Heritage Insurance Holdings, Inc. (HRTG) Q4 2015 Earnings Report, Transcript and Summary

Welcome to Heritage Insurance Holdings Fourth Quarter and Full Year 2015 Financial Results Conference Call. My name is Mike and I will be the operator today. [Operator Instructions]. I would now like to turn the conference over to Ms. Melanie Skijus. Ms. Skijus, the floor is your ma'am.

Good morning. The fourth quarter and full year 2015 earnings release can be found in the Investors Relation Section of heritagepci.com. The earnings call will be archived and available for replay. Today' call may contain forward-looking. These statements which we undertake no obligation to update represent our current judgment and are subject to risk, assumptions and uncertainties. For a description of the risks that cause our results to differ materially from these described in the forward-looking statements, please refer to our Annual Report on Form 10-K and other fillings made with the SEC from time to time. With us on the call today are Bruce Lucas, Chairman and CEO and Steve Rohde, Chief Financial Officer. I would now turn the call over to Bruce.

Thank you, Melanie. I would like to welcome all you to our fourth quarter and full year 2015 earnings call. Before we address the quarterly results of I would like to take a moment to thank all of our employees for their dedication and commitment to the company. I'd like to start by addressing the acquisition of Zephyr Insurance Company. I'm very excited to announce that the Form A acquisition filing with the State of Hawaii Insurance Division has been approved and we expect to close the Zephyr Insurance transaction very soon. We expect the acquisition to be immediately accretive to the second quarter numbers but not to have any material impact on our first quarter results. To provide a quick recap the acquisition provides Heritage with an immediate presence in the State of Hawaii and we expect it to produce some reinsurance synergies within a year. As we have previously stated we expect net income contribution of roughly 13 million before reassurance synergies. The Zephyr team understands the Hawaii market and we are thrilled to welcome aboard such a solid team as we work together to drive new opportunities with the Zephyr brand. Now onto the quarterly and annual results, we have continued to post solid financial results while we focus on growing our voluntary book of business assuming new policies from citizens and expanding into new states. We achieved record voluntary production in commercial residential premium in the fourth quarter and added 20.4 million in new business in this line. Premiums and policy count also increased significantly year over year in the fourth quarter and some of our key fourth quarter metrics include a 34% increase in gross premiums earned as compared to the fourth quarter of 2014. A 253% increase in involuntary commercial residential premium as compared to the fourth quarter of 2014, a 23% increase in total policy count compared to the fourth quarter of 2014 and we declared the company's first dividend of $0.05 per share in the fourth quarter. And for the full year 2015 the company had another record year, we were able to grow gross premiums earned by 68% and more importantly grew net operating income by an incredible 96%. Some metrics for the full year are gross premiums written were 586.1 million which represents an increase of 34%, gross premiums on earned were 524.7 million, an increase of 68%. Net income for the full year was 92.5 million, an increase of 96%. The combined ratio on a gross basis was 74.9% compared to 79.4% in 2014 and stockholders' equity at December 31, 2015 was 356.5 million, an increase of 40% compared to December 31 of 2014. We were fortunate to have a quite hurricane season but work has already begun to enhance our reinsurance coverage for the 2016 season. We recently closed on a $250 million catastrophe bond that will drop our floor to hurricane catastrophe fund participation to only 45% and will lock in favorable rates for the next three years. We anticipate a reduction in our reinsurance rates but it is too early to determine the amount of the reduction in 2016. With respect to the daily claims activity, we continue to have success in handling claims by using our water mitigation division and BRC Restoration specialists. Our internal divisions have responded well to a series of six extreme weather events in the first quarter five of which were tornadoes. While these events could add as much as eight points to our first quarter 2016 loss ratio as compared to the fourth quarter the impact would have been substantially higher without a vertically integrated mitigation and construction divisions. We believe their rapid response to these events is a great example of our unique ability to capture losses and reduce claims after a severe weather event. For 2016, we are focused on streamlining our platform and resources to serve new markets. We are encouraged in North Carolina as we sign on new agents and work with our trusted partner National General Insurance to penetrate that market. We are pleased with the progress we're making in North Carolina which is ahead of schedule. We're also licensed in South Carolina and have been approved in Alabama and Mississippi and we plan to roll out these states later this year. We intend to hit the ground running with Zephyr and we are working toward a seamless integration with their team. I look forward to answering your questions at the end of our prepared remarks and I will now turn the call over to Steve Rohde to recap our financial results. Steve?

Thank you, Bruce and good morning. Gross premiums written for the fourth quarter were $167.5 million, a decrease of 8% year over year. This was made up of approximately $136 million of direct premiums written and $32 million of assumed premiums written. Assumed premiums written experience a sharp decline in the quarter from $103 million in the fourth quarter of 2014 related to fewer citizens take out and our direct premiums written grew 72% year over year. Related to or assume business we participated in citizen during October, November and December resulting in approximately 22,000 personal residential policies and 500 commercial residential policies assumed. We netted approximately $50 million of annualized premiums from these three assumptions. As a reminder we only record the unearned premium that is transferred from citizens has assumed written premium. The op-out rate during the quarter was 67% reverting back to the higher opt out rates we experienced earlier in 2015. Commercial residential assumption opportunities from citizens were limited this year as expected. While on the fourth quarter of 2014 we assumed approximately $85 million of commercial residential annualized premium. We assumed only $8 million of annualized premiums during the fourth quarter of 2015. Last year we disclosed that we did not expect there would be a significant number of commercial residential policies in citizens that would be attractive to us after such a large assumption during the fourth quarter of 2014 and that has proven to be the case. In the commercial policies that we get assume in the fourth quarter 2015 were smaller in size, an average premium of approximately $15,000 compared to $35,000 for the average premium for our total commercial residential book of business. Regarding personal residential for the full year 2015 we assumed approximately 68,200 policies from citizens representing $139 million of annualized premiums from 10 takeouts throughout the year. In 2014 we assumed approximately 57,600 policies from citizens representing $120 million of annualized premiums from seven takeouts throughout the year. In 2014 however, approximately 71% of the policies were assumed in the fourth quarter while in 2015 the takeouts were spread out more evenly with only 32% assumed during the fourth quarter. Our total personal lines policy count increased during the quarter to approximate 254,000 policies, an increase of approximately 16,000 policies from last quarter. Our voluntary personalized policies increased by almost 300,500 policies during the quarter. Our total premium at December 31, 2015 were $591 million an increase of almost 20% from the same quarter one year ago, an improvement of 9% from the end of the third quarter. Commercial residential premiums enforce were approximately $113 million, an increase of almost $23 million from the end of the third quarter. This level of enforced premium resulted in $143 million dollars of gross premiums earned in the fourth quarter of 2015 compared to $107 million for the fourth quarter of 2014. Our ceded premium ratio was 32.0% for the fourth quarter 2015 compared to 23.5% for the fourth quarter of 2014. The increase in the ceded premium ratio is primarily attributable to the inclusion of commercial residential in our 2015 reinsurance program which has a higher cost of reinsurance in the smaller amount of premiums assumed from citizens during the quarter relative to the fourth quarter of 2014, $32 million of assumed premiums written versus $103 million written in 2014. A good measure of the impact of the fourth quarter citizen assumptions on the ceded premium ratio is to compare the fourth quarter ratio to the third quarter ratio, the third quarter has the best matching of growth premiums earned and ceded premiums earned due to the timing of the annual renewal of our catastrophe reinsurance program on June 1st. The fourth quarter 2015 ceded premium ratio was 3.8 percentage points lower than the third quarter of 2015, while the fourth quarter of 2014 ceded premium ratio was 7.0 percentage points lower resulting from the larger fourth quarter assumptions in 2014. Our loss ratio as measured against gross premiums earned was 27.2% for the fourth quarter of 2015 compared to 25.7% for the fourth quarter 2014. The loss ratio was favorably impacted by the inclusion of commercial residential business but was unfairly impacted by the increase in frequency of losses reported in personal residential business primarily water related claims, frequency was particularly high in [indiscernible] Miami-Dade Counties during the quarter. Commercial residential continues to perform well and after one year of being in the business our reported loss ratio of commercial remains in the low single digits. During the quarter we increased IBNR, our incurred but not reported reserve by $6.4 million to $46.9 million. IBNR represent approximately 56% of our total loss reserves at December 31, and accounted for 4.4 points of the loss ratio for the quarter compared to 5.9 points for the fourth quarter of 2014. Our expense ratio as a percentage of gross earned premiums was 20.3% for the fourth quarter of 2015 compared to 25.1% for the fourth quarter of 2014. The year over year improvement in our expense ratio is primarily related two items. The first is the Sunshine State Insurance Company, policy acquisition fees that amortize during the fourth quarter of 2014. All the fees associated as SSIC were fully amortized as of June 30, 2015 thus there is no impact to the fourth quarter of 2015 ratio while increased the fourth quarter of 2014 gross expense ratio by 2.8 points. Second, stock based compensation accounted for 0.5 points of expense ratio in the quarter compared to 3.0 points for the fourth quarter of 2014. Also impacting the expense ratios for both the fourth quarter 2015 and 2014 were assumed earned premiums from citizen takeouts where there are no acquisition expenses associated with the premium. This improved the Q4 expense ratios for 2015 and 2014 by approximately 2.8 points and 3.0 points respectively. A combined ratio as a percent of gross premiums earned was 79.5% for the fourth quarter of 2015 compared to 74.3% for the fourth quarter of 2014. There are several items I previously mentioned in ceded premium expense ratios that resulted in about 3.7 point unfavorable net impact on the combined ratio. The most significant was the impact of the larger citizen assumptions during the fourth quarter of 2014. In addition, we had approximately 1.5 points on favorable result from our loss experience when compared to the fourth quarter of 2014. Our fourth quarter combined ratio of 79.5% when adjusted for the timing benefits of citizens assumptions resulted in an underlying combined ratio of approximately 86% one point higher than the guidance we have given in the past of an expected combined ratio on a gross basis of 85% in years of which we have no hurricanes. Net income for the fourth quarter of 2015 was $20.2 million compared to $19.7 million for the fourth quarter of 2014. Net income for the full year of 2015 was $92.5 million compared to $47.1 million for 2014. On the balance sheet side stockowners equity increased to approximately $357 million compared to $255 million at December 31, 2014 an increase of approximately 40%. Statutory surplus in our insurance company subsidiary at December 3,1, was approximately $216 million. Our invested assets at December 31 were $400 million with approximately $364 million invested in bonds with an average credit quality of A, and a duration approximately 4.1 years. Our cash position increased to $235 million in anticipation of the closing of our acquisition of Zephyr Insurance Company as well as reinsurance payments due in the first quarter. Our total assets were $837 million at December 31. We reported a solid quarter and year and believe we're well positioned as we enter 2016. And with that Bruce and I are now available to take your questions.

[Operator Instructions]. The first question we have will come from Mark Hughes of SunTrust. Please go ahead.

This is actually Kevin [indiscernible] for Mark Hughes today. You mentioned that you’re enthusiastic about your North Carolina productions. So far is that -- can you give a little bit more color on that if you could please, is it redistribution? Is it pricing and then any future trajectory of this?

We've just rolled out the North Carolina program in early to mid-February we beta tested our system of a handful of agents and as of the end of February we had just signed up over 100 agents with probably 150 to 200 more to go. We wrote approximately 100 policies in the month. We were expecting to write about 10 to 20. We are definitely seeing an increase in quoting activity and the increase in bound policies on a daily basis as we continue to roll out the North Carolina initiatives and we are excited about where we are on that front, we think there is a huge market opportunity there particularly as it relates to our partnership with National General Insurance. Just for ratification National General has a large auto book of business in North Carolina of approximately $300 million in annualized premium. They do not have a companion homeowner product to go with the auto policies that's something that we've stepped in at Heritage and worked with them to solve and we are their exclusive homeowners carrier in the state. So we're very excited about the opportunity at cross selling and increased retention can bring to the table with this partnership.

And at then at this I know you’re really in any other states once you’re looking but do you have any outlook on some good prospects with those that you're hoping to enter for the end of the year on anything particular?

Definitely, the next state that we will roll out is South Carolina and we already have a ground game in process there as well. We’re finalizing forms and rates with the South Carolina Department of Insurance, we’re looking for roll out there probably in the next 90 days or so after that we will move to some of the Gulf Coast states where we've been approved mainly Mississippi and Alabama and we are also pending right now in Georgia and Massachusetts.

And then one more, talking about the strong growth for commercial residential, can you just a give a little more color on why it picking up? Do you think the prospects there for the rest of the quarter, rest of the year?

Yes so commercial residential is definitely been increasing for us. We came into the market originally if you go back to the IPO days. We saw this great opportunity at citizens to do what we thought was mainly a onetime opportunity to [indiscernible] post IPO in the fourth quarter. We did that, we have some success in taking policies there. There isn't a lot left in citizens in terms of commercial residential that are attractive to us. We said that since day one it's mainly a onetime opportunity there but we've been building up our commercial residential division. We have easily the deepest bench in the State of Florida. We have approximately 15 people in that division. We are very active now on quoting. We've had some time to get through growing pains, make sure the system works appropriately, understand the market and where our reinsurance structure is falling into place. So we have seen a large increase in our commercial residential voluntary premium, it is well ahead of our internal expectations. Something that we’re very proud of, we’re running right now an attritional loss ratio there of less than 5%. So it's a very profitable business for the company and we're excited about the growth prospects that commercial residential affords.

For the first quarter of 2016 through February we added an additional close to $13 million of premium as well.

Next we’ve John Barnidge of Sandler O'Neill.

I’ve a few question s here, just housekeeping you said 8 points on a loss ratio from those events you had cited to have already occurred in the first quarter. Did you say that was eight points as compared to the fourth quarter of 2015 or as compared to the first quarter of 2015 and is that on a gross premium earned basis or net premium earned basis?

That will on a growth premium earned basis and that was compared to the fourth quarter of 2015.

Okay, so that would put you at around 35% gross loss ratio which is the highest since you've gone public. Am I correct in thinking that? That's what we're thinking.

We have had and just so you know John, we have had five tornado events in the first quarter and then we had another severe rainy event that took place for several days down in South Florida. The weather in the first quarter has been not the greatest, it's probably an impact on [indiscernible], I'm sure that every other insurance carrier in State of Florida is going to experience the exact same results.

So then would you anticipate disclosing the catastrophe losses then when you report?

No, I don't think so because they would go beneath our retentions.

These are more, we’re calling them weather related claims at this point through February in managed about 10% of our loss rate ratio and in the fourth quarter it was a little over 2% so that’s kind of guidance we have at this point. And these aren't fully developed yet, we're still getting claims reported and so forth and not sure again what the rest of quarter is going to look like.

Yes one thing that's been great from this John, is that we've been able to really test BRC and get them out to the disaster sites quickly tarping [ph] routes, signing up homeowners, doing repair work. No doubt that type of effort will help to mitigate the losses that we experience versus our peer group. So we're excited to actually be able to take that asset and deploy them after some severe weather events with great success.

Okay. And then as we think about the ceded premium ratio prospectively. Do you think it will be closer to say 32% that you reported in the fourth quarter on an ongoing basis or how should we think about that?

I would think it would be when we renew our reinsurance program it will be in the mid-33% range and in the second quarter I think we'll see some -- I think it would be and again kind of similar to what it was for the first quarter of this year.

So which was about 20%?

No. The premium ratio?

You’re talking about 33% or the first quarter of last year?

No, the first quarter of this year. So about 32% for the second quarter going up a little bit. The third quarter we will increase our or buy a new reinsurance program.

Okay. And as we think about your expense ratio as you build out more states where do you think that would settle in and then also one of your great selling points as you mentioned Bruce was BRC your vertical integration on claims process. How do you see that developing as you expand out of states given the fragmentation in a contractor market?

Yes. I think as we go out the state John, the number one thing that we need to look at as policy concentration if we’re going to internally scale that model outside of Florida. So you need to have a certain policy concentration in one geography in order to justify having the vertically integrated services until we reach that threshold that saturation threshold so to speak, what we need to do is rely on third party vendors that go through our Contractors Alliance Network. When those vendors go through CAN we're able to sign them up, use standardize pricing and get a 10% discount on the work that they perform there and that's what we did early on in the history of the company and until we acquired the BRC last year that's what we did on build back in State of Florida which worked very well. We'll continue with that model outside of the state and once we had a large enough policy concentration we can look at them go ahead and deploy some resources in those areas so that we have true vertical integration in new markets.

Regarding the expense ratio, John, I see our expense ratio on a go forward basis with no benefit of takeouts being about 23% expense ratio of which what 14 points would be on policy acquisition and about 9 points on G&A expenses.

And my last question would be, M&A has clearly been a part of your strategy for growth perspectively, you’ve Zephyr that you're going to closing this quarter. How do you think of M&A going forward as you digest Zephyr?

Yes we’re definitely still involved in some M&A opportunities, we’re going to be selective about the companies that we have acquire. Not all of them are going to meet our profile and you know it's an issue -- are you getting proper reinsurance synergies, do they have a good management team. What does the profile that company look like? How can we scale their operations and increase their top and bottom line. Those are all things that at the end of the day probably knock out 90% of the companies that you look at. We're not just going to spend money on M&A just to do it, they have to make sense and be strategic for us. There are opportunities out there in the market, we continue to evaluate them. I think where we will be right now between now and say storm season, we are focused on locking in our probable maximum loss, locking in our reinsurance ratios and treaties. We look to do another M&A transaction that transaction will probably be something that closes at the end of wind season into the first quarter of next year. That be an ideal timeline for us.

The next question we have comes from Arash Soleimani of KBW. Please go ahead.

I don't think I understood before, do you see the eight points of weather losses that was in the fourth quarter or year-to-date in the first quarter?

Primarily it's first quarter loss ratio, we think will increase as much as 8%. We haven't had -- it's not fully developed yet, we're just giving an estimate through the end of the quarter. But these are events that happened in the first quarter of this year.

So can you talk about the fourth quarter because the loss ratio did increase year over year in the fourth quarter and in the press release you said there was a higher frequency. Can you give a bit more detail around what happened there?

Sure. Our frequency of losses for [indiscernible] was 5.3% in the fourth quarter of 2015 and that compared to 3.6% in the fourth quarter of 2014. So a significant jump there and severity was very close pretty much unchanged from one quarter to the next both around $10,600. Frequency strictly in in particularly in Broward and Miami-Dade Counties were particularly high in the fourth quarter. Miami-Dade was a little over 9% and Broward was 8.3%. And so that’s what we really saw the uptick in particular.

We did have [indiscernible] we did have a severe rain event in the fourth quarter in Southeast Florida that lasted several days that caused a lot of claims. Some of those claims are coming in now in the first quarter and they're included in the six extreme weather events but a portion of those claims also came in the fourth quarter as well. So that helps to explain some of the uptick there.

Okay. So any of this -- so was it mostly rain claims or whether just water claims in general or -- you know what I mean was it something specific?

Yes if you look at our current loss ratio water claims excluding water coming through the roof which we put those into the weather related claims. The loss ratio quarter over quarter increased about 3.5 percentage points from water and about 1.5 from weather events.

Okay. So it seems like the water loss not from weather where I guess the bigger culprit, I mean is that something that would be attributable to a timing benefits or is that not related to the subject?

I think there is definitely a correlation to assigning the benefits, I mean there is no doubt that in the State of Florida every homeowner's company is being hit with assignment of benefit fraud, that's something that as a company we identified back in 2012 before it was even a problem. Our entire business plan since inception four years ago was designed to combat what we thought would be a growing assignment of benefit problem in the state, that’s why we went out early and acquired our own internal water division that's why we required BRC. We've been way ahead of the curve on that but there's no doubt that if the legislature does not take action you're going to see an increase in AOB, that's why we're really watching what we're taking down in TriCounty [ph] we’re credit scoring our book of business on the voluntary front. No doubt that what we call insurance scores here to be clear. No doubt that there is a correlation between better insurance scores and lower loss ratio. So we're very diligent on what we're taking there, we use predictive. AOP modeling on all of our citizens assumptions so we're very careful what we take out of citizens in the TriCounty area but it is a growing problem down there and in fact it's a growing problem throughout the state. I do feel like we're handling it probably better than anyone else because of the vertical integration of our water mitigation contractors in claims department.

And I own a couple of your competitors have reported already so I think you know there was some loss ratio pressure there as well but it seem like you’ve a bit more, is that you think attributable to citizen policy specifically or geographic mix. I'm just trying to get a sense of what in your book specifically was more pronounced?

Looking at all regions were up again generally year over year, but it was more pronounced in the TriCounty. But you know we are seeing upticks all over, our best area [indiscernible] county, it performed very well as a loss ratio in the teens but last year in the fourth quarter it had an 8% loss ratio this year it was a 16%. But you know a 16% loss ratio is extremely good but it had an unusually low loss ratio in the fourth quarter of 2014. So I think we had an extremely good fourth quarter 2014 and then also you know the impact of as Bruce mentioned AOB and so forth that’s some pressure on it. I think an overall it looks like our loss ratio is s about 3 points higher for 2015 compared to 2014 if you look at quarter by quarter it's about a 3 percentage point difference quarter over quarter and it's pretty consistent. In the third quarter weather related claims seemed to overshadowed our water losses and this time the water losses overshadowed the weather related claims.

And our historical number when we look at loss ratios by citizens assumptions and voluntary policies, actually we've been performing pretty much the same across the board voluntary or citizens' assumptions and I think that's a real testament to the way we underwrite policies. On the front end we use predictive modeling for the AOP loss ratio, we're avoiding the worst of the worst policies at citizens. We’re not going to denigrate that underwriting and we've got pretty sound underwriting on the front end as well especially now that our insurance scoring in the book of business.

One thing we had seen that is also impacting is someone on the frequency is -- there's an increased lag in reporting of claims now that we're seeing. You know I you go back to the AOB [ph] issue. For the last four quarters our average reported lag time was 28 days in 2014 it was 17.5 days so there has been a significant lag in reported of late claims.

And I do think, Arash in terms of rate environment in the state I think that homeowners' premium rates are going higher. There's no doubt in my mind that that's happening and I know citizens came out and told the public yesterday that they anticipate 10% rate increases across their book every year for the foreseeable future. We do monitor what our competitors are doing in the states in terms of their rate filing activity and everybody is taking rate. Some companies are taking double digit rate but I think the average of the last batch of say 25 companies that we follow the average rate increase was somewhere around 7%. So rates are going higher as claim activity goes higher and we make it back in the higher premiums.

So would you and for Heritage specifically for 2016 do you anticipate putting through rate increases in your book and if so how would I guess TriCounty compared to the state overall.

Yes we are anticipate rate increases. We recently went live with our voluntary rate filing and that happened in February. Overall that was about a 4% increase statewide. It was a double digit increase and a lot of the areas in TriCounty and then we had other areas of the state like Pinellas County where we took a double digit rate decrease. So we are pricing the book of business to go along with the increase risk, just like everybody else in the market is doing and so if we’re going to take a policy in TriCounty it's going to have a higher rate attached to it and we are insurance scoring that book of business. So we know we're getting better risks and when it comes to areas where we have that better loss ratio such as Pinellas County we're giving big decreases in shifting the concentration of the book of business more toward the west coast and if we're going to take it in TriCounty it's going to have a good insurance score and it's going to have a higher premium.

And right now in the process of working on our takeout filing. We have two separate rating plans, one for a voluntary business and one for policies that we assume from citizens. We will be filing that by the end of March and we're just starting work on it right now but we would expect it would be a rate increase associated with that.

So the 4% overall rate increase for the state was that on the citizen side? You said non-citizen side for everything.

That was for the voluntary production and then our citizens rate filing as Steve mentioned that is in progress right now. So we don't have any filing that's been publicly made with OIR [ph] we’re still doing the actuarial analysis but I do anticipate a fairly substantial rate increase on that book of business.

Okay. And given I guess the losses and AOB [ph] frequency issues we've seen -- I think in the past you have I think guided sort of an 85% run rate on the combined ratio assuming those citizens subsidies, is that something that you still think you can hit or do you think now that we should assume that targets a bit higher?

I think 85 is still a reasonable target for us. Like this quarter you take out the timing benefits it was an 86% combined ratio. Look you know first quarter obviously it will be higher than that but I think second quarter and beyond I think an 85 is still a reasonable target for us.

I would agree with that. We have had -- it's weird on the [indiscernible] year you’re definitely getting a lower frequency of Atlantic base and cat activity. So that's very helpful for us probably has reasons. But we've also seen more kind of one off extreme weather here in the state. We had a 10100 event in over the summer that contributed to the loss ratio in 2015. We've had lot of tornado activity in the first quarter. To give you an example of how rare and how unique this tornado activity is. Since our inception through the fourth quarter of 2015 we only paid out about $120,000 in tornado claims and then of first quarter we get hit with five tornadoes.

Those were $4 million of claims at this point.

It's really just about 4 million so far. So it definitely is a one off event and that just happens sometimes. You have odd weather. I would certainly expect every other insurance carrier that will be reporting similar results.

So you mentioned citizen put out that report last night and I think they used the term the losses are crisis level through the AOB. So my question is, you guys had a decent number of pick up off on the first quarter and it seems you still have an appetite I guess, you know my question would be what's driving that appetite if you know citizen seems to be struggling a lot with the policies that it has?

Arash, a couple of things to note here we have said now for the past I don't know over a year that our focus is on new business coming into citizens. New business comes in at an uncapped rate. So when citizens talks about their policies particularly in the TriCounty and the need for a large rating increases there, a lot of those policies have a rate capping mechanism on them because they can only raise their rates their 10% a year and so if a policy has been there for five years it could be massively under-priced versus the market. We don't look at those policies. We are primarily focused on new business coming in because it comes in at a higher rate. It's got newer underwriting attached to it and we look at the predictive modeling that we use for AOP loss ratios and it has been pretty accurate for us since we started this years ago. And those are the policies that we're really looking at. We are looking at [indiscernible] policies that are into citizens. A lot of these policies are coming in from State Farm and Allstate and other captive writers [ph] and it's very good premiums. But if you're a State Farm customer you have two choices, you can either take a homeowner's product from State Farm, and if their belly is full in terms of their concentration in Florida. It automatically goes in the citizens and so we look at those policies in particular as really good customers, very well underwritten loss ratios have performed quite well on them. Those are the things that we're looking at and we shifted that business plan over a year ago to do smaller, more frequent takeouts to mine new business activity as it comes in the front door that's why you get some kind of odd looking stats such as fourth quarter our premium decreased 8% year-over-year well that makes sense because we did our large take out in September. Not in that from the third quarter and then compared to 2014 the fourth quarter and we actually netted more policies from citizens throughout the year in 2015 than we did in 2014. So we actually grew the number of assumptions we did and I think the other kind of glaring thing as to why you saw a slight decrease in the fourth quarter year over year was because we took a large commercial residential assumption in the fourth quarter of '14 which we told everyone was essentially a onetime opportunity. So you know overall I think that we've done a really good job of identifying the market conditions in advance, being ahead of the curve executing on the business plan, being nimble and it's produced phenomenal results and you see it in the increase in net operating income year over year its up 96%. So we're pretty proud of the results we have. We’re going to be very focused on what we do in terms of new business activity in TriCounty as mentioned what we do on the take out side but what we've been doing has been working.

And the loss ratio on the assumed business. So the assumed losses against assumed earned premium for the quarter that was about a 26% loss ratio so the assumed business had actually slightly lower loss ratio than policies that are renewed on our paper as well as a voluntary. So the recent assumptions there's been no deterioration in our loss ratio from those policies.

And I think commercial residential is 19% of your annualized policies and premiums enforced as of the end of the fourth quarter. How should we expect that to trend through 2016? Is it stable or should we?

Are you asking for top line growth in that sector? Is that what you’re looking for?

Yes I guess more just looking for the mix of business so that I think right now you have one 19% of your premiums enforced from commercial residential. I just wanted to know if that's something that would increase or if that will stay stable around you know 19% or 20%?

I think around 20% is a good stable number for now because we're setting PMLs right now for wind season. So we had great opportunities in the fourth quarter and we had record production in the fourth quarter. In January it was a record month for us compared to any other month we've done. So we have done a great job of identifying those market opportunities, getting a very attractive combined ratios. They have larger TIVs to them the AOP is extremely small. And so we're in the mode now in March as we sit here, wind season is in three months and we're trying to lock in our reinsurance towers. So we're going to be selective on what we take between now and the end of wind season to mitigate risk, keep our reinsurance costs low, protect the franchise etcetera and then we will look in the fourth quarter to continue to increase production as more opportunities come online and that's the big renewal season this fourth quarter.

And that commercial residential loss ratio you said it was like I think around 5% or low single digits is that -- what's the loss ratio when you include IBNR. So I think it's on a GAAP basis?

It's about 5% maybe slightly higher than 5% or even on a GAAP basis. It's on the 5% range.

And that is just to put that in context Arash, that is half of what we projected when we launched this line of business at the IPO.

And then last two questions, one can you just remind us -- I think you may have said this prior period reserve development was in the fourth quarter and then second just what percentage of your personal residential policies are wind only?

Regarding wind only, it's small, we have the numbers here. It's 19,000 policies or 250,000 personalized policies.

And then the prior period development in the fourth quarter?

I don't have the information at hand right now. And for the year we had favorable development of $5.3 million from prior year at the end of this year on a quarterly basis.

5.3 million is favorable for the whole year you said?

Yes. And Arash, in terms of percentage wind only it's approximately 7% of our overall policy count.

So including everything you're saying whether it's personal commercial it's 7% of everything, okay.

Yes, we don’t have wind only coverage on commercial residential.

And our last question will come from Matt Carletti of JMP Securities.

Just said a couple questions one to follow up on the frequency in the quarter particularly in Broward and Dade, when you take out weather and look at the non-weather frequency have you seen a change as we've gotten into Q1 now that we're in 2/3rds of the way through the quarter, has it gotten better or worse or unchanged?

It's unchanged.

And then it's a numbers question, if they happen to have it but do you have what assumed premiums were in 2015 for the first three quarters? And if not I can follow-up off line.

Assumed premiums earned for the first three quarters of 2015 they were -- first quarter was this is written or earned?

Written is fine.

32.5 for quarter one, 800,000 for quarter two, 33.1 million for quarter three and 32 million for quarter four.

Well this concludes the question and answer portion of the call. I would now like to turn the conference call back over to Mr. Bruce Lucas for any closing remarks. Sir?

I would just like to thank everyone for participating in our fourth quarter 2015 and full year conference call.

And we thank you sir and to the rest of the management thing for your time also today. The conference call is now concluded. At this time you may disconnect your lines. Thank you. Take care and have a great day everyone.