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Federated National Holding Co. (NASDAQ:FNHC)

Q1 2013 Earnings Call

May 9, 2013 4:30 pm ET

Executives

Michael H. Braun – Chief Executive Officer, President

Peter J. Prygelski – Chief Financial Officer, Treasurer

Analysts

William Meyers – Miller Asset Management

Lee Matheson – Broadview Capital Management

Samir Khare – Capital Returns Management

Douglas S. Ruth – Lenox Financial Services

David Spier – Nitor Capital LLC

Operator

Good day, ladies and gentlemen, and welcome to the Federated National Holding Company First Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

The statements in this 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, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target or will or the negative thereof or other variations thereon and similar words or phrases or comparable terminology are intended to identify forward-looking statements.

These 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 including, but not limited to the risks and uncertainties described in this conference call, our press release issued today and other filings made by the Company with the SEC from time to time.

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

At this time, I would like to turn the conference over to your host, Mr. Mike Braun, CEO and President. Sir, you may begin.

Michael H. Braun

Good afternoon. Thank you for joining us to discuss Federated National Holding Company’s first quarter 2013 financial results. I’m joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results for the quarter 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.

Highlights, as measured against the same three month period last year, include 123% increase in earnings per share, 48% increase in revenue, 47% increase in gross premium written, 47% increase in net premium earned, 41% growth in homeowner policy count to approximately 67,000 policies, 13% growth in book value. Our approach to growing the top line has revolved around disciplined underwriting and sound risk management, techniques that will allow us to grow our book of business significantly throughout 2013.

During the first quarter, we improved our operational efficiency by reducing operating cost by 10% as a percentage of revenue as measured against the same three-month period last year. Managing our business in the most cost-effective and efficient manner is very much a cornerstone of our company’s culture. The increase in policy count and the profitability of those policies reflect a continued expansion and quality of our product distribution channels. We are pleased with the first quarter’s results, and the underlying key performance metrics indicate sustained quality growth in future quarters.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from William Meyers of Miller Assets, your question please.

Michael H. Braun

Good morning, William.

William Meyers – Miller Asset Management

Hey, Mike. Hey, Pete. Great quarter and really a great turnaround these last couple of years. Just a couple of items I can find them again on the press release. Your unpaid loss and loss adjustment expense line, I believe went down both year-over-year and quarter-to-quarter. Is there anything significant you want to tell us about that?

Michael H. Braun

What we do is, we have a independent actuarial review as well as internal reviews that we do. And basically that’s done on a fourth quarter and an annual basis how we adjust and look at our reserves. And I think you are looking at a better quality book of business. Our reserves over the last couple of years have gone down and it’s just really a testament to good underwriting. I think we do a very good job with our risk management as well as our claims handling. So I think things have trended favorably and we are very comfortable with where our reserves are.

William Meyers – Miller Asset Management

Okay. And then could you give us a little bit more color on to what extent you can see expansion happen? Are you in a situation where you can right I mean that’s a tremendous growth rate for the number of policies, how does that look in the foreseeable future?

Michael H. Braun

Sure. The last couple of calls I spoke about new business that we are writing and that continues to increase. We started with Allstate in the last 90 days. Last week, we wrote 3.5 million of new business alone on homeowners, that’s separate from everything else that we have in terms of renewals. So we are seeing significant growth, seeing at both from Allstate as well as voluntary agents and I think people really, I would almost say there is stampede to us in the sense that we’re a quality carrier that does a great job. I think we do a good job in terms of our rates, rules and form to be competitive in the marketplace. I think we do a great job for our policyholders, both on underwriting and the claim side. And I think that the agents trust us and value our partnership. And I think that you’re going to see significant growth continue through 2013 and thereafter. So I don’t see that that the volume is slowing down for us.

William Meyers – Miller Asset Management

Okay. Well, that sounds great and that’s all from me. Thanks so much.

Michael H. Braun

Thanks so much for the question.

Operator

Our next question is from Lee Matheson of Broadview Capital, your question please.

Lee Matheson – Broadview Capital Management

Hi, guys.

Michael H. Braun

Good. How you are doing?

Lee Matheson – Broadview Capital Management

Good. How are you?

Michael H. Braun

Great.

Lee Matheson – Broadview Capital Management

You guys don’t sound so effervescent anymore, what happened?

Peter J. Prygelski

They were going well, Lee.

Lee Matheson – Broadview Capital Management

Yeah, that’s it. You guys (inaudible) about the turnaround and then when it comes, could cut it anymore.

Michael H. Braun

Things are going well, we continue to remain discipline. We’re going to do the same blocking and tackling that we do day in, day out. We have great agents, great staff and we’re going to keep doing what we do.

Lee Matheson – Broadview Capital Management

Good. Well, a couple of quick things just on the loss and LAE, anything from cat or prior period in there?

Michael H. Braun

Pete, do you have any more detail for the quarter for loss and LAE?

Peter J. Prygelski

Lee, are you talking about in terms of dollars or in terms of percentage?

Lee Matheson – Broadview Capital Management

Either, dollars would be great.

Peter J. Prygelski

Well, dollars are up slightly because one obviously more earned premium this quarter versus last quarter, first quarter of 2012, that’s one. And two just – it’s hard to look at it on a quarter over prior year quarter basis because the incidents of claims one quarter is high, one quarter is low, but if you look at it on a yearly trend, it’s pretty much flat. If you look at it over a 12 month period instead of a three month, it’s pretty flat. So I think you are just seeing one, our earn is up, so the dollar figure is up slightly and then we had a couple of fires in the first quarter, but nothing catastrophic.

Lee Matheson – Broadview Capital Management

Okay. So, no cat losses and nothing in prior periods?

Michael H. Braun

No.

Lee Matheson – Broadview Capital Management

Okay. So in terms of statutory capital, where were you at the end of the quarter?

Michael H. Braun

We round up $55 million in statutory surplus at year end. If we sound different on the phone, Pete and I are in different locations.

Lee Matheson – Broadview Capital Management

I see, okay.

Michael H. Braun

I’m actually at a – we do what’s called Town Hall with our agents, so almost in the panhandled about 60 agents where we continuously train and develop our agents and make sure we have good relationships with them. So that’s why we might sound a little different, I’m in a different location.

Lee Matheson – Broadview Capital Management

Okay.

Michael H. Braun

But statutory capital $55 million, you’re seeing that continue to grow, and we have the ability to write conservatively I would say five to one, perhaps six to one. So we have plenty of capital to continue to grow throughout our book of business.

Lee Matheson – Broadview Capital Management

Yeah so basically that is, I mean just kind of modeling according to this growth rate, now that you are profitable, you’re actually – you could write this number in your policies for the foreseeable future and you won’t actually be really raising here.

Michael H. Braun

Yeah...

Lee Matheson – Broadview Capital Management

Your premium to capital ratio [too much].

Michael H. Braun

Yeah we think we have plenty of dry powder. But we will also say that Pete and I continue to talk to people about opportunities for additional capital if it’s needed in the company. We want to be very selective on how we do it. So, that if it’s accretive as possible for our agents, I’m sorry for our shareholders. So we’ve looked at different things and we’re receptive to that as well. But absolutely right now we have plenty of capital to continue running the business that we are doing.

Lee Matheson – Broadview Capital Management

Okay. And my other favorite topic is depopulation transactions.

Michael H. Braun

Yeah.

Lee Matheson – Broadview Capital Management

I think on your last call you mentioned that these might become change to the way that those are structured and it might become more attractive, can you give any comment on that?

Michael H. Braun

Well, the legislative session just ended, and unfortunately there wasn't anything too crazy that happened. But basically what they’ve come out with is something called the clearinghouse, and this has been passed, it still have to be signed by the Governor, but what this clearinghouse means is, any policy that goes into citizens will have to go into the clearinghouse for about 48 hours which is two days, and we and any other voluntary market can look at it. And if we decide to take it and where within 15% of citizens right, the policyholder will have to come with us. So that’s something that’s new, this will start effective January 1.

Now really what that does is that opens up some captive markets, the two big ones really State Farm and Farm Bureau that haven’t allowed companies voluntary business to be written in their agencies. So I think that’s a great opportunity. I think you’re going to see the growth of citizens slow. Now in addition to that, citizens also will have this clearinghouse effect for renewal business. Now, the renewal business will have to be at or the same price and once again this opens up a lot of business.

So I think these big de-pops at the end of the hurricane season, they work from an accounting perspective. They are very short term profitable, but I think what you're going to see is, we are going to see less growth, less people doing these big de-pops and more for hopefully good underwriting taking polices one at a time that makes sense from day one. And so we’re receptive to that, I would not call it de-pop, we’re absolutely receptive to this clearinghouse that's going to be established January 1 or we will be able to get even more business that comes in the front door. Now when I say comes in, one at a time, we're going to underwrite it the correct way.

Peter J. Prygelski

Yeah, I guess, so I mean our math on these is that citizens did the 300,000 at the end of the hurricane season last year, but they wrote these out in new policies in the quarter, so this is on a treadmill. So I guess at what point does the state look, we’re really not de-risking citizens if we just keeping handing over policy through de-pop and they come back to us.

Michael H. Braun

Well, it’s interesting because when they do get de-pop they tend due to circle back to citizens at some point. But I’d say as I told we’re in Town Hall. True statement made by an agent today is, we try to put as much as we can with you, but you guys are so selective. Really, you are my declination carrier and what that means is, they use our recession to get into citizens.

Lee Matheson – Broadview Capital Management

You are right.

Michael H. Braun

We’re skewing everything and what we’re not interested in either we don’t want the risk or wait that’s not competitive, it goes right into citizen. So I keep coming back to the statement, if we’ve already passed on it, and it’s going down the stream, why do we want to go chase it again? I do believe most agents are very comfortable with us. We get a good look at it and now the last piece of the puzzle, the two big outfits, which are State Farm and Farm Bureau, now we’ll even be able to look at those policies. So things are going very well. Our plan is working. I’m not a fan who dig de-pops. I don’t believe they were.

Lee Matheson – Broadview Capital Management

Yes, no, no. I guess I mean the other way to look at it is if they work as well as some people think they work, how is it not simply a transfer of wealth from the citizens of the state of Florida to a private enterprise?

Michael H. Braun

Well, you are absolutely right. I would exactly say that it’s a transfer of surplus short-term and because you’re getting those policies without the reinsurance cost.

Lee Matheson – Broadview Capital Management

Yes.

Michael H. Braun

And so really you have a 50% margin in the first two quarters after you do the de-pops. If you do a December de-pop, you have no acquisition or reinsurance, which is let’s just say for easy math, 50%, so theoretically you’re operating at a 50% margin of profitability for the next two quarters.

Lee Matheson – Broadview Capital Management

Yeah.

Michael H. Braun

I mean they are very attractive short-term, but I don't believe that's a sustainable business practice and that's why we're not interested in it.

Lee Matheson – Broadview Capital Management

Yeah, good, okay. And in terms of reinsurance, you had some commentary in the K around the hurricane catastrophe fund potentially raising rates and we’re hearing the opposite in the private market. Can you kind of comment on that view?

Michael H. Braun

Sure. Yeah, in term of the FHCF, they’re warning to restrict it. They’re trying to shrink it. And I can tell you that FHCF is a great cost-effective reinsurance mechanism. So they do not change it. It’s not shrinking.

Lee Matheson – Broadview Capital Management

Okay.

Michael H. Braun

In terms of private, where we spend majority of our money, the world is flush with cash and they’re chasing yield and a lot of that money is winding up in Bermuda. So what does that mean? That means we buy a lot of our reinsurance from Bermuda. I’m confident that we’re going do very well on our program. Rates are – you can speculate that they may go down, maybe in the private sector, maybe down 10% to 15% on reinsurance. But let’s just say a third of our cost at 15%, so theoretically, we might have 5% relief in our expenses theoretically. That is a lot of moving pieces to that and nothing has been negotiated or done, we’re in the process of getting reinsurance. There is a lot of pressure above this capital in Bermuda pushing rates down.

I think some of the new capital in Bermuda can actually – it’s helping some of the new companies, because more than it will help us. I think it will keep our partners, keep their pencil sharp so we get good rates. But we’ve got very good partners. Something after writing property for as long as we have, capital comes and goes and you want good partners. So, we’re going to do what we can to make sure we keep all of our partners on our program, but clearly there is new capital there that’s pressing the market down. So, I think we’re going to benefit from that.

Lee Matheson – Broadview Capital Management

Okay. So I think you could below the sort of 43 number…

Peter J. Prygelski

As a percentage of premium?

Lee Matheson – Broadview Capital Management

Yeah.

Peter J. Prygelski

Yeah I think we’re going to be in the low 40s. There is some volatility there obviously, but I think reinsurance is a spend as a percentage of earned premium. Over the next 12 months, we are going to be in the low 40s. We don’t know where we are going to be until we are completed the program and we see how our premiums go. I think I said in the last call, we are looking at buying about 300 million of cat cover and I was looking at buying about 350 million of cat cover. So in a short amount of time, I’ve really raised the expectation of where we are at and we are very careful to buy the reinsurance that we need and that we can afford. So we are buying more cat cover than we anticipated because everything is trending so favorably.

Lee Matheson – Broadview Capital Management

Yeah, sure, okay…

Michael H. Braun

And the key is not with the total spend is but as you were referring, it’s a percentage of premium that you’re spending on reoccurrence.

Lee Matheson – Broadview Capital Management

Yeah, loss ratio margin in the quarter was 46, is that I mean is that a decent – are you contend with that number?

Michael H. Braun

Do you have any more color on that Pete?

Peter J. Prygelski

Yeah, Lee, very content. I mean we look at our loss ratios four times a year on a quarterly basis and we looked at all the data and see how things are trending. If you compare the 46, you will see that 46 was a little higher than last year first quarter, and to tell you why its because the Q1 2012 loss ratio was about 44 and it rose to about 50 at the end of the year 2012. So our first quarter 2013 has been – makes this more in line with how we close the year, actually a little under how we close the year by 3 points. So, yes, we are very comfortable with 46 and that’s a good number.

Lee Matheson – Broadview Capital Management

Yeah, okay so, at that level you guys think you can kind of comfortably write combined in the mid-90s.

Michael H. Braun

Well, I think mid-90s are pretty reasonable.

Lee Matheson – Broadview Capital Management

Yeah okay.

Michael H. Braun

There is a lot of moving pieces but I mean you know last year from a stat perspective we were in 2012 stat we ran at about 93 total combined. I think things are trending favorably, so things – there is – you never know until you get through, but things are trending favorably.

Lee Matheson – Broadview Capital Management

Good and we’re getting the reduction in operating cost as a percentage of earned premiums that really started to kick in.

Michael H. Braun

Yeah, our business is scalable. As we continue to drive more business, our fixed costs get allocated over that much more premium. So we absolutely have in our culture to be cost effective with our shareholders money, so absolutely.

Lee Matheson – Broadview Capital Management

Good. Thanks guys and congratulations on turning the corner.

Michael H. Braun

Thank you.

Operator

Our next question is from Samir Khare with Capital Returns Management, your question please.

Samir Khare – Capital Returns Management

Hi, good afternoon guys. Great quarter.

Michael H. Braun

Good morning, Samir.

Samir Khare – Capital Returns Management

Good thanks. I just have a quick question about the loss ratio again, it went up a bit and did you guys say early that was because of some one off – few bylaws in the quarter.

Michael H. Braun

Samir, which law? Are you talking about the total dollars? Are you talking about the percentage?

Samir Khare – Capital Returns Management

Yeah, that’s right, percentage loss ratio.

Michael H. Braun

Well, if you take homeowners, it went up about four points from 3.31.2012. It actually might have ticked down a couple of points from year-end, and I am looking at overall, it went from about 50.9 at the end of 2012 to 49.6. So where we were reserving – the percentage we were reserving beginning first quarter 2012 as the year progressed we reevaluated our loss ratios and at the end of the year they round up somewhere around 50%, 51% all lines combined. And if you look at where we are today or where we closed first quarter 2013, we finished at 49.6%. So our loss ratio today kind of reflects where we were at the end of the year.

So it’s hard when you’re comparing it to first quarter of 2012 just because we had more history, more experience and we adjust loss ratios as we go. We look at them like I said, like I mentioned to Lee, we look at them four times a year. So, yeah, there were some fire losses if you are going to compare quarter-over-quarter, there were some fire losses. But if you look on our percentage basis, as a percentage of premium there was probably $600,000, $700,000 of extra fire losses in first quarter but we did not last around large losses as we call them, but not catastrophe losses. But again like I said, the percentage is more in line where we finished the year.

Samir Khare – Capital Returns Management

Okay, so then there is more IVNR in the 2013 number it seems like, is that a fair statement?

Michael H. Braun

I would say that we are reserving at a slightly higher percentage than we were last year at this time, yes.

Samir Khare – Capital Returns Management

Okay. The second question is on growth, I guess you last said $3.5 million in a week, is that a good run rate to you going forward or is that kind of what was that an anomaly.

Peter J. Prygelski

You know, Samir, I can tell you things weren’t trending favorably for a quite awhile where we used to write a $1 million and then we went to $2 million. Clearly since we’ve turned on all state, volume has increased. We add more underwriters and more adjusters. I have no reason to believe that flow of premium will slow down. We’ve been at that – we’ve been kind of got up to that level of $3.5 million and I think we are going to hit probably close to that again this week. So I’ve no reason to believe that it’s going to change, I think that we’re doing a very good job with the business that’s coming in.

But I don’t want to mislead and tell you that we have some goal that we have $3.5 million a week, that’s not the case at all. We’re writing quality business, and if it comes in at $3 million a week or $4 million a week or even a $1 million a week or $5 million a week, we’re going to write quality business with the same underwriting criteria and a seamless management analysis on everything.

Samir Khare – Capital Returns Management

Okay. And how many claims adjusters and the new writers you’ve hired?

Michael H. Braun

We’ve grown significantly, we probably got I’m going to say, let’s say 23 personal lines underwriters and about let’s say about 7 commercial line at ballpark so about 30. Total staff about 125, in-house adjusters I’m going to say maybe 10 to 12 and field adjusters I think we’ve got about 8.

So, we’ve got quite a team of people to handle the volume. The management teams is clearly in place and experienced and we see no reason to expand or develop more levels to the management team. All we’re doing is that in increments of adjusters and underwriters to handle the business.

Samir Khare – Capital Returns Management

Right. Are you guys finding it easy to find talent in a competitive market?

Michael H. Braun

Yeah, I think we are, we have a sustainment, you can either have good HR skills underway in, underway out. So we really make sure that we hire good people and we have a lot of good people that are long-term with the company, a lot of people have been with us 20 plus years. Also a lot of the new hires I think are very quality, we tend to hire them from some local companies, it’s always good to get agents in-house as underwriters and a lot of our underwriters have moved over to client as adjusters. It’s yeah, I think we are very happy with the quality people that we have.

Samir Khare – Capital Returns Management

Okay, great. And Mike you alluded to it before that you might be looking in certain circumstances to raise equity, what kind of scenarios would you consider building equities?

Michael H. Braun

Well basically, Samir, we’re getting equity knocking at our door. We are getting debt knocking at our door, things like that. And we don’t need capital as we sit here today, we’re fine. But lastly, we want to do is dilute our shareholders. However, we clearly have a platform that works well and it’s clearly running much faster than it has a year prior. And you can see that at some point if it continues to grow, we could use more capital above and beyond what we’re generating from an underwriting profit. And we see those numbers and we’re receptive to that. So we’re looking, we’re exploring different avenues of capital. We haven’t committed to it, but we’re exploring it, and if we can find, if we believe the business will support additional capital, then we’ll bring additional capital into the company.

Samir Khare – Capital Returns Management

Thank you.

Michael H. Braun

There is no one form that we are specifically committed to or that we are specifically going to go through it as well. We’re continuing to research it.

Samir Khare – Capital Returns Management

Great. Congrats, guys.

Michael H. Braun

But I don’t think it’s a big challenge to raise capital in this environment. It’s important to raise capital and deploy it in an efficient manner is really what our goal is.

Samir Khare – Capital Returns Management

Okay.

Operator

Our next question is from Doug Ruth of Lenox Financial Services, your question please.

Douglas S. Ruth – Lenox Financial Services

Hi, I want to offer my congratulations, Mike. That was just a fabulous report.

Michael H. Braun

Thank you, Doug. I think that we’ve got a one heck of a team and Pete and I get to hear the good news out here with our investors, but really there is a whole team of 125 people behind us. So, we’re committed to the same things that we do everyday, good underwriting, good claims, good marketing, good risk management. So, thank you.

Douglas S. Ruth – Lenox Financial Services

You are welcome. Could you, one of the things that you did last time is you gave us some idea as far as where the policy count was almost on the day of the conference call. So you’ve given us a policy count here. Do we have a updated number, we had the 67,000 number.

Michael H. Braun

Yeah, I can tell you bound today, we’re going to cross 80,000 all average loan. Yeah so that’s going to happen sometime today, I anticipate it in the middle of the afternoon. I haven’t look since this morning so we may already be there, but there is always a lag of about 45 days to 60 days from bound to enforce and that there’s couple of different things, but basically there is an underwriting process as well as effective dates.

Douglas S. Ruth – Lenox Financial Services

Okay. Could you offer a little more color about the relationship of all state and it seems like it might be expanding from what you are saying?

Michael H. Braun

Well, I think we have a very healthy relationship with them. They have quite a few agents and clearly the business is coming in, there is volume. A lot of these, we are very successful in getting the appointment with all state and one of few carriers that have that relationship and the volumes coming in, there is no about it, and I think there some of that support that we got came from the agents that helped us to get that appointment, process completed with all state of the corporation.

So the business is clearly picking up, I can tell you the court volume from the all state agents is coming in. And we roll that up rather slow. It took us I’m going to say almost 90 day to get all the agents appointed and for the most part of the 720 agents that they have in Florida. I’m going to put the number at around 500 that have been appointed. And not every agent is going to take the appointment, which is fine, but there are certain parts of the state where there are less in need of the appointment where there is they have other opportunities.

But I think that the majority of the agents if not all that are interested in getting appointment with us from all state have been appointed and they are clearly coding the product, and there is always a lag when an agent gets a new appointment. So when they start bringing the business because your core to policy people don’t always conduct that same day. They maybe buying a house in the next six to eight weeks before they close or the renewal that they are shopping may not be for another let’s call six to eight weeks, most renewal offers in Florida go out at round 50 days, part of the renewal. So I think that I think the volumes picked up significantly and I have no reason to believe that that is going to change.

Douglas S. Ruth – Lenox Financial Services

Okay, why are the Allstate agents, why are they using Federated versus using Allstate.

Michael H. Braun

Well Allstate does not really write that much property in the state of Florida. Allstate has a subsidiary in Florida that’s called Castle Key and they do have property in there. They clearly do but all state I think – I can’t speak for them, but I think their focus is more auto related, but I think that because they’re willing to broker it out, we’re clearly and they are very comfortable us, and I think we have a very good relationship with them. So we are going to do everything that we told them that we would and like I said the agents are comfortable with us, and that’s they are writing the business that we’re competitive and so it’s working well.

Douglas S. Ruth – Lenox Financial Services

Tom really got. Could you offer us more commentary you talked about your four pillars and how you are during the rapid growth or staying true to those four pillars.

Michael H. Braun

Well, the one thing as I said to the previous caller, Doug is that – we there is no magic that we’re chasing, there is no certain policies that we have to get, that’s not the case at all. What we do is – we’re very much committed to doing what’s right, and that’s good underwriting on a day in, day out basis. So, once again – I don’t want to say that we’re chasing premium, we are not chasing premium. We’re chasing bottom line earnings, and that’s critical to what we do and that’s just having good people there for us to do it.

Douglas S. Ruth – Lenox Financial Services

Yes, we’re all [further yet]. Is there been any further discussion now where we are working with a lot of older people that really could use dividends with the strong quarters or any further fall about maybe raising the dividend again?

Michael H. Braun

Well that's something the board – that we’ve discussed on board on every quarter. Clearly as the company continues to grow and throw off more earnings, clearly becomes more possible to raise a dividend and that's something that we will discuss what to do, whether we reinstate – continue the dividend as it is or raise it whatever we may do. So, I think there is a compelling case to keep it at least where we are at, if not grow it.

I’ll put it that way, but that’s really a decision for the board and we know that our shareholders find that dividend to be very rewarding and that’s part of how they view us as a company is to bring that cash back to the shareholders, so we know that and we want to be as shareholder friendly as we can be, and as dividend friendly as we can be. So, we’re a little bit conservative in that regard, but I think that – I think it’s very compelling where we’re at that we could afford a higher dividend. I’m not saying we're going to be issuing higher dividend, but it’s clearly the map supports the dividend.

Douglas S. Ruth – Lenox Financial Services

Okay. Thank you for answering my questions, and congratulations again on a great quarter.

Michael H. Braun

Thank you, Doug.

Operator

Our next question is from David Spier of Nitor Capital, your question please?

David Spier – Nitor Capital LLC

Hey how are you guys?

Michael H. Braun

Good David, how are you today.

David Spier – Nitor Capital LLC

Just wondering is there more of a normalizing ROE that we can expect on a go forward basis, now that you guys have kind of stabilized the business?

Michael H. Braun

Yeah, we don’t have the specific number that we can say that we’re going to be hitting, but it’s clearly, I think the business is much more stabilized.

David Spier – Nitor Capital LLC

It seems like a more of a double digit ROE as compared to the past, that seems more realistic right now.

Michael H. Braun

Well, I think that we will be much more consistent with insurance companies in the industry. You may be looking for specific number that we can’t commit to…

David Spier – Nitor Capital LLC

I’m not really specific more just as back-end normalized compared to your peers other insurance businesses in the industry?

Michael H. Braun

I think that our business is stable, I think its solid, and I think there is you can never be complacent, because if things can always occur that change the dynamics of where we are at. I think we’re absolutely, where we got into trouble back three years ago, that was – because there was a dramatic change in our rates that we are charging to the insurers, the mitigation credits. That was a huge game changer for us, but where we are at right now? Our business is absolutely far more stable.

David Spier – Nitor Capital LLC

All right.

Peter J. Prygelski

And Mike, hey David, just to add color to what Mike said, in the first quarter, our ROE was 3.5%.

David Spier – Nitor Capital LLC

Got it. But if you annualize that I was talking to more it’s substantially higher. And then it’s pretty clear I guess from this, especially this quarter that you guys have created some substantial leverage. As you know, you mentioned in the previous caller I think that you have a pretty good control of OpEx and SG&A, and the same time we’re going premium. So should we expect more margin expansion going forward that will lead further earnings growth?

Michael H. Braun

Well, I think that you’re going to see us continuing to grow in Florida. Absolutely there is opportunities for us in other states as well. We are looking at property in a couple of other states as well, perhaps Louisiana, Alabama, South Carolina there is opportunities there. We write our GL not only in Florida, but Texas is ramping it up a bit more and we see some opportunities in Louisiana and Georgia. We’ve started writing personal auto more of that over in Texas as well. But honestly the biggest part of our business is Florida homeowners by far, and yeah, I think, once again we have a quality product, another competitive price, the agents are very comfortable with us, the businesses coming in. We’re very disciplined in what we are doing, and we’re handling the policies and paying claims fairly and timely. I think we are doing what we need to do and that only brings more good business to you. So...

David Spier – Nitor Capital LLC

All right, great. And then the last question is more – at this point I guess the one concern we would have as an investor would be the potential repeat significant LAE deficiency I incur from 2004 through 2009. I guess maybe kind of squash that and I don’t answer that concern. How would you say your policy standards are different more or less, is there percentage of a new home builds or average agent homes et cetera that could give us further confidence and that's not really – that’s not going to occur again?

Michael H. Braun

Yes, something very huge happened in 2004 and 2005. We had significant development. And what happened is, over the last 20 some years of business we’ve paid out over $900 million in claims, of that over $375 million were result of the storms of 2004 and 2005 and those storms that came in were very challenging from a financial perspective and an operational perspective. And everyone in the industry had development, including the FHCF, we all by cover from the FHCF, and they had I believe in excess of $2 billion of development and we didn't move that needle I can tell you that in terms of $2 billion.

So, I understand that, but we absolutely have not had a cat since, we have control over book, we have not had a cat since October 24, 2005 that was Wilma, obviously the storms of 2004 and 2005 that's far in the rearview mirror. We know our business on a day-to-day basis or non-cater, what we call AOP, we feel we have adequate reserves on it. If the storm comes in, we reserve accordingly for it. Last year we bought $233 million of cover. We model storms in that, all of the prior storms that hit Florida that hit in 2004 and 2005 as well as Andrew, which we were not writing property when Andrew happened. Those nine storms, none of those storms surpassed a $100 million. So we feel that our cat program is sound.

David Spier – Nitor Capital LLC

More or less the real question I was asking, the confidence in your currently stated the LAE that was…

Michael H. Braun

Well, what drove that was a storm.

David Spier – Nitor Capital LLC

Yeah.

Michael H. Braun

We had eight storms in the matter of really 15 months. It was a very challenging environment to operate in. If we get eight storms this summer, sure, we’re going to have operational challenges, but I think clearly…

Peter J. Prygelski

At the same time your policies are much stronger in terms if you’re not really –the Tri County area. But…

Michael H. Braun

Our distribution of Tri County back in 2004, 2005 was very high. Right now, we have, I believe, it’s 18.5% Tri County. We’re in 66 of the 67 counties, haven’t been able to penetrate Lafia county, hopefully soon, but not many people live there, we’re all over the state. So clearly, we have a very well diversified book of business. We favor new construction and performs much better from a non-cat perspective AOP and it also performs much better be it has better mitigation features when it comes to storm. So yeah, we have a quality book of business absolutely.

David Spier – Nitor Capital LLC

Go it, so overall, your book is obviously your mitigated risk substantially since then.

Michael H. Braun

I think, we were light years ahead, and where we were in 2004 and 2005 and I’d tell you going into 2004, a lot of what we learned in 2004 and 2005 of going through such a challenging environment. We still have in our culture today of redundancy from IP to systems to making sure that we have emergency plan in case a storm hits not only our policyholders, but our central office.

David Spier – Nitor Capital LLC

Got it.

Michael H. Braun

We’ve been through, we had no powerful week on Wilma ahead, we know how to handle that. So now look how much technologies changed in the years, I think its lot easier now. So operationally and financially, I think we’re set for a storm, there’s always statistical anomaly that could challenge that statement, but by in far we’re doing everything we need to do to run our business.

David Spier – Nitor Capital LLC

Great. And last thing I mention is, it’s seems that the operation, but you’re running add or if not better than your peers, and current stock price right now is about $0.95 a book. It gives an average around 1.8 to two times book, so we’re looking for especially to that valuation narrowing in the near future.

Michael H. Braun

We hope our shareholders are rewarded with the performance that we do, and I can tell you not only do, we do a good job with our people and our policy holders, anyone is welcome to come by our South Florida offices and see that’s very non opulent, its – we’re there for business, we’re there to get things done, and contain cost and how we do it.

David Spier – Nitor Capital LLC

I appreciate. Great work, guys.

Michael H. Braun

Thanks David.

Operator

(Operator Instructions) Our next question is a follow-up from Lee Matheson of Broadview Capital. Your question, sir.

Lee Matheson – Broadview Capital Management

Hey, guys, just wanted to quick clarify, did you mention the year 80,000 homeowners’ policies as of (inaudible)?

Michael H. Braun

It was the difference between what you saw in the press releases that’s at quarter end in 2004. As we see here today we’re going cross 80,000 bounds. So, the difference is 14,000 is that goes from bounds, so an agent today – as they bound I’m going to estimate we were 325 policy today. So some time mid afternoon is when we would across that threshold, so now not only that business we’ll result into bound policies, but substantially the majority of that will lets say 85% of what’s coming, and we’ll actually clear underwriting and be a full bound policy, I am sorry, a full lack of policy.

Lee Matheson – Broadview Capital Management

I mean this is, we’re not even six week into the quarter.

Michael H. Braun

Correct, we’re, yes. On a business day, Monday through Friday we’re writing over – let’s say 325 policies a day ballpark. It’s varies from day to day. But yeah, the book of business is growing.

Lee Matheson – Broadview Capital Management

Okay. Well, so you guys really are stepping on the guess.

Michael H. Braun

Well, I don’t want to say we’re stepping on the guess. We’re disciplined what we’re doing. We’re staying disciplined to what we’re doing, however the business is picking up, absolutely.

Lee Matheson – Broadview Capital Management

Good. Okay. And anything or not any new capital coming into the industry, I mean I guess if you guys coming into to takeout is there any…

Michael H. Braun

There is one new competitor that was formed in the last six months. I’m sorry, two competitors that were formed. New capital can come in. I think the minimum threshold that you need to enter the market is $25 million basically and there is room in the marketplace for people, but clearly what you see is there’s a lot of existing players. And I think that you’re going to see it continue diverse split, let met say it, between the better operators and operators who are struggling. And I clearly think we are one of the best operators out there. I absolutely stand by that statement, we’re one of the best operators period in Florida.

Lee Matheson – Broadview Capital Management

Okay. Good. Okay, thanks again guys, and congrats.

Michael H. Braun

Thank you.

Operator

And at this time, I’m showing no further questions from the audience.

Michael H. Braun

Well, I just want to thank everyone for taking the time to dial in to listen. Those who have asked the questions, really appreciate it. We’re going to continue doing what we’ve said we’re doing on the call, and we look forward to reporting the next quarter. And in the meantime, if anyone has questions, Pete and I are always available. So thank you very much to everyone.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. And this concludes the program. You may now disconnect. Good day.

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