of the losses from South Carolina's $2.3 million gross loss, which were not covered by the Florida excessive loss quota share agreement.

The year was challenging for the Company, based on significant increase in losses for multiple weather events and, separately, from the inflated cost of handling homeowner claims in Florida, primarily as a result of the growth in assignment of benefits, or AOB.

Federated National Insurance Company had an average statewide rate increase of 5.6% that had been in effect since August 1, 2016, and has recently filed and requested another rate increase of 6.5% to be effective August 1, 2017, which should gradually offset the increased cost associated with AOB claims.

Our fourth-quarter results reflect continued revenue growth, as well as strong organic growth, in both written premiums and policy counts in our homeowners' Florida and non-Florida business segments. We have expanded our non-Florida homeowners' program with the recent addition of Texas where we wrote our first policy in February 2017.

Our written premium growth is the result of continued high retention rates, driven by our commitment to servicing our policyholders. Our partner agents placed $30.5 million in new Florida homeowners' premium, $3.1 million in new non-Florida homeowners' premium, which, with our other lines of business and our renewed business during the quarter, totaled $137.1 million in total gross premiums written.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions). Arash Soleimani, KBW.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [2]

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Thanks. Good morning. So, just start off with a numbers question. Can you provide prior-year development and also current accident-year development, and also let us know what drove those items, if there was any?

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Erick Fernandez, Federated National Holding Company - Interim CFO [3]

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(multiple speakers). So in Q4 from a prior-year development, we had $1.6 million of prior-year development split between CGL and Homeowners Florida. Both of those related to calendar year pre-2014 and weren't related to AOB. And then from a 2016 accident year, the biggest thing you'll see is we strengthened our reserves around one specific auto program to the tune of about $1.5 million in Q4, so that was the other kind of outlier item in our losses outside of, obviously, Matthew.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [4]

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Okay. So you said no AOB in any of the numbers, right?

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Erick Fernandez, Federated National Holding Company - Interim CFO [5]

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Correct.

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Michael Braun, Federated National Holding Company - President, CEO [6]

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But, Arash, to clarify, we clearly have a higher attrition loss ratio that's been driven by AOB.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [7]

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Right. Now I understood. I just wanted to make sure there wasn't prior year or current accident year strengthening related to that. And is the attritional increase, I think you mentioned in the release the $5 million, that seems to be kind of in line with the six points of additional gross that you mentioned, since you also did increase the attritional 4Q 2015 a bit.

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Erick Fernandez, Federated National Holding Company - Interim CFO [8]

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Correct. There's no change in our attritional loss ratio related to 2016 accident year.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [9]

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Okay.

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Erick Fernandez, Federated National Holding Company - Interim CFO [10]

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We continue to be at 36.1%.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [11]

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Thank you. And my other numbers question was around the gross earned. Can you provide the breakout of gross earned between homeowners, auto, or just what it was for those two lines of business?

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Erick Fernandez, Federated National Holding Company - Interim CFO [12]

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So homeowners in Q4, all homeowners, $127.8 million. And then, auto was $18.7 million.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [13]

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Thanks for those numbers, and the other question I wanted to throw you guys is Allstate has mentioned that they are reentering Florida, I think in April of this year. What implications does that have for your partnership with them and does that imply additional pricing competition in Florida?

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Michael Braun, Federated National Holding Company - President, CEO [14]

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I spoke with the folks at Allstate yesterday. We are aware of that. We can't specifically tell you what their intentions are, but it appears that they have a limited appetite and their pricing is not the most competitive. So they definitely have some desire to be in Florida with Castle Key. We'll monitor that, but I don't see that as a game changer or a big threat to our distribution through our voluntary agents or our business with [our advantage], which is Allstate's general agent.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [15]

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Thanks. And along those lines, do you think the new RMS model that's coming out is going to have any impact on competition?

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Erick Fernandez, Federated National Holding Company - Interim CFO [16]

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Well, yes, I think it's going to impact the industry. We've been RMS heavy for a number of years. I think most of our competitors are much more air driven, but at the end of the day I don't think it's a dramatic change, RMS, but clearly that will impact people's exposure that you have to purchase reinsurance with and your pricing. So, I don't think is going to be a big impact, but it's another movement within the Florida property space.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [17]

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Thanks. I have some more questions, but I'll requeue.

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Operator [18]

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Sam Hoffman, Lincoln Square.

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Sam Hoffman, Lincoln Square Capital - Analyst [19]

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Good morning. I just had a question on your long-term objectives. Do you think that the rate increases that you filed, which I guess our 5.6% this year and 6.5% now for 2017, do you think those are going to be enough to get you to the 15% ROE objective once they fully earn through, I guess, some time by the end of 2018?

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Erick Fernandez, Federated National Holding Company - Interim CFO [20]

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Sure. Good morning, Sam, and to answer that, when you look at our loss ratio, our loss ratio has moved from approximately 29.5% to 36%, which is about 6.5 points. 6.5 points on a $465 million book is $30 million.

So, what have we taken? We have taken rate of 5.6%, which has had pretty much no impact in Q3. Let's call it $0.5 million of additional earned premium. Q4, let's call it about -- less than $2 million. By the time we get to Q3, I think you're looking at about $6 million in a flat book, just off that additional rate. So I think we're looking at that rate generating about -- over $25 million of premium, additional premium, in a flat world.

What expenses are associated with that? Really, acquisition, so you're talking about, let's just call it, 12%, 13% to the retail agent. That additional premium will not affect our reinsurance spend, nor will it affect our attritional loss ratio, so the 5.6% is huge, absolutely huge. We're well underway.

In addition to that, we have filed for 6.5%, which should bring $30 million of additional premium into the Company. Once again, the only cost associated with that is acquisition -- the only additional cost, I should say. That is huge.

Now this premium, as we bring it on the books, takes time to earn out. It's painfully slow, and when you identify that you need rate and when you prepare your filing and when you submit it to the OIR and when they review and it goes back and forth, and then you go ahead and whatever they approve and then it gets programmed and then it goes into the policy, it's terribly, terribly slow. Takes really about two years.

We're well down that path. We're about a year down that path where all that work has been done, and one rate is well -- is already in the books earning out gradually and the other one should come online. Do I believe those rates are correct? I think that is sufficient rate with all available information at this time. If AOB is resolved in the legislative session in 2017, perhaps we can give rate back. If AOB is not resolved, I think additional rate may be needed, and if AOB, which appears in our book to be plateauing, it appears not to be getting worse and it appears that it's actually slightly improving, if that's the case, our rates should be sufficient, may be sufficient, and we're going to continue to evaluate that.

But the other question that you might be asking is, what does this rate do to our book and our competitiveness? We believe that we are competitive. We see multiple carriers taking rate. AOB is an industry phenomenon, and it's hitting everybody and it has taken about $600 million versus prior year in the industry. I believe it's $590 million, which is significant. So I believe we remain competitive and I believe these increased costs associated with AOB are pushing up our rates and we have no choice but to raise the rates to pass through those expenses, unfortunately, to our policyholders.

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Sam Hoffman, Lincoln Square Capital - Analyst [21]

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Okay. And do you believe -- just following up on what you just said, do you believe that you can grow through this -- including the rate that you're taking, and obviously you had good new business in the quarter, but the renewals, you kind of gave up a bunch of policies, it looked like. Do you believe that you can continue decent growth through this period?

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Michael Braun, Federated National Holding Company - President, CEO [22]

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Yes. However, let me clarify. Currently, we're writing in Federated National approximately $2 million a week of new business, so if you have, just real quick math, an existing $450 million book and let's just use 10%, that means we have to -- just through evaporation we lose $45 million. If we're writing $2 million a week times 50 weeks, that's $100 million. Just off that, we should have growth of, let's call it, $50 million on an annual basis. Obviously, things change on an ongoing basis. So the answer is yes.

Will we have the growth of growing by $100 million, $150 million, $200 million, some of these huge numbers that we had in the prior years? The current math would say no; however, this market is in flux and I'm not -- I believe there will be ample opportunities in the voluntary space for us to write business perhaps at a greater rate and/or other situations that may come about.

A lot of people have been impacted in this industry. You don't just take $590 million into the industry and not have that impact carriers. It's going to impact carriers. That will create opportunities either through scenarios where we can create additional value short term -- when I say short term, quickly, with some of these other carriers or our tried-and-tested method of writing voluntary.

So, yes, I believe we're competitive and we remain to be so, and I reiterate and remind you that we are a source -- destination source to most of our agents. They want to place the business with us and we need to be competitive.

Also, our distribution is unique, that we have the great partnership with Allstate. We have a great partnership with Geico here in Florida and a lot of other preferred carriers. So, yes, Sam, the answer is I believe our growth will continue. It's just a matter of what that growth rate will be.

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Sam Hoffman, Lincoln Square Capital - Analyst [23]

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Okay. My last question is there are a number of one-time items in the quarter. Obviously, the deferred tax adjustment, the caps, but there's one thing I didn't understand is the $8 million of increase in expense from unwinding a quota share. Is that a one-time item or is that an ongoing item?

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Erick Fernandez, Federated National Holding Company - Interim CFO [24]

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Sam, this is Erick. So the $8 million that we mentioned on the press release has to do with the fact that in Q4 of 2015 we had additional ceding of commissions, as the 30% property quota share was in place at that time.

In this quarter, we don't have that. The 30% -- the treaty has ended, so that's not in place now, so we're ceding a lot less commission. So when you compare Q4 2015 to this current period, just that alone showed that we have additional $8 million of expense when it's really just a reinsurance item.

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Michael Braun, Federated National Holding Company - President, CEO [25]

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Sam, let me step in on that. There is a lot of movement on the income statement between the quota share that we had in place, the 30% plus the 10%, but let me just compare 2015 and 2016. 2015, pretax we made $65 million; 2016, zero, okay?

Where did that money go? Two things, two things, a 6.5-point increase on our attritional loss ratio on $465 million Florida book, that's $30,200,000. And then, Mother Nature in 2016, net $34.5 million. Those two numbers combined equal $64.7 million, so, yes, there's absolutely a lot of accounting and I'm sure you are going to have some follow-ups, I'm sure you'll reach out to Erick to go deep on, but rest assured those are the two items.

Now in terms of Mother Nature, that's what we're in the business of doing and I make no apologies to that. In terms of AOB, the shareholders need to understand what we're going to do. We're taking rate. I'm not certain that legislation will pass that will improve the situation. We're taking rate, which is appropriate, and those are the two items by far that impacted us in 2016.

What will happen in 2017? I can't tell you specifically as it relates to Mother Nature. As that unfolds, we'll share that, but in terms of rate, as I indicated, $25 million rate increase from last year, we'll be earning out 100% [correct] in August. That's huge and I think that's the focus of what we're doing.

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Sam Hoffman, Lincoln Square Capital - Analyst [26]

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Thank you.

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Operator [27]

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Samir Khare, Capital Returns Management.

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Samir Khare, Capital Returns Management - Analyst [28]

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I see that you're saying that you're raising price to help offset some of the AOB pressures, but what are you guys doing in terms of shutting down subcodes and enhancing underwriting claims operations to help mitigate the problem? And Mike, I think you've said in the past that you are willing to shut down agents that are providing bad business. Have you cancelled any agents as of yet?

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Michael Braun, Federated National Holding Company - President, CEO [29]

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Good morning, Samir. Couple things, we have not shut off ZIP Codes. You've heard Dade and Broward being cut off over and over in the industry. That is not the case with us.

We underwrite the business, and I would actually argue some of the most profitable business you can write in the state of Florida is in southeast Florida, which is Dade, Broward, and Palm Beach. AOB is a huge problem and it is an expense. The claim on an AOB is twice a non-AOB claim.

So what we are doing is we're working with our agents. Our claims team is continuously improving and evolving and adapting to the industry. We've got about 175 people in claims, including about 40 field adjusters. We are proactively communicating with the insurers, we're proactively working with the agents, but there's a lot of bad actors out there that are intent on getting on a claim and inflating those costs and that is unfortunate, but that's what's happening.

So, no, we don't have -- we're not shutting down counties and ZIP Codes in that regard. We're underwriting it and we're working with the agents and communicating with them, as well as the insureds. The claim handling is tricky, but it's just a lot of people that are jumping on a claim which is making it expensive, and we're adjusting those and modifying our strategy continuously, but as is the other side, the folks that are intent on getting on a claim.

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Samir Khare, Capital Returns Management - Analyst [30]

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Are you guys able to change your underwriting such that it could identify potential bad actors?

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Michael Braun, Federated National Holding Company - President, CEO [31]

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The attorneys that are putting in the suits, a small group is disproportionate, and Citizens has put out a tremendous amount of information that's very helpful to the investing community, as well as everybody, legislators included.

That's a small group. The dryout and the plumbers, it's a small group that is abusing the process, and when we come across fraud, we do share it with the state, but in many cases what a lot of people call AOB fraud is not AOB fraud. It's not fraud. It's just people getting on claims and thus unnecessarily, in my opinion, raising the costs associated with that.

So, yes, we're doing what we can, but these folks are out there and they are doing some very effective marketing in many different regards to get on claims, and it's not just Federated National. It's not just Federated National. This is an industry issue, so it's everywhere.

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Samir Khare, Capital Returns Management - Analyst [32]

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Okay. And then, given the competitive environment, how have you seen your homeowners' policy retention change? And I think you said you're writing $2 million of new business a week. How much of that is through Advantage? How much of that is Geico?

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Michael Braun, Federated National Holding Company - President, CEO [33]

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In terms of the retention, we typically are around 90%. It bumps up a point or two or down a point or two based on -- it's always moving up or down, but I would call it on average 90%.

In terms of Allstate, they are our largest producer by far. Obviously, our growth with everybody has slowed, including with Allstate. And with Geico, they are writing Florida of about $200,000 a week and then non-Florida another $25,000 to $50,000 a week, so that's -- we'd like to see that increase, but that's where we're currently at.

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Samir Khare, Capital Returns Management - Analyst [34]

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Do you have a number for the Advantage per week?

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Michael Braun, Federated National Holding Company - President, CEO [35]

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Advantage, I don't have that in front of me. It's about a $120 million book with them and I'll follow up with you on that, Samir, but there, it's typically about 20% of the new production, so call that around $400,000 a week, $450,000 a week, but I'll get a better number for you.

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Samir Khare, Capital Returns Management - Analyst [36]

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Okay. And then, the reversal of the profit commission in the quarter, did that deplete all the accrued profit commission on the quota share? And then, I guess, the second question on that is how should we think about how you'll book the next two quarters with respect to ceded premiums as it relates to this profit commission or experience account?

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Michael Braun, Federated National Holding Company - President, CEO [37]

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Yes. That did reverse the balance to zero, and then in terms of the next two quarters, just like we've done the previous six quarters, we'll go ahead and calculate what the profitability of the quota share is after Q1 and after Q2 and we'll adjust our numbers accordingly.

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Samir Khare, Capital Returns Management - Analyst [38]

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Okay. And then, the commission income was down quite a bit. What's causing that?

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Michael Braun, Federated National Holding Company - President, CEO [39]

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There's a little bit of variability in that account quarter to quarter. Part of that is the changing commission rates within our five programs in auto. We do have our agency income running through there. Again, that can vary quarter to quarter.

In terms of looking at that, I would also look at the full year, where we had pretty significant revenue growth there, and when you look at it for a full year, some of that variability just kind of stabilizes.

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Samir Khare, Capital Returns Management - Analyst [40]

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Okay. So we shouldn't project off of the latest quarter? It sounds like (multiple speakers)

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Michael Braun, Federated National Holding Company - President, CEO [41]

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No, I would project out looking at the full year. I do anticipate it being a little bit more steady in 2017.

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Samir Khare, Capital Returns Management - Analyst [42]

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Okay. And then, the auto business production was down quite a bit. I think you alluded to a program running hot. Can you just expand (multiple speakers)

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Erick Fernandez, Federated National Holding Company - Interim CFO [43]

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On that, Samir, we have five different programs. Unfortunately, two of them we did turn off. We have three running. There are some challenges in the auto program.

So from an underwriting perspective, we did not make money in 2016; however, from an MGA perspective, we did. And on a consolidated basis, I would say it was slightly profitable.

However, we need to do better. We need to have an underwriting profit. As you know, it's a heavy quota share program and our reinsurance partners need to be profitable on that program for us to sustain it, so we're tweaking the existing programs, but we think we got rid of -- some of those other ones that we got rid of, we didn't see the opportunity for improvement. We need to do better with auto, but on a consolidated basis in 2016, slightly profitable, but we need to focus in on that underwriting profit and we need to do a better job there (multiple speakers)

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Samir Khare, Capital Returns Management - Analyst [44]

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(multiple speakers). I was just going to ask, what should we expect in 2017 in terms of the size of (multiple speakers). What are you guys booking it at?

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Michael Braun, Federated National Holding Company - President, CEO [45]

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It's a tough question because in terms of gross written, it's at $70 million. Like I said, with some of the underwriting challenges, if we lose the reinsurers on some of those programs, that book could decrease.

But if we can -- we think we've identified the challenges. We need to make sure we can not only renew those programs, but also grow those programs. So I don't want to give you a number. It could be $50 million or it could be $100 million. There's a wide variance there and I apologize that I'm not giving you a better number. Our intention is to grow it; we see some great opportunities, but we need to make sure our reinsurance partners are on the programs and we need to make sure they are profitable as well.

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Samir Khare, Capital Returns Management - Analyst [46]

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Okay. And the problems that you've identified, what kind of the problems (multiple speakers)

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Michael Braun, Federated National Holding Company - President, CEO [47]

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Some of the general agents just were not generating the business that was sustainable in a profitable manner. Some of the other ones are clearly rate. I think, Samir, you're very deep in the industry. You know that frequency and severity on auto claims is an industry event, primarily associated with distracted driving. So once again, how do you resolve that issue? Until people are not distracted, that's going to continue and you need additional rate, so we've taken rate and are requesting rate on these programs.

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Samir Khare, Capital Returns Management - Analyst [48]

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Okay. And what are you guys booking it at right now (multiple speakers)

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Michael Braun, Federated National Holding Company - President, CEO [49]

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Gross loss ratio, do you have that?

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Samir Khare, Capital Returns Management - Analyst [50]

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Or just looking forward, what are you guys going to book it at?

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Erick Fernandez, Federated National Holding Company - Interim CFO [51]

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We're roughly around 90%.

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Samir Khare, Capital Returns Management - Analyst [52]

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Okay.

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Erick Fernandez, Federated National Holding Company - Interim CFO [53]

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Through 2016. And we do expect in 2017 to kind of lower that as we implement some of the things that Mike was referring to.

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Operator [54]

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Greg Peters, Raymond James.

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Greg Peters, Raymond James & Associates, Inc. - Analyst [55]

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I just have one question for you, and I've noted your commentary around the rate increase that you were able to achieve last year in Florida and the expected rate increase you hope to achieve in 2017, and I'm just curious about your perspective of how your competitors are responding to the same pressures that you're seeing and if they were taking rate last year and if you are seeing a flood of other companies filing for rate increases so far in 2017.

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Michael Braun, Federated National Holding Company - President, CEO [56]

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Sure. Good question, Greg. And to that, I think we're a little ahead of the curve. I think we're a little ahead of the curve in taking a lot of reserves, which was unfortunate to our shareholders in Q2 and Q3. I think we're a little ahead of the curve in terms of taking rate, which from a policyholder's perspective is unfortunate, but this is needed. This is -- AOB is the driver.

What are others doing? I see a lot of people starting to take rate more frequently; however, I think it is happening slow. So with that, what occurs? And I think some people are trying to hold onto market share and I think when you're holding on to market share with rate that's too low, that could create a big problem.

So once again, the industry had a bad year, Florida property, and unless there's something that fixes it, the answer is rate, but I think that it's well documented that Demotech had multiple conversations with all the carriers in the industry and their question was this, what are your results and what are you doing to improve your results?

You can't just downstream money into an underwriting loss. What are you doing to prevent an underwriting loss on an ongoing basis? That's the challenge, and I don't know that there's any other answer to the increased expenses on these claims other than taking rate. So I don't think that the industry can fight it. I think it's here and I think you are going to see more people taking rate.

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Greg Peters, Raymond James & Associates, Inc. - Analyst [57]

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Just as a follow-up to that, Mike, the retention rate in the state of Florida for residential homeowners has been somewhat unusual compared with most of the rest of the country, and I suppose that stems from this long track record of cyclicality on availability of homeowners in your state. And I guess if the market is going to be taking rate in 2017, will it really lead to dislocation or will the homeowners, residential homeowners, just hunker down and accept it and move on?

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Michael Braun, Federated National Holding Company - President, CEO [58]

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I think it's a combination, Greg. That's a great question. So you see a lower retention rate in Florida because of the dislocation, because of the large amount of companies that have come and gone and have changed their rates significantly.

You don't have the brand loyalty in Florida like you do some of these other states. A lot of these other states, the big boys are there and they have a brand loyalty based on a number of things, but I'd call it brand exposure.

So, what will rate do? I think if you have a rate generally -- I'll tell you. I like to maximize our rates at no more than -- I try to prevent policyholders from getting anything more than a 9.9% rate increase on these big rate increases because it lessens the impact to them, it lessens the impact to the agents, us, and so on.

So, yes, some people will shop it. Some people will shop it if you increase their premium $1, but I think 5.6% in 2016, I think that's reasonable. That should minimize the disruption and appears to be doing so, and I think 6.5% in 2017, if that gets approved, I think that should minimize our disruption as well.

So you've got to ease these things in, and the legislators and the OIR, they get called when you see big rate increases and they don't like getting that from policyholders. So I think it's politically correct as well to implement those rate increases gradually.

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Greg Peters, Raymond James & Associates, Inc. - Analyst [59]

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Mike, in your opening comments, or maybe it was in one of your answers, you spoke of work going on on the legislative side to correct AOB. It's my impression, and correct me where I'm wrong, but it would be my impression that the likelihood that something happens on a legislative front in 2017 is probably low. Am I misreading the situation or is really 2018 a more likely target for some sort of reform?

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Michael Braun, Federated National Holding Company - President, CEO [60]

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Greg, unfortunately, I agree with you. I don't see AOB being fixed in 2017.

The industry is putting up multiple proposals. I think the Department of Insurance, the OIR, has been fantastic. I think Citizens has been fantastic, making information public, educating people; however, there's a lot of people that don't look at it in the same lens and are absolutely against resolving AOB and the drivers, such as one-way attorney fees.

I put the probability of something changing in 2017 as very remote at best, and there's actually proposals out there that could amplify AOB. The plaintiffs' industry is very strong and there's some proposals out there. I don't think that's going to happen, either. I think AOB is going to stay as is and I think rate is a burden that will be carried by our policyholders and all policyholders in the state of Florida. Perhaps in 2018 or beyond if rates continue to go up would you then see some type of adjustment or fix in the legislative body. That's my personal opinion.

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Greg Peters, Raymond James & Associates, Inc. - Analyst [61]

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Perfect. Thanks for the answers.

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Operator [62]

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Doug Ruth, Lenox Financial Services.

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Doug Ruth, Lenox Financial Services - Analyst [63]

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Hi, thank you for taking my call. The $590 million AOB, are you attributing that all to 2016?

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Michael Braun, Federated National Holding Company - President, CEO [64]

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There's an industry -- this is statutory. It's an industry number that I have and I have it actually in front of me. It's $576 million.

So, basically, the net income in the industry -- statutory, this is -- of the Florida carriers is down 89.6%. It's down $576.3 million, so this is off of statutory filings, so there's been a massive erosion in underwriting profit in Florida in 2016, correct.

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Doug Ruth, Lenox Financial Services - Analyst [65]

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Is that from the five public companies?

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Michael Braun, Federated National Holding Company - President, CEO [66]

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No, this is from the 62 companies that write property in the state of Florida. This was released by SNL on Tuesday.

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Doug Ruth, Lenox Financial Services - Analyst [67]

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Okay. What is the Company's statutory surplus at this point?

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Michael Braun, Federated National Holding Company - President, CEO [68]

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So year-end 2016, FNIC is $141 million; MNIC, $31 million.

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Doug Ruth, Lenox Financial Services - Analyst [69]

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Okay. And do you have any estimates of what it might be at different points in 2017?

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Michael Braun, Federated National Holding Company - President, CEO [70]

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So, I don't know that we have that at our fingertips, but based on 2017 we see what do shareholders expect from us. They want net income to be positive. They want book value to increase, and absolutely when you see how we wrote in 2016 versus 2015, I can't tell you what's going to happen with Mother Nature, but obviously 2016 we had a lot of tornadoes, hail, and multiple hurricanes. That happened in 2016. I don't know what that will do in 2017.

AOB, that's real. You're talking attritional loss ratio up $30 million and I'm telling you we're taking rate. A good chunk of that will earn out correctly in 2016. So I think from an underwriting perspective, you're going to see a huge improvement, and from a net income perspective, I think you're going to see a huge improvement.

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Doug Ruth, Lenox Financial Services - Analyst [71]

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Okay. And what is the status of Monarch at this point?

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Michael Braun, Federated National Holding Company - President, CEO [72]

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Monarch is, unfortunately, not growing like it should be. It's about a $12 million book. We're only writing about $100,000 a week of new business.

The program is a fantastic program. Unfortunately, the pricing is still a bit above the market. If AOB continues to be a problem, which I believe to be the case, the markets should move to where Monarch is. We're evaluating and looking at Monarch's program in terms of the pricing, trying to penetrate the market better, but we don't want to be foolish and buy into the market at an unsustainable rate.

So from an underwriting perspective, we're extremely disciplined. We're deploying that capital wisely; however, from a shareholder perspective, it's very disappointing because we have capital in there that has not been deployed and is not generating the business we want it to. So it's very frustrating; however, we're being disciplined in our approach because we want to write profitable, sustainable business.

I'm extremely excited about Monarch because it's locked and loaded, ready to go, and we want to penetrate the market. I think that as this market shifts a bit, which absolutely appears to be underway, I think Monarch is extremely well positioned.

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Doug Ruth, Lenox Financial Services - Analyst [73]

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Are you able to quantify how much above the market Monarch might be?

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Michael Braun, Federated National Holding Company - President, CEO [74]

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It still varies, but I would say that, unfortunately, you've got to be in the top five to be relevant in terms of competitiveness and Monarch is really not there at this point.

So we may still be about 10% above the market, but once again, Doug, there are so many variables that are based on the type of construction, based on the year of build and square footage, based on the geographic location. So what we're trying to do is sharpen that pencil. We're trying to identify where we can take rates down appropriately, whether it's based on construction type. What can we do? We don't want to be foolish and just say we're going to drop rates 10% to grab it. We're trying -- if we can bring rates down 2%, 3%, 4%, 5% in a smart manner, that's what we're trying to do right now. The actuaries are working on the program, but that's how we're looking at the market.

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Doug Ruth, Lenox Financial Services - Analyst [75]

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Okay. What do you think is happening with the Demotech ratings now?

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Michael Braun, Federated National Holding Company - President, CEO [76]

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So Demotech is under a lot of pressure. They've been in the news, obviously, where they've reviewed the industry and they are putting out a report on Monday is my understanding. I'm not sure exactly what's in that report, but it's going to, I guess, give everyone their year-end -- publicize everyone's year-end 2016 rating.

Demotech is under a lot of pressure from a lot of different folks, but I think they're concerned with the underwriting profit within the industry. They're concerned with AOB. I think they're concerned with the sustainability of writing business at a low price. They want answers from the carriers, which includes, what's your capital? What's your plan of action? What's your rate?

So I think that Demotech will impact the market significantly in 2017, primarily with small carriers, and they have repeatedly stated that they are looking at carriers primarily as it relates to statutory surplus that are on the low end and other things, high quota shares or perhaps debt, things like that. So I think that will unfold in 2017.

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Doug Ruth, Lenox Financial Services - Analyst [77]

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Okay. I got two questions left. What's the size of the staff at this point?

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Michael Braun, Federated National Holding Company - President, CEO [78]

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The last number I had is 408 people. By far, the largest team is claims.

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Doug Ruth, Lenox Financial Services - Analyst [79]

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Okay.

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Michael Braun, Federated National Holding Company - President, CEO [80]

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And we retain most services in house, so we can be considered a little heavy on staff, but rather than -- I mean, even printing, the mailings, we do that in house. We think it's better control, better quality, and actually better pricing, so we do a lot of things in house. We have our own field adjusters, tax adjusters, obviously every department, underwriting, marketing, IT, HR, claims, risk, accounting, finance, you name it, we've got all the functions.

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Doug Ruth, Lenox Financial Services - Analyst [81]

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Okay. The last thing, I think that the investment community, we've hung in there with you. We've heard the stories. But I could tell you personally if the management team and the Board of Directors stepped up and bought some Federated stock, it would really be a big encouragement. It would really show us that you folks have confidence in the future of the Company. I think it would just really be a huge deal for us.

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Michael Braun, Federated National Holding Company - President, CEO [82]

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Sure, understood. And I can tell you that when you speak of the Board, I think the Board has some pretty good shares within the Company. In terms of management, we do as well.

In terms of purchasing shares, me personally, I think you're -- probably where I have a lot of shares that have vested over the years. As a matter of fact, this week alone it's costing me $300,000 -- about $250,000 to $300,000, depending on the price of the stock, to pay the taxes on my shares as they vest. I'm looking at $1 million in 2016 and then in 2017 to pay the taxes on shares I vest.

I'm very long on the stock. I believe in that, absolutely, plus in 2016 I bought my options. I believe it was 40,000 options. So I don't know that that always goes noticed, but I hear your statement and I'll share it with the rest of the team.

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Doug Ruth, Lenox Financial Services - Analyst [83]

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Okay. We've got St. Patrick's Day, so I'm thinking corned beef, cabbage, and Federated stock, it all sounds -- I think they all go together pretty well.

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Michael Braun, Federated National Holding Company - President, CEO [84]

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Sounds good.

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Doug Ruth, Lenox Financial Services - Analyst [85]

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Okay. Thank you for answering my questions.

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Operator [86]

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[David Seer], [Needer Capital].

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David Seer, Needer Capital - Analyst [87]

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First off, I want to commend you guys for the buyback, especially the recent actions. I just want to confirm, so that's an additional $10 million to the $10 million that was announced in November that hasn't been completed yet?

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Michael Braun, Federated National Holding Company - President, CEO [88]

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Let me clarify on that. So March 2016, we authorized -- the Board authorized $10 million, which was exhausted. In November, it authorized $10 million, which has just expired as of March 1, and that was approximately -- what was that, $4 million? $2.3 million, I apologize. So that has since expired, so those two, $2.3 million and $10 million of the $20 million that was authorized. The Board has just authorized a new one, which hit the wire this morning, $10 million effective immediately, and that's out there for a year, so thank you.

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David Seer, Needer Capital - Analyst [89]

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So there's $10 million -- you have the authorization as of right now to buy $10 million?

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Michael Braun, Federated National Holding Company - President, CEO [90]

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Correct.

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David Seer, Needer Capital - Analyst [91]

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And how much cash do you currently have at the HoldCo?

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Michael Braun, Federated National Holding Company - President, CEO [92]

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After the downstream, about $35 million; however, once again, we're generating positive cash in our nonstatutory entities, primarily the MGA.

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David Seer, Needer Capital - Analyst [93]

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Got it. And speaking of the MGA, because I know you mentioned it at the Raymond James conference the other day, I think you mentioned that the MGA business is making a lot of money for shareholders. Is there any way you can quantify the number on kind of an isolated basis what that MGA business generates?

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Michael Braun, Federated National Holding Company - President, CEO [94]

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Do you have that in front of you?

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Erick Fernandez, Federated National Holding Company - Interim CFO [95]

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We don't have that handy. We can certainly circle back.

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Michael Braun, Federated National Holding Company - President, CEO [96]

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David, it's significant. If you look at the $65 million in 2015, it was, I believe, around $35 million of that. It's significant, and then also our reinsurance intermediary is very profitable, Century Risk with Insure-Link. So those entities -- so you're absolutely right, David. There's two sides to our business, the underwriting profit, which has struggled in 2016, but on top of that we have an MGA that's very profitable.

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David Seer, Needer Capital - Analyst [97]

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Yes, because in the presentation, I think one of the items you highlighted is that you are shifting towards a more fee-based business model, I think that's the way you put it. So I think -- especially to shareholders, I think it would be very helpful to kind of illustrate what that model is actually generating or capable of generating, just so we can have a better understanding in that aspect.

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Michael Braun, Federated National Holding Company - President, CEO [98]

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Yes, a very good point, David, and making a note of that, and the product that we do also sell, we're very proud of our partnership with Hiscox, which is a Lloyds syndicate. It's only about a $3 million or $4 million book. In addition, we have partnership with Hudson where we sell a liability umbrella, which is about a $3 million book. We're trying to expand that. We're working on a number of initiatives. We would like to offer our partner agents as many products as possible.

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David Seer, Needer Capital - Analyst [99]

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Got it. And then, just last one, you mentioned, I think it was, that in 2016 about $30 million was due -- you had a breakeven year in 2016, you said. About $30 million was due to attritional loss. So I just want to clarify. I think you then said that for this year you should, as a result of the rate increases, get about $25 million in additional premium, so all else being equal, if you were to have per se the same type of year as you did last year, due to the rate increases you would have about a $25 million earnings in, let's say, 2017, all else being equal?

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Michael Braun, Federated National Holding Company - President, CEO [100]

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Once again, the world is not flat (multiple speakers)

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David Seer, Needer Capital - Analyst [101]

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What I'm saying is in the exact same year as a result of the rate increases, you had the exact same cat losses, et cetera?

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Michael Braun, Federated National Holding Company - President, CEO [102]

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So the two things we are looking at is -- you're right, attritional loss ratio, that $25 million of the 5.6%, that will be earning out 100%, correct, as of August. So let's say that, yes, in a flat year we'd have that, which takes care of the vast majority of the problem, and then weather.

Unfortunately, we did have some weather in Q1. We're looking at tornadoes and hail, primarily tornadoes, of about $3 million. So those are the two items. I think rate solves the 6.5% increase in the attritional loss ratio. You're right. It's just a timing issue.

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David Seer, Needer Capital - Analyst [103]

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Got it. Okay. I appreciate it and I'm looking forward towards the full implementation, hopefully, of that buyback plan. Thanks, guys.

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Operator [104]

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Arash Soleimani, KBW.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [105]

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Thanks. I just wanted to follow up again on the homeowners' growth. So you may have made a comment earlier about the retention in Florida, but the $33.6 million of new business you wrote, that implies close to about $3 million a week, so it looks like it was a pretty healthy new business rate. But, then, homeowners' overall looks like it only grew 8.5%, so it almost implies that retention was -- if I look at last year's fourth-quarter number, it implies that retention was about 78%. Does that sound right? And if so, why would it have been so low?

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Michael Braun, Federated National Holding Company - President, CEO [106]

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There's a couple of things there. So, let's say we write 100 policies. That 100 policies are bound. So that's what we'd say when we wrote business. We'd say, what did the agent bind?

Of that, you're talking you've got to take about a 10%, 12% haircut on policies. Maybe someone was buying a home and they did not close on it, whatever it may be. Maybe there was a home and we went out and inspected it and we saw a roof that was in bad shape. So immediately you've got to take off, let's call it, 12 points there, and then from there if you get down to, let's call it, 88 and then you can take off -- what of those 88 will make it through a redual offer? And if you take off 10% there, now you are down to, let's just call it, 80. So that's how you get there with the math.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [107]

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But I guess is that rate lower than where you've historically run?

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Michael Braun, Federated National Holding Company - President, CEO [108]

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No, we're not seeing it moving much. Our underwriting, those that clear underwriting vary, but I would call it 10% to 12% that don't actually make it through a whole 12 months on their policy, for a variety of reasons. And then those that do make it through and then actually renew, I'd say another 10% evaporation. That's been consistent year after year.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [109]

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Okay. So I guess with that said, what was the main driver of the deceleration in the homeowners' growth rate?

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Michael Braun, Federated National Holding Company - President, CEO [110]

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Why did we not -- what are you saying? Why did we not grow as much in Q4?

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [111]

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I'm saying with the $3 million per week of new business that you did in Q4, the rate of growth seems lower than would've otherwise been expected, so I was just trying to figure out what was it that caused that. Was it lower retention? Was there something else that was kind of a headwind in the quarter?

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Michael Braun, Federated National Holding Company - President, CEO [112]

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Yes. I'll go deeper with you, I guess, off-line because I'm not sure I'm following your question 100%, but maybe we'll just follow up afterwards if you (multiple speakers)

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [113]

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Yes, sure. That's (multiple speakers). And then the other question I had, so just on the rate increases, so you have the 5.6%, then you're going to hopefully get the 6.5%. So if you compound the 6.5% over the 5.6%, that implies about a 12.5-point combined rate increase. Let's say you keep 87% of that because 13% goes to agents, so that gets you to about 10.9%. So, if you have 10.9%, and then I think you said the loss ratio on a gross basis has been up about 6.5 points, so that implies, I guess, 4.4 points of additional margin that you should get once these rates are both fully earned in. Does that jibe with how you are thinking about it? About four points of --

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Michael Braun, Federated National Holding Company - President, CEO [114]

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That's exactly how I look at it. For the record, the actuaries have got hundreds and hundreds of pages that kind of look at the math a little bit differently, but that's exactly how I look at it.

The world is not flat. Other things do come in, additional expenses, savings, so at the end of the day, you're right. We have three expenses -- reinsurance, which has been very favorable for the last five years and I would anticipate this upcoming as we buy into the new cat program in late May, I'm anticipating flat to an improvement with rates being down a little bit. The acquisition, I don't see any changes in acquisition, so those two items, let's call them flat for simplicity. The attritional loss ratio is our third expense and you just nailed it. That's exactly it. That's how we are going to recover the deterioration in our underwriting profit, which was driven by one item there, which is -- attritional, which is driven by AOB.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [115]

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Thanks. On the auto combined ratio, I know you said the loss ratio was 90%, but what's the combined ratio when you include expenses?

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Michael Braun, Federated National Holding Company - President, CEO [116]

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It's significantly higher on a gross basis.

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Erick Fernandez, Federated National Holding Company - Interim CFO [117]

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Yes, it's roughly breakeven for the year.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [118]

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So you're saying the 90% loss ratio with the expense ratio, when you say breakeven, you mean it goes to 100%?

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Erick Fernandez, Federated National Holding Company - Interim CFO [119]

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When you combine it from a consolidated basis, the combined is roughly 100% when you factor in all the fee income.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [120]

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(multiple speakers) excluding the fee income, just looking at the purely underwriting. So if we pretend there's no fee income, I just wanted to get a sense of what the combined ratio there is?

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Erick Fernandez, Federated National Holding Company - Interim CFO [121]

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Generally speaking, I would say it's 110%, generally speaking.

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Michael Braun, Federated National Holding Company - President, CEO [122]

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And that's a challenge because not only do we have to have our MGA profitable on the private passenger program, we've got to have an underwriting profit in there as well for our reinsurance partners. There's a lot of accounting in terms of how it's ceded and so on, so you may want to follow up with Erick as well.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [123]

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And I'm sorry, was that 110, then, the growth combined ratio excluding any kind of fee income?

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Erick Fernandez, Federated National Holding Company - Interim CFO [124]

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Correct.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [125]

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Okay. And the other question I had, so in terms of Monarch, I know you said the rates still seem like they are above, and if I recall, I think you guys took the rates down by 11% or so, maybe it was 12, 18 months ago.

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Michael Braun, Federated National Holding Company - President, CEO [126]

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12% last April, correct.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [127]

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12% last April, okay. My question was, was AOB -- AOB didn't seem like it was getting as much press as it is the last few months, but I guess are you surprised that rates have not caught up, given that you took your rates down before AOB was as advertised of an issue?

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Michael Braun, Federated National Holding Company - President, CEO [128]

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So AOB, we've been talking about for about two, three years, but it bit really hard in 2016. Monarch, we've treated it very gingerly and we came out, we got it licensed in 2015, and we knew we had high rates, but the market moves continuously so that was part of the strategy.

Us bringing rates down 12%, at that time we thought that was correct, absolutely, in part because some of the concerns, some of the trends that we had as it related to AOB. So, sure, you always want to launch that perfect product, but it's not that easy. It's usually multiple steps and it's much easier to step down into the program than to come -- and this is the one thing that I try to avoid at all costs, specifically with our state expansions, why we have an MGU as a partner, it's far better to ease yourself into the market than to jump in, buy the market, and then have to take rate to that effect. So we're trying to continue to ease into it.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [129]

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And when you say ease in, I guess looking at the homeowners' side, you are using the MGU now. Is the plan in the future to just directly appoint independent agents in the other states, since that's probably cheaper from an acquisition cost perspective?

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Michael Braun, Federated National Holding Company - President, CEO [130]

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That's a great question. So a couple of different things you just asked, so Monarch gets Florida. That's direct, et cetera.

Non-Florida, now you are switching topics, we do use an MGU, yes. That does cost us money, but we believe it pays for itself by better underwriting results. So FNIC, non-Florida, we do the utilize our partner SageSure and we've given them great latitude, and then we're -- absolutely, they are great operators, great management team, and they execute the plan very well and they are paid based on profit.

So Monarch, Monarch is looking at state expansion. I'm not sure that we'll be using SageSure for that expansion. That may be direct. We are continuing to look at that, but, once again, I would say while SageSure does have higher acquisition expenses, we believe that pays for itself.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [131]

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Thanks. And I just wanted to move to the ceded premium ratio, so that was 50.5% in the quarter, so basically that's higher than what I would expect, given that the 30% quota share has been unwound, and I know you have -- obviously, you are ceding about 80% or so on the auto book, but that's still, I guess, only about 10% of the book. So are there any -- can you walk us through? Are there any unusual adjustments or numbers moving through ceded premiums that are elevating that ratio?

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Michael Braun, Federated National Holding Company - President, CEO [132]

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Arash, yes. So there's three things running through ceded premium. One is you mentioned the excessive loss, which that cost is kind of fixed for the reinsurance year, which starts in Q3 of 2016.

And then, the second part you mentioned is 75% to 80% are auto business that's heavily ceded, right? And then, the last piece is the 10% quota share, which a part of that is very straightforward as it's just 10% of what we cede for homeowners Florida, but then there's -- the last piece of it does get kind of funky from an accounting perspective, which has to do with the profit-sharing balance, and that also factors into ceded premium as well.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [133]

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And what was the adjustment from the profit-sharing balance?

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Erick Fernandez, Federated National Holding Company - Interim CFO [134]

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So if you look at just overall both the 30% and the 10% quota share, it was roughly in the [quarter] of $14 million of ceded premium.

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [135]

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Okay.

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Erick Fernandez, Federated National Holding Company - Interim CFO [136]

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Kind of combined both the actual ceding of the premiums, plus the adjustment around the profit sharing.

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Michael Braun, Federated National Holding Company - President, CEO [137]

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With that, you've always got good questions, but you have a lot of questions as well. We've got other callers we don't want to lose. If you don't mind, I'd like to move to the next caller, and then maybe you can follow up with Erick. Is that all right with you?

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Arash Soleimani, Keefe, Bruyette & Woods, Inc. - Analyst [138]

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Sure. Thank you.

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Operator [139]

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Ron Bobman, Capital Returns.

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Ron Bobman, Capital Returns Management - Analyst [140]

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Hi, thanks. A couple of questions to clarify, so (inaudible)

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Michael Braun, Federated National Holding Company - President, CEO [141]

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Unfortunately, Ron, you've got a terrible connection there, but I think you're asking about the retention. So, generally, if we write 100 policies, 100 policies are bound. Those that actually go through the first year, the full 12 months, let's take away about 12%, and then so now you are down to 88, and of the 88 that actually renew, let's just call that roughly 90%, you are down to about 80, so the number of 78% to 80% is a reasonable number.

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Ron Bobman, Capital Returns Management - Analyst [142]

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Okay. Sorry about the connection. Then my other question really relates to the auto business. Your homeowners' business from a premium perspective is multiples the size of the auto business and the auto business sounds like it may be shrinking at least as it relates to program count.

The profit margin opportunity and the combined ratio margin opportunities are meaningfully higher as multiples are also superior in the homeowners' business, potentially, as compared to the auto business. Obviously, the homeowners' business is your core business and the potential for profitability is multiples of the auto business. Given you are generating (technical difficulty) on a consolidated basis the auto business and given, importantly, the serious challenges that you face in your core homeowners' business, as well as the core challenges that the auto experts face and are grappling with in their auto businesses, which is not your core, why are you bothering with an auto business at all?

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Michael Braun, Federated National Holding Company - President, CEO [143]

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Sure. So, once again, it was hard to hear most of that question, but my understanding is you're asking about why are we in the auto business. What we see as the opportunity is this. The staffing that we have is about 50 people that are committed to our auto program. It's really a fee-based product, so, in other words, the staffing is primarily adjusters adjusting. I think 99% of them of the staff that we have is associated with adjusting.

The business plan is this. We want to make an underwriting profit. For it to be sustainable, we need to make an underwriting profit. However, let's put aside the underwriting profit. The MGA fee that we anticipate, we get 10 points for the financing and for ULA, unallocated loss adjusting. Our goal is to only use five of those points, make five points, so make five points on that, and if we write at 4 to 1, that's 20 ROE pretax. I think that's attractive.

There are challenges and these programs are heavily reinsured, so they have to be sustainable. They have to be profitable, but absolutely the fee component is a big part of the attraction that we are looking at. Also, if we can make five, 10 points on the underwriting profit, now you amplify the ROE to a 25 pretax. I think those numbers are attractive. You're right. There are challenges not only in the homeowners' business, but also in the auto. We're aware of that and we think we have the plan to work through on the homeowners' side and we're working through the auto side as well.

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Operator [144]

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Samir Khare, Capital Returns Management.

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Samir Khare, Capital Returns Management - Analyst [145]

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Hi, guys. I just wanted to ask you, is any part of the Florida agents' commissions, is any of that based on profit, the profitability of the book?

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Michael Braun, Federated National Holding Company - President, CEO [146]

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Well, yes and no, and what I mean by that is this. To generate business with us, you are an agent and we do track your loss ratio and if you write terrible business, we're going to turn you off, period.

So it depends on a number of things. So sometimes you can have a shock loss and if you have a $300,000 liability claim and the agent has only got a $300,000 book, he is fried. So we do look not only at the quantity, we also look at the quality, meaning why does an agent have a loss ratio. We do give incentives. We do give overrides to agents that produce better business and it's based on a number of things. It's based on the type of business and the quantity of business, including -- we do include the loss ratio of that agent in that analysis.

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Samir Khare, Capital Returns Management - Analyst [147]

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Okay. And does any part of the expense ratio in this quarter reflect a decrease or a reversal of accrued management compensation throughout the year?

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Erick Fernandez, Federated National Holding Company - Interim CFO [148]

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Some of it, but I would put that number less than $500,000.

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Samir Khare, Capital Returns Management - Analyst [149]

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Okay. And just coming up on fixed ones, are you looking to renew the quota share at all during this renewal? I would advise against that.

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Michael Braun, Federated National Holding Company - President, CEO [150]

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No. We're comfortable that XOL can satisfy our needs and I would say there's a lot of the folks on our program are jockeying to maintain their line and increase it. So, I feel very good where we're at.

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Samir Khare, Capital Returns Management - Analyst [151]

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Okay. And then, can you tell us about the progress of your CFO search?

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Michael Braun, Federated National Holding Company - President, CEO [152]

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Yes. We -- once again, I think Erick has done a fantastic job. We also have three Board members, myself and two others, that chair the audit and chair the Board that have conducted a search, and we're very near to disclosing something here in the next couple of weeks. We've got multiple good candidates, including Erick, in there. So we will be making that announcement here, subject to finalizing everything, but I think that we'll have closure here in the next few weeks.

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Samir Khare, Capital Returns Management - Analyst [153]

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Okay. And then, can you just talk about Q1 cat-related weather or storm weather, what your exposure is in there?

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Michael Braun, Federated National Holding Company - President, CEO [154]

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Sure. I would say right now you are looking at a $3 million hit, unfortunately, in Q1. That's primarily associated with two storms, one that really impacted most of Florida. That's about $2 million and we've got claims all over the state, from south Florida to the west coast, up in the northeast and the Panhandle, and then we had a separate incident, separate tornadoes and a wind event that came through, that literally just went down I-10 from Jacksonville, Tallahassee, Pensacola into our book in Louisiana. So right now, the rough number I have for you is $3 million.

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Samir Khare, Capital Returns Management - Analyst [155]

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Okay. And then, in your opinion, do you think Allstate's intention to grow in Florida has anything to do with their view on homeowners' profitability being at a trough level?

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Michael Braun, Federated National Holding Company - President, CEO [156]

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I can't tell you what -- I can't represent Allstate, but based on the financial results of -- in my opinion, based on the results of the industry, I don't think that's too inviting for someone to grow in the market if you haven't been in the market.

So I don't know specifically their intentions. I think they have an auto book, but they are a great partner, they have a very big auto book in the state. I think they are the second largest writer, and I'm sure they are just trying to maintain their residence in Florida and perhaps round out that account. I'm not threatened by it. I'm not. I can't say enough good things about our partnership with those folks. I'm not threatened by it. I don't see it as a huge appetite and I don't think their product is overly competitive. They will pick up some policies, yes, but I'm not threatened.

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Samir Khare, Capital Returns Management - Analyst [157]

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Okay. And then, given the expertise of some of the Florida homeowners' specialists, do you think it makes sense for Allstate to potentially acquire a Florida specialist to fulfill this aspiration?

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Michael Braun, Federated National Holding Company - President, CEO [158]

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I can't speculate on that. That's a great question and I can't speculate on that.

I'm very proud of what we do. I'm very proud of our partnership with Allstate, as I am with Geico and Progressive that writes business for us now in Florida and are independent agents. So I think we're going to continue doing what we do, and regardless of how Allstate penetrates the market, I don't think it's going to be big, but I can't speculate on what their intentions are.

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Samir Khare, Capital Returns Management - Analyst [159]

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Okay. Thank you.

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Michael Braun, Federated National Holding Company - President, CEO [160]

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Thank you. Appreciate the question.

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Operator [161]

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And it looks like we have no other questioners in the queue at this time. So I'd like to turn the call back over to management for closing comments.

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Michael Braun, Federated National Holding Company - President, CEO [162]

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Sure. Thank you. I just want to thank everybody for their time today and follow-up questions. Erick and I are always available. Our contact information is out there and wish everyone a great day. Thank you.

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Operator [163]

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Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may now disconnect at this time. Everyone, have a great day.