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Executives

Michael Braun – President and CEO

Pete Prygelski – CFO

Analysts

Casey Alexander – Gilford Securities

William Meyers – William Asset Management

Doug Ruth – Lenox Financial

David Spear – Mineral Capital

Samir Khare – Capital Returns Management

Ron Bobman – Capital Returns

Brad Nelson – Private Investor

Lee Matheson – Broadview Capital

21st Century Holding Company (TCHC) Q2 2012 Earnings Call August 9, 2012 4:30 PM ET

Operator

Good afternoon and welcome to 21st Century Holding Company’s second quarter 2012 financial results conference call. My name is Sahid (ph) and I will be your operator today. Please note that today’s call is being recorded. At this time, all participants are on listen-only mode. Later, we’ll conduct a question-and-answer session. (Operator Instructions)

Statements in this conference call that are not historical fact are forward-looking statements without limiting the generality of the foregoing words such as may, will, expect, believe, anticipate, intend, would, could, estimate or continue with the negative other variations thereof 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’s expectations involving risk and uncertainty 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 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.

Forward-looking statements made during this presentation speak only as of the date of which they are made. The 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. Now, at this time I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of 21st Century Holding Company. Please go ahead, sir.

Michael Braun

Good afternoon and thank you for joining us to discuss 21st Century Holding Company’s second quarter 2012 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.

Second quarter net income improved $1.4 million, or $0.18 per share, for the second quarter 2012, compared with $1.1 million, or $0.13 per share, for the first quarter 2012, at a net loss of $800,000 or $0.10 per share in the second quarter of 2012.

Net income for the 2012 six-month period improved at $0.31 per share, compared with net loss of $0.35 per share in the same six-month period last year. Book value increased at $7.89 per share at June 30, 2012, compared with $7.61 per share at March 31, 2012, and $7.05 per share at June 30, 2011.

Gross written premiums increased by $5.1 million, or 18.1%, compared with the same three-month period last year. Net premiums earned increased by $3 million, or 26%, compared with the same three-month period last year.

Homeowners policy count has grown from 43,793 at the start of 2012, to 52,908 at June 30, 2012, or 20.8%. Our continued focus on writing sustainable quality business and controlling expenses has led to another profitable quarter.

The growth in our policy count, gross written premiums and net earned premiums are notable after tightly controlling our book of business over the prior two years. While we have taken a prudent path towards growth, we feel these decisions have set the course for future success. With that, we are glad to open up the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question comes from Casey Alexander from Gilford Securities.

Michael Braun

Hi Casey, how are you today?

Casey Alexander – Gilford Securities

I’m fine, thanks. I have a couple questions. One, can you – was there a single event on the net realized loss for the quarter, the investment loss?

Pete Prygelski

Casey, this is Pete Prygelski. What specific number are you looking at?

Casey Alexander – Gilford Securities

The $218,000 net realized investment loss for the quarter?

Pete Prygelski

No, there was no single one event as we’ve – I don’t know – you haven’t been on the call in a while. But we’ve outsourced a lot of the equity – that would be all equities $200,000 loss and we’ve outsourced the management of our equity portfolio to three different equity managers in three different asset classes and it was just normal selling on their part.

Casey Alexander – Gilford Securities

Okay, that’s fine. Secondly, I’m a little curious about the minus 44% loss ratio in the commercial general liability business. Was there a claw back of a previous claim that was made? Or how did that come about?

Pete Prygelski

I’ll answer that one too, Casey. Basically what we did in the second quarter is we looked at our total IBNR for all lines, CGL had been performing better than expected. We reallocated some of our incurred but not reported reserves from CGL over to property

So you can see property went up 5% and CGL, which didn’t have much unearned premium, went down dramatically because it was almost moving $2 million to 3 million over to property and removing it from CGL, so it’s probably more helpful to look at it on the total basis of all lines combined.

But that money wasn’t sort of speak of it as a claw-back. It was – so you’re not seeing that $2 million or $3 million that was taken out of CGL purely reflected in the earnings because it was almost – we took it from CGL and moved it over to property.

Michael Braun

Casey, this is Mike, I’ll give you some more color on that. In the past, years ago, we used to sell our general liability through general agents. And that has led to, in the past, higher loss ratios. Bringing that back in-house has dramatically lowered loss in LAE (ph) on that program.

And with time you saw the ultimates of that come down. I would anticipate that you might see in the mid-upper 50’s on an ongoing basis on that program.

Casey Alexander – Gilford Securities

Okay, all right. That explains it. Great. Thank you.

Michael Braun

Thank you.

Operator

Thank you. Our next question comes from William Meyers from Miller Asset Management.

Michael Braun

Hi, William. How are you today?

William Meyers – William Asset Management

Good and congratulations on the quarter and the continuing good trend. You have a lot of cash at this point and you’ve been in the black for a few quarters now and so there is – so I can’t say anything to criticize but I was hoping you could give me some insight as to since we are in the win season, what does happen – what are the scenarios if there is a hurricane that hits Florida?

Just in broad strokes, are we looking at possibly losing a quarter’s worth of earnings or are we looking at – what would be, in the best general terms that you can describe, the immediate and long-term financial results of actually being hit by a hurricane? Hopefully that won’t happen.

Michael Braun

Sure, Will, in that regard, we’ve got some experience in terms of handling hurricanes. What we have is on our reinsurance program is an $8 million retention, just real rough math, $8 million. After tax let’s say it’s around $5 million.

The capital in our insurance company is approximately – statutory surplus is approximately $46 million. So taking an event with that full retention would bring us to $41 million. We have ample capacity to continue our book of business at that point.

If there was a second event and we had another $5 million event after tax, based on the $8 million retention, you could argue that perhaps the surplus is at $36 million. Once again, that is more than adequate to support our existing book of business.

In the most recent quarter, a storm did come through and it was pretty minor but you’re talking that that storm is probably around the $400,000 range, so we have cover up into approximately $233 million.

In terms of $233 million, all the storms that we’ve been through over the years and the big one that – the one that predates us as a company, we’ve run through – run that through – those through our models, and really none of them pierce $100 million. So here we are with approximately $233 million of cover and the prior storms were all the way back in ‘04, ‘05. You’ll see that we paid out a total of over $350 million of cat claims.

So that’s why we buy a lot of reinsurance and that’s why it’s critical that we have good reinsurance partners. So we believe we’re prepared for that.

William Meyers – William Asset Management

Okay. So let me just repeat that back to you in my terms. So because of the reinsurance, in effect, when you are booking profits, you kind of already have – by paying reinsurance, you’ve paid most of the expense of any possible storms, so the profits that you book in any given quarter are solid and then in effect you’ve really prepaid for any possible storm damage. That’s the idea here?

Michael Braun

Yes, yes, what we have is we have two different reinsurance programs that we have in place here. We have a sort of private market and through the state which is the FHCF.

But let’s just assume for simple math it’s $40 million. So overly simplistic, we’re base – you can say that we’re expensing $10 million a quarter. So any loss above our retention really would not hit us providing we have the reinsurance recovery.

William Meyers – William Asset Management

Okay. Well, that is reinsuring. I’m happy to hear that answer and hopefully your good results will continue. Thank you so much.

Michael Braun

Thank you.

Operator

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

Michael Braun

Hi, Doug. How are you today?

Doug Ruth – Lenox Financial

I’m doing well. Congratulations on a very good quarter.

Michael Braun

Thank you.

Doug Ruth – Lenox Financial

Could you talk to us about this – your book of business and why it’s better now than it’s been in the past?

Michael Braun

It’s significantly improved over the last two, three, four years. In terms of what we do, the CGL (ph), I spoke on that briefly a few minutes ago. Bringing that underwriting in-house has made that book a much better quality book of business.

It’s a smaller book than it was five years ago but our focus is not on top line growth written. Our focus is on the bottom line net earnings. So that book has improved significantly over the years with good underwriting.

The other book of business, the much larger book of business that we have is Florida property and I would say that our analytics on Florida property is very good. And our underwriting is very good. And I think our claims handling is very good.

So not only have we diversified our business throughout the state, approximately 24% of our business is in the tri-counties, which is the South Florida area. The book continues to perform well.

We’ve got very good agents all across the state that continue to give us quality business. I think we have very good programs in place from inspection of properties upon underwriting, the modeling of it. So it’s a quality book of business that we think is sustainable in the long run to generate what it needs to do.

Doug Ruth – Lenox Financial

That sounds terrific. Can we talk a little bit about what the company and the board are thinking about as far as a stock buyback? The stock is still trading at a significant discount to its equity.

And then the also either stock buyback or a dividend a lot of – working with a lot of retired people who could really use dividends.

Michael Braun

Yes, and Doug, that’s a great question. We clearly know the desire for a dividend. We know that value. Part of our hesitation has been when we merged the two carriers about a year, 1.5 years ago, I think it was January of ‘11, one of the things we agreed to do was not have a dividend until we’ve had two consecutive quarters of an underwriting profit.

Well, here we are four quarters out of an underwriting profit. So while we’re legally allowed in that regard to have that dividend, one of the things is to – I’ll be visiting with the OIR over the next few months to have a conversation with them just to see – just to confirm that they’re in agreement with where we’re at.

The board clearly understands the value of the dividend. I think that having four quarters of not only a profit but an underwriting profit lent to that argument. So I’m confident that the board will review that on a go-forward basis and we want to return value to our shareholders.

Doug Ruth – Lenox Financial

That would be very beneficial. Could you talk a little bit more about what’s happening with the name change and what the benefits would be for the policy holders and the shareholders?

Michael Braun

Yes, that’s – we have a proxy out there to all of our shareholders and 21st Century Holding Company is not a name that we really use. And I think it’s really, I want to say, irrelevant in terms of what we do with our policy holders and our agents is we operate under the name Federated National.

So I think it only makes sense to change the name from 21st Century Holding Company to Federated National Holding Company, which is much more consistent with our insurance company, Federated National Insurance Company. I think it goes a long way.

So that proxy is out there and people are voting on that and I encourage people to support that before our September 11th shareholder meeting.

Doug Ruth – Lenox Financial

Okay. And my last question is if you could just talk a little bit about what’s happening with Citizens.

Michael Braun. Sure. Citizens has a new president and he has repeatedly stated that they’re looking to downsize it. They’re at approximately 1.5 million policies. I think their underwriting has gotten significantly tougher over the last year is what I hear in the marketplace from the agents.

So I’m confident they don’t want to grow and I’m more – as confident that they want to shrink. I personally believe Citizens should be in the ballpark of maybe 250,000 to 500,000 policies.

There’s clearly certain risks that are non-insurable for any number of reasons. So as you see from our policy count, we’ve grown significantly in the first six months of this year. And as we sit here in the first week of August, that pace is not slowing down.

So I think that the private market, there’s definitely demand out there. And as I’ve said in the past, it’s not difficult to write business in Florida. There’s plenty of business to write. The trick is writing it profitably year after year.

We bit the bullet in the last two years, in ‘10 and ‘11 and did a lot of non-renewals and that really hampered us short term. However, I absolutely believe it was the right thing to do and I think you’re going to see the positive effects of that on a go-forward basis.

Doug Ruth – Lenox Financial

(Inaudible) that you’re focusing on profitability instead of just a pure policy count. Thank you, again. It was a beautiful report.

Michael Braun

Thank you, Doug.

Operator

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

Michael Braun

Hi, David. How are you?

David Spear – Mineral Capital

Hey, how are you?

Michael Braun

Great.

David Spear – Mineral Capital

You mentioned on the previous question – I believe it was Doug’s – that you’re meeting with the OIR about a dividend. I think you’ve been profitable now for about four quarters in a row. Do you actually need their permission?

Michael Braun

We do not need their permission. When we merged the two companies in January of ‘11, we agreed that no dividend would be paid until we had two consecutive quarters of an underwriting profit.

I am the one that’s requesting the meeting and I think the merger was a fantastic success and I don’t think that anyone would disagree with us including the OIR. But I think it’s prudent to share our plans with the OIR and make sure that they’re in agreement. I don’t anticipate a problem from that but I think it’s the right thing to do.

David Spear – Mineral Capital

And out of curiosity, this dividend, do you plan on eventually going forward being in a situation where as the hurricane season ends you’re going to send out a special dividend or is this plan a quarterly dividend, something like HCAI puts out? I’m just wondering what type of plan is anticipated.

Michael Braun

Sure. Well, I think the most value that people see is a consistent dividend that they can count on quarter-to-quarter and we clearly understand that.

I think if we – there’s opportunities where you can form a captive and basically a captive you can take additional risk in your retention and that you could generate an additional special one-time dividend and you may see that in the marketplace with some of our competitors.

So it is additional risk that you can take. And if it’s storm-free, it enables you to do a special dividend. That’s something that we may look at in the future but that’s a separate item. I think that – I think there’s a lot of value to be said for a consistent dividend on a quarter-to-quarter basis.

David Spear – Mineral Capital

Definitely, definitely agree. And in terms of the rate, do you see rate increasing from here on as they have in the past couple years or do you think they’re about to stabilize at this point?

Michael Braun

Well, I think that the shock of the mitigation credits and the shock of the rollback of a lot of things that we had to do in years past has mostly passed. We had some significant rate increases of 19% and 20%. I don’t believe you’re going to see us with – barring something unusual – I don’t think you’re going to see us with double-digit increases like that.

Right now we have a rate pending of approximately 9%. I think that that’s going to be approved. I don’t know at what amount. I would say in the 5% to 10% range it may be approved. That’s subject to the regulatory approval.

Now, how does that compare with the industry? I think that our rates are very competitive. You may see in the news that some of the big national carriers are pushing for some pretty significant rate increases. You’re seeing Citizens has just recently put in a rate increase of approximately 8.5%. They’re on what’s called a glide path. And that varies by territory.

But no single territory of theirs can go up by more than 10%. So I think the shock of what happened in the marketplace is over where you saw significant rate increases. We had a 40%, about a 50% rate increase back in ‘06 which lead to an overreaction of the expansion of the FHCF and perhaps mitigation credits. So then our rates went down sharply and then they phase up, the FHCF and the challenges of mitigation credits are fully realized and our rates go back up.

That volatility was not helpful to anyone and I think that that – the volatility is no longer there and that you’re going to see much more stable rate structure.

David Spear – Mineral Capital

Okay, because that’s really what my question was gearing towards in terms of the fact are we going to see a normalization in the environment because if so I think that’s a big catalyst there moving your stock above book value whereas right now you’re trading at a discounted book value and I think it just has entirely to do with just the uncertainty with the industry.

And I think now in the current time there seems to be from an onlooker standpoint, a lot of uncertainty in the business and I’m just wondering going forward do you see that as being the case that this is a normalized environment and a profitable environment right now?

Michael Braun

Sure. I’m very encouraged where we’re at. I think not only is the environment much better than it was back three, four years ago from a political perspective but also financially. We have great reinsurers on our program.

They’re all solid and we buy from FHCF which is more liquid than they’ve ever been and I think it’s much more standard of a normal environment. But we remain committed and focused on writing profitable business. I have no problem telling you that we could write a lot more business than we’re writing.

We reject – the majority of the business that comes in does not get written because of our underwriting process. So regardless of what the future may hold, we’re confident that we need to underwrite soundly policy-by-policy that – you mentioned Citizens I believe. We don’t see doing a de-pop of Citizens. I mean the quality of writing business individually one at a time, underwriting that and visiting the property, I think there’s a lot to be said for that.

David Spear – Mineral Capital

And last one and I’m going to get off. But is there a time table when we can see an announcement regarding the meeting with OIR or dividend that we can reasonably expect here?

Michael Braun

Well, I don’t anticipate putting out a press release after meeting with the OIR. Once again, there’s not a problem. It’s – this is just a courtesy meeting that I’m requesting of the OIR and I would anticipate that that’s going to be really the hurricane season here we go into September, October, November in the ballpark.

But I can assure you that we are well aware of the desire for a dividend and immediately if the board makes a decision we’ll get information out to that effect. But I don’t want to mislead you and tell you that this is going to be something that’s coming out that’s certain it’s not.

This is going to be a courtesy meeting that we have with the OIR and then we, as a board, are going to discuss it. But once that decision is made, that will be made public – we’ll make that available public immediately.

David Spear – Mineral Capital

Okay, great. I appreciate it. Thanks. Hope for good news (inaudible). Have a good one.

Michael Braun

Thank you.

Operator

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

Michael Braun

Hi, Samir. How are you today?

Samir Khare – Capital Returns Management

Good. How are you doing?

Michael Braun

Great.

Samir Khare – Capital Returns Management

I apologize if you guys covered this. I had some technical difficulties earlier and I had to dial in again. But I was hoping you could go over some of the rate increases you guys have been able to get to date and any pending rate increases or rate changes, rather, that you have in the pipeline.

Michael Braun

Sure. I’m going to be brief on that, Samir, because I did speak a little bit more at length. Basically we do have an 8.5%, about a 9% rate filing pending with the OIR. I anticipate that should get approved in the fall here. I can’t say for certain, obviously, but the shock of the big rate increases, I think that’s something that is behind us, not only for us as a carrier but the industry as well.

Samir Khare – Capital Returns Management

Okay. And can you also talk about some of the cost cutting initiatives you have in place.

Michael Braun

Yes, I think that we have a great infrastructure in place that we can very easily grow form and then write more business on. I think that Pete and I, the whole management team and the board prides ourselves on our operations. I think we do a very good job, a quality job with our underwriting, with everything that we do but for our insurers and for our agents and our claims handling.

So I think that really the objective is to maintain, to be diligent on our expenses at all time but we really see the opportunity. We clearly have that in our culture here where we contain expenses.

What we see is a great opportunity for us to grow and you’re seeing significant increases in our growth not only in this quarter but year-to-date and right now as we sit here in the first week of August that’s staying pretty steady. So I think that’s where you’re going to see an upside.

As we grow, the infrastructure doesn’t grow at the same rate. A lot of those fixed expenses are the most expensive policies or the first ones we write. Adding additional ones is not really the way we control. Variable expenses are much less costly.

Samir Khare – Capital Returns Management

Okay, thank you.

Michael Braun

Thank you.

Operator

Thank you. Our next question comes from Ron Bobman from Capital Returns.

Michael Braun

Hi, Ron, how are you?

Ron Bobman – Capital Returns

Good, gentlemen. Thanks a lot. I had a couple of sort of assorted questions. Commission income, could you remind me, is that sort of like reinsurance brokerage commission income or something else?

Michael Braun

Well, we have an in-house agency that’s very small. There’s – where we have – it’s called Insure-Link – where we do write third-party products. And then also we have our MGA where we write third-party products as well. So I believe that’s what you’re seeing, yes.

Ron Bobman – Capital Returns

Okay, okay. I had a question, if I heard Michael correctly in the prepared remarks, I think Debbie was the named storm and you mentioned $400,000, obviously relatively small, very small. But if I strip out the $400,000 of losses from that cat, if you call it that, your losses are, I don’t know, a $6.7 million or so and I get a loss ratio of still pretty high, like over 45% for a attritional loss ratio.

Is there something else that’s sort of inflating that loss ratio, again, when …

Michael Braun

Yes, let me answer that, Ron. I think if you’re comparing us to other Florida property companies, you have to know that we have a slightly different mix. So I would say that our property, our homeowners property – I think you’re looking at from a gross of a – let’s say gross loss in LAE high 20s, perhaps a 28%.

However, after deducting the reinsurance – well, let’s just say for easy math reinsurance is 50%. So you really could double that up to let’s say 56%, around those lines. That is not unusual in the industry.

What we have that’s different is we have our liability line. Our liability line is not heavy on reinsurance where we’re giving up 50% of our premium. So you’re seeing that our liability line, let’s just say that it’s going to run 55% to 60%. That would pull up the average on our …

Ron Bobman – Capital Returns

Okay. Thanks a lot for the help in the mix. I did not appreciate that.

Michael Braun

Okay. And also, just on a much smaller scale, we do have automobile as well, private passenger and commercial and, once again, that’s not heavy cat excess of loss driven.

Ron Bobman – Capital Returns

Okay. So if I look at the quarterly gross rate and premiums of $33 million, what’s the approximate split of those three lines: home owners, (inaudible) and auto?

Michael Braun

In terms of our in force homeowners, you’re talking north of $90 million. GL (ph) you’re talking about $10 million. We have flood, which is under Allied (ph). That’s about $4 million – probably – that’s about $5 million right now. Auto, you’re looking at about $1 million ballpark.

Ron Bobman – Capital Returns

Okay, okay. So your mix is a little different. And then my last question, I think again, Michael, in answering another question talked about – can you hear me okay?

Michael Braun

Yes, go ahead.

Ron Bobman – Capital Returns

Okay. I think Michael mentioned $40 million of sort of private reinsurance and Florida cat fund reinsurance expense annually and a quarter. And I just – the second quarter obviously still has the prior year’s reinsurance program showing up as the $11.7 million.

So has your reinsurance rate gone down? Has the program structure changed that much that we’re sort of going from a quarterly run rate of $11.7 million to $10 million?

Michael Braun

Well, where we’re at right now is in terms of the reinsurance, it’s fairly consistent and I’m overly simplifying it when I say $40 million equals $10 million a quarter. To be more technical, I mean, Pete can go into much more detail on how he seeds of the reinsurance on a quarterly basis.

But what we put out in our press release and our 8-K on our reinsurance program is that that comes in at $40.7 million. So last year I don’t recall with the adjustment. It was pretty consistent with that but we have other reinsurance as well because we do have reinsurance on our auto program. We do have it on our GL. We have some excess of loss on where we seed off premiums for – let’s just say of the fire or it’s a big liability claim, things like that.

Pete Prygelski

This is Pete. We also – what you’re all seeing in that line is we write flood insurance and the flood insurance is all seeded off and then what we take is a 5% commission on that.

Michael Braun

Yes, basically the profit on that is about 5%. After we pay, we have a TPA which is NFS (ph) handles that and then also after we pay our retailers is about $5 million. I think the flood book’s around $4.8 million.

Pete Prygelski

So the number you see there is not pure catastrophe reinsure.

Ron Bobman – Capital Returns

It’s for homeowners, right, right, right.

Pete Prygelski

There’s other stuff in that – in the actual number that you’re seeing. When Mike threw out the $40 million, that was specifically just for cat.

Ron Bobman – Capital Returns

Got you. And flood – and is the seeded flood premium showing up in that – for example, in this second quarter, $11.7 million? Is that – is there a flood seeded …

Michael Braun

Yes.

Ron Bobman – Capital Returns

Oh, I see. Okay. Thanks, guys, appreciate the help.

Pete Prygelski

Yes.

Michael Braun

Thank you.

Pete Prygelski

No problem.

Operator

Thank you. Our next question comes from Casey Alexander from Gilford Securities.

Michael Braun

Hi, Casey.

Casey Alexander – Gilford Securities

Hi, sorry. And most of my other questions you already got to. Particularly I was going to ask if you were considering participating in any more depopulation events from Citizens.

But my other question is it does seem as though some rationality has returned to the market after years of irrational underwriting environment. As you know, when Citizens made it somewhat irrational, some of the larger national competitors withdrew for all intents and purposes from the market.

Have you seen any inkling of a return from the larger competitors to the market now that it’s more rational?

Michael Braun

I have not seen anything to that effect. And when you see that these big boys were in the news recently as they’re trying to get rate, I can’t speak for them but I think that they have opportunities in 50 states – and Florida can be a bit problematic from them is what they’ve said in the past – I have not seen anything saying that they’re coming back to this marketplace.

But what we’re seeing is the majority of this market is by Florida domestics like companies like ourselves.

Casey Alexander – Gilford Securities

Right. Okay, great. Thank you.

Michael Braun

Thank you.

Operator

Thank you. Our next question comes from Brad Nelson (ph), private investor.

Michael Braun

How are you doing? What that Rod or Brad?

Brad Nelson – Private Investor

Brad.

Michael Braun

I’m sorry.

Brad Nelson – Private Investor

Nice quarter and more so, congrats on really over the last, whatever, two or three, maybe a little bit more than that, years turning the ship around and also thanks for having these conference call in both good and bad times.

Michael Braun

Sure.

Brad Nelson – Private Investor

I know you’re not exactly a big company but that’s why I appreciate that. This is – I apologize for my ignorance on this. The first quarter I think was guilt-free analyst and you and him were discussing something regarding the CGL and property lines.

And you don’t have to explain that to me. I just want to confirm that whatever happened there was basically a wash effect and had no net effect on any bottom line – virtually no net effect on anything to do with the bottom line.

Pete Prygelski

Yes, this is – Brad, this is Pete. Exactly, it had no net effect on earnings because …

Brad Nelson – Private Investor

Okay, great.

Pete Prygelski

Yes, we just removed it.

Brad Nelson – Private Investor

You don’t have to explain. I’ll take more of a look at it but I don’t expect you to give me a lesson and everything right now.

Pete Prygelski

Okay.

Brad Nelson – Private Investor

But anyway, that’s it. So thanks a lot and congrats on the quarter.

Michael Braun

Thank you very much.

Operator

Thank you. Our next question comes from Lee Matheson from Broadview Capital.

Michael Braun

Hi, Lee. How are you doing?

Lee Matheson – Broadview Capital

I’m good, guys. Thanks, guys, how are you?

Pete Prygelski

Good.

Michael Braun

Great, thanks.

Lee Matheson – Broadview Capital

Good quarter. Just a quick question on the unpaid – or sorry, the loss expense in the quarter; how much of it was current period versus prior year development?

Pete Prygelski

I would say that the losses actually paid the – the book we’ve shown over the last I think now, Lee, 14, 15 months, no development in prior years, meaning that whatever was paid out was pretty …

Lee Matheson – Broadview Capital

It fell flat. Okay.

Pete Prygelski

Right, previously reserved for, right.

Lee Matheson – Broadview Capital

And then in the $400,000 of cat loss was in the quarter.

Michael Braun

That’s a ballpark.

Pete Prygelski

That’s a pretty good ballpark, actually but …

Lee Matheson – Broadview Capital

Okay. And again, regarding the reinsurance seeding on the homeowners program, just a rough – the back of the envelope is sort of $28 million of gross premium written and about $10 million seeded under the reinsurance program, which is a much lower ratio than historic. Is that kind of where we should expect it?

Michael Braun

I would say that you can anticipate us being in the low, perhaps to mid 40s. There is a lot of variables in that but it’s taken a considerable amount of effort on our part, not only from an underwriting perspective but also with the rate adequacy that has moved through our book over the last two to three years.

It seems like it moves through painfully slow how we have to earn out the premium. But I think that as we sit here today I don’t see any volatility in the reinsurance market on a go-forward basis. Things could change but I think that the Florida market is much more stable and I think the reinsurance market is much more stable.

Lee Matheson – Broadview Capital

Okay. So from a pure operating standpoint, you’ll be back up at $200,000 of realized losses and the $400,000 or thereabouts of cat loss, which you’re talking pre-tax income in the – almost in the $3 million range for the quarter.

Michael Braun

I don’t know. I mean, you just wiped off $600,000, I mean, $2 million maybe – $2 million, I don’t know. It’s hard to analyze that. We have – as far as the cats, they come, they come. But you’re always going to have with the realized or – with realized investment gains or losses, I mean, that’s going to fluctuate from quarter to quarter.

Lee Matheson – Broadview Capital

Yes, we’re just trying to pull those out to get a sense of your really – your operating – to give a more recurring number, I guess. So we strip that out, it’s obviously a very strong quarter.

Pete Prygelski

Well, if you strip those out you’re at $2 million.

Lee Matheson – Broadview Capital

Right, okay, yes, yes, of net.

Pete Prygelski

Net.

Lee Matheson – Broadview Capital

Yes, yes, yes, yes, $3 million pre-tax and $2 million net. So we’re really starting to see book value grow and obviously at growth premiums to tangible book of about $2 million. You’ve got the ability to accelerate here, so good to see.

In terms of taking OpEx – I think somebody asked previously – but is there anything material to come out?

Pete Prygelski

In the quarter, there was no material impact on our financials. Is that what you’re asking?

Lee Matheson – Broadview Capital

Yes, just in terms of anything else you guys have to go in terms of pulling OpEx down.

Michael Braun

No, I think that you’re not seeing anything unusual in the quarter and I think you’re seeing us – our fixed expenses are fixed. And as we continue to grow – and you can see we’re growing – that those variable expenses are leading to much more profitable business.

Lee Matheson – Broadview Capital

Okay. And are you guys going to – I guess I could wait for the Q – but what was the average homeowners policy premium in the quarter?

Michael Braun

It’s been relatively flat, which is a bit interesting. But over the last couple of years it has been relatively flat at about $1800 but there’s a reason for that. Our average non-tri is $1400 and our average tri-county is about $2700.

But the reason why you’re seeing that it’s remained flat over the last two to three years has been our shift where you’ve seen perhaps 50% of our book in tri-county. Now you’re seeing more at about 20% is tri-county. So it’s really just a shift in the book.

Pete Prygelski

Lee, I wanted to add something. As Mike said, and I think we said this two years ago almost when we were getting questioned on why we were writing so few policies and we’ve gone from $43.7 million to $52.9 million and relatively without adding additional staff.

I mean, when I say relatively, we might have added one or two to the head count. But the factory is built and we can continue writing more policies while maintaining a fairly fixed head count.

Lee Matheson – Broadview Capital

And to get the 24% tri-county on the $52 million and change that you reported, we’re talking sort of 12,700 sort of tri-county policies, which is actually down 1000 quarter-over-quarter, so you’re still actively running that book down?

Michael Braun

Well, we’re not writing much business in tri-county and that’s intentionally occurring. And then also we’re growing non-tri. So I don’t think you’re going to see that. We’re comfortable where we’re at on tri-county.

Lee Matheson – Broadview Capital

Okay. And then what did you guys spend in the quarter on policy acquisition costs?

Pete Prygelski

I can get the – hold on one second. I will tell you. We spent in the quarter approximately $3 million.

Lee Matheson – Broadview Capital

That was the amortization of it or that was the actual cash expense?

Pete Prygelski

Oh, the cash I don’t have. I can get you that. I don’t have …

Lee Matheson – Broadview Capital

Oh, no problem. Okay. (Inaudible). Yes, you didn’t really grow year-over-year the amortization of acquisition costs, which given the strength in the policy county I would expect you to have obviously greater cash cost in that regard this quarter.

Michael Braun

Just a rough number for you, if we wrote $30 million in the quarter, our homeowners were averaging at 11%, so you could say it’s about $3.3 million from a gross actual cash (inaudible). There’s other variables on that though because it depends on how the insured pays and things like that.

Pete Prygelski

Well, Lee, if you want to talk about that offline, I can give you the exact numbers.

Lee Matheson – Broadview Capital

Sure, I’ll talk about it with you tomorrow.

Pete Prygelski

Okay.

Lee Matheson – Broadview Capital

Okay. Thanks, guys.

Michael Braun

Thank you.

Operator

Thank you. (Operator Instructions)

Michael Braun

All right, well, with that, we’ll go ahead and wrap it up. It looks like we handled all the questions and we always enjoy getting the information out there and things are going well for us and we’re always available. If any other questions come up, our contact information is on the press release. 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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