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Federated National Holding Company (NASDAQ:FNHC)

Q4 2012 Earnings Conference Call

March 13, 2013 4:30 PM ET

Executives

Michael Braun - President & Chief Executive Officer

Pete Prygelski - Chief Financial Officer

Analysts

William Meyers - Miller Asset Management

Doug Ruth - Lenox

Samir Khare - Capital Returns Management

Lee Matheson - Broadview Capital

Operator

Good afternoon and welcome to Federated National Holding Company’s, fourth quarter 2012 financial results conference call. My name is Sayed and I will be your operator today. Please note that today’s call is being recorded. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. (Operator Instructions).

Before we begin today’s call, I would like to read the Safe Harbor statements. Statements in the conference call that are not historical facts 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, 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 that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements made on this call due to numerous risks and uncertainties include, but not limited to the risks and uncertainties described in this conference call or press release issued today and other filings made by the company with the SEC from time to time.

Forward-looking statements made during this presentation speak only as of the date on which they are made and Federated National Holdings Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise.

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.

Michael Braun

Thank you. Good afternoon and thank you for joining us today to discuss Federated National Holding Company’s, fourth quarter and year ending December 31, 2012 financial results.

I am joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results for the quarter and the year can be found in our earnings press release. I will go over some brief highlights from the quarter and then Pete and I will open up the line for questions.

2012 full year highlights include net income of $4.3 million, compared with the loss of $400,000 in 2011. Gross written premiums increased by $21.2 million or 21.6% compared with the same 12 months of the prior year.

Net premiums earned increased by $10.9 million are 22.3% compared with the same 12 months of the prior year. Growth of unearned premiums at year-end increased by $11.1 million or 23.1% compared to December 31, 2011.

Book value per share increased to $8.26 at December 31, 2012 compared with $7.32 at December 31, 2011, a 13% improvement. Homeowners’ policy count grew from 43,793 at the start of 2012 to 61,102 at December 31, 2012, a 40% increase. Continued improvement in underwriting results, loss ratio improved to 50.9% for the full year 2012, compared with 53.7% for the full year 2011.

I am pleased to announce that the Board has also approved a dividend increase of 50%. The dividend of $0.03 per share will be paid on June 3, 2013 to shareholders on record as of May 6, 2013. This actually reflects both, our commitment to returning capital to our shareholders and the Board’s confidence in our business plan.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from William Meyers from Miller Asset Management.

Michael Braun

Hi William. How are you?

William Meyers - Miller Asset Management

I’m good. Congratulations on the quarter. I would just like you to talk about the, I think it was roughly eight-tenths of $1 million assessment that was in the quarter that it has been announced earlier. But could you give us some historical context for that and any thoughts about whether those kinds of assessments can occur in the future and the magnitude of them.

Michael Braun

Sure. There’s always a risk of assessment in Florida, whether it’s from FIGA, which deals with insolvent companies or the FHCF, which is the reinsurance, or Citizens for that matter, so that treat’s always there.

Unfortunately the $800,000 was our share of a company that went down a few years ago and they needed about $47 million to run off its book of business. It’s a company that wrote a significant amount of business in areas that were prone to sinkholes and they went through all their surplus and obviously came up short.

I don’t believe there’s anything pending out there that would indicate that we have any other assessments coming, but that ours is going to be fully recovered through our rate action. Basically once that was paid, we went and filed it with the State and now we have the ability to recover it over the fall in approximately 12 months and there’s some movement out there based on how we project our business to be. It could go a little bit longer or a little bit shorter.

William Meyers - Miller Asset Management

Okay, just a follow up then. When are you likely to know about the rate increase?

Michael Braun

In terms of the rate increase, it is pending right now, has yet to be approved, but it’s a very routine matter. So in other words that $800,000 will come back. I’m going to over simplify it; let’s just say $800,000 over 12 months will come in within equal portions. That’s not entirely true, but just over simplify that and that should be approved in short order and like I said, we’ll recover all that money over the next 12 months.

William Meyers - Miller Asset Management

Okay, well thank you. That’s all from me.

Michael Braun

Thank you William.

Operator

Thank you. Our next question comes from Doug Ruth from Lenox.

Michael Braun

Hi Doug, how are you?

Doug Ruth - Lenox

Fine, thank you Mike. That was a beautiful report. Could you expand on your four pillars that you’re talking about here and tell us a little bit more, maybe give us a little more color.

Michael Braun

Yes, really the main things that we continue to focus on is this disciplined underwriting, risk management, controlling of our expenses and our distribution. Our underwriting as we’ve been talking about for the last two to three years was very disciplined and it’s not difficult to write business in Florida. I’ve said that numerous times and it’s a very profitable business, that’s the key, and sustainable profitable business.

In terms of risk management, our number one expense being in Florida is reinsurance. So we want to make sure that we can afford to buy the correct amount of reinsurance based on the premium that we are getting to that policy. So you have to have the ability to perform analytics on that, to ensure that new business or renewable business is coming in profitably.

And also controlling expenses; I think we’re very disciplined in that regard and run a lean operation at our distribution. Our distribution is our agents. They are our partners. I was an agent before I joined the company back in ’98 and they are critical to our success. So we want to make sure that we are providing a great service, not only to the insured who is our customer, but also the agent who is our customer as well, to ensure that we’re providing timely service and we’re competitive with our prices in the marketplace and handling our claims in a timely manner and in a fair manner.

Doug Ruth - Lenox

One of the things that I read, you had stated that you had some restrictions on where you could file insurance in Florida. Now it seems like some of those restrictions have been removed. Could you maybe give a full color on that issue?

Michael Braun

Yes, absolutely. I think in the last earnings call I said that we were doing approximately $1 million a week of new business and now we are seeing that increase significantly. Right now we are doing about $2 million a week of new business, which is a significant improvement.

But we’re not chasing the market and what I mean by that is, we have the remaining true to our discipline in ensuring that we’re writing the correct business, but I think that we have the ability to ramp up the business even more. So let’s just say they are about approximately $120 million book of business that’s renewing based on normal retention rates.

On top of that I think that we’re going to go from $2 million. We may approach $2.5 million to $3 million a week of new business. That actually has to go through the actual underwriting process and so I would anticipate, let’s say 80% to 85% of that would stick on the books.

Renewal, they tend to anticipate about 90%. So we’re seeing its always easy to write the premium, but what we are seeing now is the market is really coming to us and I think it’s because of our competitive rates, our quality of service and our people. There’s 124 people now that are really committed to good service and being there for our policyholders when they need us.

Doug Ruth - Lenox

One of the things that you had mentioned before was that Citizens rates were going up higher than Federated. Could you explain how the expense fit in the company?

Michael Braun

Absolutely. We are definitely seeing more. We are very competitive in the marketplace. The type of business that I prefer and most companies go after, that performs better I should say, tends to be the higher value coverages, higher value coverage A and that’s the value of the structure and newer homes do better.

We are very competitive in that. We targeted that for quite a while and where anyone can really see that is there’s a website of the State OIR where people can do their own comparison-shopping and it’s called Choices. So if you were to go on the OIR’s website or Google the words Florida Insurance and Choices, you’ll see it.

But in the 67 counties for new construction, we’re one of the most competitive companies out there. We’re always in the top five. I would say in most if not all of the counties listed. So we have the ability to write the correct business and that leads us to a more efficient reinsurance buy as well.

New construction is built much better. If you put two homes next to each other, the one from the 70’s, that frame and could be particle board roofing and 3x1 shingle and then you put next to that a concrete block with a HIP roof and [bearwidth isle] (ph) and straps, it’s going to react differently in a storm and the need for reinsurance is much lower on that newer construction. It’s going to perform better.

So that older construction, you may have a $50,000 to $75,000 loss and the newer construction you may have a $5,000 loss. So the need for reinsurance is much less. While that’s volatile based on the needs in the reinsurance market and really we’re attracting that quality business.

Doug Ruth - Lenox

That sounds wonderful. What about this deal that you signed with Allstate. Can you put any color or do you have any projections on that at all?

Michael Braun

Sure. Allstate has a limited number of partners that they allow, carriers to right homeowners business in their Florida agencies and we are now one of them. And as I said earlier, we’re about $2 million a week right now. We really don’t have many of the Allstate’s turned on yet, so basically its about 700 agents in Florida and we anticipate those good quality agents are going to continue to feed us with new business that will be advantageous to us, as well as to Allstate and their agents, as well as the insured’s. So I think that’s going to help us continue to grow our business.

Doug Ruth - Lenox

That sounds wonderful. Mike, you’ve done everything that we can ask as shareholders and we are looking forward to the next report and thank you for answering my questions.

Michael Braun

Well, thank you. Have a good day.

Operator

Thank you. And our next question comes from Samir Khare from Capital Returns Management.

Michael Braun

Hi Samir, how are you?

Samir Khare - Capital Returns Management

Good. How are you guys doing?

Michael Braun

Great. Thanks.

Samir Khare - Capital Returns Management

Good. I’ve got a few questions. The first is you said you guys are writing about $1 million, what was it, a month; oh sorry, $2 million a month?

Michael Braun

No, no. What we have is, our in-force book, let’s just call it approximately $120 million. So you’re talking that’s renewing as normal, but on a weekly basis we’re binding about $2 million a week of new business.

Just to give you some other comparable in that, in 2011 we were doing about $0.5 million a week; in 2012 we did about $1 million a week and right now we are at about $2 million a week. So we are seeing great demand for our product and some of that is just a change in the marketplace. I think some of our competitors have struggled in some areas we worked in, but we’re really shining and were able to write that business. We’ve got the surplus to do it and the agents have to deal with it. So I think that’s a great opportunity.

Samir Khare - Capital Returns Management

Okay. Is some of that coming by way of opening new zips or is it kind of the same areas or places we were looking at before.

Michael Braun

Yes. Well, the only change that we’ve had this year is we’ve opened up some additional areas in the state, because we were able to have our new forms updated. So we’ve been able to write more business in the Tampa, St. Pete area where in the past we had Tampa, St. Pete, effectively that was closed for about 10 years, and that was significant in the sense of growing top line; however it was the right thing to do.

There are some of our competitors who are getting hit very hard with these sinkhole claims and it continues to be an issue today. Now with better language, we can go in those areas and we’ll cover what’s called catastrophic collapse, but we won’t be covering sinkhole and that’s just a small, may sound like a small definition difference, but catastrophic is when you see a significant sinkhole similar to what you’ve seen in the media lately.

However sinkhole claims are very numerous and they are very costly, separate from catastrophic collapse. So what we’re doing is we’re writing business in that area that is covering normal homeowner type risk, but catastrophic collapse and not sinkhole.

Samir Khare - Capital Returns Management

Okay. And presumably you guys are writing similar risk profiles, that same average premium, seeing that profile as I guess your core book in these zip codes.

Michael Braun

Well, that’s a great question, because there’s a couple of things. South Florida has much higher premiums and unless you’re living in Florida, these numbers may sound even higher than you may anticipate, but South Florida premiums can come in $3,000, $4,000, $5,000 and in Central Florida and North Florida the premiums can come in $500 to $700. So it really varies. And it’s not that they are so much more profitable in South Florida, South Florida has a huge reinsurance component to it.

So statewide we are seeing our average premium, non-tri-county about $1,200, tri-county about $1,800 and statewide about $1,500. Those are rough numbers. I mean it really had to fluctuate some different geographic parts, but clearly South Florida has higher average premium per policy.

Samir Khare - Capital Returns Management

Okay. And then just looking at the 700 agents you’re going to be appointing from Allstate, what is the premium potential there and maybe you kind of touched upon it a little bit before, but…

Michael Braun

Well, I can’t say for sure. But obviously there’s potential there. Our book has ramped up from about $1 million a week of new business just since the beginning of the year to $2 million and we still have other voluntary agents that would like to write business with us and we have a process that we go through before we appoint them. We become t sought after by many agents. So I do believe we may approach $2.5 million to $3 million a week of new business.

And once again, I want to stress that this is not some top line number that we’re chasing; that is not the point at all. We actually believe that the market has come to us and our product and its working very well for us, but I would say as we sit here today, so we’re writing $2 million a week, I think it could ramp up to $2.5 million to $3 million a week with a combination of different factors.

Samir Khare - Capital Returns Management

Okay. And then just turning to reinsurance, I know it’s still probably early days, but 6/1 7/1 (June 1 and July 1), when you guys look at your homeowners reinsurance, what do you guys anticipate, how big are the sales you think you will buy? What will the retention kind of look like and what kind of costs you guys are looking at?

Michael Braun

Well, I would say the main thing you’d want to look at is the percentage of premium, and I think we are going to be in the low 40’s again as a percentage of premium. I’m just going to say roughly 42%, it’s a real rough number.

In terms of how much cover, last year we bought approximately $250 million of cover. This year I anticipate around $300 million. But that number is fluid and the reason I say that is, is because about 90 days ago I would have said that number was probably closer to $275 million, but with the volume of business that we are writing, obviously that requires more reinsurance.

So in terms of the actually cost, last year’s program was approximately $42 million to $43 million. So I don’t want you to get too caught up in terms of how much dollar amount we are actually going to spend out. But as a percentage of premium, I think we are looking at a ballpark of low 40’s, 40%, 41%, 42%, it could be as high as 43% or 44%.

But we are comfortable that the reinsurance market, there is adequate capital, there is no doubt about that. I’ve had more reinsurers visit me this year than I’ve ever had and basically the capacity that we are stating that we need is not an issue with the reinsurers that we met with to this point.

Samir Khare - Capital Returns Management

Alright, great, and just one last question. Are takeouts still off the table? It looks like you – it seems like you don’t need it given your top line growth.

Michael Braun

I’m not a fan of takeout, I’m really not, and the big reason is I think our volunteer is working very well and I would say if we are writing $2 million, we are doing $100 million takeout is what you could say and we are not doing a takeout, but I’m just saying to draw a comparison.

What I like about volunteer business is we underwrite it policy by policy and the word I use with voluntary is it’s sustainable, its quality business that’s sustainable. The De-Pop, I don’t think the system works and I think you are going to see a change by Citizens with that.

And what I mean by that is, the majority, the great majority of Citizens policies are not profitable for Citizens. For a carrier that’s not Citizens, a private carrier, they need premium that’s roughly 15% higher to maintain the same combined ratio, because the state has certain advantages. I don’t believe that Citizens, the majority of the policies as I said are not profitable. I don’t believe there’s another 15% of margin in there.

The main benefit you get from Citizens is, you get a boost in earnings short term, it’s a tremendous boost and what that means is, from the day you do a De-Pop, if you do it in December and people do De-Pops in December, right after the wind season, and the reason for that is, is because at the start of the wind season you already have your reinsurance cost in hand. But now you are going to do a De-Pop and you got a lot of free unearned premium.

When I say free, it’s sort of premium without reinsurance expense or without acquisition expense, for the first, roughly six months or so. So those expenses typically eat about 50% of premium and you don’t have those when you do a De-Pop.

My problems with Citizens De-Pop is, I don’t believe it’s a good sustainable model and it tends to lead towards more De-Pops, which I believe perpetuates a bigger problem. They have to deal with it at some point. I like voluntary. I think its better quality. I think it’s sustainable and I think it will show in the long term that it’s a much better business plan.

Samir Khare - Capital Returns Management

Great. Thank you for the answers.

Michael Braun

All right. Thank you Samir.

Operator

Thank you. Our next question comes from David Spear (ph) from Venture Capital.

Michael Braun

Hi David, how are you?

David Spear (ph) - Venture Capital

Hey, how is it going?

Michael Braun

Very well.

David Spear (ph) - Venture Capital

First of all, great quarter. Very impressing that you are now writing about $2 million in new business a week. I was just curious, is this purely a homeowners insurance, the $2 million.

Michael Braun

We are just talking about homeowners. Our GL is actually up 25% and I think we can increase that as well, and the reason I would attribute that to is I think its fantastic service that we provide. I think our rates our competitive. But I will be honest and say that the market is improving in the state that’s affording us the ability to get more business. The contractors are working more frequently. Our GL is absolutely up; it’s about 25% right now.

David Spear (ph) - Venture Capital

But I mean, if you look at your press release, I mean your loss ratios are obviously far better in the homeowners. Why would you more shy away from the other lines and just focus purely on the homeowners, which as you know loss ratio is around 50%, and excluding your other lines, this is far better overall.

Michael Braun

Well, there’s other expenses. And let me just go in more in detail, but let me say this way. Let’s say homeowners ballpark. If we say 45% goes to reinsurance and let’s say another 30% goes to non- Cat losses, AOP losses, you get to 75 pretty quick. Now then we still have acquisition and overhead. So those numbers can work and I actually think we beat those numbers.

Now in terms of GL loss in LAE, that program is running right now at about 55, let’s just say 60. Now we still have the same type of acquisition expense and so on, but my point is that 60 are roughly 10 to 15 points better than the homeowners.

The big piece about homeowners is there’s a huge reinsurance and on the GL we don’t have that as much. We actually do cede it off, everything over 500,000 in our property program and our general liability program. So there is some reinsurance expense there. But my point is that the GL is profitable as well. The ratios are distorted, just because of the big cost of reinsurance on property.

David Spear (ph) - Venture Capital

Got it. And now that you are writing on $2 million a week, do you expect that to translate directly into continued revenue growth and earnings growth this year.

Michael Braun

Well, there is no doubt David. All that premium that comes on our books is unearned premium and it earns out according to the accounting rules throughout the year. So right now we are doing $2 million. I do anticipate that increasing and that will earn out correctly, and we are very disciplined with our expenses.

Our expenses are not increasing, our fixed costs are really not increasing at all and just our variable expenses are associated with, typical reinsurance as I said on these policies, standard loss and loss adjusted expense and commission to agent. My point is, the margin that we expect to keep would actually grow as a percentage of premiums with volume, as the volume ramps up.

David Spear (ph) - Venture Capital

Got it. So with volume ramping up you think your loss ratio is to gradually improve going forward.

Michael Braun

Sure. Our business is scalable. I’m not going to say it’s a huge -- most of our expenses associated with our business is variable expenses and those will remain flat. But our overheard absolute will represent a smaller percentage of our premium written, if that answers your question.

David Spear (ph) - Venture Capital

Sounds great. And lastly, currently you have no analyst coverage, but now it seems you guys have almost turned the corner and are very compelling if that’s an opportunity. Do you anticipate that to change or have you guys addressed that or approached by any analyst in that regard?

Michael Braun

Well, we do talk with analysts and in terms of it in the past. Over the last year we’ve interviewed a number of them who still haven’t come on board and help us get our story out there. We haven’t made any decision at this point, but that’s something that Pete and I deal on a regular basis, as well as the Board looks at it. So I think we have a very good story that’s out there and people are receptive to it as well.

David Spear (ph) - Venture Capital

Yes, I agree on all those points. I’ll be looking forward to speaking to you guys soon and a great quarter.

Michael Braun

Thank you David. Have a great day.

Operator

Thank you. And our next question comes from Lee Matheson from Broadview Capital.

Michael Braun

Hi Lee, how are you?

Lee Matheson - Broadview Capital

I’m good guys. How are you?

Michael Braun

Good, good.

Lee Matheson - Broadview Capital

A couple of things. There was a question earlier about premiums. Obviously the average premium decreases as you go north in the state, but you are also at the same time increasing policy limits. I’m wondering if you could kind of walk us through your view on let’s call it PML 100 or PML 250 kind of scenarios. Where you are today versus where you where in 2004 and obviously just a policy limit number being so big now scares us a bit, but why don’t you talk us down a bit.

Michael Braun

Well, as we go north in the state, the need for catastrophe reinsurance decrease and to exaggerate the point. Let me say this, if we were to start to write homeowners not just in Florida, but let’s just call it in Ohio, the need for reinsurance for hurricanes would be much less. So you would see our TIV continue to increase, yet our PML not increase at the same rate.

So your right our TIV, let’s call it about $21 billion or $22 billion of TIV, yet our PML of let’s say $250 million. So the more business we put on and let’s say if we were in Ohio, that would not push our PLM up, because the storm would not hit both places theoretically at the same time. There is a lower probability and there is a lower probability of the storm hitting Ohio. So let me bring that back to what’s actually happening in Florida.

So we typically have been a coastal company. We’ve been typically with concentrations in the tri-county, which is Dade, Broward and Palm Beach on the east coast, up to Volusia. And then on the southwest Florida, which is Lee, Martin (ph), Sarasota and Charlotte.

Not you are looking at us and if you look at like what called the heat map of all the counties, you are seeing it light up in most cases. So we have much more exposure in Tampa, St Pete. Our concerns in the past have been mostly answered.

In terms of the panhandle, we are able to write there and be very disciplined. Orlando there is much more competition over there, however we are penetrating the market better than we ever have as well as Jacksonville.

So what I am saying is, as we diversify throughout the entire state as we are, then the reinsurance models are not raising at the same level as our TIV as it is our exposure.

Lee Matheson - Broadview Capital

Yes. So your view is that 100 at this point is 250, something like that.

Michael Braun

Last year we bought to 250. I would say right now ballpark and this is just a rough number; I’m saying it’s probably 275 and I think we are probably going to go out to market with looking for a round 300; those are just rough numbers. These have to go through the model and there has to be an output on that. Those are just very rough numbers.

It could be more of less depending on the volume of the business that we write, but not only the volume, but that amount of reinsurances needed on those policies. So our focus is on profitability and like I said, I think the main thing you want to look at is reinsure as a percentage of premium, which we think we are managing well.

Lee Matheson - Broadview Capital

Yes okay, and again on the Citizens takeouts, I mean we would tend to agree with you. Obviously the market thinks something different. I noticed you now have a history of pretty solid underwriting, yet small takeout. What’s your view on doing them around the edges versus trying to swing for the fences?

Michael Braun

Sure. We’ll continue to look at it. I can’t comment on United or any other company for that matter. However any company that’s sustainable in the State of Florida, anyone who’s been here for a long period of time, their primary business is voluntary.

Every company that’s been here for an extended period of time, their core business is voluntary. I do not believe Citizens De-Pop is a sustainable business model. So that’s why I shy away from them. I don’t like those in that regard.

But let me say that it does give you a huge short term earnings and let me just say, if we were to De-Pop a $20 million book of business and let’s just say they were half way through the term, just to be using these numbers, we have $10 million of unearned premium, and that’s my example, let’s say it was 50% acquisition and reinsurance expense.

That’s $5 million that we would realize instantly, and that’s very attractive and trust me, we look at that and we think about that. However, you are required to keep those policies for three years and I could argue that you would be giving back all of that $5 million over the next three years.

Lee Matheson - Broadview Capital

So the game is to just play the daily chain and keep – okay, saying the losses on the existing book by taking out great underwriter number of policies in our November, December take.

Michael Braun

Sure and that’s my concern. I don’t want us to be required to do another De-Pop and I say required, just to be able to sustain our margins. That’s a huge increase in margin. Having 50% of your premium as profit, just assuming the book normally would run at a 100, that’s extremely attractive, that’s not over looked by us.

Lee Matheson - Broadview Capital

So I’d say it’s a quite profit than your sort of arbitrage around your neck for 36 months thereafter.

Michael Braun

Yes, I mean we did them in 2004 and we did them in 2009 and I think our voluntary business is sustainable in the way to go and I’m very comfortable with what we are doing. We think it works, and we think it’s the right thing for our shareholders and our policyholders.

Lee Matheson - Broadview Capital

Good and where was that statutory capital at the end of the quarter?

Michael Braun

At the end of the year I think we were at ballpark 51; 52-1.

Lee Matheson - Broadview Capital

In 12/31 (December 31)?

Michael Braun

Yes, in 1231.

Lee Matheson - Broadview Capital

Okay. So I mean you guys are growing, but you are also – you are saying your capital is really kind of pounding out here, so…

Michael Braun

Absolutely. And what’s nice to know also is we have dry powder, and what I mean by that is, just assuming the $52 million, there is no reason why we can write 5 to 1 ; that’s $250 million. So let’s hope we have a problem in the next 12 months where we may need additional capital, because we are writing so much good business. But there’s other things we can do obviously.

We can always raise capital and there is capital out there that comes knocking on our door, but we are not looking to dilute our shareholders (inaudible). What we are about is making sure that we will reward them. We have the capital that we need, we need to deploy it in a profitable manner and that’s what we are working on.

Lee Matheson - Broadview Capital

Good, and in terms of tri-county policies, I know you kind of stopped in Q3 reporting the actually number. Did you drop below 20%?

Michael Braun

We are right at 20%. I believe 19.88%, but I’m not certain on that, but let’s just call it at 20% and I can tell you that our in force business you saw in the press release was about 61,000. With policies, this are data policies that are in transit and what that means is someone has, an agent hit the button and it’s yet to come in. Maybe it’s effective in a week or two weeks, whatever it may be.

Our bond policy, we are already over 70,000 as we are here today. Now agents can bind up to 45 days in advance. So there is another 9,000 policies in transit that got to get to us from year-end. So what we’ve gotten on the books since year-end plus what’s in transit, and I think the number’s going to continue to grow.

Lee Matheson - Broadview Capital

Sorry, and that growth post Q4, none of that is tri-county, is that what you are implying?

Michael Braun

No, I’m not saying that. I’m saying that we are still at about…

Lee Matheson - Broadview Capital

At about 20.

Michael Braun

Yes, ballpark 20%, so let’s just say at 60,000. Let’s call it 12,000 ballpark, 12,000 tri-county; that’s a rough number.

Lee Matheson - Broadview Capital

And then finally the $800,000 assessment, did that flow through operating expenses in the quarter.

Michael Braun

Yes, lately it flew though operating expenses.

Lee Matheson - Broadview Capital

Okay, so is it fair? I mean you guys were at basically $10 million OpEx both years, 2011, 2012, and actually kind of flat there since 2009. I mean this is to grow that at the premium rate that you are doing. Can you keep the OpEx down in that $10 million range?

Pete Prygelski

Well, as Mike mentioned in the press release, our expense that we can control, meaning expenses that aren’t directly tied to premium. So our salaries, the building and such, we believe we can hold those flat. I think we as a percentage of revenue, they decreased by 3% year-over-year, and in think that in ’13, we are going to pretty much hold those flat; the ones we can control.

Obviously loss and LAE as a percentage of earned premium, our reinsurance cost is a percentage of earned premium and then premium tax and surveys and inspections are all part of percentage of premium. But the fixed type costs, like I said they were down 3%. I think we can hold those flat in 2013, excluding of course we get another assessment.

Michael Braun

But to add more color to that, basically the shareholders are getting a lot more premium from our management team. Meaning our management team, our expense is being amortized over that much of premium. The only expenses that we are really incurring is additional underwriters, there is additional adjusters and there is additional filed adjusters, but these are all small incremental costs.

Lee Matheson - Broadview Capital

Right, exactly. Okay, and then the last question just on the loss in the quarter, the ALE is higher of the year-over-year but bigger business, but a little bit higher. Is there anything of note in there, any prior period stuff?

Pete Prygelski

Well, there’s two things in your observation that, obviously we are taking whatever 30% of the larger number of earned premium. That accounted of about more than a half of the 2.5 increase and the other was we settled a GL claim. So say we are drywall for about $1 million that we’d been working on for a while. So basically that’s flowed though there also.

Lee Matheson - Broadview Capital

Got you. Okay, thanks guys. Well done.

Michael Braun

Thank you Lee.

Operator

Thank you. And our next question comes from Brad Nelson a Private Investor.

Michael Braun

Hi Brad, how are you?

Brad Nelson - Private Investor

Congratulations on a (inaudible) not completing the turnaround I think.

Michael Braun

Thank you.

Brad Nelson - Private Investor

I got a quick question. What everybody has been talking about delivering on the Citizens issue; on the last call you did mentioned and I guess that was in October or November, that in December you thought you might have an opportunity to take out some of these sort of policies. So obviously you made a decision in that one and two month period that – what made you change your mind in that relatively small time period?

Michael Braun

Well, I don’t recall what I exactly said on the last call, but we are always aware of Citizens. As a matter of fact I met with management of Citizens, Barry Gilway and the CFO as well, and basically they are trying to make it more attractive.

Something that’s coming down from Citizens is back to the 90’s they had something called the keep-up program and what that meant was literally we would drive up till half way and then as policies went into Citizens before the underwriters at Citizens could have them, we could intercept them and then we could take them and issue them on our policy, on our paper.

They are very close to – I think the legislators are willing to pass I believe, but it’s not passed yet, something similar to that, but in an electronic format. And the biggest reason for Citizens growth is the state farm, these captive agents such as state farm and Farm Bureau and things like that. So they don’t take appointments from private companies.

So this is what this will do, is set up an exchange whether they would go to buying the polices, and basically a private carrier like ourselves could go on an electronically underwriter and say, we will take that. So if our private carrier gives it a green light, then they would not be eligible for Citizens. Once again I want to stress, this has not yet been approved by the legislative body, but this is what they are considering.

But that’s the case. Well, this will afford us a huge opportunity to be able to write more business and once again, the key thing is being able to underwrite these policies on a case-by-case basis to verify the data. First to go out to the home and verify any information that we want to see firsthand, do a liability inspection, mitigation inspection; I think it’s very valuable.

So I think that the Citizens Deep Op says as we’ve know for the last five years or so, I think you are going to see that be less and less prominent in Florida.

Brad Nelson - Private Investor

Okay thanks; it’s very interesting. One other question is, recently when some of your competitors have announced very large rate increases approved by the state, one was 14% and one 10%, I think one was 6% and back in I guess August or September you had a 4% rate increase. What is the strategy, because you have a – we have a higher base to begin with. What are the reasons you think? I’m not trying to compare you to your competitors exactly, but why do you think you were relatively lower than the others.

Michael Braun

I’ll tell you, it’s been a lot of hard work. And to give you more color on that, our rates were, let’s call them accurate at one point and then with what the mitigations credits and HP-1A, that really turned things upside down. We all suddenly had mitigation credits that took about 30% of our book, about 29.5% of our premium went away in mitigation credits.

It could be argued whether or not those credits are good or bad or right or wrong, but that’s a separate issue. We didn’t have 29.5% margin in our books. So suddenly we had a big problem like most people in the State. However we were more of a costal carrier, so those with books on the cost have higher wind premium and are hit much harder with mitigation credits.

So we did have two years of big rate increases, one was 20% and one was 19%. Our goal, I’d like to see that our rates don’t go up, but by maybe had a inflation rate of 2% to 3% to 4%. It’s based on our underwriting and our losses and with insurances you can control frequency of losses, but you can’t control severity. I think we’d be doing a much better job with our underwriting and our risk management and our claims, and I look at that 4% as a victory.

Citizens went up about 9%. They are still on a glide path. They are supposed to go up another 9% in January, as in nine months from now and some of our competitors are going up 10%, 15% and we are becoming that much more attractive. However, we have to remain disciplined to remain competitive and that means good underwriting policy by policy, good clams handling clam by clam and I do believe that’s what we are doing.

Brad Nelson - Private Investor

That was very informative. And just my last question is, how do you think is the general upswing or maybe the slight upswing in the real estate, and I know you mention before the new housing. But just in general, real state and increasing home prices; does that help you over the mid-term.

Michael Braun

Sure. In Florida, right, I don’t know if you follow Florida politics a lot, but basically it looks like the State of Florida may have $1 billion surplus and I’m sure they are going to spend that pretty quick. But what that tells you is the economy is improving in Florida, whether is tourism or whatever it maybe, but real estate is a bit part of it, so I think real estate is coming back in Florida that’s clearing helping us earn CGL line. And in terms of homeowners I do believe it helps us as well. It doesn’t necessarily help us on what’s called the replacement cost estimator.

So let me give an example. Let’s just say the house was built for $300,000 and then the market went crazy and it went down and it was sold for 150. That’s irrelevant to us, what it sold for. We want to build we have coverage A, based on what would it cost to replace that home? What would it cost to rebuild it?

So just because the markets destroying it, we want to make sure that we are still through. So as the market went down, a lot of people wanted their insurance to go down to coverage A, but it didn’t.

On the flip side, if the market becomes over -- so now as properties go back up I think you are going to see replacement cost and market value come together, defiantly. Now could get over heated and you could see properties becoming worth more than what is to replace. But we haven’t seen that since really the last four or five years.

But long answer short, what I’m trying to say is, yes. I think the economy and the improved real estate sector is helping our homeowners and GL.

Brad Nelson - Private Investor

Okay. Thanks for the answers and congrats on the quarter.

Michael Braun

Thank you, Brad.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to hand it back over to management for any closing remarks.

Michael Braun

Well, Pete and I thank everyone for taking the time to dial in today, specifically all the questions. We continue to remain focused. I’m writing a good profitable business and we think we have the team in place and the systems in place and I look forward to 2013. Its starting out strong and we thank everyone for their support. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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