FedNat Holding Company (FNHC) Q3 2018 Earnings Conference Call Transcript

FedNat Holding Company

(FNHC)
Q3 2018 Earnings Conference Call
Nov. 7, 2018 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to FedNat Holding Company's third-quarter 2018 financial results conference call. My name is Joelle , and I will be your operator today. Please note that today's call is being recorded. [Operator instructions] Statements in this conference call that are not historical facts are forward-looking statements.

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 and other similar words or phrases are intended to identify forward-looking statements. The matters discussed on this call that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements made on this call due to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in this conference call, our press release issued yesterday and other filings made by company with the SEC from time to time. Forward-looking statements made during this conference call speak only as of today's date, and FedNat Holding Company specifically disclaims any obligation to update or revise any forward-looking statement to reflect new information, future events or circumstances or otherwise.

And now at this time, I would now like to turn the conference over to Mr. Michael Braun, chief executive officer and president of FedNat Holding Company. Please go ahead, sir.

Michael Braun -- Chief Executive Officer and President

Thank you, operator. Welcome everyone to our 2018 third-quarter investor call. Ron Jordan, our chief financial officer; and Erick Fernandez, our chief accounting officer, are with me on the call and we will take your questions after my opening remarks along with Ron's detailed review of our financial results for the quarter. We continue to make good progress on our strategies to drive strong earnings power and sustainable long-term growth.

Third-quarter earnings reflected improvement in Homeowners underwriting profitability, both including and excluding named storms from each year, as well as our efforts to reduce expenses. But this progress was overshadowed in our bottom line results by two primary issues: additions to loss reserves in our Florida homeowners book of business as a result of higher fire and lightning losses as well as adverse reserve development in the non-core business, which we are winding down. The quarter's results also included $4 million in claims from weather events that include Hurricane Florence and Tropical Storm Gordon, which made landfall in South Carolina and Florida, respectively. Our underlining business continues to move in the right direction as we work to improve underwriting profitability, consolidate the performance benefits of both our recent rate increases and our new reinsurance program along with continuing to focus on reducing our operating expenses.

Underwriting profitability improved as our gross loss ratio excluding impacts of Hurricane Irma came in at 49.1%, which is an improvement over last year's 54.6%. Our net loss ratio, excluding Irma, was 65.6%, down from 73.2% in the prior year same quarter. Our combined ratio for the quarter of 100.3% isn't yet where we want it to be. However, it is significantly improved from the 134.7% reported in last year's third quarter, and is roughly flat with the 99% in this year's second quarter.

We continue to do a good job managing our Homeowners book for profitability and maintaining underwriting discipline about what we choose to write in a competitive environment. In the quarter, Homeowners net income was $8.2 million, which demonstrates earnings power in our core business line. In addition, we continue to outperform in growing our market share in our non-Florida coastal states, which includes Louisiana, South Carolina Texas and Alabama. Gross premiums earned increased 54% to almost $18 million in the quarter in our non-Florida business.

On August 2017, 10% rate increase on our Florida homeowners book of business is now fully earned into our quarterly run rate contributing to the mitigation of the ongoing effects of assignment of benefits. We have recently filed for an additional 3.6% rate increase with an anticipated effective date of March 1, 2019, which is obviously subject to regulatory approval. We will keep you informed as there is additional information to provide you on this filing. Additionally, our new reinsurance program began flowing through our income statement in the third quarter, allowing us to reduce our reinsurance costs while continuing to mitigate our exposure risk.

Finally, we have continued to take action to control costs and reduce expenses. General and administrative costs were flat in the quarter, year over year, and down slightly from this year's second quarter. We have continued to lower our staff count and have reduced payroll costs in excess of $5.1 million on an annualized savings. We continue to invest in technology and our staff's training to further increase our company's productivity.

During the third quarter, our entire staff, specifically including our claims team, have done a terrific job in providing excellent service to our policyholders and maintaining and building upon -- on the great reputation and relationships that we have earned in our local Florida homeowners insurance market. Despite the weather-related challenges that we faced in the quarter, our team continues to do a tremendous job of providing excellent service to our entire network of policyholders and agents, which we are grateful for. Let me recap our recent filing concerning hurricane Michael and its expected impact on our fourth quarter's results. This was a major hurricane that made landfall on Mexico Beach in Florida's Panhandle during the month of October and has severely impacted their lives of many Floridians, including those that are policyholders of FedNat.

We have deployed the appropriate resources and we'll be there for our customers in their time of need. To give you more perspective, while we have a 5% market share across the entire state, FedNat writes approximately 10% of the total insured homeowners a value in Bay County and Gulf County, where Michael made landfall. We expect that the total number of Michael claims will be roughly a quarter of Irma, which has generated approximately 40,000 claims. We estimate that our aggregate gross losses for Michael will be approximately $275 million with losses net of reinsurance not exceeding the first event pre-tax retention of $23 million.

That retention number includes $20 million for FedNat Insurance Company plus $3 million for Monarch National Insurance Company. Our program -- reinsurance program affords FedNat and Monarch National approximately $1.8 billion of aggregate coverage with a maximum single event coverage totaling approximately $1.35 billion. Any non-Florida losses will be reduced due to the profit sharing agreement that we have with our nonaffiliated to managing general underwriter that rights our non-Florida business. Our effective retention on the storm will also be reduced by fees that we earn handling claims that are covered by our catastrophe reinsurance program.

Ron will dig into the financial results in greater detail, but let me share some highlights with you. Net income was $7.95 million or $0.62 per share compared with last year's third quarter loss of $0.36, which included the impact of Hurricane Irma. Revenue, excluding investment gains and losses, was $109.1 million, an 18% increase over the $92.6 million reported in last year's third quarter, and up over the $95.5 million reported in the second quarter of this year. Net earned premiums were $98.5 million and benefited from the lower cost of our excess of loss reinsurance program.

Book value per share, excluding accumulated other comprehensive income, at the end of the quarter, was $17.91, representing almost 15% annualized growth from year-end 2017. FedNat remains on the positive trajectory that we have put in place. And I am confident that we are in a strong position to deliver improved performance in 2019 and going forward. We remain focused on maintaining and growing, when appropriate, our market share in our core Florida homeowners market while continuing to run the book with profitability as our top priority.

Beyond Florida, we are seeing strong results in our non-Florida coastal states as our methodical approach to growing shares in these states is paying off. The cost savings and benefits from our new reinsurance program had a very favorable impact on our third quarter results and will continue in Q4 and into 2019. That continued wind-down our non-core commercial business will improve our profitability going forward as well. And finally, we have a strong balance sheet, which provides financial flexibility for us to use our capital in a way that will benefit our shareholders and create value.

Now I'll turn the call over to Ron for a detailed review of our financial results.

Ron Jordan -- Chief Financial Officer

Thanks, Mike. Good morning to each of you on the call, and thanks for your interest in FedNat Holding Company. FedNat's third-quarter results reflect several strong indicators of our continuing momentum to increase profitability but also a couple of headwinds. On the plus side, the catastrophe reinsurance save we discussed the last quarter, kicked into gear up approximately $8 million a quarter, representing an annualized save of $32 million pre-tax, even higher than the $30 million annual benefit we forecasted as of last quarter.

Also, our non-Florida book continues its strong growth, up 16% and 53% over 2Q '18, the sequential quarter, and over 3Q '17, respectively. Our exit from auto took a major step forward with the novation of our Texas book effective August 1, 2018. Areas of drag in the quarter included our Homeowners gross loss ratio, while lower than 3Q '17, even when one excludes the impact for Hurricane Irma, increased from first half '18 levels, due primarily to an uptick in activity in the fire and lightning cause of loss category over the summer months, and from higher losses from severe weather, including Florence and Gordon. And lastly, we recorded $3 million of adverse prior year reserve development in auto and commercial general liability, the non-core lines that we are exiting.

So I'll touch on these items later in my remarks. But let's start with the bigger picture. Net income in the quarter was $8 million, representing a 14.5% return on equity and $0.62 per diluted share. This, of course, represents a substantial increase over 3Q '17's $4.7 million loss, which was driven by hurricanes Harvey and Irma.

Excluding investment gains and losses from both periods, 3Q '18 produced $6.6 million of earnings compared to a loss of $8.5 million in the prior-year quarter. This turnaround was driven by a significant improvement in our core Homeowners businesses in which earnings swung from a loss of $8.2 million in the prior year quarter to net income of $8.2 million this quarter. On a sequential basis, Homeowners' net income declined 3% due to the current accident year loss ratio strengthening, already mentioned, which amounted to $6.1 million. A 2.5% increase in severe weather, that's net of profit share recovery, and $1.4 million of lower brokerage income from inception of the new catastrophe reinsurance treaty year.

Together, these headwinds slightly exceeded the $8 million per quarter boost received from our excess of loss catastrophe reinsurance save, plus the final bit of rate earn out from our August '17 -- August 2017 10% rate increase. Excluding investment gains, auto and other -- and the other is where our commercial general liability business resides, declined $1.8 million sequentially, driven by the adverse prior year developments already mentioned. Digging into revenues. Excluding investment gains in all periods, total revenue for 3Q '18 was $109.1 million, an increase of almost 18% versus the third quarter of 2017, including almost 30% growth in Homeowners, driven by higher net earned premiums.

Revenue growth was also impressive on a sequential quarter basis, up almost 18% in Homeowners and 14% overall from 2Q '18. This growth in Homeowners revenues stems from three sources. Our excess of loss catastrophe reinsurance save, which increased net earned premiums by approximately $8 million versus 2Q '18 and $9.6 million versus 3Q '17. As described last quarter, this save stems from rigorous exposure management, allowing us to reduce the total dollar amount of limit purchase, while maintaining the same methodology and coverage related to our exposures.

Second, the reduction in our quota share reinsurance treaty from 10% for the treaty year ended June 30, 2018, to 2%, beginning July 1, 2018, which added $6.4 million to net earned premium in the third quarter of '18. And third, growth in our non-Florida business, which contributed gross earned premium increases of $2.5 million over 2Q '18 and $6.3 million over 3Q '17. On the revenue front, I think it is also worth pointing out that the work we have done in repositioning our investment portfolio over the past year has led to an additional contribution to the bottom line on an annualized pre-tax basis of approximately $3.5 million as compared to the run rate that existed in the third quarter of 2017. Returning to the topic of our third quarter Homeowners loss ratio, let me start by delineating the severe weather impacts in the quarter.

We recorded $4 million of gross losses related to Hurricane Florence, which impacted our South Carolina book. Pursuant to the profit sharing arrangement we have with the third-party MGU of that book, we will recover 50% of our losses from this storm from the MGU, leaving $2 million of earnings impact to the company. The second notable severe weather event in the third quarter was Tropical Storm Gordon, which impacted Florida and resulted in $2 million of gross and net losses for FedNat. In terms of income statement geography, note that the full $6.1 million of gross weather losses in the quarter flows through the loss and loss adjustment expense line of our income statement, fully impacting our loss ratio.

This is because the $2 million recovery on Florence from the profit share calculation flows through the commissions and other underwriting expenses lines of our income statement. Excluding Irma, in the prior-year quarter, our Homeowners gross loss ratio was 44.8% for 3Q '18 compared to 45.2% in the third quarter of 2017. And that's despite higher weather losses in 3Q '18 that are included in the ratio, and 38.7% for 2Q '18. Regarding the sequential increase of 6 points, approximately half the increase is due to higher severe weather in 3Q '18, i.e.

Florence and Gordon over the second quarter of '18. As for the remainder of the increase, the third quarter is typically our highest loss ratio quarter of the year in terms of the current year accident loss ratio due to severe summer weather in Florida. Some of our Florida peers have a referenced the same phenomenon in their 3Q results. In this year's third quarter, we saw a greater impact than the typical seasonal trend due to a higher frequency of large fire and lightning claims in the summer months.

Based on past history, and based on a preliminary look at October claims, we do not expect these fire and lightning losses to continue into the fourth quarter. Even with the elevated losses just discussed, our Homeowners 3Q '18 combined ratio of 93.6% was essentially flat with the 93.1% from our second quarter, aided by the lower cost of catastrophe reinsurance in the current treaty year. Our 3Q '17 combined ratio was 129.7% in Homeowners, and included our Hurricane Irma retention. In terms of our expense ratio, with the net earned premium impacts of our catastrophe and quota share reinsurance changes complicating net expense ratio comparisons, the gross expense ratio is a better indicator of our performance.

Our Homeowners gross expense ratio was 24.4% for the third quarter of 2018, down from 26.2% in 2Q '18, due to the hurricane Florence impact on the non-Florida profit sharing calculation discussed above. 3Q '18's gross expense ratio is up slightly from 3Q '17, due to the growth of our non-Florida book relative to our total Homeowners book. In dollar terms, Homeowners commissions and other underwriting expenses increased over 2Q '18 and 3Q '17, driven primarily by the lower quote share session in 3Q '18 and due to fluctuations in the non-Florida MGU profit sharing agreement in each period. G&A expenses are down versus both of the comparison periods, driven by our headcount reductions and other operating expense initiatives.

Our expense control initiatives are progressing and our total number of staff declined by another 85 in the third quarter, bringing our cumulative staff reductions up to 85, a run rate impact of over $5 million annually. Wrapping up, expenses note that we incurred approximately $900,000 of severance costs in the quarter, which increased the net expense ratio by almost a full percentage point. I have perfectly focused my remarks thus far on Homeowners as our non-core operations are continuing to become smaller. During 2019, our consolidated results will converge even more with our Homeowners results, inclusive of the impact of commissions on brokered products and investment results.

With that said, let me make a few comments on our non-core lines. Automobile gross written premiums were negative $3 million in the quarter, reflecting the impact of the Texas novation transaction mentioned earlier, under which we ceded $4.4 million of gross written premium. Net earned premiums in Auto were $675,000, down almost 60% from 2Q '18. And the vast majority of that was earned in the month of July, preceding the August 1 novation.

So we expect a substantial reduction from 3Q to 4Q. The unearned premium reserve on the in-force business, as of August 1, and the claims handling responsibility for claims with dates of loss after July 31 have transferred to the third-party. We retained all the net premiums earned up through July 31 and continue to be responsible for the runoff of all claims with dates of loss of July 31 and prior. Gross earned premiums in Auto from here forward will be truly negligible.

Further, total net earned premium is expected to be less than $300,000 from now through January 2019, at which point in-force premium will, for all practical purposes, reach 0. Due to the loss -- adverse loss development mentioned earlier, we lost $1.4 million on Auto in the quarter, roughly flat with the prior-year quarter. Our Other line of business, includes our non-core commercial general liability operations, from which we are exiting, as well as commissions on brokered products, investment activities and interest expense. Other contributed a loss of $100,000 in the quarter, excluding investment gains, due to the prior year reserve development mentioned earlier.

CGL contributed $1.4 million in gross premiums written in the quarter, down 44% from 3Q '17 and down 9% from 2Q '18, with net earned premium trending down at a slower pace as one would expect. CGL now represents less than 40% of gross earned premiums in our Other line of business with our flood book, on which we carry no risk, comprising the other 60%. Net investment income continues to trend up nicely, as mentioned earlier in my remarks, and contributed $3.1 million pre-tax to the quarter. Now turning to the balance sheet.

Our book value per share was $17.45 as of September 30, up $0.56 from June 30, driven by net income in the quarter, partially offset by $0.04 of additional unrealized losses on our bond portfolio from the impact of rising interest rates. Excluding the impact of unrealized gains and losses, our September 30 book value per share of $17.91 shares was up 3.5% from June 30, representing 14% growth on an annualized basis. Our investment portfolio is performing well and has a carrying value of $449 million at September 30. The portfolios composite S&P rating was an A- as of quarter, which has been further strengthened in recent weeks as we are moving up a bit in credit quality, based on our view of where we are in the credit cycle.

We ended the quarter with $69 million in total cash in our HoldCo and other noninsurance entities together had liquidity of approximately $60 million. We did not purchase any shares in the quarter, which is not unusual for us at this time of year. Circling back to earnings for a moment just before I close. I began my remarks by mentioning some indicators of strong progress and some challenges in the quarter.

What I'd like to point out is that the three pluses I mentioned, the cat save, non-Florida growth and diminishing impacts from non-core lines are all run rate tailwinds into the fourth quarter and beyond. Conversely, the challenges that I mentioned are not run rate items. Just as the third quarter is historically more challenging for the Florida homeowners insurance market due to summer weather in terms of the loss ratio, the fourth quarter is historically one of our most favorable quarters in terms of claims experience. As a result, we expect our 4Q attritional loss ratio to decrease meaningfully from 3Q '18 levels.

Overall, I feel great about the progress the company has made in the past year and about our earnings trajectory heading into 2019. Headwinds from our runoff lines of business will continue to diminish, while our Homeowners block continues to become more profitable as a result of the rigorous actions we're taking in the areas of exposure management, rate actions, expense management and service. And now I'll hand the call back over to Mike before we open it up for Q&A.

Michael Braun -- Chief Executive Officer and President

Well, thank you, Ron. Yes, we'll just go ahead and open up the line there, please, operator? We'll be happy to take our first call. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Doug Ruth with Lennox.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

I noticed that the combined ratio was the best since 2015 for the third quarter.

Michael Braun -- Chief Executive Officer and President

Thank you, Doug.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

And then I also noticed that you're starting to talk about return on equity. Do you have some sort of target as far as what you think the return on equity could be, maybe going forward?

Ron Jordan -- Chief Financial Officer

Yes, Doug. So we reported about 14% in this quarter, even with some of the challenges that were in it. So I see no reason why, if weather behaves and the like, that we shouldn't be in the upper-teens or low-20s.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

Wow. That sounds terrific. And can you comment some about how big you think the non-Florida homeowners book might be?

Michael Braun -- Chief Executive Officer and President

Doug, I think that book has a long runway ahead of it. We are very pleased with our partner that writes that program for us. We think that they do an excellent job. As you know, they run it, the non-Florida states for us, which includes Texas, Louisiana, Alabama and South Carolina.

They do operate in many more states beyond that. And they're interested in working with us in more states. But we've just been very slow and cautious in the rollout. Once again, there's always pressure to grow.

However, we want to make sure we're doing this correctly for a variety of reasons. But when you get into these other states, shrinking a book can be very difficult if you've grown it incorrectly. So we're just being very methodical about it. We're very pleased with the partnership.

We think we're going to do approximately $75 million of non-Florida. I have no doubt that we could do far more than that. But we're just being methodical in our -- in the opportunities that are out there. So we think there's a long runway ahead of us.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

So the $75 million is the non-Florida goal for 2018?

Ron Jordan -- Chief Financial Officer

Yes. I think that's a reasonable number. I think we'll actually come in a bit above that, but that's a reasonable number at this point.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

And how is the company's relationship with Allstate at this point?

Michael Braun -- Chief Executive Officer and President

Allstate is a great partnership. Just -- they had a summit up there for their -- there's about half a dozen carriers that were up there from Florida that they really have partnered with in the state. And we're pleased to be in that group. And I think we have a great relationship with them.

I think they do a great job, their agency, for us, as well as their corporate office. And I think it's a deep relationship that's doing well for both parties.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

And is there a possibility that the relationship could expand somehow going forward?

Michael Braun -- Chief Executive Officer and President

There's always a possibility of that. They do broker business, non-Florida. But they do want an A.M. Best rating on that paper.

So that's a challenge. And that's something that we do look at. We do look at the opportunity of getting A.M. Best paper in the future as perhaps another subsidiary or whatever it may be, but we're not at this point at this time.

But I think we have a very good relationship with Allstate. And I think, once again, I think there could be more opportunities but nothing that we're exploring other than Florida at this time.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

OK. And then could you talk a little bit more about the bond portfolio? What type of -- what kind of bonds you're buying and the length of the bond?

Ron Jordan -- Chief Financial Officer

Yes. Our overall duration on the portfolio at 9/30, is about a 4.0 duration. I mentioned it's S&P A-. The total bond portfolio, $450 million, roughly.

We have quite a bit of focus in corporates and government as well as some collateralized mortgage obligations.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

And not too much in municipals at this point.

Ron Jordan -- Chief Financial Officer

No. We really deemphasized that aspect of our portfolio dating back, I would say, going back nine months -- nine to 12 months ago heading into tax reform.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

Yes. That's proven to be a good strategy. And then Mike, can you give us a little bit of update as far as what's happening with Monarch at this point?

Michael Braun -- Chief Executive Officer and President

Yes. Doug. Monarch once again is -- it's a small book, it's approximately $15 million. And since we've taken control of that in the last year, we're just kind of revamping it slowly.

So to clarify, we still have some non-renewals in place. But we're also writing organic business. But it's really not growing. It's just kind of repositioning it and trying to create the underwriting profit in it that we need.

And the South Florida book, the Tri-County, as we call it, is approximately about 35%, 40% of the total book in terms of a policy count. And we are planning on having a filing in with the state before year-end that will add credit score to it and some other enhancements to make it more competitive in the marketplace. It's more of a 2019 rollout for us. But once you get in that capital, it is not siloed off and not being utilized.

FNIC does own MNIC. So that capital is being utilized, I believe, efficiently in the holding company.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

So are you thinking more like the second half of '19 at Monarch might be positioned to grow some?

Ron Jordan -- Chief Financial Officer

Yes. I think in the second half. And the reason for that is once we get the filing in, those do typically take about three months, and then to go ahead and get the programming done. And then as we deploy it, we want to deploy it carefully.

So once again, even if it was to grow 100%, which I'm not saying it is, that's only a $15 million growth. So we want to be careful as we relaunch the trajectory on that to make sure we're happy with the numbers as that occurs. So I believe it will be more competitive in the marketplace in the latter half of '19. But we're going to have a go-slow approach with it.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

And are you -- is there a rate increase in for Monarch at all?

Michael Braun -- Chief Executive Officer and President

It's not really a rate increase. Like I say, it's just really updating a lot of things. There will be some policies that will receive a decrease and some that will receive an increase for but also once again, we are trying to enhance the sophistication of it to give more people more credits that we think are indicative of a lower loss ratio.

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

OK. And has there been any talk internally at all about the dividend and maybe the possibility of raising the dividend?

Michael Braun -- Chief Executive Officer and President

Yes. Doug, we do talk about that quite a bit. And we absolutely understand your position on it. We do have capital in the HoldCo that we think is sufficient, and are evaluating opportunities with that.

Obviously, the dividend is a possibility, a buyback is a possibility. And expansion, whether it's organic or through other opportunities is also a possibility. And we continue to evaluate all of those.

Operator

Our next question comes from Greg Peters of Raymond James.

Greg Peters -- Raymond James -- Analyst

Can we circle back on the gross premium written in your Homeowners business? It was down year over year in the third quarter, and I'm just wondering what's driving that.

Michael Braun -- Chief Executive Officer and President

In terms of -- there's two numbers out there. So there's the non-Florida and Florida. So non-Florida, the book, in '17, we anticipate -- we wrote about $50 million. In '18, it's going to be about $75 million.

But in terms of inside the Florida marketplace, it's a challenging market. Obviously, it's well-documented of the challenges of AOB. And we have non-renewed policies. And you see that our policy count is down about 20,000 policies now, over the last few years.

And our TIV, our total in-force values is down about $20 billion as well. So these are big numbers, yet our premium has remained fairly flat. And with that, it's just -- there's challenges in the marketplace and we want to be mindful of that. So not only with the nonrenewals, but also just want to make sure we're happy with what you're writing.

The AOB challenge, Greg, is out there and it's not just in the Tri-County area, it's in multiple parts of the state. So it's just prudent behavior on our part.

Greg Peters -- Raymond James -- Analyst

So just to clarify. Would you characterize the third quarter level as being the new level? Or do you anticipate further underwriting actions and further policy count declines as we migrate through 2019? And I'm speaking specifically of Florida?

Michael Braun -- Chief Executive Officer and President

In terms of Florida, I think you could say it's the new normal with all available information that we have right now. There's a couple of folks that are extremely aggressive in the marketplace, and from a pricing perspective, where they're much lower than the pricing in the market, and also from an underwriting perspective. And we're not going to fight that and try to grab those policies that we don't believe we can write profitably. So I -- yes, we're going to continue to prune back the book, but also, we are writing organic voluntary business.

So I think the shrinking of the book will absolutely slow and this may be the new normal. However, it's our intent, it's our desire to grow the book. But we just don't see that opportunity at the moment. Because once again, we want to -- we're focused in on the growth in earnings are not chasing any type of growth in gross written.

Greg Peters -- Raymond James -- Analyst

Got it. Can we -- I'd like to circle back to your discussion on the non-catastrophe losses. Could you talk to us about the difference -- the balance between frequency and severity. I guess what I'm curious about is the loss cost trend on settlement of these claims versus just the increase this year -- increase in number of the claims?

Michael Braun -- Chief Executive Officer and President

Well, I would say over the last few years, Greg, our frequency has not ticked up. It has ticked up slightly but not meaningfully. And then in terms of the severity, this last quarter, we really saw an uptick in severity. So that's what Ron was stating.

But once again, we think some of that's seasonal. So in terms of the drivers, there was an unusual quarter, for whatever reason, based on the fires that we experienced in our book of business. That's why we're also taking an additional 3.6% rate. To clarify that, we have asked for an additional 3.6% rate on our FedNat Florida book.

We do see certain indications in the book in the claims that we're experiencing that there's litigation expenses. And to clarify once again, I think we're one of the least litigated companies because of our proficient and fair and efficient claims handling. But we do feel the pressures. And it's -- it was an unusual quarter.

And we're continuing to monitor that.

Greg Peters -- Raymond James -- Analyst

Great. The last question I have will be around reinsurance costs. If you step back and you're going to review 2018 results and its impact on your reinsurance partners and compare that with the previous years, is this going to be another year where some of the lower layers of your cat program are going to be tagged? I'm just curious what kind of feedback you're getting from your reinsurance partners at this point, especially on those lower layers that are getting hit. And I'm thinking about the context of what happens to reinsurance pricing as we enter 2019?

Michael Braun -- Chief Executive Officer and President

Yes. Greg, just -- I was just at PCI, which is an industry event, and had probably 10 to 15 meetings with reinsurers. And let me tell you, they're all great partners. And they have stepped up to the bat on Irma, which was $600 million-ish.

And now $275 million-ish on Michael. They're doing their part. And they've been a great partner. But needless to say, these expenses -- this is not what they're enjoying with their shareholders.

There'll be pressure to raise prices. There's no doubt about it. It's very premature to understand where the market is going. But I still believe there's a lot of capital out there.

And I think we've got very deep relationships with many reinsurers and very -- I think that's going to be healthy, and it's going to help us on a go-forward basis. So can't really speculate too much on pricing. But we're thrilled with the partners that we have and what they've done during these losses that we've experienced.

Operator

Our next question comes from Christopher Campbell with KBW.

Christopher Campbell -- KBW -- Analyst

OK. I guess just the first one. Just circling back a little bit at the end of -- Greg, you answer to Greg's question. You said like $600 million on Irma.

The last quarter, it was $630 million. So has that estimate come down?

Ron Jordan -- Chief Financial Officer

No. It has not. Your holding me to the letter of it. You're absolutely correct.

So to clarify, FedNat is at $600 million and Monarch's at about $32 million, I believe. So that was correct as of Q2. We're evaluating the numbers as we go into year-end. So that will be updated before the end of the year.

Christopher Campbell -- KBW -- Analyst

All right. Got it. But you didn't see anything in the quarter of that, like caused you to like up the numbers?

Michael Braun -- Chief Executive Officer and President

No, unfortunately not. And as we go into year-end, we've got a lot paid out on the Street on Irma. We've got about 95% of these claims closed. I'm real proud of the statement that we've got about -- only 2% of these files have resulted in litigation.

That's a low number in the industry, and half of those have already been resolved. So we're talking about 1% that are of the 38,000 of claims that are open. But that were -- that had litigation associated with them. So we're nearing the end of the road on Irma.

And we're happy to get that money out into the policyholders hands and get this resolved as quick as we can.

Christopher Campbell -- KBW -- Analyst

OK. Got it. And then, are there any -- do you anticipate any negative impacts on reinstatement premiums or anything like that?

Michael Braun -- Chief Executive Officer and President

No. In terms of -- I'm not sure I understand your question. But in terms of pricing for next year, once again, I go back to my statement. We've got a great panel.

And there's a lot of capital out there, and sure, there's pressure on that pricing. In terms of the reinstatement premiums, we do have prepaid on all of those layers not only for Irma but also for Michael. So you should not be seeing -- there'll be no expense associated with that, if that's what you're asking.

Christopher Campbell -- KBW -- Analyst

Yes, I was just wondering if you would have like -- if you hit -- if the losses get to certain level it and gets into that layer that you could potentially be on the hook for paying reinstatement premiums off that?

Michael Braun -- Chief Executive Officer and President

Yes. Good question. We have prepaid all reinstatement premiums.

Christopher Campbell -- KBW -- Analyst

OK. Got it. So no further drag on that. All right.

And then just curious, on the buybacks, obviously, you weren't active and it make sense because it's a high-cat quarter, but you guys did buyback a little bit last year. And kind of they look like they tapered off in 2Q as well. So I guess, could you just share your latest capital management thoughts, I mean, between dividends, buybacks?

Michael Braun -- Chief Executive Officer and President

Yes. So last year, the stock was a lot lower. And we saw that opportunity. So once again, we've got different constituents that are in our shareholder base.

It's well documented, obviously, that we've got some that really would like to see an uptick in the dividend, others that really don't think that's an efficient use of capital. And trust me, we are very mindful of these calls that we get and we discuss it as a board. But the other part is, what do we do in terms of growth? And right now, we're currently not growing in Florida, but we do think there's opportunities with our partnership outside of Florida to grow more non-Florida. So we're evaluating that.

So I hate to give you a generic answer, but we're looking at all those as well as I still think consolidation is going to impact the market in Florida. And where we're receptive to creating value for our shareholders when we look at the right deal. And there's opportunities out there. And we're continuing to evaluate them.

Christopher Campbell -- KBW -- Analyst

Got it. And so -- like as you're -- that's very interesting you bring that up. So it's -- so as you're looking with the latest Michael losses and RBC charges, et cetera, like those being updated, I guess, could that -- what kind of opportunity is that going to create for FedNat? And then what would you guys be looking for if you were to consider something organic? What would fit with FedNat's strategy?

Michael Braun -- Chief Executive Officer and President

Yes. So we're looking -- first and foremost, we think the best way to grow is organically. It's -- I think it's just the best way to grow. And I think that's been demonstrated with some of the best run companies in the world in terms of how they do things, not even just in the insurance space.

But absolutely, we're seeing a competitive marketplace. So I think that you're going to see people under pressure with capital -- once again, this is our 3rd year in a row taking a cat retention. We've said -- we keep talking about Irma and we keep talking about Michael, but the year prior, we also had Matthew. And so this is not unique to us.

So there's pressure in the Florida marketplace, not only on the pricing side and the competing for business side but also managing capital effectively. And we see that. We know that. And I believe there's 56 carriers that are competing actively in the Florida homeowner market.

There's a lot of carriers. And we want to make sure we're ready to move for the appropriate opportunity.

Christopher Campbell -- KBW -- Analyst

Great. And just thinking about the expense ratio improvement. I guess, is like the 36%, 37% rate, is that a good run rate going forward? Any kind of one-offs that it could be impacting? And I guess just how are you thinking of that going forward now that you're running off like the Auto and the GL lines?

Ron Jordan -- Chief Financial Officer

Yes. So in the quarter, certainly, the profit sharing on Tropical Storm Gordon certainly benefited the expense ratio, that's $2 million. So if you were to adjust the third quarter ratio by that, I mean, that feels like a reasonable run rate. Obviously, the cat save, $8 million a quarter, is benefiting that ratio.

And that's on an ongoing basis, that benefit.

Christopher Campbell -- KBW -- Analyst

OK. Got it. And then just 1 final one on the quota share. I guess just for my own edification, I guess, why do you -- why did you guys have the 2% quota share during cat season and then ramp it up to 10% after cat season? Because I was thinking it would make more sense the other way, right, where you'd have that 10% during cat season and then bring it down to 2%, where, presumably, it would be more profitable it in your like non-high cat quarters?

Michael Braun -- Chief Executive Officer and President

Yes. That's a good question, Chris. So let's back that up a little bit. That's with Swiss Re, we've had it for a period of time, and it had -- it expired, and our capital position was very good going into wind season.

So it has a feature where we can continuously adjust with that. So I get what you're saying. However, what we've done is to manage our capital. We would like to keep some of that capital in the holding company for some things that we see in the marketplace.

And we want to -- we think that it's an efficient use of capital to utilize that relationship with Swiss Re to expand the quota share at this time. But it does adjust multiple times, so we're able to further increase it or further decrease it on a go-forward basis.

Ron Jordan -- Chief Financial Officer

The other key point, Chris, is that, that quota share excludes named storms. So there was no hurricane season impact whatsoever. It's really -- it's really a quota share on our, on non-named stores.

Christopher Campbell -- KBW -- Analyst

OK. Got it. And then what quarter do you typically have like elevated non-cat weather, I guess? So we've seen a lot of that with different homeowners carriers and that would presumably be picked up by the quota share. So I guess how does that bake out seasonally for you guys?

Ron Jordan -- Chief Financial Officer

Yes. 1Q is low, 2Q is higher, 3Q is the highest and 4Q is low. So that's our seasonal trend. And you're right.

I think we've heard from others this quarter that we're not alone in the Florida space with that trend.

Operator

Our next question comes from Samir Khare with Capital Returns.

Samir Khare -- Capital Returns Management -- Analyst

I want to start out by clarifying something that Ron touched on. The elevated fire and lightning homeowners claims in the quarter, that wasn't a change from any prior quarter or years' reserves. And it doesn't represent any -- an adverse view of your loss picks going forward, correct?

Ron Jordan -- Chief Financial Officer

Correct. It was responsive to the higher frequency of large lightning and fire losses in the summer months of 2018.

Samir Khare -- Capital Returns Management -- Analyst

OK. And when did you do your last full reserve review? And what was the as-of date of the data used?

Ron Jordan -- Chief Financial Officer

We -- KPMG is our Big 4 firm that does our actuarial work. We have them do studies, typically three times a year. They recently completed a study that included data up through August 31.

Samir Khare -- Capital Returns Management -- Analyst

OK, great. And just on AOB and litigation trends, with the benefit of the reserve review, anything you're seeing that is worsening either on a frequency or severity basis in your data?

Michael Braun -- Chief Executive Officer and President

Well, Samir, I mean AOB is not going away. It's here. The legislation body is the one that can fix that. So we are seeing AOB staying.

And I don't see it going away. So the frequency has ticked up a bit. The severity kind of bumps around, as Ron stated, quarter to quarter. And we're going to reevaluate that based on Q4 before we close out the year.

But AOB is -- really Tri-County is where it started. But the things with Tri-County is, we've had challenges in the marketplace for 20-some-odd years, and that's why -- one of the reasons why you get a lot of rate in Tri-County. But what we're also seeing is the AOB is going to other parts of the state, including Orlando, where there's not a lot of rate and it's kind of a new challenge in that marketplace. Plus Tampa-St.

Pete is another big city area, two big cities, and AOB is over there. We're seeing it everywhere. We're seeing it on the East Coast of Florida, north of Palm Beach, and we're seeing it in Southwest Florida. So there's challenges with AOB.

You can do continuous things, such as improved claims handling include -- improved underwriting. Things like that. But once again, rate is part of that answer, and that's why we're seeking additional rate.

Samir Khare -- Capital Returns Management -- Analyst

OK, great. And there are a bunch of moving parts in the quarter. So I just wanted to understand your earnings power going forward on an ex-cat basis. So just going to the Homeowners ceded premium.

I know the quota share in the in the quarter was de minimis. But can you split out both the XOL and the quota share premium for Homeowners, specifically?

Erick Fernandez -- Chief Accounting Officer -- Analyst

Samir, it's Erick. On the cat, that was roughly $37 million in the quarter. And then the 2% Swiss Re quota share was $1.6 million in the quarter.

Samir Khare -- Capital Returns Management -- Analyst

OK. And there was no one-timers that were in that ceded premium number, right? So going forward we should kind of expect the sub-30% Homeowners XOL ceded premium ratio. Is that right?

Erick Fernandez -- Chief Accounting Officer -- Analyst

Yes, yes. That's right.

Samir Khare -- Capital Returns Management -- Analyst

OK. And so just kind of putting back the moving parts. If I start with an $11 million pre-tax number and add back, what I'll call, one-timers of, say, $4 million of net cats, $30 million of adverse in the Auto and CGL and the $6 million of non-cat weather from this quarter, you get pre-tax earnings of about $24 million per quarter approaching 20% ROE. And then going forward, there's also the additional benefit from staff reduction, expense saves and the rate increases you took.

Does that sound about right?

Michael Braun -- Chief Executive Officer and President

It does. And I think, in my answer to Doug earlier about ROE, yes, I mean, it's entirely feasible and even expected, with weather cooperating, that we'll be in the low 20s from an ROE perspective. But Samir, you know me. I'm a cautious guy.

So yes, there's a lot of good things in what you're stating. But just remember there's uncertainty in what we do. So once again, that's just part of my personality to always remain cautious on what we say. But we see a lot of good things happening in this company and what we're experiencing.

However, there's always ongoing challenges. And we're mindful of that, and we will always adapt to what we see that's happening.

Samir Khare -- Capital Returns Management -- Analyst

OK. If things go as planned for the next quarter or so, when do you expect you'll ratchet down the Homeowners quota share?

Ron Jordan -- Chief Financial Officer

We could consider that as soon as 1/1, if we want to, but I think we'll evaluate it forward. We appreciate Swiss Re and their partnership and the opportunity to have adjusted it, pursuant to the terms of the treaty, when we did, effective 10/1. So we'll say a longer-term view, I think, of the overall relationship and make that decision during the first quarter.

Samir Khare -- Capital Returns Management -- Analyst

OK, great. And how just much capital do you have in your unregulated subsidiaries?

Ron Jordan -- Chief Financial Officer

We've got -- capital -- noninsurance capital is around $70 million and liquidity is around $60 million.

Operator

I'm not showing any further questions at this time. I would now like to turn the call back over to Michael Braun for any closing remarks.

Michael Braun -- Chief Executive Officer and President

Yes. Hi, thank you, operator. I think we've taken up the -- pretty much most of the hour here. So with that, we are very pleased to get the results out there and really appreciate the questions that we've gotten today.

So anyone that has further comments or questions, our contact information is on the press release, and we're always happy to take those calls. So everyone, have a great day, and thank you, for your interest in FedNat.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

Michael Braun -- Chief Executive Officer and President

Ron Jordan -- Chief Financial Officer

Doug Ruth -- Lenox Financial Services, Inc. -- Analyst

Greg Peters -- Raymond James -- Analyst

Christopher Campbell -- KBW -- Analyst

Samir Khare -- Capital Returns Management -- Analyst

Erick Fernandez -- Chief Accounting Officer 

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