FedNat Holding Company
Q4 2020 Earnings Call Transcript

Published: 3 Mar 2021

[Operator:]

Good morning. And welcome to the FedNat Holding Company's Fourth Quarter 2020 Conference Call. My name is Victor 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, FedNat Investor Relations. Bernie?

[Bernie Kilkelly:]

Thank you, Victor. And good morning everyone. Welcome again to FedNat's fourth quarter 2020 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.

[Mike Braun:]

Thank you. Good morning and welcome to our fourth quarter 2020 conference call. Ron Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer are on the call with me today. After my remarks, Ron will go into more detail on fourth quarter results. And then we will take your questions. As you know, our results in the fourth quarter and full year 2020 were impacted by an unprecedented number of severe weather events. The 2020 Atlantic hurricane season had 30 main storms, the highest on record, and 12 main storms that made landfall in the U.S. FedNat remains committed to providing the highest quality service to our policyholders and partner agencies in their time of need. I want to commend our staff, over 95% of which continues to work remotely for their dedication to meeting that commitment. In the fourth quarter, we had a pre-tax catastrophe losses of $31 million driven primarily by hurricanes Delta, Zeta and Eta. The majority of these losses were in Louisiana and Florida. Our fourth quarter results were also impacted by reserve strengthening and our discontinued commercial general liability book of business. We strengthened prior year reserves by $12 million after tax due to recent trends that emerged during 2020 relating to construction defect claims that have resulted in higher-than-expected claims and litigation costs.

[Ronald Jordan:]

Thanks Mike and good morning, everyone. As Mike mentioned, our fourth quarter and full year 2020 financial results were impacted by record number of severe weather events. Primarily due to this impact in the fourth quarter of 2020, we reported an adjusted operating loss of $1.96 per share, compared to a loss of $0.59 in last year's fourth quarter. For the full year, we reported an adjusted operating loss of $5.21, compared to a loss of $0.03 in 2019. In the fourth quarter, our pre-tax losses from cat events were $102 million on a gross basis, and $31 million net of recoveries. For the full year 2020, our pre-tax losses from severe weather events were just over $450 million gross and $139 million net of recoveries. It was clearly an unprecedented year in terms of catastrophe losses. As Mike mentioned, our fourth quarter results were also impacted by reserves strengthening in our discontinued commercial general liability line, which had a pre-tax impact of just over $16 million. Overall, net prior year reserve strengthening in the quarter was approximately $11.5 million pre-tax. Excluding cat losses and the net reserves strengthening, our fourth quarter adjusted operating measure would have been approximately $2 million of income, representing a low-single-digit ROE based on our December 31 stockholders' equity. As already discussed, rate increases are on the way to restore greater profitability to the book. And I'll come back to this topic at the conclusion of my remarks. Consolidated gross written premiums in the fourth quarter grew 12% year-over-year to $168 million. This increase was due primarily to the acquisition of Maison completed last December, when it contributed only one month of premium to last year's fourth quarter. The percentage of gross written premiums coming from non-Florida markets increased to 35% in the fourth quarter of 2020, compared to 28% in the prior year quarter. Non-Florida policies in force were 154,000 at December 31, compared to 152,000 at September 30 of this year, our smallest sequential quarter increased in quite some time reflecting our desire to limit our growth in the states at this time. The geographic mix of our policy count at December 31 was approximately 57% Florida and 43% non-Florida. This compares to roughly 75% Florida 25% non-Florida prior to the Maison acquisition just a bit more than a year ago. Gross premiums written in our Florida Homeowners business were flat in the fourth quarter, compared to the same quarter in 2019.

[Mike Braun:]

All right, Ron, thank you for that. Operator, can you go ahead and open it up for questions, please.

[Operator:]

Thank you. Our first question will come from the line of Greg Peters from Raymond James. You may begin.

[Greg Peters:]

Good morning. So, I would like to spend a minute and I know you talked about it in your comments, but spend a minute on the reinsurance purchases you've made, and how we should be thinking about events that might happen from this point going forward? And when you think about the first and second quarter, things like hailstorms, tornado events, and weather like that is pretty commonplace in Texas and other states in the South. And it will generate industry losses. When I think about FedNat, what should I think about your retention, if say for example, we're sitting here in April, and there's a huge hailstorm that goes through Houston, what would we think about your retention being on a per event basis based on the reinsurance that you've now put in place?

[Ronald Jordan:]

Yes, good morning, Greg. And the short answer is $10 million. Generally speaking, per event we have cover in excess of $10 million for that events. So, what we have done is, we've tried to be prudent to buy additional reinsurance, the loss of cascading reinsurance with so many events, five events, and now Uri being the six has created challenges, and a significant spend on our part to buy replacement coverage. So, we would have coverage above $10 million through the end of May for an event.

[Greg Peters:]

Got it. And then sticking on the topic of reinsurance, obviously, a lot of moving pieces here. But is there any perspective you can provide regarding your big cat annual renewal? And what we should be thinking about in terms of costs there? And more importantly, I mean, given the frequency and severity, I imagine you're going to do more to protect the balance sheet from a recurrence of this frequency that we had last year. So, any perspectives you could provide on that would be helpful?

[Mike Braun:]

Yeah, absolutely. So, one of the challenges as we've grown from a Florida carrier to a non-Florida carrier, is some of the reinsurers that are specific to Florida have been less interested in the lower layers. So, effective this year, with our July 1 renewal, we will be splitting the cat tower. So, our SageSure book will have a separate cat tower. And that's been in the market for, I believe, two, three months, and most of that program has been completed. So, July 1 forward our SageSure reinsurance program will be a separate tower. And then our non-SageSure business, which is primarily Florida, which is all three carriers, FNIC, MIC and MNIC as well as MIC non-Florida would be in the other tower. So, in terms of the total spend last year before buying additional limit, we spent approximately $265 million. And we've bought additional cover to replace some of those holes from the lack of cascading. So, in terms of total spend, I think it will be a decrease in our total spend, based on the optimization that we're doing with our portfolio, and how we're now renewing policies, and where we're writing policies and so on. So, it's too early to say where the reinsurance pricing is clearly at January. The renewals for the reinsurance were less than expected because more capital has come in. But clearly, Florida is a peak zone. Clearly, coastal states are a peak zone, and we recognize that. So, on a total spend, I think we're in pretty good shape there. While I'm not saying that rates are going down, I recognize that rates may increase, but our book is smaller, and with a splitting our non-Florida SageSure book off, I think we'll benefit there. And once again, to pay for this reinsurance, which once again an absolute spend, I think should go down. We have massive rate increases, massive rate increases. These rate increases in Florida, statewide are nearing 50% over the last four years. Brian said we have over $90 million that will gross earn out in 2021, including $7 million in Q1 versus Q4. So, we find the challenge to be the weather, in terms of non-Florida, and we find the challenge in Florida to be the attritional loss ratio. But that attritional loss ratio we find stabilizing in Florida as well. So, I'm throwing a lot out there, Greg at your question. Happy to go deeper on any of that.

[Greg Peters:]

No, I appreciate the commentary. As I'm thinking about this, and looking at your results and not only your results, let's be honest, the industry has been clobbered last year as a result of everything that's happened. And Texas is clearly an issue for a lot of different carriers. I guess one final question I'd have for you just on this is, do you find any change in tone with the regulators? Do they recognize the pain that you're going through? And do you suspect they're a little bit more sympathetic to try and make it right for you and be more sensitive to rate filings? Are they just agnostic and just plowing through business as usual?

[Mike Braun:]

Yeah. In terms of Florida, in terms of the regulator, the Florida OIR, I think they've done an incredible job, a very good job. I think they're in a very difficult situation. I commend the OIR for being in a tough spot by trying to protect everyone who's a resident of the state of Florida and help contain price increases. However, unless there's reform by the legislators, their job is that much more difficult. And I would say they're forced to therefore give rate increases. We find the Florida OIR to be fair and reasonable. We find them to be accommodating with the reality of the situation. I think they've been very proactive, trying to inform the state legislators on the abuses that we see in Florida. And the abuses that we see are primarily related with litigation. So, I'm hopeful there's some type of litigation reform in 2021. But the truth is, Greg, I don't anticipate that happening this year. I don't. Therefore, we will continue with. We're limiting our business in Florida, where we're continuing to write new business in Florida, not a lot. But the business that we're writing looks good. And we're continuing to shed policies that was non-renewals, which absolutely improves the profitability of our existing book of business. We're happy with those moves. Unfortunately, these rate increases that we talked about are good for our stakeholders that is our shareholders. But they're bad for our policyholders. They're bad for all residents in the state of Florida. And I hate to say it, if the situation could be improved would not be necessary. So, it's an unfortunate situation, we're going to continue to take rate and limit our new business until there's either reform or once again as our rates catch up with these inflated costs. In terms of the attritional loss ratio in Florida, that increase which was pretty steady over the last four years, I believe it's slowing. And it's not that the abuses are slowing or stopping, but we've got so much premium working through the book to offset those abuses.

[Greg Peters:]

Got it. And I guess the final question, given your preannouncement or preview of the Texas losses, I know you commented on your RBC ratios at year end and the capital liquidity sitting in the holding company. Do you have any view on how things might change, when you report first quarter results?

[Mike Braun:]

Yes, so there's a couple of things there. So, in terms of the amount of weather that we incur in 2020, it's truly amazing the amount of weather that we've experienced. And now with Texas, once again, I think the loss would have been a tiny fraction had it not been for the lack of power, with the grid going down, that really created a problem where you had homes that were not able to stay warm and then you have all these water losses. So, in terms of where we're at on capital, we are committed to support our carriers with the appropriate levels of capital. We have affiliated companies that generate significant fees to support our business, to support our carriers, to support our policies, our policyholders, and facilitate with claims. So, there's a lot of fees being generated. Unfortunately, the underwriting losses have exceeded that when you get these big weather events. So, I feel that the second half of 2021, Greg, with less of a spend on reinsurance, once again, I'm not stating the rate online, but the absolute spends. So, with a at VAT plus all these rate increases taking effect, the second half of 2021 really improves as those rate increases take hold. But once again, it's just been the amount of weather that we've endured, while our costs have increased so much. Our costs related to the attritional losses and our costs associated with reinsurance.

[Greg Peters:]

Got it. All right. Thank you for your answers.

[Mike Braun:]

All right. Thank you, Greg.

[Operator:]

Our next question comes from the line of Steve Hale from Hale Partnership. You may begin.

[Steve Hale:]

Hey, Mike, Ron, how is it going?

[Mike Braun:]

Hey, good morning, Steve.

[Steve Hale:]

Good morning. Question for you guys on the disclosure regarding the special committee about them reviewing options to strengthen the capital position. Kind of two questions on that. Is that the path they decided after reviewing all options available?

[Mike Braun:]

The committee was formed in November. Formerly, it was, I should say, when we announced it, but honestly, it was something in the work and plus process before them to see what we could do to create value. But clearly, the committee their lens has been impacted by the amount of weather that we've been experiencing. So, with Q2 last year having a lot of weather and then Q3 being Laura, Sally, Q4, Delta, Zeta, Eta, these impacts their analysis and then now with Uri in Q1. So, the special committee that we have formed is continuing to do their work to try to create value for our shareholders. And I would say that it would creating value, a portion of that is ensuring we have adequate capital based on recent events. Yeah, you have to assume that's part of the analysis. Absolutely. More so now than it was before all these weather events occurred.

[Steve Hale:]

Yeah, I guess I'm trying to there's a strategy wheel of things that can happen. And if you're going the position of strengthening your capital position as opposed to a complete sale of the company is the strategic alternative or M&A. It's a little bit indistinct. Is the strengthening capital position could be selling assets accretively, it could be raising capital? I'm just curious if you guys are going to get more specific? And I guess the reason the question comes up, is the concern for existing shareholders who have literally been through the storms with you, would be that you go to a third-party capital source as opposed to the folks who are sitting here that could be supportive, and not diluted. So, I'm just trying to make sure that shareholder voice is heard, as those alternatives are assessed and that it's fair from a shareholder's perspective.

[Mike Braun:]

Hey, Steve, I hear you loud and clear. You're a very large shareholder, you've been through the tough times with us. Absolutely. The committee is - their focus is to look out for our shareholders. That's what they're looking to do. Whatever is the best outcome for our shareholders is what they're evaluating. I cannot get more granular than that. But once again, they're also looking at the capital of the company. Once as we sit here today, we have sufficient capital to support our business. We have the latter half of '21 really a lot of premium rolling in, but we want to make sure that we're well positioned if there's additional headwinds before those rate increases roll in, in a more meaningful manner. So I hear you Steve, I can't give you anything specific, other than to say the committee is working diligently to try to create value for our shareholders.

[Steve Hale:]

Yeah, Mike, I appreciate that. You've got to bridge period to get to that, the Holy Grail. And we don't know what happens with weather. It's just hopefully that normal pre-emptive right of shareholders to be able to provide that bridge becomes part of the conversation. So, with that, I'll drop off. Thank you, guys.

[Mike Braun:]

No, I appreciate that, Steve. And if you have follow-up, obviously, please do not hesitate. Thank you.

[Steve Hale:]

Yeah. Thanks, Mike.

[Operator:]

Thank you. Our next question will be from the line of Bill Broomall from Dowling. You may begin.

[Bill Broomall:]

Great. Thank you. Just a quick follow-up on the Texas event. Mike, can you just maybe help us understand what types of claims you're getting in Texas? Was it, I'm guessing a lot of pipe burst? But is that actually what happened? Texas is kind of unique in its losses? And maybe to that, what's the average size of some of these losses that you're seeing in Texas?

[Ronald Jordan:]

Yeah. So, if you look at the Insurance Journal yesterday, I believe they're putting numbers out there in the $15 billion to $18 billion to $20 billion range. The losses we're seeing is water, its water, all day. And once again, had it not been for the loss of power, I think these losses would be far less than what we're experiencing. The majority of the losses that we're seeing are in the Houston area. And we have a sizable book in Houston with our SageSure Partners. So, it's a sizable event. It's being compared to a hurricane. But we're seeing some big losses, specifically when you get pipes on that one, if you have a second-floor bathroom, and those compound they can get pricing. So, we're seeing the gamut of some more than others. But I think the comparison of a hurricane is fair in terms of a $20 billion event. And in terms of the average severity, I think it's comparable to what you're seeing out there in the media.

[Bill Broomall:]

Got it. Is it you have kind of a unique perspective, I think that maybe some in Texas, because you've experienced hurricanes in Florida? Is the demand surge for contractors and everything match prior events that you've seen?

[Mike Braun:]

Yeah. So, demand search is a part of our business. And once again, when you need a plumber, there's a price, when you need to dry out guy, there's a price, when all your neighbors need a plumber, and they all need a dry out guy, there's an increased price. Absolutely. So, after a hurricane we do see demand surge, for labor and for material. And I think that's happening right now in Texas as well. Typically, that spike diminishes with time. In other words, the demands of these plumbers and dry out remediation services will decrease with time and some of that spiking will dip down.

[Bill Broomall:]

Got it. And your claims handling services business that will participate and will react to this event, correct? Just I think you said so but I wanted to confirm that.

[Mike Braun:]

Yeah. So, we have multiple claims organizations. We have our desk adjusting and our cat adjusting and our field adjusting. We've got a lot of resources though, we do utilize external vendors as well, just because you can't be ready for every residence, perhaps it's located in a distant location, or just because there's such a spike in claim activity. So, the majority of what we're doing, we're able to do in-house however, we absolutely utilize our third-party contractors that have partnered with us over the years. And they're a big part of our process.

[Bill Broomall:]

Got it. Okay thanks. And I appreciate the conversation about the rate increases. I wonder if you could talk about the other side. You're pushing through rate, how your retentions held up? I'm guessing a lot of people are increasing rates. So, I just wonder how you're doing in that environment.

[Mike Braun:]

Bill, from a shareholder perspective, it's very frustrating that we're seeing elevated increases in our costs. It's litigation, from a shareholder perspective. From a policyholder perspective, it's very frustrating as well. People are seeing 50% increases. These are working people, and it doesn't need to happen. The policyholder is not getting the big upside. It's the litigation, that's getting the big upside. It's very unfortunate. And it doesn't need to happen. We need reform in Florida. So, we're seeing our prices have doubled in Orlando over the last four or five years. It's driven by litigation, and 50% relative to Florida, as a state. So, it's unfortunate. The regulator's doing an admirable job, trying to inform and educate people. There's multiple things that are being proposed in the legislative body, which meets really for the month of March and April. I unfortunately, don't see something big happening, which is too bad. So, therefore rates continue to increase. And at some point, I would assume that it would be addressed. I'm hopeful that there's some reform in '21. But I don't think it'll happen and hopefully, there'll be more opportunities in '22, for it to reform. But until then, we have no choice but to pass through the rate increase. And let me say it again, with our rates, when they go up, we have to incur the expense, then we file for the rate, which takes time, the review takes time. And then we have renewal offers. And then policies gradually renew over 12-months. You're talking 18 to 24 months. So, we're in that period, where we've had huge increases in expense. And we haven't seen the increase in premiums, earned premiums. And then while we're most vulnerable, because of these increased costs, but yet not realizing the increased premiums, we get hit by six weather events. It's the timing is unfortunate. It really is. And things look very much better on the latter half of '21. But once again, hopefully we can get there with Florida with the legislators. I think the tort reform you see in Texas in 2017, I think that was great. And it created value for the residents in the state of Texas and I hope Florida can do something like that as well.

[Bill Broomall:]

Perfect. Thank you for those expanded comments. And when you're talking to the reinsures for quota-share and different structures, have you seen their view change on how much cat they're willing to put into the quota-shares or caps at all? Has that changed or what's…?

[Mike Braun:]

I think there's always been the reinsurers have always kind of been divided into two buckets, either non-cat and cat. It really, you don't find a lot that liked to go into both buckets for a variety of reasons. So, there's only so much cat that goes into quota-share. Some quota-share doesn't want cat others want minimal cat and then you have your cat writers that are on an actual, primarily on an actual basis. So, it's there's different types and that's why we have such a big relationship with 75 reinsurers is to try to find that matching point with all of them.

[Bill Broomall:]

Got it. Okay, thanks. Just one number one real quick, what was your surplus at year-end '20? And I'm all done. Thank you.

[Mike Braun:]

And with that, I got to cut you off Bill. Ron, do you have it handy because we got a couple more calls we're trying to get to. You have it handy, Ron?

[Ronald Jordan:]

Yeah. FNIC were at $106 million based on $39 million and the FNIC is inclusive of Monarch's since it's stacked under there, so the sum of the two, $145 million stat surplus.

[Mike Braun:]

All right. Thanks, Bill, appreciate it. And we can follow up.

[Bill Broomall:]

Yeah. Thanks so much, guys.

[Mike Braun:]

Thank you.

[Operator:]

Our next question will come from Doug Ruth from Lenox Financial. You may begin.

[Doug Ruth:]

Hi, good morning to everybody there. Could you talk a little bit about the status of citizens and what you think is happening with them now?

[Ronald Jordan:]

Yeah, good morning Doug. Citizens in Florida continues to grow. Everyone may recall, they were at about 1.5 million policies back about six, seven, eight years ago. Then they got down to the low 400,000. My understanding is they're approximately 600,000 right now. And it's speculation, they may end up at 800,000 to a 1 million policies at the end of this year, subject to a lot of variables. Citizens is competitive in the marketplace. They obviously have some tax benefits being a state entity, and also, they don't have to purchase certain reinsurance to protect their balance sheet. So, they're competitor and their competitors.

[Doug Ruth:]

And do you think that there's something that maybe the Florida Legislature could do to make it so that citizens is less competitive against FedNat and other carriers?

[Mike Braun:]

Doug, there's a lot of things they can do. Do I think anything's going to change? The answer's no. Once again, right now, just stay with a carrier, basically if you have a private market that's willing to take you, you're supposed to go to the private market, but that doesn't always happen. Number one. Number two, before you go into citizen that the private market will take you at not more than a 15% premium. You're not supposed to go into citizens. But really in terms of policies, most people are staying put in their private carriers if they get a renewal offer, and others will move if the private market won't take them and citizens as a competitive option. So they're out there. I don't see anything changes in the near future.

[Doug Ruth:]

Okay. Well, I appreciate the cantor. And we're looking forward to some better days to come. Thank you for answering my questions.

[Mike Braun:]

Thank you, Doug. Have a good day.

[Operator:]

And the next question comes from the line of Matt Carletti from JMP. You may begin.

[Matt Carletti:]

Thanks. Good morning. Mike, I was hoping you could talk briefly about - it's very early days in the Texas event and kind of how you came to your estimate. And did you just get there because that's the max net exposure you can take and if there is a bigger number than you think it all goes to reinsurance or is there potential additional net exposure should the loss be bigger than you think?

[Mike Braun:]

Yeah. So Matt, good question and good morning. To that, what we're saying is we're going to go over our retention. Okay, so we're stating that. And then unfortunately, we have a whole in the program, the cats hour because we did a lot of strengthening at year end. So, we really took reserves up at year end. And as we finalize those numbers not much after that, do we go and get hit with Uri. So, to clarify, the $18 million co participation there, it's basically where we think we've got a whole from really relating to Delta Zeta and Eta. So the $18 million could increase or decrease. But I don't anticipate it shifting with all information that we have right now. We think 18 is the right number. But that's once again, Laura was our first event, which was very big and Sally was our second event, which was the second biggest. But Uri is coming in, I think you're going to see a big event with Uri. We're not putting a gross number out at this point. But it's well above our retention.

[Matt Carletti:]

All right, so we've been hearing you right, if there were to be movement on the net number for Uri, it would more likely come from development on last year storms that move kind of where the gap in your program might be as opposed to where Uri itself falls on a gross basis, is that right?

[Mike Braun:]

You are correct. So, any gap from Uri and layer one would be based on movement from Delta, Zeta and Eta. We've got a lot of ballparks, we believe on all three of those, so we're comfortable with our reserves on those events with all best available information, we're comfortable with the $18 million.

[Matt Carletti:]

Okay, great. And then my other question relates to kind of expenses and how we should think about that, mostly because of the moving pieces with the additional layers of quota-share that are getting added on. And I could be wrong, but I presume that those are at not as good terms to you as kind of a lot of the stuff placed earlier when there wasn't storm pressure. How should we think about where expenses fall, our expense ratios fall with all those new programs in place?

[Mike Braun:]

Yeah, I'm sure, Ron can go deeper on that. But let me just give an overview. The quota-share, we feel to be reasonable terms based on a historical perspective as well as today perspective. Of course, we always want better terms, but I think they could be categorized as reasonable. Ron, you want to go deeper?

[Ronald Jordan:]

Yeah, I guess my main comment with respect to the quota-shares, I talked about how when our XOL costs go up, that drives our net expense ratio up and our net loss ratio up. The same phenomenon really does not exist on the quota-shares because you've got pro-rata types of reductions happening on the premium line, the loss line and the expense line. So, I would not expect quota-shares to significantly move our net ratios. With that said, Matt, I'm sure what you're getting at is, it's not free. I mean, the lawyers of quota-share are doing it because they do expect to make some money. So, is there a bottom-line cost to those additional treaties? Sure, it doesn't - it's not going to evidence itself in the form of higher expenses or a higher expense ratio.

[Matt Carletti:]

Okay. Thank you. Good luck, going forward.

[Mike Braun:]

Thanks.

[Operator:]

Thank you. And I am not showing any further questions in the queue, I like to turn the call back over to Mike Braun, for any closing remarks.

[Mike Braun:]

All right. Well, thank you everyone for participating in today's call. Before we close, I want to again recognize our FedNat team. Our team, including our staff and partner agents, continue to provide the highest quality service to our policyholders in their time of need and are doing this in the midst of an ongoing pandemic. Their efforts and dedication will help FedNat maintain our quality reputation and continue to build value for our company. So, appreciate all the question and answer and participation today. And everyone, have a very good day. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.