21st Century Holding Company Q4 2008 Earnings Call Transcript

Mar. 5.09 | About: Federated National (FNHC)

21st Century Holding Company (TCHC) Q4 2008 Earnings Call Transcript March 5, 2009 4:30 PM ET

Executives

Peter Prygelski – CFO

Michael Braun – CEO

Analysts

Dimitri Cornasofskia [ph] – First Wilshire Securities

Gregg Hillman – First Wilshire Securities

Richard Carlson [ph] – RCS Asset Management [ph]

Dan Harvey [ph]

Ron Bobman – Capital Returns

Ray Derricks [ph] – Derricks Brothers [ph]

Carl Dorf – Dorf Asset Management

Bryan Freeman [ph] – Deacon Investments

Operator

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

Statements made in this conference call or in documents incorporated by reference that are not historical fact are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as may, will, expect, believe, anticipate, intend, could, would, estimate, or continue, or the negative other variations thereof, or comparable terminology are intended to identify forward-looking statements.

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

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

With us today is the Chief Executive Officer, Mr. Michael Braun, and Chief Financial Officer, Mr. Peter Prygelski. At this time, I’d like to turn the conference over to Mr. Peter Prygelski. Please go ahead.

Peter Prygelski

Thank you. Thanks for joining the call today. Before Mike goes through his opening remarks I just wanted to go through some of the financial highlights for those of you who haven’t had a chance to review our release. For the three months ended December 31, the company reported a net loss of $2.8 million or $0.35 per share on approximately 8 million average shares outstanding as compared to net income of $8.1 million or $1.02 per share on approximately 7.9 million average shares outstanding in the same three months period last year.

For the 12 months ended December 31, the company reported a net loss of $2.5 million or $0.31 per share on 8 million average undiluted shares outstanding as compared to net income of $21.3 million or $2.69 per share on 7.9 million average undiluted shares outstanding in the same 12-month period last year. On a diluted basis, the company reported a net loss of $0.31 per share based on 7.97 million average undiluted shares outstanding as compared to $2.65 per share based on 8 million average diluted shares outstanding for the 12 months ended December 31, 2007.

Realized investment losses of $800,000, net of $500,000 income tax benefit, were reported by the company for the three months ended December 31, 2008. Excluding these losses, the net loss would have been $2 million for the same three-month period. Realized investment losses of $6.6 million, net of a $4.0 million income tax benefit, were reported by the company for the 12 months ended December 31, 2008. Excluding these losses, the net income would have been $4.1 million for the same period.

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

Michael Braun

Thank you everyone for listening in today. Obviously, the results in 2008 are disappointing. And as we look at the numbers to summarize them, investments had a big impact on us and the rough year for lot of equities didn’t obviously in general and that included equities that our company has owned.

Separate from that, we feel that our homeowners book is very stable. We feel that the premiums were down in 2008. But as it stabilized in the latter half of the year, we anticipate that we are in a good position now to start growing that book. And what I mean by growing that book is primarily the biggest thing is the Citizens depop I think on the last call we had mentioned folk in detail actually about the Citizens depop and how it can impact us.

We are originally approved for up to 30,000 policies, with 15,000 of those occurring on the first round. The first round, we did take about 4,400 policies, short of the 15,000. That number is not a hard number and that the insurers can still decide to reject or offer to assume their policy. I’m anticipating that the final number is going to be around for 1,000 at approximately 6 million of in-force premium. That’s for January. We also plan on attending the March assumption as well as May. Our anticipation is that we will probably have similar results. So, about 6 million perhaps in March as well as in May.

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

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

Something else that’s happened in the State of Florida recently has been State Farm, where they have announced that they plan on leaving the state in certain lines of business. They put a request into the State of Florida to leave, which would be about 1.2 million policies, about 800,000 property policies. We have put a request into the State of Florida and into State Farm that we would like to assume up to 50,000 of those policies that we do not have a response back from either one.

DLIR has given tentative approval to State Farm to leave with certain assumptions, one of which being that the policies do not go from State Farm into Citizens, but rather goes out into the private market, and also that the agents have the ability to broker – their State Farm agents broker, which would mean that they would be able to sell independent carriers like ourselves. I think that’s a great opportunity for us. I think that 50,000 is a number that we feel very comfortable that we could absorb in terms of our surplus things to that. And we think that we have great growth opportunities for the homeowners product in 2009.

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

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

In terms of American Vehicle, American Vehicle, the premium has been down that’s primarily a result of the economy. The main line on that once again is the artisan general liability. And obviously as the real estate market has been not positive, has been negative, construction industry followed and the need for insurance for those contractors has decreased. The program is running higher than it has in the past, and we feel we can solve that issue with the surplus route that we are going.

Currently American Vehicle is sold in Florida. Most of the premium that we have in the states is on an admitted basis. One, you have run into issues with losses and things like that on an admitted basis, it’s very hard to raise rates. It’s time consuming. When you’re surplus, you’re much more flexible. So currently we would cut back or be a lot tighter to make sure that we are getting hit hard on the losses. On a surplus basis, we could just raise our rates immediately and move forward.

The other benefit to that is that we anticipate having the A-rated paper on that. The A-rated paper has been something that we’ve been working on for quite a while. We have an agreement in place with an A-rated company. So it would be an A-rated product that we are selling. And when I say A, meaning A-invest rated. We also have a reinsurer that would be participating on this program, probably – which would be taking 50%. The only thing pending on that, that we have not released yet is because we do not have final approval from the State of Florida. That’s something that we’ve been waiting on for a period of time. And we’ve made some modifications to it over the previous months, but we feel very close on that.

Also we are working on with American Vehicle some other products to – that would make the artisan liability more attractive, and that’s a commercial auto and an inland marine. Other things just we sold alongside of that. One other thing that we have been doing with American Vehicle is we utilize general agents in multiple states in our home, which is South Florida. We started selling direct in the last – back in December. And I can tell you results in the first 90 days are positive.

We feel that we’ve got better control of the underwriting in it because this is our market, and I think we know the market very well. But also because of our marketing initiative, selling that direct, we feel very good. In the rest of the state we have two general agents that we feel do very well for us, but we saw an opportunity that we could do better and try accounting ourselves.

With that, I think I have given you a broad overview of a lot of different things that we are working on. Pete had received an e-mail from someone just asking a couple questions. So I’ll go ahead and read that real quick. There’s three there. The question is – asking about the Citizens and how – it says that Michael mentioned competitors are extremely loose with their underwriting. Can we get an update on that situation, and also describing Citizens and the process?

In terms of our competitors, I think I touched on that I think that some of the aggressive nature out there I think is slowing down significantly. So I feel that as it returns to a more disciplined market, I think that that’s going to work for us well. In terms of Citizens, we’ve identified that Citizens has approximately 1 million policies. We’ve had approval for up to 15,000 on the first round and up to 30,000 total. We only took about 4,400 policies. And the reason for that is because we want to ensure that the policies that we take work well with our existing book. We are in the State of Florida. The number one item that we need to look at is really our wind exposure.

There is a third question on there. So I’ll turn that one over to Pete.

Peter Prygelski

Yes. One of the questions that we received was just the outsourcing of the management of our investment portfolio. Just to go back maybe six months, during last year, we hired an investment advisor to help us hire money managers both on the equity and on the fixed income side of the house. We spent good five to six months going through some pretty aggressive due diligence, looking at various performances of different money managers across different asset classes.

Beginning January – the 1st of January basically, we’ve turned the money over to these professional money managers and they have been managing it basically beginning this year. Just to go through the current portfolio, because I know somebody might ask that question, currently we have a $150 million investment portfolio, of which $95 million is in cash, $51 million in bonds, and about $4 million in equities.

Our projected portfolio over the next six to 12 months might look a little different, might be just rough numbers, $35 million in cash, which is 23%; probably $100 million in bonds, which would be about 67%; and potentially up to $15 million in equities. And right now we are comfortable with going up to 5% in equities right now. I mean that – we'll see what the market does in the next couple of quarters. So that’s were – that's were we stand with the investment portfolio.

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

Michael Braun

Before we go ahead and open up to questions, the one other item that I’m sure people have some questions on is the dividend. And unfortunately, that’s something that we did cut. We think that’s in the best interest of all our shareholders for the company. And we did that primarily just, but to ensure that we want to make sure that the dividend that we are paying is what the company can support. And 2008 obviously was not a good year.

We do expect 2009, as I’ve indicated, to be lot of growth initiatives with the premium where we anticipate those to kick in. So the other piece of that is that if we were to meet additional cash, raising cash in this current environment, it appears to be next to impossible. So I think it’s the prudent thing to do to retain some of that cash on hand for the company. That’s something that the Board will look at every quarter, the dividend. So we will review that. Our next Board meeting on that would be in June. With that, we will go ahead and open up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We go to Gregg Hillman, First Wilshire Securities.

Dimitri Cornasofskia – First Wilshire Securities

Hi, guys. This is actually Dimitri Cornasofskia [ph]. I’m here with Gregg. On the investment realized losses, could you give us a little bit more detail on sort of where that came from, like what securities?

Peter Prygelski

Well, yes, I can answer that. This is Pete. Basically, I’m just going to – not going to talk specifically about the fourth quarter, but just in general for the year. Mostly equities, we did have some – we did own $750,000 worth of Lehman bonds. We wound up selling those for, I believe, that was a $0.29 on a $1. That was third quarter. Lehman bonds on the – on the equity side, the major losses came from the financials; Bank of America, Citi, AIG, Merrill. So that’s basically where all the losses came from, the financial sector. The current rating of our equity portfolio, like I mentioned before, we basically have 3% or little more than that now, but maybe up to 5% of our portfolio in equities. And out of that $5 million, there is probably right now 5% of the $5 million is in the financials, in good names. Again, that’s about what we are right at almost the benchmark on the financials. So we’ve lessened our exposure in that area greatly.

Dimitri Cornasofskia – First Wilshire Securities

Got you, got you. And then on the – what's the unrealized loss position in the first quarter right now?

Peter Prygelski

The unrealized losses, well, I’m not going to comment on the unrealized losses for the first quarter, what we are looking at now. I mean, we look at that pretty much on a monthly basis, but we just got invested. So it’s hard to predict. Like I said, the money that – we’ve basically just started investing the money towards the end of January in the equities. So it’s really not a good indicator now. Well, I can tell you that it’s a broad diversification of stocks. We – large cap growth, small and mid-cap value, broad diversification.

Gregg Hillman – First Wilshire Securities

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

Michael Braun

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

Gregg Hillman – First Wilshire Securities

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

Peter Prygelski

I can’t give you a specific percent, but I can tell you that currently we have in force about 30,000 to 31,000 policies, approximately 58 million in premium. I think voluntary in this competitive market can have some growth, I would say, maybe in the 10% range. I’ve indicated earlier that I anticipate that January will be – January that just occurred, about a $6 million in-force depop. And I’m anticipating March and May to be $6 million. So let’s just use rough math of $60 million. That alone right there is $18 million. That’s a significant amount of growth. In terms of depop-ing during the wind season, we will look at that very carefully to see if there are opportunities for us.

The quality of the risk may be greater during that time of year and we need to balance that out with the reinsurance on our current portfolio. But in that math I’ve just given you, I would say that we’re looking at, let’s say, 31,000, if we get 3,000 each item – I'm sorry, if we get 4,000 each time, that’s 12,000. You’re talking 42,000, 43,000 policies. Whatever might happen with our other marketing initiatives on that, I think that we could have higher policy count, maybe 45,000, maybe 50,000. There’s a lot of variables there that will unfold in the coming months.

Gregg Hillman – First Wilshire Securities

In terms of the risk in these policies, I mean, are you going to – what are normal profitability and expect normal loss ratios on these policies? Are you going to increase the risk of the company that you’re going to be able to mitigate that with reinsurance so you keep expected earnings at the same level?

Michael Braun

Our current portfolio of property is primarily the Tri County, which is Dade, Broward, and Palm Beach. All the policies that we are taking out are non-Tri County. So that in itself is a good thing for the diversification of the book. In terms of our rates, our rates in these territories where we are taking policies from the depop is actually lower than what we are taking in the depop. So basically whatever the rates are for Citizens, we are taking – we have assumption rates like a me-too of Citizens’ last 2%. So let’s say the Citizens is, let’s just say, $1,000 and we are 2% below that.

Our voluntary rates, if we have the right in voluntary, are actually lower in those areas. So these assumed policies are at a higher rate than our voluntary, but at a lower rate than they are currently at with Citizens. The policies that we are taking, I think that once again out of 1 million policies, approximately 1 million policies, at the end of the day we’re only taking whether 4,000, 4,400, whatever that number might be. I would say that we are looking at those policies to ensure that we are taking what works for us. So the answer is yes. I think that we would expect similar results in those policies and consistent with our voluntary book.

Gregg Hillman – First Wilshire Securities

Okay. Okay, great.

Michael Braun

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

Gregg Hillman – First Wilshire Securities

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

Michael Braun

In terms of earnings projections, that’s not something that we’re going to put out there. In terms of profitability of the homeowners book, I feel good about that book, absolutely. 2008, we had some unusual events that occurred in the investments and things like that with – that we got hit on. I feel very good about the homeowners book of business. I feel very good on what we are doing with the book and where we are going. I would say we’ve been a bit conservative versus others in the market. I think we’ve done the right thing and – for the long-term protection of our shareholders. And – you know, it’s a hotspot we’re in right now because we’ve got those write-downs that have impacted us and our premiums down. But I stand by my statement that we are doing the right thing long-term. I guess that’s a little bit of the conservative underwriter that’s in me that that’s what we do.

Peter Prygelski

Gregg, just to follow up there with the investments. The second half of ’08, we really made some hard decisions and really cleaned up the portfolio. So we could give these money managers a fresh start. I definitely believe that we are headed in the right direction now as long as the market cooperates. But our exposures – you know, our exposure right now to equities is so small percentage-wise to the total. Like I said, you talk about 5%. And the only reason we are exposed 5% is, you know, nobody knows when the market is going to recover. But I feel like by investing that 5% – or we feel by investing that 5%, we have some exposure to the equity market when the rebound occurs. And so I think it’s definitely the right thing to do in the right direction.

Gregg Hillman – First Wilshire Securities

Okay. And finally, guys, could you just touch on the regulatory risks at the state level, whether Citizens or the governor will reverse themselves, or anything where it will happen? What’s your take on that?

Michael Braun

Well, it’s a very fluid situation in the State of Florida. When you say regulatory with Citizens, the two big entities that are in the market is Citizens and the Florida Hurricane Catastrophe Fund. Those have a big impact. Citizens’ rates have been deemed to be insufficient for quite a period of time. There was a rollback in ’07, which hurt us very hard. And due to our concentration in the Tri County perhaps hit us harder than most carriers, perhaps all – not all, but most carriers.

I don’t know what’s going to happen with Citizens. I don’t think that bill today would pass. What I mean by that is HB1A that was passed in early ’07, the state is taking on inordinate amount of risk and a lot of people didn’t fully understand that risk and people not – you know, some – a lot of people not living on the coast in Florida feel as though that other people in the state, they’re subsidizing those people. I don’t know that that would have passed.

There has been a Citizens task force talking about raising those rates, perhaps on a glide scale where they go up perhaps 10% or no more than 20% per year. I anticipate Citizens’ rates will go up at some point. The freeze is through the end of ’09. The legislators can extend that freeze. I don’t know that they – I don’t believe they will, but I don’t know that. The other is the Florida Hurricane Cat Fund. That’s another state entity, which that you touched – that has risk associated with that. Their liquidity is a concern. And I don’t know what the state is going to do in regard to that.

Apparently, FHCF is talking to the Federal government to see if there can be liquidity either through the purchase of their bonds, something to that effect. I don’t know. The legislators just started, I believe, March 3rd, I want to say, through maybe May 1 roughly. I don’t know what they are going to do, but I think they are going to – they have to do something to correct those two entities.

Gregg Hillman – First Wilshire Securities

And how does the hurricane cat fund – Florida Hurricane Cat Fund affect you? How much do you have with them?

Michael Braun

A significant amount. I don’t know the exact amount, but I would say maybe about $130 million of our reinsurance is with the Florida Hurricane Catastrophe Fund. In terms of their liquidity, there’s concerns. There’s different layers within the cat fund. There is a limited apportionment layer that’s expired – it is set to expire. There is a, what they call, TEACO, which really there has been no one interested in those because of the rates. The traditional, which is the FHCF is mandatory, and then there is something called TICL, which is an extra layer above the mandatory. All that being said, they could have liquidity issues on that. Their funding is about $10 billion. And their maximum liability could be about $28 billion.

Gregg Hillman – First Wilshire Securities

Okay. So they may not be good, they may not pay out if you get hit bad?

Michael Braun

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

Gregg Hillman – First Wilshire Securities

Okay, thanks. Thanks very much for your help.

Michael Braun

Thank you.

Operator

Next to Richard Carlson [ph], RCS Asset Management [ph].

Richard Carlson – RCS Asset Management

Hi, fellows. You probably looked at Warren Buffett’s letter on Saturdays pretty interesting. And he kind of looks at book value. He is in insurance. He’s one of your competitors. And he focuses on growth of book value. Do you think that’s a fair way to look at insurance company?

Michael Braun

Well, some people look at it as earnings. Some people look at it as book. Obviously, we’re trading well below book. And I think that has to do with that our book has not been growing in the last early two years. And the reason for that, which I’ve touched on, is really the HB1A. When that came about, that really brought reduction in our premium, significant reduction. So I would say that’s up to the personal investor to decide how they want to value our company or any insurance company for that matter.

Richard Carlson – RCS Asset Management

If you think about book value in an insurance company, in some ways that’s liquidation value. But if you put that aside, if you sort of theoretically thought about your book value and how you could double it, so it’s 9.50 and to get it to 19, you’d have to earn $72 million after tax. Okay? You have to earn $9 a share after tax. But if you took $8 million – I’m not saying you do this.

If you took $8 million and you bought back 4 million shares, your book value would double overnight with very little risk. Now you can’t buy your stock at $2, you certainly can buy half of it. But if you didn’t pay the dividend at all and you took that $2 million and you bought your stock back at $2, you know what happens to your book value? It goes from 9.50 to 10.60. Now, is that a better use of your funds in paying out $0.24? Well, the leverage is about 4 or 5 to 1 over paying a dividend. And you said in the past that you have better use of your funds in buying your shares back, but I don’t see how you get it.

Michael Braun

Well, that’s something that – it's something decided by the Board of Directors. And that’s been – that has come up in previous conference calls. And we don’t have anything new to report on that on this conference call. But we understand what you are saying.

Peter Prygelski

Yes. In the third quarter call we addressed that the two points that I will remake is that obviously increasing our book value of shares is important. But at the same time, we can’t ignore our aggregate capital. As we expand our lines of business, we need to maintain the adequate capital levels.

Richard Carlson – RCS Asset Management

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

Peter Prygelski

The opposite side of that is that – to the dividend point is that we feel right now that paying out the dividend will reward our shareholders instead of the few who sell while we are buying the stock back. And we feel that – like you said, we can’t buy the stock back at whatever it’s at, $2 a share right now. Like I said, it’s something we –

Richard Carlson – RCS Asset Management

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

Michael Braun

I don’t think we can buy $4 million worth of $2.

Richard Carlson – RCS Asset Management

No, of course, you can’t. But you could take the dividend, which is $480,000. Is that right?

Michael Braun

Yes.

Richard Carlson – RCS Asset Management

More than that. It’s $1.9 million a year if you continue to pay for the year and you could use that money to buy shares back. You get (inaudible) million shares, maybe 7 million instead of 8 million, and book would go from 9.50 to 10.57. If you had presented that to the Board of Directors, I cannot imagine how they could reject that logic. How can you reject that logic?

Michael Braun

Well, I think you bring up a good argument. And that – like I said, that’s something that we’ve looked at numerous times back when the stock was higher.

Richard Carlson – RCS Asset Management

Well, I know you made the right decision, because the stocks are down 80% or so. Let me ask you another theoretic question. At what price does it make sense to buy the stock back?

Michael Braun

That’s a good question. And I think – I don’t know the answer to that question, but I think it depends. I mean, if you just look in that stock price, it depends on a lot of things. It also depends on our position and our growth plans for the company too and what the Board feels is the best use of the capital.

Richard Carlson – RCS Asset Management

I mean – you know, I’m a shareholder and Wilshire is a shareholder and others are. We’re interested in making money for the stock. We don’t give care about the insurance business. I mean, you guys are insurance guys. I’m in investment business for like 35 years. And I watch steel guys build steel mills because they are steel guys. They didn’t care about the stock price, didn’t even understand it in most cases, maybe the CEO did. So I think you guys need to focus on the price of the stock and book value. Book value is going to fall the price of the stock probably. I mean, it seems to. Warren Buffett thinks it will and he is a pretty smart guy. So you guys need to focus on that. Insurance business is what you do to generate book value. But you can generate book value other ways. I mean, I can’t imagine your directors are addressing this issue, because it doesn’t sound like you are presenting it to them.

Michael Braun

Well, we will bring it up again. We’ve had the stock buyback, the dividend conversation and the group of the company conversation. We do present it, we do discuss it, and we will bring up your concerns in the next Board meeting -you’re your suggestions, I should say.

Richard Carlson – RCS Asset Management

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

Michael Braun

We could do that. And I –

Richard Carlson – RCS Asset Management

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

Michael Braun

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

Richard Carlson – RCS Asset Management

Right, okay. Okay. I just – I think you should address it. I think it’s very important. And I think probably you guys get a lot more bang for your buck than, A, paying out a dividend, or B, buying policies. That is just my opinion. Thank you.

Michael Braun

Thank you.

Operator

We’ll go next to Dan Harvey [ph], private investor.

Dan Harvey

Hello, can you hear me?

Michael Braun

Hi, Dan, how are you?

Dan Harvey

Fine. I have a question on a macro level. It’s been tough throughout in the Florida legislator and couple bills that they want to take the wind portion of the premium and let the state take that over, kind of nationalize that – socialize that portion of it. And I was wondering if you guys have an opinion on if you think that will gain any muster in the recession here.

Michael Braun

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

Do I think the state is going to assume win? I think currently the state has concerns that they can’s shoulder the risk – their current risk of the win that they have taken on. And if you’re going to increase that exponentially, I think that’s pretty aggressive. I don’t know what the legislators are going to do, but that’s pretty scary for the state. I think the state – they could bankrupt the state. I think traditionally government programs don’t always work in this.

If you look at the Florida – I'm sorry, the flood program, that program has been actually wrong for years and that has been corrected. I believe they still have some $20-odd billion of debt that I think the Federal government only in the last year or so went and – wrote off. If you look at how Citizens is being around FHCF, when there is no wind, they look pretty good. I don’t know, maybe that’s an exaggeration, but they don’t look so bad. When there is winds coming through, it’s a different situation. I don’t know what the legislators will pass. I don’t think it’s a good idea personally.

Dan Harvey

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

Michael Braun

Our current program that runs through July 1 is a $3 million retention. And that runs up to our $1,100,000 [ph], which we are just in the process now starting for the ’09 season. We anticipate that we like – our intention is to stay at the $3 million retention, but that will be determined by what the market will bear, the reinsurance market.

Dan Harvey

You can see that kind of conservative, only retaining $3 million or –?

Michael Braun

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

Dan Harvey

All right. Thank you.

Michael Braun

Thank you.

Operator

We’ll go next to Ron Bobman with Capital Returns.

Ron Bobman – Capital Returns

Hi, thanks a lot. I was curious if your reinsurance brokers had given any sort of guidance or estimation as to what the increased renewal cost would be for the reinsurance program?

Michael Braun

Well, just like us as an insurance company have taken hits on investments, the reinsurers have taken hits on investments. And there are surplus, most surplus. The company’s surplus has been reduced. Two events really hurt our reinsurers in ’08. One is Wall Street and the second was Ike. Ike was a big storm that hit taxes and showed losses. They are all over the place, maybe 18 billion to 25-plus billion. So you have less capacity. Due to the laws of supply and demand, we have less capacity. We believe that the rates might go up. We were being told that could go up 5%, maybe 10%, 15%. We don’t know specifically until we really get in.

We think we are a better company than most and we think that we should do well on our reinsurance contracts. What we’re being told is a lot of the newbies that don’t have – the new carriers in Florida that don’t have the track record would be the first ones to get pinched on lack of capacity or more aggressive pricing. So I would say perhaps 10% to 15% range is general statement that are being given out there from the brokers. And that’s in publications. That’s not specific to our company. Those are general statements.

Ron Bobman – Capital Returns

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

Michael Braun

In terms of the FHCF, there is a mandatory level. So that has no point. We have no ability not to buy that. In terms of something that is expiring, we bought just $1 million of coverage last year. I believe it was $1 million excess of like $9.67 million, roughly $9.7 million. So that is at set to expire. In terms of the optional coverage, there is two optional coverages on the program; TEACO and TICL. TEACO is cheaper in the private market. We anticipate the private market being cheaper this year as well.

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

Ron Bobman – Capital Returns

The TICL right now is going to be problematic. Am I right, that may go away and you may have to buy it privately?

Michael Braun

It is problematic. It’s – they are talking about possibly cutting it back, possibly reducing it or getting rid of it. You are talking about, I believe, it’s about 18 billion, which I don’t think the market could support. So I don’t think that – meaning, it would be too much of a shot and which would lead to dramatic increases in premium to policyholders, which I don’t believe that’s what the state wants to do. It’s set to expire next year, the TICL layer that is. And I would anticipate some type of – they are using the word glide for Citizens rates to go up. I’m anticipating there might be some type of glide path for the FHCF exposure to contract, maybe over a period of one – you know, at least one year, perhaps two, three, four or five years, I don’t know.

Ron Bobman – Capital Returns

Okay. Thank you.

Michael Braun

Thank you.

Operator

Next to Ray Derricks [ph], Derricks Brothers [ph].

Ray Derricks – Derricks Brothers

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

Michael Braun

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

Ray Derricks – Derricks Brothers

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

Michael Braun

We don’t put projections out there for earnings. In terms of premium, I think we discussed about a lot of different things such as our current in-force book, some of the things we are looking to do with the Citizens book that –

Ray Derricks – Derricks Brothers

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

Michael Braun

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

Ray Derricks – Derricks Brothers

Okay. Thank you very much. Appreciate it.

Michael Braun

Thank you.

Operator

Next to Carl Dorf with Dorf Asset Management.

Carl Dorf – Dorf Asset Management

Hi, let me identify myself. I’m a director of the company. And I know we don’t get on this call, but because of the long discussion that we have relating to the buyback, I wanted to give a little bit of a feel as to where I’m personally coming from and to some extent the Board. First, the mechanics that the individual who brought up that issue speaks about are absolutely correct. You would get very substantial appreciation in terms of your book value.

The problem with that is when looking at only from that point of view is that the company and the approach that the individual took is very pertinent if you want to liquidate the company. We are not in a business of liquidating the company. We want to stay as an ongoing company, and you heard some of the plans that we have in order to make this company grow and become a very healthy company and do very well. If you just attempt to increase the book value, you are doing two things.

The first thing that you’re doing is you’re depleting capital that’s on. If anybody looks at what’s going on in the marketplace, this is not the time to do it. Second is, as a shareholder in the company as well as being a director, I believe that you should try to maximize whatever you can do for the shareholders of the company. There are two ways to do that. You can increase the book value, which in theory improves the value of the stock. However, in this market, nobody seems to care.

What actually is being put into shareholders’ pocket though, it’s hard cash that the company can generate from its business and take it to the shareholders. The optimum way of treating the issue that was discussed would be a buyback and a cash dividend, both of which if they could easily be afforded out of the capital position of the company would benefit all shareholders. We as a Board address this issue on a regular basis, as management said before. It doesn’t mean that at sometime in the future we might not choose to do that. In the past, it was brought up before.

As the caller mentioned, we made the right decision by not buying back the stock, or what would have happened is we would have depleted our capital at a time when capital is king. Everybody in the investment business knows that. So we’ve held on to that capital. We’ve paid a good return in cash during that period of time to shareholders, which they realize. And even though the price that the stock depreciated substantially at one time on the basis of the cash that we are giving shareholders, then we’re getting an 18% return.

And last but not least, I think the most important point is, in any business that you have, there is an infrastructure in the business. If you attempt to pay out your capital and do not maintain enough capital in the business to grow that business, you are painting a scenario where the company won’t be able to earn enough money because you’re going to shrink the revenue. This is not what we intend to do. So all that said, I just wanted to clarify that issue a little bit, give some of our thinking, perhaps this helps. And this comment does not mean that at some time in the future the Board might not decide to buy back stock as well as pay cash dividend. I hope this helps everyone.

Michael Braun

Thank you.

Operator

We’ll go next to Richard Carlson with RSC Asset Management.

Richard Carlson – RCS Asset Management

I appreciate director’s comments on the thinking on the buyback. I was a director of Carmen Forrester for many years and we sold our company. And when we sold the company, we sold on a basis of multiple of book value, plus earnings and some other metrics. And on many, many occasions, we would go into the market when it was selling below book and buy shares back, and the insurance cycle was of course up and down. It just depends what the discount is to book and you don’t have to use all your capital. You only have to use what you’re paying out in dividends. That grows book by $1.07 just using your dividend money here.

So I understand where you’re coming from, but there is nothing to say you can’t do both. And you also mentioned that nobody would care about your stock. We don’t care about the stock price. We only care about fundamentals of the business and book value. The stock would take care of itself. And you probably have the lowest price to book right now of any insurance company in North America. I think you’re selling at 20% of book, just a little above 20% of book. I have a question though. The question is – I noticed your operating expenses were up in the fourth quarter quite a lot over last year. Could you deal with both the salary and wage line and also the operating and underwriting expenses?

Michael Braun

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

Unfortunately, there is a long process there. I can tell you we have hired staff in the latter half of the year primarily for some of these new things that I think are going to come to fruition in ’09. And a defensive strategy, we could have – we were the leaner in the beginning of the year, but I think we may have been – that was the leanest we’ve been in years. And that was leaner from really when we saw our premium decreasing in ’07, our staff count was probably as high as, I would say, 135. And it went well below 100, down to 90 some odd. But right now we’re at about 105 and we’re planning growth. We’re in a hard market.

Unfortunately, these expenses, they hit you. But we think we’re doing the right thing with these people with our marketing initiatives. We’re actually paying more commission to our agents than we ever have. We’re paying what we think to be very – more than competitive – I shouldn’t say more than competitive, very competitive in the marketplace. On our homeowners we were paying as low as 8%. We’re paying 12%. So I feel that we are in a good place there. We are spending money wisely to build the business. Are you still there? Do you have another question?

Richard Carlson – RCS Asset Management

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

Michael Braun

Yes.

Richard Carlson – RCS Asset Management

Hiring a money manager, I of course take issue with, but that’s the way you manage your policy. I mean, your chance to finding money manager is going to add values probably one out of three. All right. Thanks a lot, fellows.

Michael Braun

Thank you.

Operator

And next we’ll take our final question from Bryan Freeman [ph] with Deacon Investments.

Bryan Freeman – Deacon Investments

Hi guys. Hope you’re all okay today.

Michael Braun

Yes. Thank you for calling. I appreciate it.

Bryan Freeman – Deacon Investments

Yes, sir. Quick question. Just really briefly looking over, I mean, this is a $15 million total market value of your equity with a book value of $9.50 per share and what seems to be is – going forward, do you not see yourselves as just an ideal takeover candidate for somebody?

Michael Braun

I can tell you I think that we’ve got a great business here. We had a tough ’08 and I think that a lot of what happened in ’08 is behind us. I think that we don’t anticipate some of those problems to occur again in ’09. I think we’re built for growth. We have the infrastructure to support what we are doing. I think we are a strong company with a strong future. I can tell you the Board of Directors and the management work for the shareholders at the end of the day, and we will do what’s best for our shareholders. But that’s – we think we’ve got a strong plan and we’re going to implement it.

Bryan Freeman – Deacon Investments

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

Michael Braun

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

Bryan Freeman – Deacon Investments

All right. I appreciate it.

Michael Braun

Thank you.

Operator

And we have no further questions.

Michael Braun

In closing, I appreciate – we appreciate everyone calling in and those questions asked. It’s been challenged – we’ve been challenged in ’08. We feel very good about ’09. A lot of these premium and initiatives as they come on line, it can be frustrating that we haven’t been able to get some of them on line quicker. And actually I’m just thinking here – the one thing I didn’t touch on was our condo program. That’s another premium initiative that we’re working on that we’ve been going back and forth with the state. That can generate a significant amount of premium. That’s through a different general agent. And that has very good marketing and underwriting that we anticipate could do $1 million to $2 million a month as it ramps up, after it has a period of time to ramp up. We feel strong about the future of the company. We feel that 2009 will be a good year for us. And we appreciate everyone’s support. Thank you.

Operator

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

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