FedNat Holding Company
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good afternoon and welcome to Federated National Holding Company's First Quarter 2015 Financial Results Conference Call. My name is Candice 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 the question-and-answer session [Operator Instructions]. Statements in this conference call, that are not historical fact, are forward-looking statements. Without limiting the generality of foregoing words, such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibly, potential, predict, probably, pro forma, project, seek, should, target, or will, or the negative 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, 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 on the date on which they are made, and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements reflecting new information, future events or circumstances, or otherwise. Now at this time, I would 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 today to discuss Federated National Holding Company's first quarter 2015 financial results. I'm joined on the call by Pete Prygelski, our Chief Financial Officer. Our financial results can be found in our earnings press release. I will go over some brief highlights and then we will open up the line for questions. Highlights as measured against the same three-month period last year accept or noted; 46.9% increase for the homeowners’ policies to approximately 196,900; 31.6% increase in gross premiums written to 106.7 million; 14.6% increase in gross book value per share to $16.19 as compared with $14.13 at December 31, 2014; 10.2% increase in net income to 9.3 million; net income of 9.3 million includes 1.7 million of accrued income resulting from the quota-share agreement that became effective July 1, 2014. The income we will ultimately earn under this agreement is contingent upon certain criteria specified within the agreement and this accrual could be reversed under certain circumstances. We are pleased to report another successful quarter in which our partner agents down 42.1 million of new Florida homeowner business with Federated National. We recently announced in March that Monarch National received its Certificate of Authority and are happy to report that our partner agents have already begun binding new business with us during April. We continue to build the Company for the long-term by investing in our staff, partner agents, products, controls, infrastructure, and technology to support our continued growth. We have an outstanding and dedicated team of 256 employees that take great pride in continuing to deliver the great service and value that our partners have come to expect from us. With that, we are glad to open up the call to your questions.

[Operator:]

[Operator Instructions] And our first question comes from Arash Soleimani of KBW. Your line is now open.

[Arash Soleimani:]

So couple of questions, can you, Mike, to start off, talk about whether you saw any change in frequency or severity of Tri-County water losses?

[Michael Braun:]

Tri-County is not a big portion of our book it’s about 19% of our exposure. Our number one losses, typically are water related, historically they’ve been over 50% of our losses. We’re not really seeing any unusual trends in terms of the frequency of those type of claims coming in. So, we’re getting water losses as we always do. It’s a dynamic environment with the water losses in terms of how those are handled with different contractors and so on but they continue to be our number one loss that we received from a non-wind perspective, what we call AOP, from those typical claims that we got.

[Arash Soleimani:]

Okay, so nothing unusual this quarter?

[Michael Braun:]

No, there is nothing unusual.

[Arash Soleimani:]

And then for Pete a couple of questions. Number one, what was the gross premiums earned in the quarter?

[Pete Prygelski:]

Gross premiums earned in the quarter -- I'll take it back to you on that. The gross premiums written was 106 and net premiums written was 80, I’ll give you that number.

[Arash Soleimani:]

And the other question I had for Pete, can you talk about the loss ratio. That went up quite a bit year-over-year. Is that just related to I guess the reinsurance accounting flowing through?

[Pete Prygelski:]

Sure. Let me start off with general statement and I think we’ve said this on prior calls that we target a lot. Now that we target but our loss ratio, our net loss ratio over a 12 month period, we assume that we’re going to hit around 50% loss ratio on a net basis. So, if you’re comparing this year-over-year I think less than 48 this quarter was 53. And the reason is simply this with the quota-share we’re ceding 30% of our earned premiums. So the denominator in that equation is reduced by 30%. We’re not actually ceding 30% of the losses. There is a lot of accounting behind how we exceed the losses in the quota-share and it’s based on incurred. So over the course of the quota-share program, we will wind up ceding 30% of the losses. But there is just -- it varies from quarter-to-quarter. So one quarter you will see that we will see 30% a little less and when the program ends we will see 30%. So I guess the bottom line is, and what I want to stress is that, 50% is a normalized number. So the 48 was a little better, the 53 was a little worst. But the normalized number that you can expect is around 50% over 12 month period.

[Arash Soleimani:]

When you say it was based on incurred, did you mean it’s based on paid or based on incurred?

[Pete Prygelski:]

It’s based on paid and case based. There is a change in case reserve and change in paid patterns, so not general IBNR, not full IBNR until both pull the IBNR and goes to case and then goes to paid, it’s not being exceeded. But we’re still reserving a 30% -- we’re still reserving that number but until move the case, it’s not being exceeded. But like I said there is a lot of accounting behind that. And so, at the end of the day, two or four months cycle, it’s going to even out.

[Arash Soleimani:]

Okay, so would it be fair to say that the loss ratio in reality didn’t actually I guess increased year-over-year to the extent that it showed up this quarter or is that little more of just like an issue?

[Pete Prygelski:]

I will say this. I mean look at last year same period, but I will say that our gross incurred, our gross incurred before ceding, between the fourth quarter of ’14 and the first quarter of ’15, was flat. So, I think that proves the point that it’s just the accounting with the quota-share and ceding of losses because the gross incurred was exactly the same or profitably.

[Arash Soleimani:]

And do you have that change year-over-year also of the gross incurred from 1Q ‘14 to 1Q ‘15?

[Pete Prygelski:]

I’ll get that for you. I don’t have it right here, but I can get that for you.

[Operator:]

Thank you. And our next question comes from Samir Khare of Capital Returns Management. Your line is now open.

[Samir Khare:]

I just wanted to -- just the pace of your writing as you guys, I think you said $42 million of new business. First question is how much of that came from Monarch?

[Michael Braun:]

Zero for Monarch, Monarch went live in the month of April. Monarch is going to be a kind of a slow rollout. Literally, we have 30 policies that have been bound with Monarch in the month of April. It’s going to be a slow rollout as we go through 2015. I think really that’s more for future growth. But as we progress through the year I’d say we’ll definitely pick as the agents have it and it enters the marketplace.

[Samir Khare:]

So just looking at 42 million where it sits up and using a 13 week quarter, that’s more than 3 million per week that you guys have sided before. Can you confirm that calculation? And then on top of that, can you tell me if that was front loaded during the quarter, if that’s gaining momentum, so it’s backend loaded?

[Michael Braun:]

Your math is correct. That’s bond. So typically let’s just -- that bond had a clear underwriting, so let’s say 90% of that will clear underwriting, or 85%, whatever that might be. But in terms of -- is it ramping up or ramping down that math is pretty, I would call it, flat in that regards. It’s been there for quite a while. So, we’re seeing it relatively flat but versus prior year new business coming in is down slightly policy count. So, business down first quarter of ’15 it is down slightly new business that was down first quarter of ’14. So there is a slight change to that.

[Samir Khare:]

And you alluded just before, Monarch down but it’s kind of up in a while. Do you guys have some kind of idea, there is a perception the traction from agents and what you could possibly right. I mean I know you had an 8-K end of last year I think.

[Michael Braun:]

We put out some, and we got that question quite a bit, we wanted to make sure that we got those numbers out so we’re kind of working into their model. We don’t know exactly what Monarch will do. However, we have high expectations. I think that Federated National is very well in homes that are well mitigated, which are newer construction and so on. And that will saturate that portion of the markets. Federated National’s growth I anticipate slowing down at some point, whether it’s in ’15 or ’16 or in ’17, we really don’t know that. However, I think Monarch is entering the market very well. It would be much more competitive in those risks that are not as well mitigated that require more reinsurance, which means they require more premium I think Monarch will do very well at that. And I would say that, that’s a much bigger segments of the market than those homes that are well mitigated. And we’re underweight in that category of the market.

[Samir Khare:]

Okay. Once the policy acquisition costs, they were quite lower this quarter. And I know you guys had some accounting funkies booked from quarters before. So is that what's going on this quarter as well or is that?

[Michael Braun:]

Sure, I mean, there is two things that happened with the deferred policy acquisition cost. In the quarter, we had -- we benefited from the quota-share because we’re getting a 25% commission on what we cede every month and then we’re advertising that out over year. And also we made change some of it -- we had a change in some of the commission, the way we pay our Texas auto commission. The commission was previously being paid by our MGA and it’s being paid by the insurance company, so it’s no longer going through DPAC so that was about $1 million benefit to DPAC. Although, on a consolidated basis, you really don’t see it because FNIC had a $1 million additional expense, and DPAC was down $1 million. So on a consolidated basis, it was zero. But when you look at DPAC here, you’re seeing $1 million not there benefit and the expense hit FNIC.

[Samir Khare:]

And so going forward will it be kind of more of this 5% level or will it be more on a 7% level?

[Michael Braun:]

No, it will be more on 7% level, that 2 points was because of that, it will be more on a 7% level.

[Samir Khare:]

And just three metrics, if you can give me policies in-force, the surplus, and I guess both the subs each and the cash in holdco?

[Michael Braun:]

The statutory surplus at the end of the quarter was 130 million. And then you’re saying our policies in-force, we just crossed over 200,000 Florida -- Federated National, Florida homeowner policies. Obviously, Monarch is coming on line a bit slow and statutory catch -- cash at the holdco?

[Pete Prygelski:]

Cash at the holdco, and Samir we invested in Monarch in the first quarter as well as we put money into Federated National Insurance Company, which was -- we did it February. But -- so we ended the first quarter at $32.7 million of available cash in holding company.

[Samir Khare:]

And on the $30 million of surplus that’s for both subs or just Fed Nat?

[Michael Braun:]

That is Fed Nat.

[Samir Khare:]

Okay, and then Monarch commission there?

[Michael Braun:]

Monarch has $30.7 million.

[Operator:]

Thank you. And our next question comes from Ryan Byrnes of Janney Capital. Your line is now open.

[Ryan Byrnes:]

Just had a quick question, tax rate looked a bit early this quarter. Just want to see if that’s any one-timers in there, or is that some sort of -- or should we expect that going forward?

[Pete Prygelski:]

Ryan it’s Pete. The tax rate going forward is going to be about 38%, 35% Federal and about 3.08% for state and local. So, last year’s tax rate annualized was 35%. We benefited from -- we filed our 2013 tax return, September of 2014, there was an adjustment to our benefit, which went through income tax, it was a contra expense, went through income tax expense in the fourth quarter which lowered our tax rate in fourth quarter to 29%, which maybe annual tax rate 35%. But that was a one-timer. So this is a more normalized tax rate going forward. And I will say that year past we had NOL. So, any true-ups to the return, Ryan, that’s going through the balance sheet increasing or decreasing the deferred tax asset. Well, since that’s gone now, any adjustments or true-ups are going to run through income tax expense, either as a benefit or not. But we believe that this 38% is the number of the project.

[Ryan Byrnes:]

And then my last one, obviously this is kind of the last time we get to talk to you guys before you guys buy your reinsurance at July 1. I realized we’re still two months away. But any thoughts on pricing for you guys or maybe limits or any change to structure for you guys?

[Michael Braun:]

Ryan, last year we bought about 1.6 billion, which is lot of reinsurance this year we’re going to be buying, I believe, in excess of 2 billion, probably -- it's a moving number but it could be around 2.5 billion. Single event would be, let’s call it, roughly half of that. So, let’s say 1.2 billion or 1.3 billion. It really depends on a couple of things. In terms of pricing, there is clearly a lot of capital out there. Capacity is robust. There has been public statement in the past that I believe Aon and Guy Carpenter saying that they see pricing going down. We’re in the middle of those negotiations so we don’t know where pricing will be until we actually ink those deals, which will be over the next two to four to six weeks, depending on how the renewal goes. But there is clearly ample capacity. It’s just a matter of -- the pricing matching up with the supply and the demand.

[Operator:]

Thank you. And our next question comes from Doug Ruth of Lenox Financial Services. Your line is now open.

[Doug Ruth:]

Congratulation on a good report. And thank you for the disclosure that you’re giving us. Could you tell us how much insurance is in fact at the end of the first quarter? What the market share is that you have?

[Michael Braun:]

Well, if you use that, we’re at about 350 million. And the whole, industry as a whole, one of the latest number that I had was about 9.6 billion. So I think they’re talking high single -- high 3% market. I would say we’re fast approaching 4%. So, there is a long run one way ahead of Federated National.

[Doug Ruth:]

Okay, so as you said -- you are saying it’s 350, even?

[Michael Braun:]

Well, I have to compute it for you. But I mean the market -- I wouldn’t say that the 9.6 billion is a stable number that lose from time-to-time. But we’ve crossed over 350 million during the first quarter of in-force. So it’s just a matter of what that 350 million is, but 350 million against the 9.6 billion we’re sure that it’s about 4%.

[Doug Ruth:]

It looked like the investment income possibly is a little lower in the first quarter. Could you maybe tell us a little bit about the bond strategy, and what you’re seeing there?

[Pete Prygelski:]

Yes, Doug. Hi, it’s Pete. Just as money we shifted some money to short-term. We continue to shorten the duration in anticipation of rates rising. And I’ve been saying that, we’ve been saying that now for 18 months, and rates haven’t risen. But we still believe it’s the right -- it's the prudent course of action to keep the durational low, give up some yield, but not take the duration risk, because like -- that really could hurt comprehensive income. So we’re just not going to take the duration risk, we’re going to just going to bite the bullet on yields.

[Doug Ruth:]

I think that that’s the exactly right strategy and encouraging. Congratulate you on having the courage to do that. And thank you for that.

[Michael Braun:]

We appreciate that.

[Doug Ruth:]

It looked like you had ramped up the employee count pretty good in the first quarter. Could you offer any comments on that?

[Michael Braun:]

It’s a steady process. We kind of drove that. We had 20 open positions two years ago, and we still have 20 open positions today. We still have 100 plus positions in between those 2 points in time. We steadily increase our staffing. We think that we are attractive in the marketplace to bring in, not only skilled people but also we really take pride in how we develop people in-house and bring people in that are new to the industry and develop them through the ranks, both on the underwriting and the claims side. So you’re going to see the continued expansion of our staff absolutely throughout the remainder of the year.

[Doug Ruth:]

Could you give us any further color on Monarch? Is there anything that’s happening that we should -- the investment community, should know about?

[Michael Braun:]

Well, the big reason is just to understand why we created Monarch. And the reason is that we believe we’re underweight in the biggest piece of the Florida property market. And that is those homes that are not as well mitigated. So, when I say mitigated, when you think of a house that’s built, making sure that the walls are sharp to the roof and the structure of a roof, both are important things. So, with Federated National, we find that we’re very competitive in that space. You don’t need as much premium to right those types of risks because when the wind comes through, they’ll be less damage to it. There is a lot of great risk out there that require additional premium to buy additional reinsurance. So, we believe we’re very underweight in that space. Once again, I believe Federated National, at some point, will saturate its position in the mitigated space. At 350 million, we’re not there today. Where does Federated National slowdown its trajectory of growth, it could be at 400 million, 500 million, 600 million, somewhere in there, we don’t know. But we think there is an incredible opportunity as we expand our products with Monarch to serve that market where we are underweight. And I think we are well received. That’s the same distribution. It’s the same agents. And I think they appreciate all that we have to offer from the transparency of our Company to the robust reinsurance programs, to the high quality of service, to our claims paying process, to the ease of use. People want to play this business with us and were very proud of that and we’re happy to be able to give them another product. We’re intentionally holding back Monarch a bit out of the gate. We want to make sure it’s done correctly. So you will see that it will ramp up gradually through 2015. But the intention is really to launch it correctly. And we’ll modify it as needed. And I think you’re going to see much more of a ramp up in the latter half of this year, but really into 2016 and beyond.

[Doug Ruth:]

Allstate be selling Monarch?

[Michael Braun:]

Currently Federated National is the only one, that’s in all states. Monarch is not in all state as we sit here today.

[Doug Ruth:]

And then is there some sort of buyout opportunity that at some point, Federated to buyout their partners from Monarch?

[Michael Braun:]

Yes, first and foremost, we have two great partners on that; Crosswinds is a fantastic organization, as well as TransRe. So as we sit here today, we’re delighted to have them and we really think we’re better off because of them. Absolutely, there is an opportunity at some point to determine the value of that and for the ability for Federated National holdco to acquire that, or to the other parties to acquire that or perhaps for that to be sold in the open market, whatever that may be. But we personally have great interest in that and the success of Monarch and are very bullish on what we can do with that and are very appreciative of those two partners. So many years down the road we’ll determine what the course of action is with all the partners. But for the next, I believe four years, is the way the agreement is written. We’re very happy with the partnership we have and we’re going to grow that into a very nice insurance company with a sizeable book that we believe will be very profitable.

[Doug Ruth:]

I am very grateful that the two of you are doing it the right way. You’re slowly and carefully making decisions. And it’s really nice to see how well you’ve positioned the Company. And thank you for the great report today.

[Michael Braun:]

Well, thank you, Doug. And just as a reminder to you, you’re only talking with two of the folks and there is 254 people behind us and they’re really the people that make is happen so -- but thank you very much.

[Operator:]

Thank you [Operator Instructions]. And our next question comes from Arash Soleimani of KBW. Your line is now open.

[Arash Soleimani:]

Are you on the retention going forward? Have you kind of thought about what might change to?

[Michael Braun:]

The retention on the cap program you’re referring to?

[Arash Soleimani:]

Yes, on the cap program.

[Michael Braun:]

Last year, it was 1.2 million and this year we’re anticipating that it will be probably 15 million.

[Arash Soleimani:]

Okay.

[Michael Braun:]

So, let me clarify this, let me start with what this amount say. So the tower will be in excess of $1 billion, whatever storm would hit us, whether it’s 100 million or 1 billion, we’re anticipating with $15 million retention that we’d be responsible for the first $15 million of that storm.

[Arash Soleimani:]

And I know someone had asked before about the Allstate Monarch potential partnership. And I know they don’t have partnership now. But is it something that, now that Monarch is sort of up and running, but the conversation is starting. And I guess what are your thoughts it, whether you think it’s a likely partnership in that?

[Michael Braun:]

I think we’ve a great partnership with Allstate. And our intention is just to rollout Monarch slowly. Allstate has huge distribution and I think they appreciate all that we do and at the appropriate time, both discussions will take place. And depending on Allstate’s desire for that product and our ability to match those terms, we’ll determine, if and when, it goes out through Allstate. But as we sit here today, Federated National and Allstate, Monarch is only with a few 100 agents right now that will continue to go to more and more agents, it will eventually match all of the Federated National agents. But we want to make it’s kind of like testing a new vehicle any other engine or anything else. You want to make sure it’s working correctly before you wrap it up too quick. It’s much easier to correct challenges in the program before you ramp it up too much. So we’ve being grateful with that and I think you’re going to see that’s the case throughout 2015 as we gain more and more confidence in and then at all of our assumption, and everything that we’ve done with the program are proving to be correct.

[Arash Soleimani:]

And I know with Monarch you’re keeping 42% after you back-out the minority interest. But the MGA fee, do you keep 58% of the MGA fee, is that the right way to think of that?

[Michael Braun:]

We are the MGA. So, generally speaking that we get 7.6% as our MGA, so within Federated National Insurance Company, it kind of washes out with the holdco. But in terms of -- if Monarch rates $100 million or squeezing that, our MGA would get 7.6% premium. Of the premium to right 8 plus also the MGA fee which is $25 per policy.

[Pete Prygelski:]

And Arash, Mike is 100% right. On the cash flow, we’re keeping 7.6%. But if you want to look at it out on a GAAP basis because we own 42% of Monarch -- we in fact own 42% of the expense. So on an income statement standpoint if you wanted to net the two, you could look at it your way because that’s the way it’ll flow through the income statement. But Mike is exactly correct. On a cash basis, we’re getting 100%.

[Michael Braun:]

The answer to your other question, you’ve asked earlier about gross premiums earned. And it was 95.7 million, just so everybody on the call has that number.

[Arash Soleimani:]

95.7, okay. And did you see in the year-over-year on the gross and current loss ratio?

[Michael Braun:]

No, I didn’t get to that. We’ll talk about that later that’s little more involved.

[Operator:]

Thank you. And I am showing no further questions at this time. I’d like to turn the conference back over to Mr. Michael Braun for any further remarks.

[Michael Braun:]

I just want to thank everyone for their time today. So unfortunately there is no more question because we really enjoy what we do with the Company and sharing it with our shareholders and all of our partners out in the state. So, thank you very much for your -- the questions that we did get and the interest. and if there is any follow up questions, Pete and I are always very welcoming to call. So please don’t hesitate. So with that, have a great day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Have a great day, everyone.