FedNat Holding Company
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good afternoon and welcome to the Federated National Holding Company’s Fourth Quarter and Year-End 2015 Financial Results Conference Call. My name is Nicole and I’ll 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, 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 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 of which they are made and the Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances otherwise. I would now like to turn the conference over to CEO, Michael Braun, you may begin.

[Michael Braun:]

Good morning and thank you for joining us today to discuss Federated National Holding Company’s fourth quarter and full year 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. 2015 full-year highlights as compared to 2014 full-year, except where noted, include 32.9% increase in Florida homeowner policies to approximately $243,000. 30.9% increase in gross-written premiums to $493.8 million. 28.6% increase in book value per share, including non-controlling interest to $18.17 and a 19.3% increase in book value per share, excluding non-controlling interest to $16.86 compared with $14.13 at December 31, 2014. 9.9% increase in net income attributable to the Company’s shareholders to $40.9 million. Our business continues to demonstrate strong momentum with solid organic growth in both written premiums and policy count. This organic growth truly reflects the hard work and dedication of our employees and the trust that our partner agents have in our organization. While the Florida property market is becoming more competitive, we remain focused on providing best-in-class service to our policy holders and partner agents, which continues to generate significant goodwill in the marketplace. In addition, we have recently filed for a rate decrease on Mono National’s program, which, if approved, we believe will be very well received in the Florida homeowner’s market. Finally, I am pleased to announce that the Board has approved a dividend increase of 20%. The dividend of $0.06 per share will be paid on June 1, 2016, to shareholders of record as of May 2, 2016. This action reflects both our commitment to returning capital to our shareholders and the Board’s confidence in our business plan. With that, we are glad to open up the call for your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Ron Bobman of Capital Returns. Your line is now open.

[Ron Bobman:]

Hi, good morning, gentlemen.

[Michael Braun:]

Good morning, Ron.

[Ron Bobman:]

I have a few questions. If it gets too long just I’ll circle back. My first question was on assignment of benefits and the incidence of assignment of benefit claims. I was wondering if you could sort of discuss the trend in the incidents at AOB and what I’m sort of asking is, if you look at sort of the incidents of AOB submissions in the fourth quarter, let’s say of 2015, how did that volume compare to the third quarter versus the second quarter? Or some other intelligent sort of metric that gets a trend. Thanks.

[Michael Braun:]

Sure. The assignment of benefits is something that’s been ongoing in Florida for the last few years. And there’s been a lot of press from Citizens, which is the state residual market about the impact that they’re feeling from assignment of benefits. We’re feeling it, but nowhere near to the way they’re feeling it. And, for everyone’s knowledge, assignment of benefits, typically when an insurer calls us with their claim, we can resolve the matter pretty quick and in the most economical manner because we have preferred vendors that we can dispatch. Assignment of benefits is the introduction of other outside vendors that can increase the cost of a claim. So in terms of frequency of claim, we’re seeing a slight increase. But really, it is the severity on those that have assignment of benefits that we’re seeing. So typically, as we’ve indicated in the past, we anticipate our losses to run around 50%; and you’ll see that, for the year of 2015, it came in approximately 50%, but you will see that Q4 had an uptick. Q4’s uptick was a result of what we saw as we came to the end of the year, which, looking back at Q3, we saw an uptick, and Q4 a bit of an uptick, but not as high as Q3. Really, what we anticipate and what we believe though, that data indicates is, that assignment of benefits is out there, which we’ve had for a number of years. But also, as you may recall, we did not have our analytics in place from June through November, so for approximately five months. And I would say the quantity of business that came in was higher than what we originally anticipated when, while we had the rule’s made underwriting in place, clearly, clearly some business, that we would not normally have written, came in and we think that had impacted it, as well. So, I don’t know how deep you want me to go into the assignment of benefits, but that is the overview for you, Ron. Do you have any–?

[Ron Bobman:]

No, I was looking for more specifics and just sort of back to my question. I was trying to get an idea of the trend. So I presume that, I understand that the – quite possibly the correspondence you received from the lawyer or from a contractor isn’t headlined with assignment of benefits, but I assume, to some degree, you track either claims or context that you believe have an assignment of benefit associated with them. So I’m trying to understand, is the volume of this assignment of benefits incidents increasing; is it accelerating; is the rate of increase slowing; is it plateauing? Do you maintain some degree of a metric that says, we’ve got so many new claims in the fourth quarter as compared to the third quarter as compared to the second quarter of 2015? I’m trying to understand; is it getting worse as far as the new submissions of AOB claims, or stable, albeit higher than, of course, you want it to be, but I’m trying to get an understanding of the trend.

[Michael Braun:]

Sure. In terms of frequency of claims in our Florida homeowner’s book, we are typically approximately 2.5%, so 2.5% of in-force policies may submit a claim; and that was typically below that, just a little bit. And now we are seeing frequency a bit above it. So like I say, frequency is not really moving much in our book of business. However, the severities within those claims that have assignment of benefit, there is an uptick. So we are seeing some uptick. I would not call it a dramatic increase. But I would call it a bit steady over the last few years. And I think that the benefit in the marketplace, from other costs that have come down, have impacted the rates so the rates have not had to go up. And what I mean by rates is our primary rates. So the savings perhaps from reinsurance is new to the impact of assignment of benefits. Right now, we have a pending rate filing for Federated National where we’re asking for a 5.6% increase on a premium in Florida. And part of that is the impact of assignment of benefits; and once again, as AOB impacts claims, that cost goes into our rate-making formula and that impacts what we do with our filings. So we absolutely track it. We don’t see frequency impact growing exponentially. However, we are seeing continued increase in the assignment of benefits; but, once again, it is not a dramatic increase. So you will see that our AOP, all other perils, increased in Q4, but that was – I don’t anticipate that will stay at that rate through 2016. There was a combination, as I say, from the lack of analytics and, I think, from the higher quantity of business, as well as the quality of business that we were not normally receiving. And now with our analytics back in place, I’m confident that we are right in the business that we are comfortable with.

[Ron Bobman:]

Thanks for the attempt at answering my question. I appreciate your thorough response. Just jumping over to the analytics and then I will circle out of the queue and get back in. So obviously, as you said, you wrote more business because of the lack of analytics for a certain period of time. Was it geographically – what was the profile of the increased volume that you weren’t otherwise expecting to write? Was it geographically-weighted in a certain area? Was it a home aging or roof aging of a varying degree, or is it really just sort of a broader spread across your geographic footprint and class of home and was simply just more of what you already had? Or was weighted in a certain class or geography? Thanks.

[Michael Braun:]

It is more granular than that. And I cannot say that one part of the state geographically increased more than any other area or a type of risk, construction type, increased more. There was a combination of things. So when you put construction type in certain areas of the state and then, where you also have concentration that we may have in that area, so there is a lot of pieces that move within the integrated fashion that can impact that risk’s profitability. So, in other words, a risk in one part of the state may be more or less profitable than another part of the state. So to answer that, it’s not single area. It was basically that we operated a very granular basis and an overly generalistic statement on the analytics is, is what we do is we ensure that our three costs, which was acquisition, reinsurance and AOP, which is all other perils, that’s a typical type claim, that those costs are correlated with the premium that we are getting for that risk. So there is no one area that stands out, Ron, in terms of what we saw when we didn’t have the analytics, but it is a combination of things that brought the business in.

[Ron Bobman:]

Thanks gentlemen, and I will circle back. I appreciate it.

[Michael Braun:]

Thank you.

[Operator:]

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

[Ryan Byrnes:]

Thanks. Good morning everybody. Just to focus a little bit on the analytics discussion. Can you guys maybe just quantify what the impact was in the quarter, and also maybe with our catch-up provision as well? I’m just trying to figure out, again, how the analytics will impact the net-loss ratio going forward as that premium earns through in 2016.

[Michael Braun:]

Yes, there is a couple things, Brian. We do an analysis at each quarter’s end, and more thorough, multiple times throughout the year of our book of business. So we are very comfortable where we were at Q3, but, once again, closing out the year with new information from Q3 and Q4, we saw a bit of an uptick. So Q3 was a little higher than expected. Q4 was less than Q3, but a little bit higher than expected. So, once again, it was an opportunity for us to bolster our reserves, which is about $90 million of bulk and case reserves, which we are very pleased with the quantity of reserves that we have on our business. So, you saw a bit of an uptick, but for the year, once again, as we have stated, was approximately 50%, where we typically tend to be. And going into 2016, we anticipate 2016 being near that, as well. There’s always going to be some volatility from quarter-to-quarter, but we believe that we can maintain that ratio on a go-forward basis, subject to some volatility than individual quarters.

[Ryan Byrnes:]

Okay. But from an absolute impact, in terms of millions of dollars, can you break that out at all, or is that just not possible?

[Michael Braun:]

Yes. We don’t have that available. If you would like to circle back with Pete on that in a more granular basis. But, once again, I would stress that the 50%, which has been a bit where we’ve been operating on historical, we think that we are going to continue pretty close to that.

[Ryan Byrnes:]

Okay, great. And then just quickly shift over to the Monarch discussion. Can you maybe talk about what type of rate decreases you filed there and basically when you expect to hear back from the OAR and when we should expect that and maybe, when we should expect that to top line to show some growth?

[Michael Braun:]

Sure. We filed for the rate decrease of 12% in December. Hopefully we will be hearing back from them shortly. I would like to see that approved, hopefully, approved and deployed in the second quarter. Now, it might sound counterintuitive that Federated National has a pending rate increase of 5.6% and Monarch has a rate decrease. So I just wanted to remind you and everyone, we intentionally came into the marketplace with Monarch very gradually and those rates were a bit high. And we knew they were high coming in, in the sense of, compared to the marketplace. So what we are doing is using industry data a year after the filing here, coming up, Monarch was approved back in April, and that will make us – we are very comfortable with where those rates are that they can be profitable and sustainable and also very competitive in the marketplace. So it's hopeful that we can get that deployed in Q2, which I think is reasonable, at this point. I have no reason to believe it's not. And I think that's will ramp up quite a bit in the third and fourth quarter. We have high expectations for Monarch and that's a very good program, very good coverage for our insurance and I think it will complement Federated National quite a bit. So, I think the second half of the year we are expecting it to ramp up quite a bit from where we are now.

[Ryan Byrnes:]

Okay, great. Just my last one, I will requeue, is the new business growth in the third-quarter, obviously it is a little bit higher than some were anticipating, and I'm guessing that is probably because of the analytics? So I just wanted to get what the new business run rate is, maybe in December and then going forward and maybe back to the $3 million that we'd get, type range, or just get your thoughts there.

[Michael Braun:]

Yes in terms of Federated National, I don't anticipate us being at the $3 million, or $3.5 million. December is kind of an unusual month because of the holiday and so on, but right now we're approximately $2.25 million a month of Federated National new homeowner's business in Florida. Alongside of that Monarch's is very small; it is approximately $50,000 to $75,000 a week. I'm sorry, so Federated National is $2.25 million a week and Monarch is about $50,000 to $75,000 a week. I don't think those numbers will change significantly, but, once again, the market in 2016 is softer than what we saw in 2015. But I think that, I believe, as we sit here, Federated National should sustain at that level. We have much higher expectations for Monarch. So really, once again, those rates need to be more competitive in the marketplace; and once those rates are adjusted, I think you'll see the volume pick up significantly.

[Ryan Byrnes:]

Okay. Thanks again for you guys.

[Michael Braun:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Christopher Campbell of Keefe Bruyette & Woods. Your line is now open.

[Christopher Campbell:]

Yes. Hi, good morning.

[Michael Braun:]

Good morning.

[Christopher Campbell:]

First question, given there were no major storms, what is the expected cash flow benefit in the second quarter when you are 30% quota share online? And just to follow-up on that one, are there any offsets to this amount and what are your plans for deploying this?

[Michael Braun:]

To the quota-share question, in the third quarter, we discussed at length how the quota share is been booked. And basically the quota share is been booked on a quarterly basis, assuming it is commuted at the end of that accounting period. So what is going through the experience account is coming into our income statement as a reduction in seated premium and the updated losses are coming back on our books. So when we unwind at quota share, it's just another quarter, because we're actually accounting for the actual experience on a quarter-by-quarter basis. So there is no – besides a settlement of a receivable, there is no impact to the income statement, so to speak, when we unwind a quota share.

[Christopher Campbell:]

Okay. Perfect. That's very helpful. Second question, is two competitors have recently disclosed elevated first quarter tornado and rain losses. Has Federated National and/or Monarch seen any elevated claims levels associated with these perils?

[Michael Braun:]

To answer that, Chris, we saw some activity last year in terms of AOP impacted by the very heavy rains over the summer as well as tornadoes hitting Port Charlotte, which is Southwest Florida, as well as a tornado hitting the Tampa area. So, during Q1, nothing that sticks out very big. But we had some tornadoes, one that hits Northeast Miami-Dade, around Aventura, one that hit Davie, Florida, which is in Broward; and one that hit Pompano. The tornadoes that hit Florida are not like what you would see out west, in Kansas. These tend to be very small and isolated. So, yes, we have been impacted, but we don't have a specific dollar amount that we can attribute to that. And I don't believe that it will materially, at this point, impact the quarter. It could be $1 million. We don't have our arms around that. It could be more or less, but right now, I don't believe it to be materially impacting us where we are at.

[Christopher Campbell:]

Okay, perfect. And just one final question just kind of going back to the assignment of benefits?

[Michael Braun:]

Go ahead. Chris, are you there? Did we lose you?

[Operator:]

It looks like we lost his line.

[Michael Braun:]

All right. Well if he dials back in, we can re-queue him. Would you like to go to the next caller, please?

[Operator:]

Sure. Our next question comes from the line of Doug Ruth, Linux financial. Your line is now open.

[Doug Ruth:]

Good morning, and thank you for hosting the call. Could you talk some about your market size and what you think your market share is at this point?

[Michael Braun:]

Good morning, Doug. As you know, we've indicated that the market is about, Florida property is about $10 million. Obviously that is a fluid number, because as premium changes, whether it goes up or down, and as people continue to move into the state, that can go up and down. So with that, I would say that we are still in the 4% to 4.5% range; as you know, that is pretty small. So the market is dominated by Florida domestic carriers, which we compete with on a daily basis. And, in terms of Monarch, obviously that being much smaller. So we think there is significant runway ahead of us for us to continue growing our business here in Florida.

[Doug Ruth:]

Are you continuing to add additional employees at this point?

[Michael Braun:]

Yes we are. I believe the last number that I have is 309 people that we have on board and that includes where we do everything pretty much in-house from underwriting, marketing, IT, accounting, audit to claims. We have our own field adjusters, et cetera. So the team continues to grow.

[Doug Ruth:]

Okay. And do we have a combined ratio at this point for 2015?

[Pete Prygelski:]

The combined ratio, Doug, sure. For the full-year 2015, the GAAP combined ratio was, let's call it, 88 for the 12 months. And the stat combined ratio was 83.

[Doug Ruth:]

Okay. And then could you talk some, as long as I got you going, Pete, I will ask you a little bit about the investment portfolio. What's the size and what is the content of the portfolio?

[Pete Prygelski:]

Sure, Doug. The portfolio is up to about $417 million, of which 78% is in fixed income. Of that 78%, about one-third is in municipal bonds, tax-exempt municipal bonds; 13% in cash, and 9% in equities. And the philosophy hasn't changed. The duration is very short. We still believe that rates are eventually going to go up and so we are trying to position the portfolio in a manner that we can take advantage of climbing rates by buying new issues. And also, as rates increase, the price of the bonds drops, so we are trying to limit the damage to comprehensive income in a raising interest-rate environment.

[Doug Ruth:]

You are doing a terrific job managing that portfolio. How is the relationship with Allstate at this point?

[Michael Braun:]

They are a great partner of ours, Doug. It continues to, I would say, flourish and I think we are really happy with them. I think they are real happy with us. And we continue to look forward to working with them on continuing to grow Florida.

[Doug Ruth:]

I think you are doing all the right things for the investors and we are all looking forward to the ramp-up of Monarch and I appreciate you answering my questions.

[Michael Braun:]

Thank you, Doug.

[Operator:]

Thank you. [Operator Instructions] And I’m showing no further questions at this – I’m sorry. We just have someone enter the queue, the line of Ron Bobman of Capital Returns. Your line is now open.

[Michael Braun:]

Hi, Ron, you there? Well, it looks like Ron is not on the line. Are you there, Ron?

[Ron Bobman:]

Yes. Can you hear me? Sorry.

[Michael Braun:]

Yes, we can hear you. Go ahead.

[Ron Bobman:]

Okay. So I agree with the last gentleman's closing comments about you doing everything right for the shareholders, although I have one constructive comment. We are now 60 some odd days, 65-plus days away from the quarter…

[Michael Braun:]

Ron, we are losing you. You there? Go ahead.

[Ron Bobman:]

Can you hear me?

[Michael Braun:]

We can hear you now. We lost you, but go ahead.

[Ron Bobman:]

Yes, okay. So I agree with the comments from the prior gentleman that he was complimentary about everything you're doing. Although I would have one constructive comment, we are now 65-plus days away from the quarter-end that you are reporting on, the fourth quarter of 2015, and we are a little over 20 days away from the current quarter's end. I really think you need to dramatically shorten the span of time between when a quarter ends and you report the results from the quarter. I think you're, literally, dead last amongst insurance companies reporting their fourth-quarter of 2015 results. So I would sort of urge you to sort of shorten that span.

[Michael Braun:]

Ron, we appreciate that feedback. And just to let you know, we are very pleased that we have been working with some new auditors this year, so we wanted to make sure we had sufficient time during that transition to ensure that everything went smooth and we know some of our competitors reported last week. So we appreciate that feedback. We think that this was an unusual quarter for us reporting later in the cycle. But on a regular basis, I think that you will see us be back to our original time, if not ahead of it, on a go-forward basis.

[Ron Bobman:]

Great. Good answer. Thanks. I had question about the AOB and the legislative actions. I was wondering what your thoughts were about the prospect of something getting tamped in this legislative session in Florida that would be marginal or materially improve the AOB situation.

[Michael Braun:]

The legislative session ends this Friday. I think the probability of something occurring is pretty remote. And if something does occur, I think it will be pretty minor. So I don’t anticipate much happening this year on assignment of benefits. So we will revisit it with the legislative session next year, which is in about, it is actually, next year it will be in March or April. So I don’t anticipate anything being resolved this year. So unfortunately, the result of assignment of benefits will, most likely, lead into all other payroll portion of our rate filings, which ultimately the consumer is impacted by.

[Ron Bobman:]

Okay. Thanks. One more question on the – sort of the reserves that you took that are associated with the increased volume of business during the no-analytics window. And I was wondering if you could talk a little bit about whether it was the nature of the business that you saw yourself writing giving cause for higher reserves, whether it was a degree of caution, separate and apart from the unique loss experience or expected-loss experience from the increased writings?

[Michael Braun:]

I think it’s a combination thing, Ron. But what we wanted to do is an abundance of caution. We are quick to look at any numbers that we have and update the income statement, balance sheet, whatever it may be, with those reserves. We want to make sure our reserves are as accurate as we can be. There’s always volatility from quarter-to-quarter and we will continue to do so as we look at that on a go-forward basis. So once again it’s a combination. There was a lot of moving pieces that occurred in 2015 that could have impacted it. So as we get further down the road, that data will be more credible the farther we get forward. So we think it was an abundance of caution to move where we were, which is what we have done. So we think we are setting up 2016 correct, which will be approximately 50% in terms of our AOP attritional loss ratio, but things can impact that. But we have no reason to believe that number is not reasonable at this point in time.

[Ron Bobman:]

Thanks. Good answer. Best of luck guys.

[Michael Braun:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Casey Alexander of Ladenburg Thalmann. Your line is now open.

[Casey Alexander:]

Yes, hi, good morning guys. How are you this morning?

[Michael Braun:]

Very well, good morning.

[Casey Alexander:]

I’m just curious. I mean, as you said, these got policies onto your books that you normally wouldn't have taken. How long does it take to get them back off? I mean, do you have to try to renew them at elevated rates and hope that they run off? And how many quarters of elevated losses should we expect as a result of these policies being on the books right now?

[Michael Braun:]

Well, in terms of the policies that we have written, we have a commitment to our agents and to our policy holders to be as dependable as we can. So we are not rushing to non-renew a large chunk of policies. Policies that are not within our guidelines, perhaps will not be written on a new basis, but, more importantly, those could be identified as non-renewal. But I would not anticipate a wholesale non-renewal of policies that we’ve wrote when we had no analytics in place. That is a commitment that we have made to our partner agents to be as user-friendly, ease-of-use, as we can to them. But as we also take our responsibility to our shareholders and policy holders to protect our surplus on income statement, balance sheet, and so on. However, our relationships with our agents are very, very important. That being said, we've indicated in the past that we anticipate that our attritional loss ratio would be approximately 50%, and it was – for 2015; it was 50% approximately, and we anticipate it to be the same in 2016. So there will be no major changes to what we are doing. The commitment to our agents remains the same as well as our shareholders, as well as our policy holders. And we think the business model is working.

[Casey Alexander:]

Okay. Great. Thanks for taking my question.

[Michael Braun:]

Thank you.

[Operator:]

Thank you [Operator Instructions] And I'm showing no further questions at this time. I'd like to hand the call back over to management for your closing remarks.

[Michael Braun:]

Just want to thank everyone for their interest in the call, for dialing in. Those that had the questions, I think we enjoyed talking about our Company and what we are doing and are very excited about 2016. So please feel free to reach out to myself, to Pete, at any time with any further questions that may come around. So thank you very much. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.