FedNat Holding Company
Q4 2021 Earnings Call Transcript

Published: 4 Mar 2022

[Operator:]

Good morning and welcome to FedNat Holding Company's Fourth Quarter 2021 Conference Call. My name is Liz and I will be your conference operator this morning. At this time, all participants will be in listen-only mode. Before we begin today's call, I'd like to remind everyone that this conference call is being recorded as well as broadcast live via webcast. Additionally, today's call will be available via webcast replay later this afternoon and accessible by visiting the Investor Relations section of FedNat's website at www.fednat.com. Now, I'd like to turn the call over to Bernie Kilkelly for FedNat Investor Relations. Bernie?

[Bernard Kilkelly:]

Thank you. Good morning and thanks everyone for joining FedNat's fourth quarter 2021 conference call. Our earnings release and prepared remarks include references to non-GAAP measures, such as adjusted operating income. We use these non-GAAP measures to provide greater transparency and a more meaningful efficient comparison to prior year's results. Our non-GAAP and reconciliations from the GAAP measures to the non-GAAP measures are available in our earnings release. Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, estimate, expect, predict, project 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 earnings release issued yesterday and other filings made by the 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 specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. Now, I will turn the call over to FedNat's Chief Executive Officer, Mike Braun.

[Michael Braun:]

Thank you. Good morning and welcome to our fourth quarter 2021 conference call. Ron Jordan, our Chief Financial Officer; and Eric Fernandez, our Chief Accounting Officer, are on the call with me today. After my remarks, Ron will go into more detail on the financial results of the quarter and then we will be glad to take questions. Before I review our fourth quarter results, I want to give an update on the shift in FedNat's strategy that we announced in November. As we announced then, we are exiting non-Florida markets and refocusing our efforts on the improving homeowners market in Florida where FedNat was established 30 years ago and where we continue to have a significant market share, strong underwriting and claims processing capabilities and strong agent relationships. As part of the exit from our non-Florida markets, we have begun an orderly run-off of Maison's insurance operations. Maison has filed appropriate documentation with it's insurance regulators in Louisiana, Florida and Texas. In January, we began non-renewing Maison's policies in Louisiana on the expiration dates of each appropriate policy. And in March, we are beginning to non-renew Maison's Texas policies. The non-renewal of Maison's Florida policies is expected to begin in July 2022. At that time, we expect the run-off of Maison's business to be substantially completed by the end of 2022. FNIC's non-Florida book was written through our third-party managing general underwriter SageSure and SageSure owns a renewal rights to those policies. Last December, SageSure began making offers of coverage to FNIC policyholders in Texas and Louisiana to renew policies on to alternative insurance carrier partners of SageSure that were not affiliated with FedNat. Up through the first quarter of 2022, SageSure policies in all states have continued to be renewed by FNIC to the extent the policyholders did not accept the alternative offer of coverage. However, beginning in the second quarter, most notably with Texas and Louisiana beginning May 1, 2022, we will begin non-renewing all SageSure policies that do not accept the alternative offer of coverage. In addition, we will begin non-renewing all policies in Alabama on May 1, 2022 and in South Carolina on July 1, 2022. As such, the pace of the one-off will accelerate substantially in the second quarter. We expect the process of transferring and/or non-renewing the SageSure policies to be substantially complete by June 30, 2023. Our commitment to honoring all existing policies remains the same and all policyholders and agents will receive the same professional service that we -- they always have received from FedNat. Upon completion of this transition, we expect FedNat to be a financially stronger company that will be right-sized to our current capital and surplus position. We anticipate we will have approximately $450 million of in-force premium exclusively in Florida with approximately $113 million in surplus within our three carriers based on year-end 2021. We will have substantially less exposure to weather frequency and therefore, less volatility in our underwriting results. The benefits of the transition have already begun to materialize in the form of lower cat exposure and capital requirements. We have maintained appropriate capital positions at FNIC and Monarch with a capital infusion into FNIC of $17 million as of December 31. After year-end infusions, we have $40 million of liquidity at the holding company heading into the first quarter. As you know, in November 2020, our board of directors formed a special board committee to oversee a review of strategic alternatives, including exploring options to strengthen the company's capital position. The work of the committee is ongoing and the committee continues to work with Piper Sandler as it's financial adviser. Turning now to the fourth quarter results. We reported a net loss of $8.6 million or $0.49 per share in the fourth quarter of 2021 compared to a net loss of $38.1 million or $2.77 per share in the fourth quarter of the prior year. This year's fourth quarter results were impacted by approximately $8.4 million of cat weather from seven storms that impacted Florida, Texas and Louisiana. It is important to note that $3 million of the $8.4 million in cat losses were from the books of business that we are running off, as previously announced. Our fourth quarter 2021 results were also impacted by $4.4 million of reserve strengthening related to the third quarter 2021 and prior accident quarters. This strengthening was primarily due to the multiple hurricanes that occurred in the second half of 2020, while we had some gaps in our reinsurance program. Ron will provide more details on the impact of the cat events and the reserve strengthening in his remarks. Looking at the Florida homeowners market, the environment continues to have it's challenges but we are seeing positive trends in our attritional loss ratios in both new and renewal business as each policy renews at the increased rates. We are seeing the benefits of the dramatic action we've taken over the past five years to shrink our Florida homeowners book until rates more adequately reflect the increased cost of doing business, including attritional losses, weather events and higher reinsurance costs. Our Florida book has declined by over 40% from 272,000 policies in-force in 2017 to 160,000 at the end of 2021. At the same time, we have increased FNIC's rates by approximately 70% cumulatively over that same timeframe, restoring rate adequacy in our book. Insurance reform legislation in recent years, including AOB reform legislation passed in 2019 and SB76 that went into effect in July '21, have also provided some help improving our attritional loss ratios. Our rate increases and FNIC's Florida book during 2021 included a 6.7% increase that took effect in March, a 9% increase in April and a 5.7% increase in November. As a result of these increases, FNIC's average premium per policy in Florida increased by $64 in the fourth quarter compared to the third quarter of 2021 and $541 higher than the fourth quarter of 2020. This increase translates into approximately $80 million more in premiums on the 146,000 policies that were in-force at year-end 2021 compared to last year with decreased exposure. Most importantly, these rate increases helped improve attritional loss ratio in FNIC's Florida book which dropped to approximately 36% for the fourth quarter of 2021 as compared to 42% a year ago. And there are still substantial rate increase benefits out in front of us for 2022 that are not yet captured in these results. This clearly demonstrates why we are much more comfortable with the Florida market now than we were just a few quarters ago. We continue to be cautiously optimistic about potential benefits from portions of SB76 reform legislation that became effective last July. We are pleased with portions of the legislation such as measures to reduce the time limits for filing claims from three years to two years and to better control plan of attorney fees which are significant drivers of increased costs. At this time, we will continue to monitor our results and implement additional rate increases as warranted to ensure that our rates are adequate so we can continue to achieve an improved attritional loss ratio. These rate increases include a 6% that is taking effect in March of 2022 for renewals. Now, I'll turn the call over to Ron for more details on our fourth quarter financial results.

[Ronald Jordan:]

Thanks, Mike and good morning, everyone. As Mike mentioned, our fourth quarter 2021 results were impacted by catastrophe losses, primarily from seven large storms that affected Florida, Texas and Louisiana. Aggregate gross losses from these fourth quarter events are estimated at approximately $10.6 million. Gross losses were reduced by ceded losses of approximately $3.5 million under quota share treaties and by the accrual of $300,000 of related claims handling revenues, resulting in $6.8 million of cat losses through the loss line of our income statement. Related impacts on sliding scale ceding commissions in the Florida quota share treaties of approximately $1.2 million brought the total impact from 4Q cats to $8.1 million or $0.46 per share on both a pre-tax and after-tax basis on a consolidated GAAP basis. This equates to approximately 15 points to our loss ratio and combined ratio in the quarter. As mentioned by Mike, approximately $3 million of this net impact stem from our run-off books of business from our strategic shift announced back in November which are FedNat Insurance Company's non-Florida book and the entire book of Maison Insurance Company. As a result of this run-off, our exposure to catastrophe weather losses outside of Florida is declining literally on a daily basis and more on that in a moment. Our fourth quarter 2021 net income was also impacted by $4.4 million or $0.25 per share of reserve strengthening net of reinsurance recoveries and other offsets. This reserve strengthening added approximately 8 points to our combined ratio in the quarter and pertain broadly to all accident quarters from 3Q '21 and prior. It was driven primarily by the multiple hurricanes that occurred in the second half of 2020 and specifically from additional net retention of losses from those events due to gaps in excess of loss reinsurance coverages during the 2020 to 2021 treaty year. With respect to the non-core lines that we exited around three years ago, year-end reserve studies were favorable in both the CGL and auto lines of business and benefited the quarter by approximately $3 million in total. If one were to adjust our fourth quarter operating loss for the impact of the catastrophe events and reserve strengthening just discussed and then apply the federal tax rate, it indicates that FedNat's adjusted operating results in the quarter would have been operating income of approximately $4.1 million or $0.24 per share. With the change in strategy to refocus on the Florida market, we are drastically reducing our catastrophe exposure. As shared on last quarter's call, since the beginning of 2020, our non-Florida business has contributed almost 70% of our net catastrophe losses despite representing just 40% of our in-force premium. With the approved and pending rate increases in Florida rolling into our book, we expect our Florida book to achieve ex-cat earnings improvement in 2022. If one assumes a flat book with year-end 2021, Florida rate increases that are either already implemented or are taking effect later this month are expected to generate an additional $80 million of gross earned premium in 2022 as compared to calendar '21. In 2022, much of this benefit will continue to offset reductions to gross premium that are a result of our exposure management. However, a portion is expected to fall to the bottom line in the form of lower attritional loss ratios. Going forward, we will continue to work to achieve low-double-digit ROEs in years where catastrophe losses approximate the models with higher ROEs attainable when cat losses come in favorably as compared to the models. We have continued to make disciplined progress on our Florida exposure management strategy. Our Florida policy count at December 31 is down over 4% sequentially from September 30 and down almost 22% from December 31, 2020. The total insured value of our Florida book at December 31 is down over 15% from a year ago. Importantly, we believe that our rates have now largely caught up with our higher cost of doing business in recent years. By the latter part of 2022, we expect our Florida policy count to begin to level out so that in the following quarters, the rate increases earning in will begin to add more meaningfully to our gross written premium. As a proof point, we're seeing some of this already. Fourth quarter 2021 gross written Florida premiums increased 2.9% from last year's fourth quarter as compared to steady reductions in our risk appetite for the last several years. Outside of Florida, we continue to execute the run-off of these books. Non-Florida policy count is down almost 10% from 3Q '21 and 22% compared to year-end 2020. Non-Florida total insured value is down over 8% sequentially and almost 20% versus year-end 2020. And we expect the pace of run-off to accelerate further in the second quarter of 2022, particularly with respect to the FNIC non-Florida book, as Mike has already described. Turning now to our balance sheet and capital position. We maintained surplus in FNIC and Monarch National consistent with RBC ratios of 300% or above. We made a capital infusion to FNIC of approximately $17 million, effective as of December 31, via the assignment to FNIC of the holdco's investment in a surplus note for Maison Insurance Company that the holdco had held since December 2019. We also maintained our commitment to having appropriate liquidity at the holding company. After year-end infusions, holding company liquidity is approximately $40 million heading into 2022. Maison ended the year with approximately $31 million of statutory surplus. Maison's Capital remains part of the FedNat consolidated group and will be redeployed within our structure at the appropriate time, subject to regulatory approval. At the end of the fourth quarter, we held total investments of approximately $333 million. In addition, we ended the quarter with total cash and equivalents of approximately $83.5 million. We continue to maintain our discipline to invest in higher quality liquid bonds and a handful of preferred securities with no common stock exposure in the portfolio. Overall, the portfolio has a duration of 3.96 and a composite credit rating of A, one notch higher than where it was last quarter. And now I will turn the call back over to Mike.

[Michael Braun:]

Thanks, Ron. And then with that, operator, we'll go ahead and queue up some questions, if there's some questions available.

[Operator:]

Our first question comes from Douglas Ruth with Lenox Financial.

[Douglas Ruth:]

Hi. Good morning, Mike and Ron and Eric. Congratulations on the improved report, it's a very welcome news.

[Michael Braun:]

Yes, thank you. Good morning to you Doug.

[Douglas Ruth:]

Could you talk some about the pricing in Florida and what you're seeing?

[Michael Braun:]

Yes. In terms of pricing within Florida, our rates are up substantially. And I would say that the market is a very hard market. So I think that our rates have moved up perhaps on the aggressive side compared to some of our peers. So we're finding in lieu of those rate increases that others maybe should have taken that they're just restricting underwriting. So we're finding that our prices have gone up significantly. And we're finding that the competition is much less than it used to be. The Florida domestics appear to have less appetite and the national carriers appear to have had a very reduced appetite for the last 20 years and I really don't see much change in that. And then, of course, there's Citizens. Citizens continues to grow and Citizens is a state insurer but they are out there growing and they have competitive prices frequently. So we are running into them. And for everyone's benefit, Citizens peaked at, I believe, 1.55 million policies back around six, seven years ago. And then they were as low as maybe 400,000, 450,000 back about three, four, five years ago. And I believe they're going to approach 900,000 at the end of -- during the first quarter here. So the market is much harder, pricing is up substantially and we're seeing less competition from multiple carriers primarily before the domestic, I should say, less appetite.

[Douglas Ruth:]

So is there -- are there some people that would prefer to deal with a company like FedNat versus Citizens? Is that possibly some of the customers that you might be getting now?

[Michael Braun:]

Absolutely. There's definitely people that would prefer not to be in Citizens, though it's hard to ignore Citizens when they're so competitive on their pricing. They have advantages to their pricing that the private carriers don't have. There's caps on how much they can increase their rates. There's caps on -- or I should say, limits to the reinsurance that they purchase. And there's actually talk right now of them not even buying reinsurance. We don't know what they're going to purchase or what they're not going to purchase. There's clearly advantages to being with the cheapest carrier which can be Citizens frequently but some people would prefer to be in the private market for a variety of reasons. And then we're also seeing some E&S writers come in. And the benefit of E&S is you can really strip out coverages and provide the policyholder with less coverages and the policyholder gets a cheaper price for that -- for less coverages.

[Douglas Ruth:]

I understand what you're saying. And then in general, are you happy with the Florida book of business at this time or is there more work to do? Maybe you can give us a little color there.

[Michael Braun:]

That's a good question. And the answer is, yeah, more pleased with the book than we have been in about three to four years. If you go back in time, you've probably heard me say repeatedly that we're restricting business in Florida and our appetite until our rates more accurately reflect our cost of doing business. I think our expense rates probably more accurately now than in the last three, four years reflect our increased cost of doing business. And there's continuous pressure on that, we need to monitor it but we're seeing less pressure for further rate action needed. I'm not saying that there's going to be no additional rate needed but I think that the lion's share of the movement has already occurred in our pricing. So our pricing is up roughly 70% plus. That already includes some active weather that we've incurred. That already includes higher attritional losses based on the social inflation that has taken place in Florida. And that already includes higher reinsurance costs. So reinsurance costs have gone up because of increased weather because of social inflation as well. So, I believe our rates are more accurate today than they have been in multiple years.

[Douglas Ruth:]

That's very encouraging. Then my last question. Is there any pending meaningful legislation reform that could help the company?

[Michael Braun:]

The legislative session ends in a little over in a week, I should say. And there's multiple things that they're looking at. They're looking at perhaps more controls than what's called ACV. That's depreciation or actual cash value. There's some ideas about litigation and so on. But at the end of the day, I don't think it's in the state's interest to have Citizens continue to balloon. So I think that it's in the state's interest to support a healthy home insurance market for the 21 million people that live here which I believe is projected to grow by another 4 million in the coming years. You need this so that people can afford to stay in their house. They sell their house so that the new person who's buying the house can find insurance. And I think you're going to see massive growth with Citizens unless one of two things happens. And that would it be that Citizens take up their rates quicker which I'm just not sure that's going to happen, or if we can get more help on keeping our rates competitive with Citizens. And the easiest answer for that is us being able to purchase more reinsurance from the state via an entity that they had which is called the Florida Hurricane Cat Fund. It's a very big fund, about $17 billion in capital. I should say, total exposure that they could have about $17 billion. It's mostly funded. Conversely, Citizens has as many things that size and I believe has less than $10 billion of capital. So, I think it's in everyone's best interest to keep the Florida domestic carriers strong. And the best way to do that is to help us keep our prices competitive, either more legislative reform or helping contain our costs with reinsurance or conversely helping Citizens right business at less favorable pricing. So those are two things that can occur. And the other option is the continued growth in E&S. E&S is excess in surplus which has a lot less protection for policyholders. But once again, you can offer policies at less rate because there's -- it's more restrictive in terms of the terms. So there's a lot of things there, Doug, that are happening. But what we're doing is we're trying to price our book as best we can with all information today. I would like to be able to take premiums down, if possible but there has to be a reason to do that. And I sure hope that rates don't continue to go up but we're going to monitor it regardless and make the appropriate adjustments.

[Douglas Ruth:]

Okay. Well, I appreciate you answered my questions. Congratulations on the improved results, and it seems like you understand what's going on and you're doing the very best that you can for the shareholders, and I'm grateful for that.

[Michael Braun:]

Thank you.

[Operator:]

I'm showing no further questions in queue at this time. I'd like to turn the call back to Michael Braun for closing remarks.

[Michael Braun:]

Thank you all for participating on today's call. Before we close, I want to recognize the dedication of FedNat's team who continue to provide exceptional service to our policyholders and partner agents, particularly in their times of need. The hard work of our team has enabled FedNat to maintain our high quality for 30 years. We look forward to continuing to meet the highest standards of customer service as we refocus on our historical home market in Florida. So with that, everyone, have a great day. And if there's follow-up questions, feel free to reach out. Thank you.

[Operator:]

This concludes today's conference.