Q1 2021 Fednat Holding Co Earnings Call
Good morning, and welcome to sit and that holding company's first quarter 2041 Conference call. My name is Josh and I'll be your conference. Operator. This morning at this time, all participants will be in a listen only mode. Before we begin today's call I'd like to remind everyone that this conference call is being recorded as well as broadcast live.
And the via webcast and.
Today's call will be available via webcast replay later and this afternoon and accessible by visiting the Investor Relations section of fitness website at Www Dot net dot com.
Now I'd like to turn the call over to burden and so Kelly for.
Net net Investor Relations Bernie.
And thank you good morning, welcome again to the conference call for Fed Nat for.
First quarter of 2021 the earnings our earnings release and prepared remarks include references to non-GAAP measures such as adjusted operating income we use these non-GAAP measures to provide greater transparency and a more meaningful efficient comparison to prior year's results.
Our non-GAAP and reconciliations from the GAAP measures to the non-GAAP measures are available in our earnings release.
Statements in this conference call that are not historical facts are forward looking statements words, such as anticipate estimate expect predict project and other similar words or phrases are intended to identify forward looking statements the math.
As discussed on this call that are forward looking statements based on current management expectations and <unk>.
The 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 and 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 yesterday and other filings made by the company with the SEC from time to time.
Forward looking statements made during this conference call speak only as of today's date and fed not specifically disclaims any obligation to update or revise any forward looking statements to reflect new information future events or circumstances or otherwise.
Now I will turn the call over to vet, not the Chief Executive Officer, Mike Braun.
Thank you good morning, and welcome to our first quarter 2021 Conference call, Ron Jordan, Our Chief Financial Officer, and Erick Fernandez, Our Chief Accounting officer are on the call with me today.
After my remarks, one of them will go into more detail on first quarter results and then we will open up the call to questions.
Our results and the first quarter of 2021 were significantly impacted by higher than expected catastrophe losses, primarily from winter storm, Yuri which cause heavy residential damage in Texas. During February and we are proud of our dedicated team who are committed to providing the highest quality service to our.
Policyholders and partner agents affected by Uri and the multiple other weather events over the past year.
Our first quarter was also impacted by a much higher seeded reinsurance premium expense from our multiple late season purchases. After we encountered a record five hurricanes during the second half of 2020.
The extra reinsurance expense will continue and the second quarter and so we have the July one renewal of our excess of loss reinsurance program.
The net impact of said net and the first quarter from Yuriy and the other smaller cat events is approximately $18 3 million pretax loss and elevated reinsurance expense of $13 6 million.
Ron will provide more details on our total exposure to policyholder claims from Yuriy and additional reinsurance that we purchase to reduce the impact from potential future large weather events.
This weather storm was the six major of severe weather event that we experience since the third quarter, including five Hurricanes. These catastrophe weather events have been very unusual and their frequency and severity and has significantly contributed to the challenging times for the company financially we.
The pro actively taken action to protect our balance sheet by ensuring that we maintain ample liquidity at the holding company and appropriate capital positions within our three insurance companies.
As you May know last November our board of Directors formed a special Board Committee to oversee a review of strategic alternatives, including exploring options to strengthen the company's capital position.
The company retained Piper Sandler and company as its financial advisor.
Since our last quarterly conference call in early March we have completed two capital raising transactions through Piper Sandler, which together gross proceeds of $38 $1 million.
These included of common stock offering in March and April, which raised 17 million and the convertible notes offering in April which raised $21 million.
As a result of these transactions we have increased our holding company liquidity holding company liquidity is currently approximately 68 million following the capital raises and after a capital infusion of $23 million into our insurance companies effective as of March 31.
The work of the boards Strategic review Committee is ongoing and the company is continuously evaluating our capital position to ensure appropriate capital adequacy and liquidity.
During the first quarter said that continue to execute and our strategies to improve our operations.
Pricing and book of business to position the company for future growth and earnings and book value. In particular, we have continued our initiatives to improve the profitability out of homeowners business, including of raising rates in Florida, and non Florida markets and restricting new business and shrinking our book.
Within Florida and fill rates are more out of court.
Looking at the homeowners market the environment continues to be challenging while the number of E. O. B lawsuits continues to decline sharply our overall litigation against property insurance companies and Florida continues at levels that are far above the rest of the country insurance legislation was passed by the Florida.
The legislator last week that if signed by the Governor will go into effect on July one.
We are encouraged by portions of the legislation, but do not believe the issues driving rate increases had been fully address.
We will therefore remain cautious and Florida and continue our current initiatives to reduce our exposures and the state and so we see evidence of potential benefits and the second half of 2021 and beyond.
We will continue to see great increases to more accurately reflect the increased cost stemming from excess of litigation as well as higher reinsurance costs.
Our near term goal and Florida, and the environment and this environment in 2020. One is to continue reducing the number of policies that we have while keeping in force premiums relatively flat through rate increases or rate increases and Florida includes 6.7% that took effect in March and 7% that was.
Implemented in April.
Our Florida policies and force continue to decline as shown by a four 9% decrease from 207000 policies at December 31, 2020 to 197000 policies at March 31. This represents a significant reduction of over 27 points five per.
And of the book since 2017, when we had 272000 policies and force.
Continue to reevaluate risk and our existing book based on new information to identify the policies that do not meet our targets along with limiting new business statewide.
As a result of these actions our average premium per policy increased by $110 from the first quarter compared to the fourth quarter of 2020 and increased almost $300 per policy compared to the first quarter of 2020.
This increase translates into over 50 million more and premiums and the first quarter of 2021 compared to last year with decreased risk.
And our non Florida homeowners book, we are also targeting profitable business by continuing to pass through our increased costs, which include increased claims from weather activity and higher reinsurance costs for.
For our non Florida business written through St shore of rate increase of nine 9% took effect and Jane and Louisiana and January and we expect the filing for additional increases in that range later in 2020 one safety.
Sales were also had a 9% rate increase and taxes.
It takes effect and May and it's planning for similar increase later in 2021.
For my son of a rate increase of 15.9% took effect in Louisiana and December and 12, 3% increase took effect in February and Texas, and we expect to file for an additional rate increase later in 2021.
Our non Florida markets continue to have a more favorable operating environment, including less litigation and more flexibility on setting rates, excluding the impact of severe weather events. We continue to be very pleased with the underlying growth performance and profitability of our non Florida homeowners business.
And non Florida, Attritional loss ratio, excluding catastrophes is generally and the mid twenties compared to approximately 40% from Florida or about 15 points matter.
As the result of our expansion and more favorable non Florida markets, our non Florida insurance exposure is now just under 50% of our total.
On the basis of total insured value.
Our overall rate increases and Florida, and non Florida are on track to generate over $90 million and incremental gross earned premiums in 2020, one as compared to 2020 based on our fourth quarter 2020 book of business.
As delineated last quarter, we anticipate that weren't fully earned out and the first quarter of 2022. These increases will contribute over 230 million of cumulative incremental premium and 2021 and 2022 and.
And $140 million of incremented, the incremental premium thereafter annually as compared to 2020.
Based on our fourth quarter, 2020 book of business, we are continuing to optimize our existing book of business to non renew policies and reduced new business.
Before I turn the call over to Ron and I want to comment on the status of the reinsurance programs renewal for 2020, one 2020 two.
We are separating out the reinsurance program on our non Florida book of business with a chore and expect the main two reinsurance programs with a very large number of our long term partners and we anticipate their continued support and appreciate their partnership the reinsurance industry is well capitalized and we will continue.
And to work with the large number of high quality reinsurance partners.
The reinsurance renewal process is well underway and the majority of our limit secured and we expect a reduction and the total cost of our Cat program beginning July one 2021 <unk>.
Paired with the cost for the 2020 2021 program, which was approximately $270 million funded but ended up with 44 million of additional reinsurance expense.
Associated with multiple catastrophe events that drove our subsequent reinsurance purchases.
Our REIT, our expected reduction for the 2021 2020 two treaty year as a result of our continued exposure management efforts to reduce our total insured value and the overall size of our book.
In addition, the expenses associated with our subsequent reinsurance purchase for the 2020 2021 year will have been recognized by the end of the second quarter. None of this expense will carryover into the third quarter.
Now I will turn over the call to Ron for more details on our first quarter financial results.
Yes.
Thanks, Mike and good morning, everyone and.
As Mike mentioned, our first quarter results were impacted by higher than expected cat losses, mostly from winter storm Aerie, We reported adjusted operating loss per share of $1 35, compared to operating earnings per share of 30, and the first quarter of 2020.
The after tax impact of Cat losses was 72 cents per share and this year's first quarter factoring and related claims handling revenues versus <unk> 46 per share in last year's first quarter. Most of the remaining delta in our earnings pertains to catastrophe reinsurance expense, which I will discuss.
And a few moments.
Going deeper on winter storm, Yuri fed net aggregate reinsurance retention was approximately $23 million for this event.
We also had a co participation of approximately $18 million, which includes $8 million of reinstatement premiums triggered by euro.
Excluding these reinstatement premiums our total exposure to policyholder claims from Yuri is estimated to be $33 million of that $33 million. We ceded approximately $19 4 million of net retained losses to anchor re so the net impact of fed Nat and the first quarter from Yuri was.
<unk> $13 7 million pretax.
As we announced and an 8-K filing last week. We also had for 6 million and other pre tax catastrophe losses during the quarter. The springs, the total impact of catastrophe losses, and the first quarter to $18 3 million pretax partially offsetting this amount of $5 2 million of catastrophe claims handling and.
Other revenues that we expect to be generated related to these first quarter events.
As such the net impact to our bottom line was approximately $13 1 million pretax for and after tax impact of $10 3 million or <unk> 72 per share.
I'd also like to go deeper regarding the other meaningful impact in the quarter, which is what I'll call extra ceded premiums related to our catastrophe reinsurance program.
As a result of the terms and conditions under which our 2000 22021 catastrophe reinsurance program was placed combined with the record number of retention events. Thus far in the treaty year, we made numerous backup purchases over the past eight months or so in order to replace.
Why is the limit.
In addition, we had co participations on reinstatement premiums and portions of the tower, we disclose these purchases along the way as they unfolded. The most recent example is the $13 million of spend on a backup purchase and $8 million of reinstatement premiums that were triggered by.
The winter storm Uri for a total of $21 million.
These costs are being recognized over the period of coverage extending through the second quarter.
And the first quarter the cumulative impact of these various backup purchases added a total of $13 6 million in excess of loss ceded premium expense that is on the top of the $270 million base cost of the tower at inception last July.
And the normalizing adjustment for this quarter related to these extra costs would be approximately $10 million or <unk> 70 per share after tax nearly as large as the cat loss impact already discussed.
And due to the $21 million worth of extra the ceded premium costs I just mentioned from Yuri we anticipate the impact of the backup purchases and reinstatement premium expenses will be even larger in the second quarter amounting to almost 21 million pretax income.
Incremental gross earned premiums from the earn out of implemented rate increases will help offset a portion of these higher costs.
Of course, our reinsurance program will reset effective July one, which will give us a clean slate beginning in the third quarter, which we expect will reduce reinsurance costs going forward.
Returning to our first quarter results, excluding the impact of cats, and the extra ex ol ceded premiums.
We estimate that we generated of mid single digits.
And the quarter combined with the additional gross earned premium that we expect to realize from filed rate increases we anticipate fed that will begin to gain ex cat earnings growth beginning in the second half of 2021 on our way to a much more profitable 2022.
Consolidated gross written premiums and the first quarter grew roughly 1% year over year two of $174 2 million with gross written premiums and both Florida and non Florida markets remaining essentially flat.
This reflects the trend toward an overall increase and average premium per policy as we raise rates, while decreasing our policy count and property exposure.
Non Florida policies and force were 149000 at March 31, compared to 154000 at December 31, reflecting our desire to limit our growth in these states at this time.
Our geographic mix at March 31 was approximately 57%, Florida, and 43% non Florida on of policy count basis compared to roughly a 70 30 split prior to the Mesa and acquisition in December of 2019.
Consolidated net premiums earned and the first quarter declined to $39 7 million from $105 9 million and the first quarter of 2020. This was due to and almost $70 million increase and ceded premiums with over $23 million of that coming from catastrophe reinsurance include.
<unk> the extra costs from backup purchases that I have already described.
The remainder of the ceded premium increase was driven by additional quota share sessions, and both Florida, and non Florida, which we entered into in the second half of 2020.
Over the course of the second half of 2020, we increased the quota share percentage and F&I sees Florida book from 10% to 30% with an additional 10% taking effect on the last day of the year as a result, 40% quota share was in effect for all of the first quarter of 2021.
Or is that representing $28 2 million of ceded premiums compared to just seven 9 million in the first quarter of last year.
For non Florida markets are quota share treaty with anchor re on F&I <unk> non Florida book was increased to 80% effective December one 2020 <unk>.
Driving $24 3 million of ceded premiums in the first quarter compared to zero in the first quarter of last year.
Our current quota share treaty with anchor re continues at the 80% session rate and as previously disclosed contains certain aggregate loss limits.
Note that the ceded quota share of premium figures are net of cat reinsurance allowances that are built into the various treaties and of course losses and operating expenses are also lower as a result of corresponding sessions and or allowances pursuant to these treaties my.
And my last comment on reinsurance is to highlight the previously disclosed aggregate excess of loss coverage that we purchased during the first quarter on our <unk> book of business, which provides sideways protection in the event and we incur a number of middle sized events over the course of calendar year 2021.
Winter Storm Youri was such an event and moved mace on one event closer to having recoveries under this treaty.
Our net loss ratio and the quarter was 128%, including 33 points from cat losses.
Excluding the effect of cats, the underlying loss ratio would be approximately 88% this ratio and our net expense ratio are both being driven upward by our higher excess of loss reinsurance costs, including the extra ex ol cost I spoke of earlier in my remarks.
As a result, the net expense ratio was 68, 2% and the quarter is important to understand that our ex cat gross loss ratio and gross expense ratio are meeting our expectations. So with continued room for improvement the gross loss ratio, excluding catastrophe losses came in at approximately <unk>.
36, 5% and the gross expense ratio came in at 26.0 of per cent for a combined total of 62, 5%.
Turning now to our balance sheet and capital position as Mike discussed, we recently executed two capital raising transactions to help maintain appropriate statutory capital and our insurance companies and liquidity at the holding company all of our insurance companies ended 2020 with RBC ratios in excess of 300%.
At March 31, we maintained those RBC levels in our for carriers and our holding company liquidity was approximately 71 million, which included approximately $15 million net of related expenses raised from the March common stock offering.
We currently estimate that holding company liquidity is approximately 68 million following the $20 million net of expenses raised in the April notes offerings offset by a capital infusion of $23 million to our insurance companies effective as of March 31.
As disclosed in earlier periods and the terms of our outstanding debt preclude us from declaring the dividend when our debt to capital ratio exceeds prescribed thresholds as a result, we do not anticipate declaring dividends in the foreseeable future.
At the end of the first quarter, our total cash and investments were $485 million.
We continue to invest and high quality liquid bonds and a handful of preferred securities with no exposure to common stock and our portfolio. During the first quarter of 2020, one unrealized gains declined $7 million, primarily as a result of rise and treasury rates the trend that over the long term will be helpful to restoring of.
Higher book yield on our fixed income portfolio.
And now I will turn the call back over to Mike.
Thanks, Ron and operator with that we'll go ahead and open up the call to questions. If you could.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby and compile the Q&A roster.
Our first question comes from Paul Newsome with Piper Sandler You May proceed with your question.
Good morning, and and thanks for the call.
Maybe we could start off on a little bit of a mystic note about the litigation and cause.
You gave us your thoughts litigation the.
Really the issue of corn pardon me, that's going through the the Florida legislature could you give us a sense of kind of exactly how that might help claims perspective and where the.
One of the details there that would make claims.
Claims necessarily possibly fall prospectively.
Yeah, well and good morning, Paul.
Did recently passed legislation.
I think the incentives to to control some of the drivers that are pushing our premiums.
I think it's it's some progress.
But we've seen some progress in the past and Florida.
That's been mitigated by by the behavior of adapting so we're a little concerned in that regard and we're going to remain cautious.
But there are some there are some attempts.
Attempts to contain the.
The incentive with these roofers the contractors the public adjusters, how the signing people up as well as some of the the litigation and trying to control that.
So we're hopeful.
But we're cautious so.
We still have some concerns on these these expenses continuing to increase and.
Till we can find comfort that our our rate that we're charging is adequate.
And until that time, we're going to not only.
Hold our line in terms of our in force premiums, but really taken out of an opportunity with these rate increases to drop our policies and Florida having.
A lot of policy count as well as less exposure, what we call you know.
Total insured value.
One of the criticism I have heard about the reform and and I have not looked at any detail at all is that it might end up causing a lot more.
And I'm sort of organizational costs and.
The adjustment costs relating to the he had just more complicated do you see that in there and and.
As part of the equation for the.
And for them.
Yeah, Paul there's absolutely more data.
Emissions of the state theirs.
Certain behaviors that.
Our need to be documented.
And the adjusting side and we welcome those as long as it's a good investment too.
To contain.
The the expenses that are just.
Continuing to increase so the expenses are really drive driven by the litigation litigation is driving our attritional loss ratio and litigation is driving our reinsurance spend because they're feeling it as well our reinsurance partners. So we welcome those opportunities.
Two.
Build out more infrastructure, if so needed or just supply more data to the state of so needed if it achieves the objective of returning the the market too.
The predictable.
<unk> versus ever increasing expenses.
Great.
And then and I wanted to turn to the second quarter, two babies sharpen our pencils on the side a little bit more.
Should we be thinking of the.
The additional 20 $21 million pretax of.
Reinstatement and the other premiums and sort of and.
And on just on top of whatever we think the run rate is for the.
The company's earnings and the second quarter.
Or are there other pieces to that that we should be thinking about when we.
Think about trying to figure out kind of the.
For both the total but also kind of the run.
The prospectively.
Yes, I guess I'll jump in and Mike can add any thoughts that he has but.
The $21 million of extra ex ol costs in Q2 compares to 13 and a half.
The $13 6 million of such costs in Q1, so the delta there is around $7 million. So if you are starting with the normalized Q1, you would theres of $7 million headwind.
Oh, I'm, sorry, and a normalized Q1, it's the full $21 million.
If you're starting with.
With the leaving of Q1 that has the $13 6 million and it then it's just an incremental 7 million other other comments that I would make about Q2.
Is that.
Typically.
The seasonality wise the.
The Florida loss ratio and non Florida loss ratio, probably ticks up a bit and Q2 versus Q1.
But the other thing on the positive side is with respect to these rate increases.
Again, assuming a flat book there, there's an incremental $7 million or so of gross earned premium that.
Comes online in Q2 that did not exist in the Q1 and that was my earlier remark and that rate increases would help.
Offset some of that $7 million of incremental ex oil cost in the second quarter.
Yeah, Yeah, and nation, and Paul just to add to add on that.
And this elevated reinsurance expense we believe.
And at the end of Q2, so last year was approximately of $270 million.
So al and reinsurance spend and then an additional $45 million.
That comes out to approximately $315 million.
We believe our new ex ol program.
And nowhere B will be nowhere near that number.
You know, so and let me clarify and reinsurance.
We believe the reinsurance market has lots of capital.
Ample capital and no doubt about it.
And there's discipline, there and we respect that and appreciate that there's some pressure on the lower layers are working layers below the EF HCF on pricing.
But keep in mind, we of a smaller book of business the significantly smaller book of business. So to your point, yes reinsurance ceded premiums will be elevated through Q2, and then as we reset July one we think there'll be a significant benefits.
And as well.
The only other piece will be the the.
And the new convertible debt will show up and the second quarter as well.
And the interest expense and the <unk>.
And diluted shares.
Anything else besides debt.
Well and Ron can give you a little bit more on the math there, but in terms of the dilution of the shares.
We look at that and and it's very difficult for us to raise the capital to create solution, but we think it's paramount that we have ample capacity of capital and our holding company.
Unfortunately, we had a record five hurricanes last year now with Uri, We Havent had six.
The big events. So we don't take that light and we really don't see but once again, it's paramount that we have ample liquidity and a holding company appropriate capital on our insurance companies.
So until a lot of this rate is rolling in and it's massive right that's rolling in and Florida because of litigation, primarily non Florida more because of the just the weather that we've been experiencing.
So yes.
We feel optimistic on the future, but we want and make sure we have sufficient capital for any type of channel.
<unk> is that we experience and in the meantime non.
I'm sorry.
And I just meant that the.
Interest expense line will go up a little bit.
And as you incur the.
The new convertible debt and the diluted shares outstanding will rise a little bit because the <unk>.
Inversion I think that's the only other piece and then.
And to think about prospectively, we think about it.
The result of that so my question.
Paul That's fair and also on the interest expense I'll just point out that on our 100 million notes that are outstanding that coupon rate.
Went up from seven five to seven seven and 5%.
And so there's a there's a slight uptick and interest expense on the $100 million of notes as well.
Great. Thank you I'll, let some other folks ask questions, but the great that's very helpful.
Thank you Paul.
Thank you and as a reminder to ask the question you'll need the press star one on your telephone. Our next question comes from Doug Ruth with Lenox Financial and proceed with your question.
Hi, Good morning, Mike and Ron could you talk some about the strategy for the book of business here in 2020 one now.
Yes, good morning, Doug in terms of the book of business.
Within Florida.
Down significantly in terms of policies, where we.
Were down significantly in terms of exposures.
And you know insured value over the last three years for years and that's going to continue during 2021 and.
Still we feel that the the rates are or have more and more stability and them are relative to our costs.
So we think our in force book, which is about $725 million.
We will stay somewhat flat.
Both the portion of that's within Florida.
Because we're going to take those rate increases as an opportunity to reduce our policy count.
And once again and in Florida, there's been just a lot of challenges with the ever increasing cost.
And so we wanted to make sure that.
The debt, we have very good rate for that and just just to clarify.
And we're seeing we're seeing that some of these costs are stabilizing but once again, we do want to make sure of those are permanent and sustainable before we changed our of course of action and really non Florida similar strategy, taking lots of range just because of the weather that we've endured as well as.
The reinsurers that want to be paid appropriately for that so non Florida, it's not driven by litigation.
It's really been a lot of hurricanes, and and tornado and hail for that matter.
So so the incentives to make sure that we're price adequately.
And lowering our exposures both in and outside of Florida for two very different reasons.
But maintaining the in force premiums somewhat close to where it is currently.
Okay, well. Thank you France for my question, we're looking forward to working through the tough second quarter and looking for better news and the third quarter.
Alright, Thank you Doug.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Mr. Brown for any further remarks.
Great. Thank you for <unk>.
All of you for participating on today's call before we close and I want to again recognize and I've said and that team, including our staff and our partner agents roughly a year ago, we transitioned to remote working environment.
And are now gradually converting back to a hybrid approach and the coming months as more staff. The turns to the office the health and safety of our team and our policyholders continues to be our top priority. It is a testament of the dedication and hard work of our team that said net operations have continued to run smoothly and that we can.
And you to meet our highest quality standards of customer service their efforts and dedication of will continue to help fed Nat and maintain our quality reputation and building long term value for our company. So thank you very much everyone have a great day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
And.
And <unk>.
Net.
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