FedNat Holding Company
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Good day and welcome to the 21st Century Holding Company, first quarter 2009 financials conference call. Today’s conference is being recorded. Statements in this conference call or in documents incorporated by reference that are not historical fact are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing words such as may, will, expect, believe, anticipate, intend, could, would, estimate or continue, or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. The risks and uncertainties include, but are not limited to the risks and uncertainties described in this conference call or from time-to-time in our filings with the SEC. Furthermore, the unaudited consolidated financial statements of 21st Century Holding Company for the quarter ended March 31, 2009 have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information and with the instructions for Form 10-Q and rule 10-01 of Regulation SX. These financial statements do not include all information and notes required by GAAP for a complete financial statement and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2008. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) Now at this time I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer of 21st Century Holding Company. Please go ahead sir.

[Michael Braun:]

Thank you and thank you for everyone listening in. Just to give you a brief overview of the first quarter, the financials are out there. We were profitable for the quarter of $0.04 and the overview of the first quarter is that the homeowners line and the general liability line, the two main products in our company. The homeowners’ line has shown significant growth in premium and the American Vehicle, which is primarily the general liability in line that has continued to contract a bit. Homeowners have two different items; the voluntary business that we have, our regular book of business has been fairly stable now for approximately six to nine months. It was contracting prior to that, it is stable and in the last 60 days it’s been growing. The other part of that is the book of business that we have through citizens where we will assume some policies. In the beginning of the year we had approximately 31,000 in our regular organic voluntary book of business and in January we added approximately 4,000, March approximately 4,000, May approximately 4,000 and we are anticipating in June approximately 5,000. That those combined, the book is going to be approximately 45,000, which is about a 50% increase. The book is a different book of business, in the sense that it’s a better balanced book. We’re diversifying outside of the Tri County, more on the west coast of the state and as well as along the east coast of the state for the homeowners. Those policies that we’re interested in tend to model well for our reinsurance perspective. Also like I say, because it’s a better geographic distribution, but with that distribution comes lower premiums in different parts of the state. The policy is right now primarily HO3, which is a residents and an HO6 which is a condominium. In terms of American Vehicle, with the economy the way it is, is that’s depended on contractors and that business has been down quite a bit and that has continued as well in the first quarter. However we see some change coming with that and that we were recently approved with a fronting, where we had an AM Best rated product. That’s something that we have launched; the preliminary is in Texas and as well as we’ve turned Texas back on with our American Vehicle voluntary business as well, which we feel good about. That should reverse the trend where the book has been getting smaller. In Florida, we anticipate that it should stabilize more as we have more marketing initiatives in South Florida where we sell direct. We have two other general agents in the state that sell as well. Such is a brief overview of what we have in terms of those two lines of business. As we move forward, there’s been some legislation that has recently passed in the state of Florida and I think that it’s been fairly favorable for the industry, where the state has taken on a lot of risk in the last two years and it will be moving risk back from the state to the private sector; and that’s going to happen in two different ways. The contraction of what’s called the Florida Hurricane Catastrophe Fund and also what they are calling a glide path of rates, where citizen’s rates maybe increasing up to 10% per year until they’re in an actually sound range. So that’s just some brief highlights of the first quarter. At this point, Pete and I will be glad to go ahead and open it up to questions from anyone that has some.

[Operator:]

(Operator Instructions) Okay. We will take our first question from Ray Dirks with Ray Dirks & Company.

[Ray Dirks:]

Hi. I just wondered if you could talk a little bit better about your book value situation and how you see that developing.

[Peter Prygelski:]

Well, for the first quarter, our book value was $9.51, which is unchanged from the fourth quarter of ‘08 at $9.51 like I mentioned. Obviously, there’s a couple of ways to increase book value and one of them is through our earnings which we anticipate in the coming quarters will be there. The other way is to restock buyback, which we continually look at. It’s been brought up on several calls. Right now, we’re not in a position to do the buyback for several reasons; one, we’re entering hurricane season where we’re preserving cash for that. We are looking at some possible strategic growth initiatives where we might need to infuse some surplus. So, we’re anticipating in the coming quarters as the growth initiative that Mike outlined take hold that it’ll produce earnings and the book value will grow.

[Ray Dirks:]

Okay great. Just to follow up, there’s a target estimate on (inaudible) of $12 by somewhat. I’m not sure who that is. Do you have any comment on who that is or who’s making estimates on what your price might be?

[Peter Prygelski:]

Well, I can tell you that in the past Dutton & Associates put up our price targets. They do that independently using all available information that they have. We don’t endorse that price target. We don’t participate and set that price target; that’s just their opinion.

[Ray Dirks:]

Well, it sounds reasonable for me based on what I can figure out. Thanks, I appreciate your comments.

[Operator:]

(Operator Instructions) We’ll go next to Kyle Packer, a Private Investor.

[Kyle Packer:]

Hi, how are you guys doing?

[Peter Prygelski:]

Hi, how are you Kyle?

[Kyle Packer:]

Good. Just several questions; first of, any visibility into what Q2 earnings look like at this point. I mean your 40 days into it and any idea on what we’re going to be seeing there?

[Peter Prygelski:]

Well, I can comment on two fronts, we don’t give out any earnings guidance, but I can tell you that looking at April, written premiums are up in Fed Nat, still down somewhat and I will tell you that as far as the investment portfolio goes, we’re not fully invested. As you know, at the end of last year, we gave roughly $100 million to outside managers. Of that $100 million, $90 million was put into fixed income instruments, which probably wasn’t fully invested until the middle of February. So in the six weeks in the quarter, we had about $700,000 in interest income, in the six weeks of the quarter. So, I think that our investment yield is going to increase certainly in the second quarter, to probably around 3.5% to 4%, so that’s a positive. Like I said we’re looking at an increase in volume in Fed Nat in April. That’s about all I can say about the second quarter right now.

[Kyle Packer:]

How is the new investment range working out with the outside investment group?

[Peter Prygelski:]

It’s doing really well. On two fronts, where the investment portfolio equities which we only had roughly for about $6 million in equities in the first quarter, and it was rough until about March 9. As you know March 9, the market hit its all time low. Even considering that, the equities are up 5% as of today. As of close of business yesterday, the equities were up 5%. On the fixed income side, we’re really happy. We’re not fully invested yet, only because our fixed income managers feel like rates are going a little higher. So there’s still some cash on the sidelines. As of yesterday, we still had $74 million in cash and $74 million in the fixed income portfolio and about like I said $6 million in equities, but we’re fully diversified on the fixed side, treasuries, high grade corporate bonds, pre-refunded munis. We have about 36% of the bond portfolio in munis and most of those are high quality, a lot of them are pre-refunded munis.

[Kyle Packer:]

You guys seem pretty good, that you’re going to be able to start to get some income off of the investment side of it?

[Peter Prygelski:]

Definitely. Like I said, in the six weeks in the first quarter, on the fixed income side we have $700,000. If you see the numbers, we had a realized loss for the quarter of $500,000, but that was basically in early January, it was kind of holdovers, legacy items that we owned, Nextel bonds that we owned. When Nextel was struggling, we sold those Nextel bonds; just took the medicine and sold them. Then we also got rid of SEA Group; that was the $500,000, but we had no FAS-115 write-downs and we feel very comfortable on the equity side and on the fixed income side, we definitely feel like we’re going to start generating. Like I said, in six weeks we generated $700,000 of interest income.

[Kyle Packer:]

So you feel like you got most of the write-off stuffed behind you at this point? I know there’s no hard guarantee?

[Peter Prygelski:]

There’s no hard guarantee, but what I will say is that our portfolio now on the equity side is well diversified. We’re not sector overloaded in any one sector. On the fixed income side, I feel we have a good balance of treasuries, solid municipal bonds that are pre-refunded and are strong corporates. We also, in that portfolio, I failed to mention before; I don’t know you follow this, but the FDIC backed some of the bonds that the financial companies issued. The rates are a little lower, but they are guaranteed by the FDIC. So yes, I feel very comfortable about it and I believe that the investment committee feels very comfortable in the direction of the investments of the company.

[Kyle Packer:]

And you guys feel like you’re keeping a decent amount of liquidity without a top in to the hurricane season, if maybe?

[Peter Prygelski:]

Like I said, Fed Nat has $30 million in cash for the hurricane season, and so yes, we feel comfortable.

[Kyle Packer:]

I appreciate that. One more question and then I’ll get out of the queue here. April 1 you guys added a new board member to the Board. I’m a little curious about the selection process for that person. They don’t seem to overly have a strong insurance background, nor a strong investment background, nor do they own any shares in the company, and I was a little curious why you would do that, versus go look for a shareholder who may be owned a significant amount of shares, who could best represent the interest of the shareholders?

[Peter Prygelski:]

Well I can comment real quick and then Mike can comment. What felt that we wanted in a potential board member and we went through a nominating process, we solicit input from several head hunters in different venues like that and we were looking for someone that could step in and we wanted to know the financial expert on the board; maybe not so much on the investment side, but on the accounting side. She is extremely strong accounting. Being void for 10 years, she also worked in investor relations at Regions Bank. So I mean that was kind of our thinking and I’ll tell you, on our part, the current make up of our board, we have someone who is very strong in investments, we have legal representation and we have two people that they are very strong in the insurance industry and we just felt that she would balance out the board bringing the accounting knowledge in.

[Kyle Packer:]

Did you guys seek out any of your large shareholders and inquire if they would be interested?

[Peter Prygelski:]

No, we did not.

[Kyle Packer:]

I think that would be an appropriate step next time?

[Peter Prygelski:]

Okay, we appreciate that.

[Kyle Packer:]

Okay, thank you.

[Operator:]

And we’ll take another question from Ted Rally, another Private Investor.

[Ted Rally:]

Hello gentlemen. Would you address your opinion of the dividend activity going forward?

[Michael Braun:]

Well, we obviously made a big change to our dividend last quarter, the dividend is visited each quarter by the Board of Directors and I would say that we’re comfortable where we’re at right now and we’ll be revisiting that every quarter. I would not anticipate a change in the near future; however, that’s a decision the board will make on a quarter-by-quarter basis.

[Ted Rally:]

Thank you.

[Michael Braun:]

Thank you for your call.

[Operator:]

At this time there are no further questions in the queue; however we would like to give everyone a final opportunity. (Operator Instructions) Okay, it appears there are no further questions at this time. Mr. Braun, I’d like to turn the conference back over to you, for any additional or closing comments.

[Michael Braun:]

I just want to thank everyone that has listened in, as well as those callers that have called in. We appreciate your interest in the company. We feel that we’ve been through a transition where we’re going in the right direction. There is some changes that we’ve made in growing our book in some areas, tightening some areas up and we feel that we’re doing right by our shareholders and we appreciate have the opportunity to go and serve our shareholders to the best of our knowledge. So that the premium is starting to turn where we’re in a positive direction; we anticipate that continuing on a go forward basis and we’ll take it from there. So thank you, very much.

[Operator:]

That concludes today’s conference. Thank you for your participation.