Good morning. Welcome to the Heritage Insurance Holdings third quarter 2018 financial results conference call. My name is Chad, and I will be the operator today. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Please note this event is being recorded. I would now like to turn the conference over to Arash Soleimani, Executive Vice President and Director of Investor Relations at Heritage. Please go ahead.
Good morning. Thanks for joining us today. We invite you to visit the investors section of our website, heritagepci.com, where the third quarter earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience. Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. In our earnings press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, November 1st, 2018, and we have no obligation to update any forward-looking statements we may make.
For a description of the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our annual report on Form 10-K and other SEC filings. With us on the call today are Bruce Lucas, our Chairman and CEO, and Kirk Lusk, our Chief Financial Officer. I will now turn the call over to Bruce.
Thank you, Arash. I would like to welcome all of you to our third quarter of 2018 earnings call. Before we begin the call, I'd like to thank all of our employees for their dedication to our company. Our thoughts and prayers are with everyone impacted by Hurricane Lane, Hurricane Florence, and Hurricane Michael. The third quarter was marked by several severe weather events. In Hawaii, Hurricane Lane caused light damage to our policyholders. The Hawaii book significantly outperformed modeled loss expectations. Only 154 claims were reported, 90% of claims are closed, and we booked an incurred loss of $600,000, including IBNR. Hawaii was also impacted by Tropical Storm Olivia, but we have no incurred losses from this event. Coverage under the Zephyr policy is only triggered when a hurricane watch or warning is issued, which did not happen in connection with Olivia.
Our Carolinas portfolio was impacted by Hurricane Florence in the third quarter. To date, 1,414 claims have been reported and 83% are closed. Similar to Hawaii, our book outperformed modeled loss estimates. There are several reasons for the outperformance. First, two years ago, we decided to shift our business from coastal areas to inland North Carolina because we did not believe the coastal market rates were adequate given the reinsurance rates and hurricane risk. Our portfolio shift from coastal areas has been very successful, and only about 30% of our North Carolina policies are in coastal zones. Our partnership with National General Insurance in North Carolina has been very helpful during this process and highlights the intrinsic value of this strategic relationship. Second, our coastal portfolio was more focused on newer construction, which performs better during hurricane events. Finally, Contractors Alliance Network was our first response to the storm.
CAN was quickly tarping roofs, removing trees, and drying homes after Florence's landfall. CAN was instrumental in capping hurricane losses and helping us to outperform modeled loss estimates. In the quarter, we booked a $20 million gross loss for Florence, including IBNR. Heritage's retention was booked at $16 million pre-tax, and the remaining $4 million will be covered by our reinsurance program. The company is also booking our maximum potential retention for Hurricane Michael. This retention is $16 million pre-tax and will be booked in the fourth quarter. Our consolidated losses on daily claims have been very stable. Prior accident year reserves developed favorably in the quarter. Despite ranking third in premiums, as of the end of the second quarter, Heritage had more loss reserves posted than any of our publicly traded Florida peer companies on both a GAAP and statutory basis.
Losses on the current portfolio are improving, our substantial loss reserve should bode well for the company moving forward. In addition to favorable loss development, there are several key metrics pointing to a favorable claims trend. Our Tri-County portfolio, particularly in Dade and Broward counties, continues to trend lower as the company's strategic diversification plan continues. Fewer policies in AOB-prone areas should result in lower claim frequencies and severities and should reduce reserve volatility. Evidence of this trend can be seen in the new non-catastrophe Tri-County claims count, which is down 31% year to date. Our diversification away from the Tri-County lower claim trends and industry-leading reserves is positioning Heritage well for the foreseeable future. We continue to see improved operating metrics across the company. Our net combined ratio was 93.9% in the third quarter, an 11.6% improvement from 105.5% in the prior year quarter.
Book value per share increased to $15.16 per share, an 18% increase year over year. Policy sales continued to grow at new record numbers, gross premiums earned increased 53% year over year, largely due to the NBIC acquisition. We are also excited to announce that Heritage has expanded its relationship with GEICO's insurance agency to all states, versus only NBIC states previously. GEICO is now partnered with Heritage, NBIC, and Zephyr, we are very appreciative of the relationship across our platform. I will now turn the call over to Kirk to provide more details on our financials.
Thank you, Bruce. Good morning. Net income for the quarter was $6 million, up from the prior year loss of $8.7 million in the third quarter of 2017. The significant year-over-year improvement reflects a better loss ratio, the addition of income from NBIC, and a one-time charge in third quarter of 2017. The one-time charge of $6.9 million in the prior year reflected the fair value adjustment of a non-cash derivative liability associated with a convertible debt that was issued in conjunction with the NBIC acquisition. The derivative liability reversed in 4Q of 2017 and was reclassified to shareholders' equity. Operating income was $14.2 million for the quarter, which was up from $1.4 million for the same period last year. Gross earned premiums for the current quarter were up 53% to $234.2 million, from $154.1 million reported for the third quarter of 2017.
The significant year-over-year increase is mostly due to the addition of NBIC. The positive increase was partially offset by the Tri-County in-force premium decrease during the past year of 17%, as we continue our planned diversification away from regions that are more prone to assignment of benefits fraud. Our continued diversifications should improve operating results moving forward. Ceded premiums earned increased to $115.9 million for the three months ended September 30th, 2018, as compared to $57.9 million for the same period in 2017. This increase relates primarily to the inclusion of NBIC in the third quarter of 2018. As a reminder, NBIC extensively uses quota share in its reinsurance program. Excluding the effects of NBIC's reinsurance program, but including reinsurance synergies, ceded premiums were 35% of gross earned premiums, down from 37.8% for the third quarter of 2017.
The reinsurance synergies are one benefit of the geographic diversification of the Heritage portfolio. To give a perspective on the change in the portfolio, Florida total insured value, or TIV, represented 71% of our consolidated portfolio at third quarter 2017, and as of the third quarter of 2018, our Florida TIV is only 32% of the consolidated portfolio. Loss and loss adjustment expenses for the quarter decreased 8% to $58.7 million, compared to $64 million for the third quarter of 2017. The decrease is due to a combination of lower cat retentions and higher profit from Contractors Alliance Network. The retention from Hurricane Florence and Lane during the third quarter of 2018 was $16.6 million, compared to the third quarter of 2017, Hurricane Irma retention of $20 million. We continuously evaluate our reserves to ensure that they are adequate and appropriate.
As mentioned in our second quarter earnings call, we have continued to focus on and evaluate on an ongoing basis our litigated claims in the state of Florida, particularly in the Tri-County area. We increased our reserves during the second quarter of 2018 due to the litigated and assignment of benefits environment in the state of Florida. During the third quarter, we have reevaluated our reserve position and currently believe that the actions we have taken should mitigate the future adverse impact of litigated claims. We will continue to evaluate our exposures, reserves, and pricing to position the company for long-term profitability. The net expense ratio increased year-over-year from 38.2% at third quarter 2017 to 44.3% at the third quarter of 2018. Ceding commissions of $18 million were offset against acquisition costs and operating expenses in proportion to the expenses associated with the production of business.
In comparison, excluding the impact of NBIC, the corresponding ceding commissions, and a non-recurring acquisition-related G&A expense of $7.1 million, the net expense ratio would've been 41.5% in the third quarter of 2018. Our combined ratio for the quarter as a percentage of net premiums earned was 93.9%, which is down from 105.5% in the third quarter of 2017. The improvement is related primarily to the deduction in the net loss ratio, partially offset by an increase in the expense ratio. Our effective tax rate increased in the third quarter, primarily related to booking our true-up of the 2017 income tax provision to the 2017 income tax return and adjusting our 2018 effective tax rate to take Hurricanes Florence and Michael into consideration. Permanent tax differences serve to increase our effective tax rate given the lower resultant pre-tax income caused by the hurricanes.
The year-to-date effective tax rate through 09/30/2018 is approximately 28.1%. Moving to the balance sheet, notable movements since year-end 2017 and from the second quarter are substantial decreases in reinsurance recoverables on the asset side related to the payment and collection of catastrophe losses and a reduction of unpaid losses on the liability side of the balance sheet.
Cash and cash equivalents increased from year-end, largely due to collections on reinsurance recoverables. Shareholders' equity at September 30th, 2018 was $391 million, up from $301.7 million at the end of the third quarter of 2017. Bruce and I are now available to take your questions.
Thank you. We will now begin our question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will come from John Barnidge with Sandler O'Neill. Please go ahead.
Thank you. I believe you said you highlighted 41.5% for kind of a normalized expense ratio in the quarter. Should we expect that for run rate in 4Q18? Where do you see it going next year once we're kind of more than a year out from Narragansett Bay closing?
Yeah. That's actually going to be close to a run rate basis, probably be slightly less than that just due to the one-time items that we have occurred. We do anticipate that by 2020, some of the integration expenses due to the dual systems that we're operating will have a positive impact. That, again, it's like we are about a year away from realizing the benefit of that.
Okay. Last quarter, I believe you retired $10 million in convertible debt. Did you do any of that this time around?
We did not retire any convertible bonds in the third quarter.
What about share repurchases?
We did no share repurchases in the third quarter.
Okay. The ceded premium ratio was 49.5%. Is that run rate, you think?
Yeah. That's pretty close. It was a little higher the first half of the year. That reflected a higher gross quota share at NBIC. That's subsequently been reduced. Yeah, that's probably more of a run rate.
My last question, I'll re-queue. You got a convertible debt, you have a term loan that's somewhat pricey because it's on floaters. Can you talk about retirement options given you got a Kroll rating during the quarter?
We are excited to have the investment grade Kroll rating. We appreciate all the efforts by Kroll to go through that process with us. We are looking at options right now to refinance some or all of the current capital structure. Since those processes are still in motion right now, I really can't comment on where they are, with whom, et cetera. We are optimistic to have some type of color sent out to the market later this year.
Thanks. I'll re-queue. Thank you.
Thanks, John.
Our next question will be from Mark Hughes with SunTrust. Please go ahead.
Yeah, thank you. Good morning.
Good morning.
Did I hear properly the $7.1 million in non-recurring expenses in the quarter? Was that year to date?
That was for the quarter.
For the quarter. That would be about six points of earned premium, if I'm thinking about that properly. If you did a 44% expense ratio and you took out six points, is the 38% more of a reasonable run rate?
Yeah. It's actually going to be a little higher than that when you look at NBIC, some of the integration costs going forward. It's probably between the 40, 41 range.
Okay. On the loss ratio, some of that was offset by the CAN network, the underlying loss, if you took out your cat amount and then the favorable development. Seems like that 38% loss ratio, is that a good underlying number for you, 38%-39%?
The difficulty with that is the loss ratio does shift quarter to quarter. What we're seeing right now, Mark, are incredibly positive trends in the loss ratios. Some just additional stats that I could share with you on the call today to kind of highlight what we're seeing in our portfolio. If you look at things like percentage of litigated claims that we have right now that are Tri-County versus other counties, my stats only go back three and a half years, but we're at the lowest point today in that three-and-a-half-year window at 67%. Similarly, when you look at non-litigated claims in the Tri-County compared to the rest of the Florida book, again, we're off my stats. We're at 41% of our non-litigated open claim count is in the Tri-County.
That's the lowest number I have in the last three and a half years, I'd have to go back to 2013 and 2014 to see if we're at a record low or if we had any periods in 2013 or 2014 that were at those levels. As we've been diversifying away from Tri-County, we've also noticed a positive trend in new water claims filed. Just year to date, for example, our Tri-County water claims are down 41% compared to the prior period. We're seeing a real shift in the claims as they come in, new claims and existing inventories that are related to the Tri-County, related to AOB fraud and litigation. These things are starting to have a very positive impact on our reserves and our losses. This is the first time in a while that we've had positive development in all prior accident years.
We do think that being the first major company to pull out of the Tri-County and our strategic shift to diversify the source of our business away from Tri-County and Florida is really starting to pay dividends. On top of that, as of the end of the second quarter, we had more loss reserves than any of the publicly traded Florida peer group. We're really set up for a, we think, a good run rate going forward. It's hard for me to give you right now a specific loss ratio number for your model, given that we're seeing an inflection point in the portfolio.
Can you say roughly how much benefit you got in the quarter? How many points from the CAN network above and beyond what would be normal trend?
Yeah. We have not disclosed what CAN does. Some quarters it's minuscule, other quarters it's more significant. We view that as proprietary sauce here. We've spent tens of millions building out that network and that division. A lot of the Florida companies scoffed at it. We're getting the benefits of it here and there throughout the year. It's something that we don't want to just give a roadmap to our peer group as to how well the system works or doesn't work on a quarter-over-quarter basis. We do not disclose what that impact is.
I had other questions, but I'll re-queue. Thank you.
Thank you, Mark.
Again, if you have a question, please press star, then one. The next question will be from Christopher Campbell with KBW. Please go ahead.
Hi, good morning. Congrats on the quarter.
Thank you.
I guess just thinking about the benefits that you're getting on the core loss ratio from the claims adjustment income, I guess how long does that continue post-storm?
If you look at CAN and what its focus was set up for, it's really set up for water mitigation as number 1, and repair of roof claims. It's tarping services, tree removal, things like that. You get benefits throughout the year on all those fronts. We have a very large water mitigation division that's out there in the field throughout Florida. The benefits are ongoing. We do have some great quarters with CAN, and other times you have expenses that catch up with revenue that you booked in a quarter, and it reduces it. It's been a pretty consistent earner for the company going back really since 2012 when we started it.
Okay. Got it. That's helpful. Just, I guess, I may have missed it, but what are your current Hurricane Irma and Hurricane Michael gross losses?
Yeah. We don't have an estimate on Hurricane Michael because it's just too soon after the storm. We do believe Hurricane Michael will be a full event retention for us, and that is $16 million pre-tax. That is being booked in the fourth quarter. That would imply a $40 million gross loss, which we may or may not hit. I just cannot say at this point in time. I'd note that we really don't have a ton of claims there. We have about 850 Hurricane Michael claims. Our frequency up there is pretty low, and the reason for that is we were diligent on the front end for underwriting. We never believed that the construction codes up there were sound. We never really believed that the models were accurately capturing the AALs and reinsurance risk. Therefore, we never even tried to grow up there.
We have a very low market share. Our thought was it wouldn't take much to cause a ton of devastation, we avoided it. It's hard to say if we'll get to that $40 million number or not because we're still in basically the second inning. We did book a full $16 million fourth quarter retention. One update, we have 950 Hurricane Michael claims, not 850.
Got it. The Hurricane Irma gross losses, has that moved? You guys gave a range of like $700 million-$800 million last quarter.
Yeah. We filed publicly an informational loss notice at $850 quite some time ago. We're still under that number, but I don't have the exact number in front of me.
Okay. Got it. I'm just kind of thinking about Irma loss, there's a competitor that also reported an additional amount. I know there may be some market concerns that potentially some collateral may have been returned to investors prematurely, especially if losses continue to creep upward. I'm just wondering, in Heritage specifically, are there any holes in the tower that could cause any adverse development before you reach the top of the tower? Then I guess just as a follow-on question, how much limit do you guys have left based on what was in place when Irma struck?
Yeah. It's interesting you mention that, I have heard that rumor too, that there's a Florida writer that has a $100 million hole in the middle of their program because they released collateral. Let me be clear, that is not us. We have no holes through the top of our tower. The top of the tower stretches up to like the $1.6 billion-ish number. That's where our reinsurance recoveries become completely exhausted. We have no concerns at all about additional retention amounts in connection with Hurricane Irma. It's not an issue for us. I don't know if those $100 million rumors are true for somebody else, I'll leave it to them to report it or not report it, then we'll know.
Okay, got it. That's very helpful. I guess, it doesn't sound like you're ready, like with the acquisition up north to kind of give an idea on what you think the net loss ratio is going to be going forward. I guess you're fine with the expense ratio on a run rate being about 41.5%. Is that right?
Yeah. Slightly lower than that. It's probably going to be right around the 40, 41 range.
Okay. Basically the issue with the net loss ratio, is there an idea on the net core loss ratio where you think that those combined books are going to run? I know the loss ratio is going to include you guys have some reserve movements, catastrophe, maybe consolidating reinsurance programs. I guess how are you just looking at the underlying performance of those books?
Well, you start with Zephyr, which doesn't have any daily losses. You look at NBIC, and we use a pretty sophisticated net quota share, gross quota share, and aggregate layer to try to mitigate risk. They've worked incredibly well for us, particularly if you look at first quarter winter storm activity was near a record in terms of losses, but performed really well. The amount of quota share that we put on, the amount of agg that we put on, has an impact on the core loss ratio pretty significantly. Severe weather events up there have a pretty significant impact. Down here in Florida, you can get that occasional hail event. We had one the other quarter. We were the first to report that one, by the way. We also have a positive trend in our Florida loss ratios just based on our Tri-County diversification.
There's a lot of moving pieces to that, and as we get closer to year-end and place the net quota share and aggregate layers for NBIC, we'll have a little bit more clarity as to what we think is a good projected loss ratio moving into 2019.
Okay, great. Well, wonderful. That's very helpful. Thanks for all the answers. Best of luck the rest of the year.
Thank you. All right, thank you.
The next question will be from James Shuck with Citi. Please go ahead.
Yeah, thanks. Nice quarter, guys. Just looking to get, I guess, what your view is of the 2019 rate environment, particularly the legacy Citizens property book.
Yeah.
I guess the overall book for January 1. Thanks.
We did put some double-digit rate on the Florida portfolio in 2018. The kind of legacy Citizens filing had a roughly 14+% rate increase that I believe went effective 5/15, so we're about halfway through that filing. The voluntary filing also was a positive, roughly 14% in Florida. That filing went effective, I believe, 8/15. We've got a lot of runway to go in terms of the current rate structure. Up in the Northeast, we have moved forward with some very modest rate increases. They're low single digits, nothing unusual, and I think Hawaii is flat. Hard to say what rate we'll need next year. That just depends on how losses continue to trend and what happens on the reinsurance front.
Got you. Thanks.
Thank you.
The next question will be from Bill Brummel with Dowling & Partners. Please go ahead.
Great. Thank you. Just one quick follow-up on CAN. I can appreciate that you don't want to give out financial specifics, can you just help us think about the split in terms of contribution from Florida versus the Carolinas and Florence, and what kind of opportunity, what maybe is the difference is in the opportunity Florida versus outside of Florida? Just some magnitude would be perfect. Thanks.
Yeah. We have CAN in place in Hawaii. That is an active system. We did not utilize the CAN network in Hawaii because the loss was so small. They had 67,000 policies and get 150 claims. There's no point in really using the network there. The Northeast, we do have water divisions that are operating, and they're starting to pick up some pretty good steam, particularly in New York and New Jersey. We're seeing some additional incremental revenue coming online through Narragansett Bay. Florida and the Southeast in general is kind of the core of that operation. That's where you're going to see most of the benefit.
Great, thank you.
Thank you.
The next question will be from Matthew Carletti with JMP Securities. Please go ahead.
Yeah, thanks. Good morning.
Good morning.
Bruce, just want to ask you about the GEICO relationship. It seems like a really good step. Couple things. Just one, can you help us think about the potential that it has for kind of business production for Heritage? Two, as we think about it rolling out to the other states, if it'll change your footprint in those states at all, if there's states where you are more coastal, if it'll help you move inland, if that's what you want to do. Lastly, last quarter, I think you mentioned kind of two partnerships in the works. I assume this is one of them. Is there still another one that we should expect at some point?
Yeah, Matt, there is one more. Once it launches, we'll do a press release on it. We are anticipating a fourth quarter launch. It could bleed into the first quarter with the holidays. We're quite excited about the relationship, and once we actually launch it to market, we'll definitely put out some PR on that. With respect to GEICO, they're just a great organization. Very professional, great to work with, savvy. We are absolutely thrilled to be working with them across our platform. We do have a policy wherein we do not disclose where strategic business is coming from, and in what amounts, and in different regions. That's an agreement we have across all of our producers. Unfortunately, given the kind of sensitivity of that information, I can't disclose that.
Needless to say, GEICO will have a nice impact on our production just because of their sheer size.
Okay, great. Thanks for the answers, best of luck going forward.
Great. Thank you, Matt.
The next question is a follow-up from John Barnidge with Sandler O'Neill. Please go ahead.
Maybe on CAN, in the quarter, the Carolinas CAN production, was it guys that drove up from Florida, or was it people that were already based there?
We sent 20 working crews to North Carolina.
Did you have any working crews-
That's a lot
in the state?
Yeah, from Florida. We pulled them out of Florida. We basically sent a convoy of Heritage vehicles up there. Box trucks, dry outs, roof tarps, you name it. They were out there. I still think we have one crew still there working losses. The response was really an internal response where we moved resources from Florida to the Carolinas.
It's not as if it's a CAN network within the state. What I'm trying to get to is if you had a storm that hit the Carolinas and then hit Florida, a different storm, kind of like what we had with Texas and Florida last year, would you be able to handle that or would you be pulled apart?
We wouldn't be pulled apart, but we would definitely rely on more of the network resources rather than internal resources if we had two simultaneous losses. I can tell you, for example, we had something similar happen between Florence and Michael, but the extent of those losses were pretty small, 1,400 total claims in the Carolinas. It's pretty easy to get to a small number like that with our resources. No sooner than we were wrapping up in North Carolina, Michael hit the Panhandle, and so we sent our crews to the Panhandle. We're still there right now working claims in the Panhandle and helping our customers.
Okay. What inning or percent basis, if you could say you are in the full build-out of CAN throughout your footprint?
We're probably about 60% of the way where I want to be.
Okay. Is some of the elevation in the expense ratio coming from CAN build-out? Would that be reasonable to think?
No. The increase in the expense ratio in the quarter primarily relates to two ongoing disputes that we have. We thought it was prudent just to book some numbers for those. They're not fully resolved yet. I'm not going to comment on what they are. They are expense related, just given their classification. In the third quarter, that's what helped elevate the expense ratio.
Okay. That makes sense. My last question. I don't want to front run an election, it's a week out. The candidate for governor that's a Democrat seems to be pulling ahead in the polls. What is your thought on the tort environment if we have a Democratic governor of Florida?
Yeah. That's an interesting question. I'm going to bite my tongue and just say no comment.
I thought you would. Thanks.
Thanks, John.
The next question is a follow-up from Mark Hughes with SunTrust.
Yeah, thank you. The crews you have for Michael, how would you think the magnitude of the volume of work that you'll do there in the fourth quarter versus what you did in the third quarter for Florence? Will it be comparable? Little less?
I think that we're going to have some pretty good traction in Hurricane Michael versus Hurricane Florence because the loss severities are significantly higher.
There'll probably be more of a benefit in the fourth quarter.
Yeah. Hurricane Michael, I think, will have a higher penetration ratio because the wind speed was so significant that you've got a lot more roof claims. When you have roof claims, you have water claims. Whereas the severities that we saw in Hurricane Florence were pretty muted, all in. They weren't very bad. You look at forward wind speed, and there's no comparison between Hurricane Michael and Hurricane Florence. Higher wind speed, higher damage ability. Then just in general, the construction class in the Panhandle lags behind the rest of the state. I think that presents a really nice opportunity for us in the fourth quarter.
Without getting into specifics on GEICO or any other partners, anything you can say in terms of what the growth rate for Heritage ought to be? If we look at just sort of organic expansion, should you grow? How much? 0 to five? five to 10? Just some thoughts with the kind of production you see and anticipate and your policy retention. How should that kind of shake out?
Well, yeah, you've mentioned a lot there. That's always something that we're trying to model and get a better handle on for our internal projections. You're right, it depends on your renewal rates and where they are and what those premiums look like. It is your strategic producers, independent agents, new states that have come online. There are a ton of factors. You throw in things like rate increases and that impact on the book because that has a meaningful impact on top line. It's something that we typically start looking at a hardcore, more concrete projection at year-end. I note that we have licenses now in Virginia and Maryland. Those states are going to come online in 2019, and we feel like there are some good opportunities there. We recently launched in Georgia and Alabama.
We're seeing excellent production in both of those states, primarily inland, by the way. We're feeling pretty good about where we are in terms of our diversification plans and new business growth. We're just not at a point where we could forecast that out to the market.
In the AOB lawsuits, what's your general observation about the overall level of suits? You're down, I think, because your penetration is down, what do you think is happening across the state?
I think that the problem's only getting worse. There's no doubt. Definitely Dade and Broward are the leaders in the AOB kind of fraud crisis that we see. You see it in Orange County, you see it in pockets of Hillsborough. It's kind of scattered here and there throughout the state. Dade and Broward definitely lead that charge. It's probably 80% of the problem. We note that Orange County is rife with problems as well. I think other carriers are seeing those results, too. The problem, I think, is getting worse. That's why we focus on credit scores. We focus on good front-end underwriting. We run claim reports on the front end, along with the Well, I guess it's insurance score. I shouldn't say credit score. You're getting an idea of kind of the profile of the customer, what their claims history is.
We like that newer construction home with a good insured in it and avoid areas like Dade and Broward. That additional due diligence on the front end is really helping loss ratios, reserve development, open Tri-County litigation, open Tri-County claims. Every metric that we have to monitor the extent of that AOB crisis is improving quite significantly in many cases. We note that the problem's getting worse, but on our portfolio, it seems to be getting better because of the efforts that we've taken to mitigate the risk.
Final question. Kirk, you had mentioned how there's opportunity perhaps in 2020 for a little margin improvement if you eliminate the dual systems. Anything you can tell us in terms of the magnitude of the opportunity?
We're talking a couple million dollars, depending upon, because I know we're in the process of negotiating the current system, and there might be some efficiencies gained with it also. Just eliminating some of those old systems is going to save a few million dollars from NBIC's expenses.
Thank you.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bruce Lucas for any closing remarks.
I would just like to thank everyone for their participation in our third quarter earnings call.
Thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.