FedNat Holding Company
Q1 2012 Earnings Call Transcript

Published: 10 May 2012

[Operator:]

Good afternoon, and welcome to the 21st Century Holding Company’s First Quarter Financial Results Conference Call. My name is Amy 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’ll 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 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 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 today, and other filings made by the company with the SEC from time-to-time. Forward-looking statements made during this presentation speak only as of the date on which they are made and 21st Century Holding Company specifically disclaims any obligations to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise. Now at this time I’d 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 to discuss 21st Century Holding Company’s first quarter 2012 financial results. I am joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results for the quarter can be found in our earnings press release. I will go over some brief highlights from the quarter and then Pete and I will open up the line for questions. First quarter net income was $1.1 million or $0.13 per share. Earnings from insurance operations improved to $0.13 per share for the first quarter 2012 compared with $0.08 per share for the fourth quarter 2011 and versus a loss of $0.25 per share in the first quarter of 2011. Book value increased to $7.61 per share compared with $7.32 per share in the prior quarter and $7.09 per share in the first quarter of 2011. Gross written premiums increased by $4.2 million or 15.2%, compared with the same three-month period last year. Continued improvement of the underwriting results, our loss ratio improved to 44.7% for the first quarter 2012, compared with 75.8% for the first quarter of 2011. With that, we are glad to open up the call to your questions.

[Operator:]

(Operator Instructions) Our first question comes from Douglas Ruth of Lenox Financial Services. Your line is open.

[Douglas Ruth:]

Congratulations, Mike and Pete, on a very nice report. I have a few questions for you. I was wondering if you could tell us why you feel the book of business is better today than it was a year ago.

[Michael Braun:]

Yeah, good afternoon, Doug. The book of business continues to have significant improvements. And what's different about the book today is, is that everything that we have been writing in the business for the last couple of years, we have improved our analytics to ensure that profitable policies are coming in. Policies that were in our book of business can become unprofitable for different reasons as we model them. And we have had a fairly robust process of non-renewals over the last couple of years. Those non-renewals have been negated by new business that’s come in, but in 2010 that was about $12 million of premium that was non-renewed which is substantial. 2011, it was another $12 million. In this year it’s about $8 million. And really we see the non-renewals slowing significantly. There will always be some non-renewals but I would say they would be pretty much immaterial after -- on a go forward after 2012. New business has replaced that so the book has appeared to be fairly stagnant over the last two to three years although it has change considerably. And now what we are also seeing is that the volume is increasing significantly. Where we have been around 44000-45000 policies, we are up at about 49000 policies. So we continue to see great demand for our product but we remain committed to the discipline of only writing those policies that we know are accretive to our book of business.

[Douglas Ruth:]

It sounds wonderful. And can you give us an update as far as what's happening with the reinsurance and the reinsurance cost.

[Michael Braun:]

Yeah, absolutely. I said on the last call that we anticipated our reinsurance spend to be approximately $40 million. We stand by that at this point, while we won't know until we truly purchase it which happens from now up until July one. It looks favorable. There’s two things. All of the incumbents on our program have expressed interest to stay on the program. We believe that the pricing will be stable. And on the last call when I said that $40 million, I think it will be around $40 million. Last year’s program at today's prices, meaning the change primarily in the FHCF, that’s the cover that we get from the state. Had we had that same program this year, it would have been about a $44 million spend. So the reason why it’s staying flat as opposed to increasing is because once again we knew what the FHCF was heading generally because of the TICL layer contracting. The TICL layer which is TICL, which is a temporary increase layer. We knew that was coming through. So those policies that were profitable when that was available, in many cases they became unprofitable. So we continue to move in that direction. So in terms of the reinsurance I think we are in very good shape in that regard.

[Douglas Ruth:]

That sounds wonderful. Could you talk about the status of what's happening with Citizens?

[Michael Braun:]

Yeah, Citizens has about 1.5 or 1.6 million policies. I think that the board of Citizens has become much more aggressive in containing the growth. I have seen numbers that they are trying to get it down to about half that size, specifically where they are trying to shed around 678,000 policies. There is different ideas. Currently there is an idea of there to -- well, I should say there is something where they’re waiving off in the ceding commission that was recently enacted by Citizens. But there are some ideas as well to create incentive for the private carriers in the state to go ahead and take some policies. But even if policies aren’t taken out of Citizens, I think the marketplace is changed a bit as well because Citizens prices, those continues to go up just like everyone else. And also what we are seeing is their truly making some big changes to become a residual market. The market of last resort as it was designed to be. They have recently enacted, where to go into Citizens you have to show the proof that you don’t have a voluntary offer that’s no more than 15% in price. That’s something new that used to be in place year ago. So that really creates a demand for the voluntary market.

[Douglas Ruth:]

And do you believe that your company will pick up some of the market share from Citizens now?

[Michael Braun:]

Absolutely. Once again, our volume of quoting has risen dramatically, and I would also say that in the last 60 days we are seeing premium coming in ahead of plan. So I see no reason why that would slow down. Once again it’s quality business. No, I would expect that to stabilize at this higher level. There is always moving elements in the marketplace but things have moved favorably for us in the market.

[Douglas Ruth:]

Okay. Two more questions. What is the status of your commercial general liability insurance at this point?

[Michael Braun:]

The commercial general liability is a program that used to written through general agents. We brought that in-house for the most part gradually from 2009 till 2012. And now over 90% of it is what we call direct to retail. And that’s where we underwrite it versus the general agents. When that program was bigger, some problems came into that program. Bringing it in house and shrinking it, it’s improved significantly. Where that program was really a loss in [LE] in excess of 80%, it’s hovering around 60% and I think it’s performing very well.

[Douglas Ruth:]

That sounds encouraging. With three quarters now of profitability, is there talk about either of starting to pay a cash dividend or consider a stock buyback?

[Michael Braun:]

Well, absolutely. Every Board meeting that we have that is discussed. And we have to look at the needs of the capital within the insurance and within the holding company and also the desire to give a return back to our shareholders. So I can tell you that a robust conversation did occur and this most recent Board meeting we have not declared a dividend. But once again we continue to look at the opportunity of utilizing the capital effectively in the company and we are on that side. At this point we know, the Board knows that there is a strong desire for a dividend and I believe that will come at some point. I just can't tell you specifically but you have mentioned on a few calls and I know it’s important to you and it’s important to other shareholders. So we do continue to balance that between the two. It’s important that we have the capital and we use it wisely but also any capital that we can return to shareholders we know is what our shareholders want.

[Douglas Ruth:]

Okay. You have done a wonderful job and thank you for answering my questions.

[Michael Braun:]

Thank you for the questions, Doug.

[Operator:]

(Operator Instructions) Our next question comes from William Meyers of Miller Asset Management. Your line is open.

[William Meyers:]

Hi, and also congratulations on the quarter.

[Michael Braun:]

Thank you, William.

[William Meyers:]

Yeah. And that was a great set of questions from the previous analyst. I would like to follow up on the last question. Just if it’s possible to get any color or if you could help us understand how much of your cash is really required through -- because of state regulations that you really have to keep it against possible future payments. And how do you -- just a little color on how does -- without telling us when you will make the decision, on how the decision might be made. What are some of the variables that go into that decision, if you don’t mind.

[Michael Braun:]

No, absolutely. And I think Pete can give you better numbers on that, but generally speaking there is two different types of capital that we have. Statutory capital and free capital. The statutory is within the holding -- I am sorry, is within the insurance company and is fairly restricted. And currently that’s where the -- obviously that’s where the majority of the capital is. Outside of that is capital in the holding company, whether it’s with the MGA or agency or the adjusting company. That would be available for dividend. One of the items that we have looked at is to have a captive in-house. And what I mean by a captive is, some of the others in the marketplace, they are able to retain a lot more risk and issue a special dividend at the end of the storm season assuming there has been no storms. So we are paying on some of our lower layers of our reinsurance program. Let's just say 50% to 60% rate online for some of those covers. Some of our competitors are unable to retain that and on completion of the storm season do a special dividend. So we are looking at that as an idea that would require capital. There is some other strategic initiatives that we are looking at that would require some capital. So it is balancing act. In terms of the actual amounts, you know like I said the vast majority of the capital that we have is statutory capital which would not be available for options without the OIR’s approval but capital outside the insurance company would be.

[William Meyers:]

Okay. That was really helpful and I appreciate your taking my question.

[Michael Braun:]

Thank you.

[Operator:]

(Operator Instructions) I’m not showing any additional questions in queues, sir.

[Michael Braun:]

All right. Well, thank you very much for everyone of you that has dialed in and also specifically to Doug and William for the questions. Just one other note that I want them put out there is that we are actually looking to change the name 21st Century Holding Company. That would be something that would be coming out in our proxy in the near future. We are looking at changing it to Federated National Holding Company. And the reason for that is really is that’s how we conduct business for the most part. Not many people really know us as 21st Century Holding Company. So I think it just kind of clarifies a bit of our marketing initiatives and some of our branding. So that’s something that will be coming out to shareholders in the near future. In terms of the marketplace we continue to see great opportunities for writing business, yet we remain committed to being disciplined to writing good business. We have got great risk management, great underwriting, great marketing, great claims handling, a great company all the way around and we are going to continue to operate in the best interest of our shareholders and policyholders. So thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.