FedNat Holding Company
Q1 2010 Earnings Call Transcript

Published: 17 May 2010

[Operator:]

Welcome to the 21st Century Holding Company's first quarter 2010 conference call. (Operator Instructions) Statements in this conference call or in the 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 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 consolidated financial statements of 21st Century Holding Company for the year ended March 31, 2010, have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements do not include all the information in a notes required by the GAAP for complete financial statements 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, 2009. 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. As a reminder, this conference call is being recorded. Now, at this time, I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of 21st Century Holding Company. Please go ahead, sir.

[Michael Braun:]

Good afternoon and thank you for joining us today to discuss our first quarter results. I will review some of the highlights in the quarter and then open up the call to your questions. For the three months ending March 31 the company reported a net loss of $900,000 or $0.12 per share compared to net income of $300,000 or $0.04 during the same three-month period last year. First quarter results decreased year-over-year primarily as a result of higher reinsurance costs in connection with the company’s property line of business. These costs were partially offset by the effects of a 19% rate increase that went into effect in November and also the impact of the new policies written during the fourth quarter of 2009. Gross premiums decreased $1.4 million or 5% to $27 million compared to $28.4 million for the same three-month period last year. Voluntary homeowners’ gross written premium increased $6.9 million or 44% to $22.7 million compared with $15.8 million for the same three-month period last year. The decrease in gross written premium can be attributed to higher reinsurance costs in the first quarter of 2010 as compared with the first quarter of 2009. Net premiums earned decreased $2.9 million or 20.8% to $11 million compared to $13.9 million for the same three-month period last year. Our first quarter results show a decrease from the same period of 2009 primarily because of higher reinsurance costs which is by far our largest expense and the continued effect of the mitigation credits. However, our results improved significantly over the fourth quarter of 2009 due to a number of favorable trends including it was the first full quarter to benefit from the 19% rate increase which has been in effect since last November on our homeowner voluntary business. We expect to build on this momentum for the rest of 2010. Ample capacity has returned to the reinsurance markets which we believe will push down reinsurance costs. In addition we continue to focus on writing voluntary policies based on our underwriting standards which leads to more profitable business. We anticipate the combination of improving industry conditions, decreasing reinsurance rates, disciplined exposure management and the impact of the previously announced rate increases both on our voluntary homeowner’s book and those assumed from citizens will create a strong foundation for future revenue growth. We expect operating margin improvement for the next several quarters which is anticipated to contribute to growth in the company’s book value for the benefit of our shareholders. The main thing as we look at on a go-forward basis is our reinsurance costs. Last year’s reinsurance costs came in at about $52 million for the year. We are anticipating insurance costs to come down significantly for us based on different exposure, based on our management of exposure as well as we are anticipating a softening in the pricing. Thank you. Operator, if I can go ahead and open up the line for questions for Peter Prygelski and myself?

[Operator:]

(Operator Instructions) The first question comes from the line of William Myers – Miller Asset Management.

[William Myers:]

Are you saying reinsurance premiums started heading down in the first quarter or are you saying that they weren’t heading down but you have reasons to anticipate they are going to go down later in the year?

[Michael Braun:]

No, what we do is we have annual contracts that we sign. Those are both with the state which is the Florida Hurricane Catastrophe Fund and also private markets. The private markets we believe there is ample capacity out there which will lead we believe to more favorable pricing. So the reinsurance costs from last year’s contracts, that is July 1 approximately of 2009 through the second quarter, so that is going to be through June of 2010, those costs are fairly consistent. We are anticipating costs effective July 1, 2010 to go down for two reasons; like I said the availability of reinsurance. So just the law of supply and demand. But really our exposure management is different as well. So we are anticipating that exposure will impact the total costs of our reinsurance.

[William Myers:]

Great. So when the contracts renew we may see some downward costs. Could you explain a little bit about what is changing in your exposure management?

[Michael Braun:]

Traditionally we have been a tri-county company; Dade, Broward and Palm Beach. Over the years we have diversified throughout other parts of the state and we are continuing to do so. Traditionally reinsurance is more costly as a percentage of premium in the tri-county area so as you diversify into other parts you have other parts of the state have a less percentage of their premium exposed to that type of expense. That is definitely benefiting us in that regard. Just exposure management, just careful underwriting at the risks we have, we think that is going to have a significant improvement on our financials on a go-forward basis.

[William Myers:]

You say there is going to be more reinsurance available. Do you anticipate using that to write more policies or is that just going to affect pricing?

[Michael Braun:]

Well, July 1 is when we will have our new reinsurance in place. There is a lot that is to be determined. As the market pricing comes to us we may be able to shift some of what we are doing and be more aggressive in our writings. The opposite may be true as well. If it is costly we may be more restrictive in our writing. At this point early indications are there is ample capacity. Ample capacity would lead you to believe rates should be coming down and that is exactly what we believe.

[Operator:]

I am showing no further questions at this time. Sir, I will hand the call back over to you.

[Michael Braun:]

Thank you very much Operator. Thank you everyone who dialed in. We appreciate that. If anyone has further questions they can always reach out to the company. There has been challenging times in the Florida property market. We have made a lot of corrective action in our writings and our underwritings, also our exposure management. We feel there are favorable trends that will be coming through the book of business as I indicated earlier primarily with our reinsurance expense on July 1. So thank you very much. Have a nice day.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.