FedNat Holding Company
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Good day. And welcome, to Federated National Holding Company's First Quarter 2017 Financial Results Conference Call. My name is Catherine and I will be your operator today. Please note that today's call is being recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Statements in this conference call that are not historical facts are forward-looking statements. Without limiting the generality of the foregoing, words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibility, possible, potential, predict, probably, pro forma, project, seek, should, target or will or the negatives thereof or other variations thereon and similar words or phrases or comparable terminology, 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 our 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 the date on which they are made, and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. Now at this time, I would now like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of Federated National Holding Company. Please go ahead, sir.

[Michael Braun:]

Good morning. And thank you for joining us, to discuss Federated National Holding Company's first quarter 2017 financial results. I'm joined on the call by Ronald Jordan, our Chief Financial Officer and Erick Fernandez, our Chief Accounting Officer. Our financial results can be found in our earnings press release. I will go over some brief highlights and then we'll open up the call for questions. Q1, 2017 highlights is measured against same three-month period last year except where noted. 7.4% increase in gross written premiums to $146.1 million; 10.4% increase in Florida homeowner policy to approximately $280,000; 56.3% increase in non-Florida homeowners policies to approximately $20,900; 34.7% increase in total revenue to $92.92 million; $5.2 million of claims from Tornadoes in Florida and Louisiana. Net income of $3.1 million or $0.23 per share, 1.7% increase in book value per share excluding non-controlling interest to $16.54 as compared with $16.26 at December 31, 2016. Total loss reserves at March 31, 2017 was $154 million. We purchased 396,446 shares of common stock at weighted average price of $16.62 since January 1, 2017. Our results for the quarter include $4.8 million in claims net of reinsurance programs related to the recent tornadoes that impacted the Florida Panhandle on the State of Louisiana. We continue to expand our business including entering the Texas homeowners market during the first quarter and continue focus on the fundamentals including stringent expense control and providing best in class service to our partner agents and policyholders. Our 5.6% statewide average rate increase that went into effect on our Florida homeowners book of business in August, 2016 continues to earn out more with each sequential quarter and should be earning out the entire approximately $25 million of annualized additional premium later this year. This increase will halt offset the higher cost that we've experienced in settling claims over the past few years primarily associated with those that having the sign of benefits, AOB. We're in the final stages of securing our hurricane reinsurance program for the upcoming 2017 wind season and intend to purchase a similar program as last year with our approximate 75 reinsurance partners, and again free of alternative type instruments such as catastrophe bonds, at pricing that appears to be more favorable than last year. Our capital position remained strong and we look forward to assist, continuing our consistent track record of being there for our policyholders when adversity comes their way. I'd also like to take a moment just to introduce Ron Jordan our CFO to all of our shareholders. He's recently joined the company and we're very pleased with that and also to acknowledge the fantastic job that Erick Fernandez has done over the last nine months as the Interim Chief Financial Officer and he's now serving as the Chief Accounting Officer, so really excited with the team that we have in place. So with that, we'd like to open up the line to the questions that you have.

[Operator:]

[Operator Instructions] and our first question comes from Ron Bobman with Capital Returns. Your line is open. Ron Bobman Have a handful of questions and then, handful of specific questions. If you can't, I'll circle back obviously. In no particular order, any CAT activity on the last call you commented mid-call about mid Q1 sort of CAT activity imperious [ph] is there any sort of insight you could give us about mid Q2 sort of CAT activity, the absence or the existence of any losses. Michael Braun Yes, since April 1 Ron nothing to report at this time. Ron Bobman Okay, thanks. There is comment in the press release about new state, premium growth and I'm just wondering qualitatively if you could sort of talk about which dates represent the geographies were you're generating the most new business growth. Michael Braun Sure, non-Florida we have about 20,000 policies. Louisiana I believe it to be around 13,000. Alabama and South Carolina are some smaller states there and we've just brought on taxes which is coming on at about $100,000 a week at premium, this is all written through a partner that we have which is an MGU and I think, they do a fantastic job, they have distribution and multiple close States. Both with AMBS [ph] paper and with our non-AMBS [ph] paper, so we're just tapping in sort of distribution into further States. Ron Bobman Okay and as we're talking about homeowners, here. Is that correct? Michael Braun Correct. This is homeowners that we're talking about. Ron Bobman Okay, I'm sorry so should I think is Louisiana being the State where the rate of growth is the most significant or at least the sizing of it is the most significant. Michael Braun Well I would say that we've been in Louisiana for about two years and we're still seeing some growth there. It's slower from what the growth that we saw a year or so ago. South Carolina, we're having a little uptick of the business there which is pretty steady. Alabama it's just a small closest State for us and like I said. Ron Bobman What's your 100K per week as far as the PIF [ph] roughly? Michael Braun You know they're coming in under $2,000 a policies. I can circle back and give you the more specifics on that. It's mostly business down in the Houston area, the Galveston area. We're trying to with our partner stay in the Southern part of Texas. Obviously when you get into Texas there's challenges just like there are in Florida, there's a lot of hail obviously up in the Dallas area we're mindful of, the market is very competitive in the San Antonio area and there's litigation in the State and there's pockets of litigation as well. So what we're trying to do is stay initially close to the coast line. Ron Bobman Okay, thanks. Shifting to auto, can you give us an update on the auto programs sort of the status of the various MGU relationships, any cancellations, any new ones? Michael Braun As you know Ron, we did cancel some of the GAs going back to Q3. In terms of Q1, we had a GA that converted a program from a pricing structure to a more favorable pricing structure in Georgia. In terms of, I think that it bodes well for the program. The new pricing structure in Georgia, the order that we're riding is primarily in Texas and Georgia as you know those have been some tough markets. The new pricing significantly higher in Georgia to say approximately 40% higher than older program and it's been well received within the market. Ron Bobman Well, 40% up that's shocking. I'm sorry so it sounds like in Q1 there was no GA or MGA changes. I mean, as far as cancellations these got rate changes as you mentioned. Michael Braun Correct, no new GAs and no termination of GAs. Ron Bobman Okay and then any, the auto dipped in Q4, 2016 volume-wise in totality and when it picked up significantly in Q1, 2017. What's that sort of reversal basically attributable to? Michael Braun In terms of the? Ron Bobman Total volume, seasonality. Erick Fernandez Ron, this is Erick. So what you saw there is a little bit of lumpiness quarter-to-quarter. There are as Mike mentioned several different programs and they kind of ramp up and down over several quarters. Part of what we have from a structure perspective is certain caps that we work with and so that's a little bit of what you're seeing, the other piece of it. Say that again? Ron Bobman Premium capture. Erick Fernandez Yes the other piece of it, on average the term is roughly six months, so if you look at Q3, 2016 in total we have written off 21.5, a lot of that renewed in Q1, 2017 so that's part of what you're seeing there, so hopefully that answers your question. Ron Bobman Okay and how about the status of the reinsurance relationships? Is there - I know it's –auto markets have been tough for nearly everybody insurers and reinsurers included. So what's sort of any changes of late looking backwards and any concerns or fears or likelihood that reinsurance availability is going to change, our ability to support these MGAs. Michael Braun Well so I'm assuming you're speaking of the reinsurance only in this context as it relates to auto. Ron Bobman Correct. Michael Braun These programs, if these programs are not performing they're causing problems for us and the reinsurers it absolutely jeopardizes the individual reinsurance program that if it's running hot, there is no way about it and if that's the case that individual program would be terminated. Subject to statutes in the specific States to run it off, so these programs need to perform, otherwise the auto programs would be terminated on a case-by-case basis and the intention is for them to perform to have the rate and take the rate as appropriate and write sustainable profitable business. Ron Bobman I'm sorry, but looking forward what's your expectation that the current programs that are in place the GA relationships and then their supporting reinsurance programs are likely to hold or likely to be eliminated and [indiscernible] in whole. Michael Braun Ron, I think likely the whole subject the programs as we renew them. So I don't want to say with certainty that it's given that these programs are doubling renewing. The reinsurance contracts and I don't want to say that they're definitely not renewing. We need to perform, we've had some problems in our auto programs, we're working through those. We think we can do it sustainable and profitable, but we have had some challenges and we need to prove that in order to keep the reinsurers on the programs. Ron Bobman Okay, I got you more questions, but I'll circle back to be respectful to the guys and girls. Michael Braun Thank you, Ron. Appreciate that.

[Operator:]

Thank you. And our next question comes from Christopher Keppel [ph] with KBW. Your line is open. Michael Braun Christopher, are you there? It looks like, operator it looks like we lost Chris. Maybe we can move to the next call please.

[Operator:]

Okay, our next question comes from Douglas Ruth. Your line is open from Lenox Financial. Your line is open. Douglas Ruth I've several questions and I'll ask few and if you want, I'll circle back as well. Mike, could you explain how the company reserves the subrogation? Michael Braun Yes in terms of the reserves you see that where reserves have picked up significantly over the last one, one and half years. Subrogations become a hotter topic as of late that we've - hearing in the space. We do pursue subrogation opportunities and then for everyone's benefit, salvage and subrogation is on auto as well as homeowners, when we pay out a claim and there is an opportunity to recover from somebody else or to be reimbursed. So in the auto space, if a car is - we take the rest of the vehicle and car that's totaled. Obviously if we can auction it off and recoup some of the money spent, that's how we operate. In terms of the property space, in terms of Florida, homeowners typically if you have a condo and we have a water loss that originated in other unit, we may pay our individual unit and pursue the other unit. But I would say that, the subrogation those opportunities tend to in the property space average around 1% of claims paid. And if you look at the competitors in the space most people hover around the 1%. We have been actively looking at performing better on that for the last year or so and have assembled the team that we think will move us to perhaps 2% or 3% and we believe that 2.5% to 3%, 3.5% in that range is where is top of the margin that we can achieve. So we're hopeful that we can achieve that in the latter half 2017. So we will pursue it when it's appropriate. Erick Fernandez Sorry the accounting rules on that, do allow you and actually even tell you to reserve based on your expected net offers and claims, net of recoveries from selling suburb so, we definitely as we continue to strengthen that function as Mike just alluded to, it will work its way into our reserves. Douglas Ruth Okay and then, we've heard a lot about AOB, can you tell us what you see from AOB from your perspective and maybe talk about frequency and severity some? Michael Braun Yes sure, Doug. In terms of AOB, it's just, I would say it's a plateaued [ph], we're seeing an uptick in frequency slight uptick in frequency and a slight decrease in severity. Geographically it's spreading throughout the State about two-thirds of the activity is concentrated in tri-county but we're definitely seeing it expand throughout the State. But I would say that, some of the opportunistic behavior that we've seen with some of these folks is being tempered a bit as they've ramped up their businesses and I think that they're showing some reasonableness that we haven't seen in the past, but it's here, AOB is here. It's in Florida, it's unfortunately the legislative session just ended last Friday not only did they not tackle any type of reform for workers [ph] comp or PIP [ph], which is auto, unfortunately nothing was addressed as it relates to AOB. So therefore you're going to see the entire State of Florida its citizens that by policies from insurance companies including Federated National and everyone else is going to increase their pricing because of these costs. So we do have our 5.6% that has been effect since last August. We do have a 6.5% additional which is pending with OIR, the Florida Office of Insurance Regulation that's pending and we're hopeful that will be approved and would like to see that rollout in the market in early August. Douglas Ruth Okay and could you tell or give us some commentary about what you're seeing with reinsurance purchase for the next year? Michael Braun Yes we feel real good about the reinsurance purchase, we're buying a similar type program that we did last year. It's a similar limits because the program has not grown by that much in terms of from last year to the current year. And I think there's plenty of capital that's still in the reinsurance space, pricing appears favorable, could be 5% down. But I don't know that all Florida companies will enjoy that and what we're hearing is, not only from the retail agents where there is a bit of flight to quality within the Florida market where people are getting nervous with dealing with smaller companies because of the noise associated with what Demotech said at year end. So agents are very nervous about that, when you're facing business with a company that has $25 million or less of capital agents are very concerned and it's our understanding that the reinsurers are bit concerned on that as well. So where all insurance companies in Florida have benefited from the ample supply of reinsurance capacity, it appears that some of the discipline is coming to that market and differentiating between the different type of Florida carriers, but we're - we feel that on the reinsurance program that we think pricing at this point appears to be favorable. Douglas Ruth Okay and what can you offer some commentary about the stock buyback? Is the company planning to continue to do this? Michael Braun So we had a $10 million authorized buyback, we exhausted approximately 50% of that and we're - we were active in the market during Q1 and we have a - the board were evaluating that again on a go forward basis, but clearly the stock has been low compared to historical terms and low as it relates to book value, so we think that created an opportunity and that opportunity may present itself on an ongoing basis. Douglas Ruth Okay and then what about, what's happening with Monarch at this point in time? Michael Braun Monarch unfortunately has rolled out very slow. We're behind our production goal significantly but the market has absolutely changed and we have held steadfast on our discipline to write sustainable profitable business. But it's just, it has been disappointing that it's only $13 million book of business here in Florida. However, we think the opportunity for the expansion is approaching based on what we're hearing and seeing in the marketplace and in terms of pricing we've just recently filed four [ph], we've to file on an annual basis, where we certify our rates and our homeowners wise going up approximately 1% and our condo line is coming down approximately 1%. So they're relatively flat, however there is a lot more in the filing then just a flat filing, where we're really trying to make it more competitive not in tri-county, so outside of South Florida. We're trying to make it more competitive but we don't want to chase the market down as the market's coming up. So it's been frustrating that we haven't been able to ramp it up quicker and better, but once again I believe that market is coming to where we are in terms of pricing with Monarch and I thought that would result in more premiums in the latter half of 2016, which it did not, but I think that we're in a similar period. I'm more hopeful that market is coming to us in '17 based on the rate filings that we're seeing with numerous competitors based on the impacts of AOB I believe it will find it's spot in the market better as 2017 progresses. Douglas Ruth Okay and what is happening with your relationship with Allstate and with GEICO how are they've been progressing? Michael Braun Allstates is a huge partner, huge book of business we're very happy with them and there is no change to that partnership or relationship. They're very, they're our largest concentration of sources of policies, their agents. And GEICO is another fantastic partner that we have, that [indiscernible] is coming in Florida and outside of Florida of approximately $175,000 to $200,00 per week nothing new to report on that. We're happy with that partner as well, as well as our other partners. Non-Florida we do have Progressive that comes into book of business in our non-Florida through our MGU and our independents agents we've got a strong healthy relationship with them as well. Douglas Ruth And what kind of production is coming from Progressive? Michael Braun Progressive non-Florida it's pretty small. We're on track that specifically just because it's been on a smaller side, but I would say that it's probably in the $25,000 to $50,000 a week range. But that will pick up more that's an existing partnership like I said that's been coming into our MGU for a bit of time and once again I think they're strong out there, very similar to GEICO with their advertising and they do generate a lot of activity in terms of doing quotes on the auto side. So we're hopeful we can expand that partnership with them. Douglas Ruth Okay and then my final question is, when do you all think you'll hear back on the pending rate increase for the August first state? Michael Braun Hopefully soon. We're very hopeful on that there's been some Q&A back and forth. But we've got no reason to be concerned at this time and I think, we'll hear back in due time and when we do we'll be putting out an 8-K to announce that and once again, I'd like to get that effective August 1 as the old rate increase comes off and I think, mostly be competitive. The five, six and six, five that comes out to 12.1 which is compounded into 12.5. We're seeing many of our competitors catching up a bit right now filing for high single-digit, low double-digit rate increases, so I don't think it's going to inhibit our ability to write business. Douglas Ruth Okay, one more question. In Florida at this point, how much insurance are you writing per week now? Michael Braun Florida, FNIC which Federated National approximately $2 million a week of binders and Monarch $80,000 to $100,000 a week of new business binders which is fine. We're not trying to grow in an adverse market, if the opportunity is not there. So we're happy with the production, the production is significantly less. As you know, Doug then we had years passed but that's not enough [indiscernible]. Douglas Ruth Okay, well thank you for answering my questions. We're looking forward for the next report.

[Operator:]

[Operator Instructions] and our next question comes from Christopher Keppel [ph] with KBW. Your line is open. Unidentified Analyst Was there any reserve development in the quarter? And if so, was that favorable or adverse and can you quantify that by line of business? Michael Braun It really was a very quiet quarter from a development perspective, less than $200,000 overall some pluses or minuses but I don't think there is really all specific attention to. Unidentified Analyst Okay, second question was on the, what would the auto combined ratio be excluding commission income for 1Q? Michael Braun Auto combined, I don't have that at my finger tip. Erick Fernandez Chris, this is Erick. It continues to be roughly sorry 110% and then factoring in as you mentioned the commission income, the five points and the five points for admin fee and the claims handling kind of net-net back to roughly speaking 100%. So it continues to be at a high level around the same number as it's been the last couple of quarters. Unidentified Analyst Okay just switching homeowners, the attritional [ph] gross loss ratio was steady at about 36.1, what drove the unusually high consolidated loss ratio for looking at it ex cap? Michael Braun So one thing you go to, just write-off the top that you need to factor in, is the gross cat loss related to tornadoes that Mike mentioned as part of this highlights and was alluded to in the press release, so that's $5.2 million gross and then $4.8 million net reinsurance, so that's kind of to me the big highlight as it relates to loss ratios as Ron just alluded to from a prior year development perspective we did have some movement across lines of business and across accident years, but net-net it was roughly $200,000 so there wasn't any movement there. Unidentified Analyst Okay, does make sense. Now another question, will your 10% quota share will go away when you renew to your reinsurance program? Michael Braun Right now, we don't anticipate the current reinsurer to renew the terms. So we're expecting to convert it to excess of loss. However we are receiving quotes for quote of share at this time and we're evaluating those and will be making a decision here in the next four to six weeks. Unidentified Analyst Okay and then just one final question on auto. Are you pushing any rates through that book and if so, how big and also what are the average terms for that book? Erick Fernandez Sure, the average term I think I alluded to this earlier is roughly across all the different programs that we have within auto non-standard is six months, right. And then from a rate perspective Mike alluded to as earlier we started up a new program and that starts up roughly essentially has an additional 40% from kind of our old program in the State of Georgia. I think obviously we're starting that program at a much higher premium level, we feel good about not necessarily right this minute but as we look ahead into Q2, Q3 and think about sustainable business, we think that the loss ratio can come down to a good number, that we think we can make money, the reinsurer can make money and all parties can have profitable business there. Unidentified Analyst Okay, well great. Thanks for all the answers. Best of luck in 2Q.

[Operator:]

Thank you. And we have a follow-up from Ron Bobman. Your line is open. Ron Bobman Yes, if I heard I think it was Erick giving some of the details about the auto combined ratio with and without the sort of collapsing of the commission in the - I think I heard you say 5% for claims servicing I guess. So am I right to assume that the auto business was breakeven from dollars of profitability in Q1, 2017? Erick Fernandez Yes, Ron let me add to that net to what I mentioned earlier, right. So yes, it continues to be roughly speaking breakeven. So we kind of talked about there's two parts to auto. There's kind of the insurance side of it and then FNU or MGA side right. So from insurance perspective we continue to have an underwriting loss, but that's made up from FNU or the MGA side we continue to make money. When we kind of combine the two roughly speaking breakeven across you know over last couple quarters, right. Seeing that, we do feel with what we've kind of mentioned earlier about some of the rate increases and starting up the program a little bit higher premium, we can start lowering the loss ratio and give the loss ratio in a place where we can kind of sustain that business long-term. Ron Bobman So what was the exact amount of dollars that was made or lost in the quarter from the auto business excluding investment income? Erick Fernandez If I think about the last couple quarters, it's plus or minus I would say less than $500,000. Let me be clear, on a net basis right because obviously that's there's - heavily quarter share on that business I would say in any one quarter plus or minus $500,000 in either direction. Ron Bobman What was the amount in the first quarter of this year? Erick Fernandez A loss of less than $500,000 I don't have the exact amount, but that's - hopefully that helps. Ron Bobman You're in two businesses, you sell auto insurance and you sell homeowners insurance. Okay, it is an embarrassment that you can't tell your shareholders how much money you made or lost in each of these two businesses. We've been asking for this for over a year, okay and it's completely unacceptable for you to not to be prepared to provide us the amount of profit and loss for these two units, split. And I mean. Ron Jordan Ron, we hear you on that. This is Ron speaking. One thing I'll tell you is, I've been here about three weeks now we definitely hear the asset play for it, there is more going on in terms of a company being ready to publicly disclose that line of business type information beyond just a willingness to do it. We want to make sure that all the infrastructure is in place, all the controls that need to be in place, all that sort of thing and it's something that we're working towards and as that line of business grows, we're definitely heading in the direction being able to give more reporting, but hear you and we're working to be responsive. Ron Bobman I appreciate you answering my question. I recognize you're new. I'm optimistic that you're going to make a meaningful contribution and any frustration and critical commentary frankly is directed at the other members of the management team because we've been asking for this for over a year. And this is not an overly complex mix of businesses with tremendous geographic spread all over the world in different currencies. You're in two lines of business in a handful of States, one core, one not core, neither are performing well and for you to be unable as a company, as a board as an executive management team to communicate dollars of profit with precision for each line of business it's just - it's pathetic and I'm optimistic that it improves obviously you can tell from my tone. I view it is long overdue, so thank you.

[Operator:]

I'm showing no further questions at this time. I would like to turn it back to Mr. Braun for closing remarks.

[Michael Braun:]

All right, well thank you. Thank you everyone who's participating in the call today. And if there's follow-up questions feel free to reach out to either of the three of us. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.