Q2 2021 Fednat Holding Co Earnings Call

August 10, 2021

[music].

Good morning, and welcome to this day.

The company's second quarter 2021 conference call. My name is passion about the year.

The 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 via webcast. Additionally, today's call will be available via webcast replay later this afternoon.

And accessible by visiting the Investor Relations section of debt next website at Www dot debt net dot com.

Now I'd like to turn the call over to Bernie Kill Kelly book.

Net net Investor Relations Bernie.

Thank you.

Good morning, and thank you to everyone for joining fed net second quarter 2021 conference call.

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 on a more meaningful efficient comparison to prior year's results are non-GAAP and reconciliations.

From the GAAP measures to the non-GAAP measures are available in our earnings release.

<unk> in this conference call that are not historical facts are forward looking statements words, such as anticipate estimate expect predict project and the other similar words or phrases are intended to identify forward looking statements.

As discussed on this call that are forward looking statements are based on current management expectations involving risks and uncertainties that may result in those expectations not being realized.

Actual events outcomes of 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 yesterday.

Other filings made by the company with the SEC from tons of time.

Forward looking statements made during this conference call speak only as of today's date and for.

Not specifically disclaims any obligation to update or revise any forward looking statements to reflect the new information future events or circumstances or otherwise.

Now I will turn the call over to fed Knotts, Chief Executive Officer, Mike Braun.

Thank you good morning, and welcome to our second quarter 2021 conference call were on Jordan, Our Chief Financial Officer, and Erik Fernandez, Our Chief Accounting Officer are on the call with me today. After my remarks, 1 will go into more detail on the final financial results for the quarter and then we will take questions.

Our second quarter 2021 of the results were significantly impacted by 3 factors.

<unk> was higher than expected catastrophe losses, driven by 15 separate weather events.

The events are primarily convective storms and hell of an income tax the Texas, Florida and Louisiana.

The pre tax impact of these cat losses, what was the <unk>.

Ultimately the $23.5 million net of reinsurance recoveries on fee income.

The quarters results were also impacted by higher than expected expenses from additional reinsurance purchases and reinstatement premiums as we work to minimize the impact of cat losses on our statutory capital.

As you May recall, we communicated this item at the time of our first quarter earnings call.

These increases.

The increase our expenses on a pretax basis of $17.3 million.

The third factor was a onetime non cash charge of $17 million for the recording of the evaluation allowance against our net deferred tax asset.

Ron will discuss the sentiments of detail.

As I stated in our earnings release yesterday, we expect the deferred tax assets would be realized in the future. However, the timing of this recognition will depend on the timing of pre tax income as we earn it in future quarters.

Turning back to the extra purchases in reinstatement premiums on the second quarter. Those were made under our 2000.22021 reinsurance program.

As you know this program of stressed by a record high number of severe weather events in the second half of 2020, along with winter storm here in Texas on February.

Which drove backup purchases and additional reinstatement premiums.

We started with a clean slate on July 1 with our new reinsurance tower for 2021.2022.

This new tower has the lower overall cost compared to the previous year's total expense.

Resulting from a progress we haven't in our initiatives to reduce our total insured values and overall size of our book.

With the growth growth of our non Florida business. We also benefited from separating the overall program into 2 reinsurance dollars. We continue to work on a large number of our long term high.

High quality reinsurance partners and we appreciate their continued support.

The overall cost of the new 2021 'twenty 'twenty 2 program.

This is expected to be approximately $288 million.

This compares to overall cost of the last year's program of 300 of 11 million, which included approximately 41 million of additional purchases of the new.

New program provides a total of $1.4 billion of.

Single events coverage, which is approximately $100 million higher than last year's program.

Also have a lower retention of $10 million per event and our main reinsurance program.

On the separate $8 million retention in our states or book of business compared with $25 million in the last year's program.

We now have $2.25 billion of aggregate reinsurance coverage within our 2 reinsurance towers versus $1.9 billion on last year's sale of the power.

As I mentioned, a major reason for the expected reduction in on reinsurance costs as the progress made in our initiatives to reduce our total insured exposure.

And raising rates and restricting business in both of our Florida, and non Florida markets until rates more adequately reflect our increased cost of game business, including reinsurance costs.

Looking at the Florida homeowners market.

<unk> has been challenging but we are encouraged by portions of Sp's 76 reform legislation that was signed by the Governor on June 11, and became effective on July 1 in.

In particular, we are pleased with the measures to reduce the time limits for <unk>.

Finally, certain claims from 3 years to 2 years and more significantly initiatives to better control of the plan of attorney fees.

Cautiously optimistic that some of the issues driving the increased costs have been addressed.

At the same time, we believe the significant rate increases that are rolling through our book much better reflect the increased cost and have enabled us to achieve improved attritional loss ratios.

In the current environment in Florida, we continue to focus on reducing the number of policies, we have while keeping in force premiums relatively flat through rate increases.

Our Florida policies in force decreased to 180000 of at the end of the second quarter.

1.9% sequentially from 197.5 of them at the end of the first quarter kind of.

This represents a significant reduction.

Of over 1 third on the book of business in 2017.

272000 policies in force.

Increases in Florida include our recent 6.7% increase that took effect in March.

The 7% increase that was implemented in April kind.

Kind of an additional $3.9 increase net is expected to take the back in September.

As a result of these initiatives our average premium per policy increased by $177 from the second quarter compared to the first quarter of 2021.

This was also a 430 of $2 higher than the second quarter of 2020.

This increase translates into approximately 72 million more on premiums on the 180000 policies in force in the second quarter of 2021 as compared to last year with decreased threats.

Turning to our non Florida book of business, we are continuing to manage our total insured exposure, including concentrations in key areas, such as Houston, New Orleans and Charleston.

Our non Florida policies in force continued to decline as well as shown by a 3% decrease sequentially to 144000 at June 30 from 149000 at March 31.

We continue to file rate increases to the pass through our increased cost of doing business.

The business written through our stage for managing General underwriting partner includes inflation guard, which is currently producing 5% increase in all states.

Due to the increase of primarily labor cost saves.

Thanks for also implemented of 6.9% rate increase in South Carolina effective in April on new business and in May on renewals.

Also expecting the take an additional 6.9% in South Carolina in the near future.

And more rate filings thereafter.

This has the recent rate increase of 9.5% to be effective in August on new business in November on the mill business. This is in addition to of recent 9% increase in taxes. The effective in April on new and on renewal business and day for.

The Louisiana of increase of 15% to be effective in September on new business and in October on the renewable business. This was in addition to the 9.9% increase that was effective in December of 2020 on new business and in January on renewals.

For me, it's on a rate increase of 15, 9%. The fact in Louisiana in December of 2020, followed by an additional rate increase of 11, 1% in July of 2021, and an 18, 9% increase expected to take the fact in November.

On a 12, 3% increase took effect from any thought on Texas in February and we expect to file for additional rate increases later in 2021.

Our non Florida markets continue to have more favorable operating environment, including less litigation exclude.

Excluding the impact of severe weather events, we continue to be pleased with our underlying performance and profitability of our non Florida homeowners business, our non Florida attritional loss ratio, excluding catastrophes and generally in the mid twenties compared to approximately 40% for Florida.

As a result of our expansion and more favorable non Florida markets or non core of insured exposure is now just under 50% of of total.

On the basis of total insured value.

Our overall rate increases on Florida non quarter are on track to generate over $75 million of incremental gross written premiums in 2021 as compared to 21 million.

Based on our fourth quarter of 2020 book of business.

Anticipate that when fully earned out on the second half of 2022.

Increases will contribute over $224 million of cumulative.

Creases in premiums in 2021 and 2022.

$156 million of incremental premiums annually thereafter as the.

Compared to the fourth quarter of 2020 book.

We continue to be proactive to maintain appropriate capital position within our 3 carriers.

True thrill of additional reinsurance points of purchases and capital infusions at the same time, we maintain approximately $40 million of liquidity at the holding company level heading into the third quarter.

It was in large part due to the capital raise as we completed in March and April, including a common stock offering of $17 million and the convertible notes offering of $21 million.

As you know last November our board of Directors formed a special Board Committee to oversee our review of strategic alternatives, including exploring options to strengthen the company's capital position. The work of the committee is ongoing and the committee continues to work with Piper Sandler of financial adviser.

Before I turn the call over to Ron I want to briefly mentioned the Hurricane also which was the third quarter of event, making landfall in Florida on July 7. This event has not had the significant impact. The day. We have received approximately 150 claims totaling approximately $1 million with about 65% of the planes in Florida.

And the remainder of most of in South Carolina.

We will need additional claims history to estimate our total losses from the storm, which we'll report on.

After we close on the third quarter on.

I'll now turn the call over the road for more details on our second quarter financial results.

Thanks, Mike and good morning, everyone.

As Mike mentioned, our second quarter 2021 results were significantly impacted by higher than expected cat losses, the expenses from additional reinsurance purchases, including reinstatement premiums and the recording of a valuation allowance against the company's deferred tax assets.

Second quarter also includes approximately $5 million of net adverse impact from reserve strengthening primarily related to winter storm Yuri.

Net loss in the second quarter was $50.4 million or $2.89 per share compared to a net loss of 21, and a half million dollars or $1.57 per share in last year's second quarter, which was also impacted by high number of severe weather events.

Adjusted operating loss in the second quarter was $50.5 million or $2.90 per share compared.

Compared to adjusted operating loss of $28.1 million or $2 <unk> per share in the second quarter of 2020.

Looking more closely at the 2 most meaningful pre tax impacts on the quarter, our pre and post tax earnings were reduced by $23.5 million of catastrophe losses net of all recoveries, including reinsurance and affiliated claims handling fees and $10.7 million of recoveries.

Presented in net realized and unrealized gains losses.

As described in more detail in our press release and in our 10-Q.

There were 15 separate events, including convective storms and hail, primarily in Texas, Louisiana and Florida.

Aggregate gross losses from these events are estimated to be approximately $90 million. This gross losses were reduced by recoveries of approximately $62 million consisting of $55 million related to reinsurance treaty excess of loss reinsurance treaties and $7 million under our quota share.

<unk> net.

Net of related affiliate claims handling fees. These cat events added approximately 96 points to our loss ratio and combined ratio in the quarter.

And reduced our earnings by $1.35 per share.

Now I'll turn for the second large impact, which was the extra costs, we incurred in the quarter from additional reinsurance purchases and reinstatement premiums.

All of these expenses related to our 2000.22021 catastrophe reinsurance program, which ended on June 30.

Given the terms and conditions of the 2000.22021 on program combined with the record number of retention events that occurred in that treaty year, we made numerous backup purchases to replace utilized limit and minimize exposure to subsequent events. In addition, we had co participations on reinstatement premium.

In portions of the tower.

In the second quarter of these purchases and reinstatement premiums added a total of $17.3 million in incremental excess of loss ceded premium expense.

This extra spend in the quarter added 94 points to our combined ratio by REIT.

Do think the.

Net earned premium denominator of that calculation.

Of course, our reinsurance program reset on July 1, which gives us the clean slate starting in the third quarter, along with reduced costs for the new 'twenty 1 'twenty 2.

<unk> the year program as Mike mentioned, the initial overall cost of the new program is $288 million or <unk> $72 million per quarter.

$85 million of seeded ex oil cost was recognized here during the second quarter, which is $13 million higher than our expectations for the third quarter of $72 million that I just cited.

The third major impact in the quarter was the booking of evaluation allowance against our deferred tax assets, which increased the quarter's loss by $17 million.

As Mike said management expects these deferred tax assets to be fully realizable overtime. However, generally accepted accounting principles set the bar pretty high when there is the recent history of losses, and thus we had to set up of valuation allowance this quarter.

This amount the amount of the charge consists of the tax benefit for gone on the second quarter operating loss and the reversal of the tax benefit recorded during the first quarter.

Staying high level. This noncash charge is accounting driven and at the end of the day amounts to a timing difference with respect to when tax benefits and tax expenses will be recorded here in 2021.

We are foregoing the recording of tax benefits against our losses, but when we generate taxable income in the future, we'll be able to forgo recording any tax expense against that income until we are made whole on our 2021 loss.

Lastly, I'll mention 1 smaller impact in the quarter, which was the reserve development from first quarter 'twenty 1 in prior.

In the second quarter, we increased ultimate loss estimates by $162 million across numerous catastrophe retention events, including the 5 named storms from the second half of 2020.

Approximately 90% of the increase was covered by related catastrophe reinsurance coverages.

After all recoveries and offsets, including estimated catastrophe claims handling fees the net impact on our second quarter 2021 earnings was approximately $5 million.

If 1 were to adjust our second quarter operating loss by the for impacts that I just discussed.

Which were of cats extra ex ol expense the tax charge and then the catastrophe reserve strengthening.

And then apply the federal tax rate to that result indicates that fed net.

Adjusted operating income in the quarter would have been approximately $10 million absent the items named.

With the additional gross earned premium that we expect to realize from the rate increases that Mike described we anticipate fed net will achieve ex cat earnings growth in the second half of 2021 as the approved in pending rate increases roll into our book.

We continue to see ourselves as the low double digit ROE company in years, where it catastrophe losses of approximate the models with higher Roe's attainable when cat losses come in favorably as compared to the models.

We continue to make strong progress in reducing the size of our book and the related total insured value, enabling us to reduce our total catastrophe reinsurance insurance cost. This is reflected in the decline of our Florida policy count and total insured value, which are down 22% and 18% respectively. When.

Pairing June 30, 'twenty 1 to June 32020, we are continuing to shrink our book of business in Florida until rates are adequate and are managing our exposure in both Florida, and non Florida markets by raising rates non Florida policies. In force were 144000 at June 30, compared to 140 <unk>.

9000, just 3 months ago, reflecting our desire to limit growth in these states at this time, our geographic mix on a policy count basis at June 30 was approximately 56%, Florida, 44% non Florida as compared to a 61.39 split at June 30 of last year.

Despite these intentional reductions in our book gross earned premiums were flat with <unk> 'twenty as Mike has already mentioned, indicating strong growth in average premium per policy, an indicator that the profitability of our book is improving net premiums earned in the second quarter declined to 35 million.

From $111 million in the prior year due primarily to a $70 million $75 million increase in ceded premiums, including the extra ex ol reinsurance costs I have described the remainder of the ceded premium increase was driven by additional quota share sessions in both Florida and non for.

Florida, which we entered in during the second half of 2020, and F&I 6 Florida book, 40% quota share continues to be an effect representing $28 million of seeded premiums in the quarter compared to just $8 million in the second quarter of 2020, when only 10% quota share coverage was in place.

For non Florida markets are 80% quota share treaty on F&I <unk> non Florida book remains in place as compared to zero percent quota share during the second quarter of 2020 driving of $24 million increase in ceded premiums.

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 in our results are also lower as a result of corresponding sessions and or allowances pursuant to the treaties.

Turning now to our balance sheet and capital position, we maintained our commitment to ensuring appropriate statutory capital in our insurance companies and liquidity at the holding company. We continue to maintain surplus in our 3 insurance carriers consistent with RBC ratio of 300% or above we.

We have made capital infusions to our insurance companies of approximately $40 million effective as of June 30, and we currently estimate that holding company liquidity is approximately $40 million heading into the third quarter.

We expect the inception of our new reinsurance tower with its lower per storm attentions to be of notable benefit in terms of conserving capital going forward along with the lower quarterly cost of the ex oil program and the continued earn out of our rate increases.

At the end of the second quarter, we held total investments of approximately $424 million. In addition, we ended the quarter with total cash and equivalents of approximately $111 million. We continue to maintain our discipline to invest in higher quality liquid bonds and a handful of preferred securities with no common stock.

<unk> exposure in the portfolio and overall the portfolio has the duration of 4 point.

And a composite of credit rating of AA minus.

And with that I will turn the call back over to Mike.

Thanks, Ron.

Operator, you can open up the.

The line for any questions.

Ladies and gentlemen at this time of day, we would like to ask a question. Please press star followed by the number 1 on your telephone keypad.

For just a moment to compile the Q&A roster again ex timeline.

And your first question is from the line of Paul Newsome with Piper Sandler.

Good morning.

On.

On the DTA am I correct.

The effectively.

In the future you should assume.

The effective tax rate.

Close to zero the.

DTA of student.

Sure.

Yes, that's correct Paul.

But would there be a couple of points of state taxes or is that also part of the DTA.

There is also a valuation allowances against the state income taxes, so zero on that side as well and again in both cases of zero, if we have future losses, but also zero for a time when we begin to generate earnings again.

Great.

Could you talk a little bit the spend a little bit more about the holding company liquidity and how thats precisely constructed.

It just all cash.

Debt capability.

How do you think of the holding company liquidity piece.

Sure.

It's not all cash there are short term working capital types of.

Components to it as well those would primarily consist of short term receivables that convert into cash in the near term.

We we certainly exclude.

Anything thats not.

Cash in the near term such as.

Deferred tax assets for example, or a long term tax receivables.

Buildings equipment et cetera.

No.

We talk about this in the capital and liquidity section of our 10-Q, which was filed last night.

But as of 630.

As the calendar crossed 630, and we closed the books, we had $80 million of.

The liquidity.

In our Holdco as we define and we as we say there in the 10-Q that included $59 million of cash and investments.

And so you can see that the other $21 million would have been.

Working capital debt converts to cash in the near term going forward.

So then.

As we close the books and record the results we determined the surplus infusions that were needed.

$80 million figure would be reduced by the $40 million of infusions.

It gets us to the ending 40 million number.

Is the.

The DTA.

Asset for statutory purposes.

It's we have valuation allowances up for statutory reporting as well.

Great.

On some other folks ask questions. Thank you for the help.

Yes.

As a reminder, for you would like to ask a question. Please press star followed by the number 1.

The telephone keypad again Thats star 1.

We will pause again.

1 of them on the Q&A Ross day.

Thank you operator with that what we will do is go ahead and conclude the call today.

Just a brief overview of once again over the last 4 quarters.

Incurred.

6 major weather events.

Reinsurance program had a $25 million retention.

That is massive.

We had 2 and the second on the third quarter.

3 in the fourth quarter, and then 1 of the first quarter.

So you combine those up at the $150 million there were some some benefits on their some fees et cetera that brought that down a bit from quota share, but nonetheless, a huge number and then on top of that we had subsequent.

So while reinsurance purchases of $40 million.

And it was the massive.

The expense that we've incurred and thats behind US we now have the new reinsurance program that is lower as a percentage of total dollars.

And lower as a percentage of premium.

We're also seeing.

Favorable movement in Florida on our Attritional loss ratio down year over year in excess of 5 points.

I would say that's also occurring while some of the headwinds remain in Florida on the first half of the year, where a lot of lawsuits pushed in before.

Insurance reform, but we expect the can continue to see the Florida Attritional loss ratio drop and the reason for that is primarily driven by rate.

I would call it a tsunami of rate that we have that's rolling into the book.

That's in excess of.

Let's call it roughly $25 million per quarter.

With all of the different lines of business that we have.

So with that we'll go ahead and conclude so I just wanted to recognize the fed that team as well for providing the highest quality service to all of our policy holders and our partner agents.

The transition to a remote environment about 14.15 months ago on.

Converted back to a hybrid environment, so the health and safety of our team on our policyholders as a top priority. So with that if there's follow up questions or comments. Please do reach out to us and everyone have a great day. Thank you.

Thank you ladies and gentlemen. This concludes today's conference call. We thank you for participating ex switching.

Now disconnect your lines.

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The year.

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Yes.

Okay.

Yes.

[music].

Good morning, and welcome to the fed Nat holding company's second quarter 2021conference call. My name is Pasha without the 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 via webcast. Additionally, today's call will be available via webcast replay later this afternoon and accessible by visiting the Investor Relations section of that next website at Www Dot debt net dot com now I would like to turn the call.

All of it to Bernie keel Kelly, what's the net Investor Relations Bernie.

Thank you.

Good morning, and thank you to everyone for joining fed not some of the second quarter 2021 conference call.

Our earnings release and prepared remarks include references to non-GAAP measures such as adjusted operating income we.

We use these non-GAAP measures to provide greater transparency on them.

More meaningful efficient comparison to prior year's results are 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 the other similar words or phrases are intended to identify forward looking statements.

Matters discussed on this call that are forward looking statements are based on current management expectations involving risks and uncertainties that may result in those 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 yesterday.

All of their 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 the new information future events or circumstances or otherwise.

Now I will turn the call over to fed not the Chief Executive Officer, Mike Braun.

Thank you good morning, and welcome to our second quarter 2021 conference call well on Jordan, Our Chief Financial Officer of Erick Fernandez, Our Chief Accounting officer are on the call with me today. After my remarks, 1 will go into more detail on the final financial results for the quarter and then we will take questions.

Our second quarter 2021 of the results were significantly impacted by 3 factors.

<unk> was higher than expected catastrophe losses, driven by 15 separate water of.

These events are primarily convective storms and hell of an income tax for the Texas, Florida and Louisiana.

The pre tax impact of these cat losses was approximately 23.5 million net of reinsurance recoveries on fee income.

The quarters results were also impacted by higher than expected expenses from additional reinsurance purchases of reinstatement premiums as written.

Worked for minimizing the impact of cat losses on a statutory capital.

As you May recall, we communicated some of them at the time of our first quarter earnings call.

These increases.

The increase our expenses on a pretax basis of $17.3 million.

The third factor was a onetime non cash charge of 17 million for the recording of the evaluation allowance against our net deferred tax asset.

Ron will discuss the side of the detail.

As I stated in our earnings release yesterday, we expect the deferred tax assets would be realized in the future. However, the timing of this price mission will depend on the timing of pre tax income as we earn it in future quarters.

Turning back to the extra purchases of reinstatement premiums on the second quarter. Those were made under our 2020.2021reinsurance program.

As you know this program of stressed by a record high number of severe weather events in the second half of 2021 with winter storm here in Texas in February.

Which drove backup purchases and additional reinstatement premiums.

We started with a clean slate on July 1 with our new reinsurance tower for 2021.2022.

This new tower has the lower overall cost compared to the previous year's total expense.

The resulting from a progress we haven't been our initiatives to reduce our total insured value and overall size of our book.

With the growth growth of our non Florida business. We also benefited from separating the overall programming to reinsurance towers. We continue to work on the large number of our long term high.

High quality reinsurance partners and we appreciate their continued support.

The overall cost of the new 2021 'twenty 'twenty 2 program.

And to be approximately $280 million.

This compares to the overall cost for last year's program of 300 of 11 million, which included approximately 41 million of additional purchases the.

New program provides a total of 1.4 billion of.

The single event coverage, which is approximately $100 million higher than last year's program.

Also have a lower retention of $10 million per event and our main reinsurance program.

On the separate $8 million with Jim and our states or book of business compared with 25 million in last year's program.

We now have 2.25 billion of aggregate reinsurance coverage within our 2 reinsurance towers versus $1.9 billion of last year's sort of thought.

Sure.

As I mentioned, a major reason for the expected reduction in our reinsurance cost as the progress made in our initiatives to reduce our total insured exposure.

And raising rates on restricting business in both of our Florida, and non Florida markets.

Fill rates more adequately reflect our increased cost of game does for us including reinsurance costs.

Looking at the Florida homeowners market the environment has been challenging but we are encouraged by portions of Sp's 76 reform legislation.

It was signed by the Governor on journal of them and became effective on July 1.

In particular, we are pleased with the measures to reduce the time limits for filing certain claims from 3 years, 2 years and more significantly initiatives to better control of the plan of attorney's fees, yes.

We are cautiously optimistic that some of the issues driving increased costs of been address.

At the same time, we believe the significant rate increases that are rolling through our book much better reflect the increased cost and on.

Have enabled us to achieve improved attritional loss ratios.

In the current environment in Florida, we continue to focus on reducing the number of policies, we have while keeping in force premium relatively flat through rate increases on.

Florida policies in force decreased to 180000 of at the end of the second quarter.

The 1.9% sequentially from 197 of them at the end of the first quarter net.

This represents a significant reduction.

Of over 1 third on the book of business from 2017, we had 272000 policies in force.

Our rate increases from Florida include our recent 617% increase that took effect in March.

7% increase that was implemented in April.

On an additional $3.9 increase ex.

If you take the second September.

As a result of these initiatives our average premium per policy increased by $177 in the second quarter compared to the first quarter of 2021.

This was also a 430 of $2 higher than the second quarter of 2020.

This increase translates into approximately $72 million more in premiums on the 180000 policies in force in the second quarter of 2021 as compared to last year with decreased revenue.

Turning to our non Florida book of business.

We're continuing to manage our total on certain exposure.

Clothing concentrations in key areas, such as Houston, New Orleans and Charles.

Non Florida policies in force continued to decline as well as shown by a 3% decrease sequentially genre of 44000 at June 30 from 149000 net March 31.

We continue to file rate increases the pass through our increased cost of doing business.

Business written through our stage for managing General underwriting partner includes inflation guard, which is currently producing a 5% increase in all states.

Due to the increase of primarily labor costs based.

Thanks for also implemented of 6.9% rate increase in South Carolina. The effective in April on New there's no standard may on renewal.

Also expecting the take an additional 6.9% South Carolina in the near future.

And more rate filings thereafter.

This has the recent rate increase of 9.5% to be effective in August on new business in November on renewal business.

In addition to of recent 9% increase in taxes, the effective in April on new and on renewal business and day for.

For me, it's on a rate increase of 15, 9%. So if the fact in Louisiana in December of 2020, followed by an additional rate increase of 11, 1% in July of 2021, and an 18, 9% increase expected the takes effect in November.

On a 12, 3% increase took effect from any thought on Texas in February and we expect to file for additional rate increases later in 2021.

Our non Florida markets continue to have more favorable operating the bottleneck, including less litigation.

Excluding the impact of severe weather events, we continue to be pleased with our underlying performance and profitability of our non Florida homeowners business, our non Florida attritional loss ratio, excluding catastrophes and generally in the mid 20 compared to approximately <unk> 40 per cent per floor.

As a result of our expansion and more favorable non Florida markets, our non Florida insured exposure is now just under 50% of our flow.

On the basis of total insured value.

Our overall rate increases on Florida, and non Florida are on track to generate over $75 million of incremental gross earned premiums in 2021 as compared to 21 of them based on our fourth quarter of 2020 book of business.

Anticipate that when fully earned out in the second half of 2022.

Increases will contribute over $224 million of accumulative.

<unk> premiums in 2021, and 2022 and $156 million of incremental premiums annually thereafter, as compared to the fourth quarter of 2020 book.

We continue to be proactive to maintain appropriate capital position within our 3 carriers.

Through the thrill of additional reinsurance book.

Purchases and capital infusions at the same time, we maintain the approximately $40 million of liquidity at the holding company level heading into the third quarter.

It was in large part due to the capital raise as we completed in March and April, including a common stock offering of $17 million kind of <unk>.

Invertible notes offering of 'twenty 1.

As you know last November our board of Directors formed a special Board Committee to oversee our review of strategic alternatives.

Loading exploring options to strengthen the company's capital position. The work of the committee is ongoing and the committee continues to work with Piper Sandler outlets financial adviser.

Before I turn the call over to Ron I want to briefly mention Hurricane also which was the third quarter of event, making landfall in Florida on July 7. This event has not had the significant impact of date.

Saved approximately 150 claims totaling approximately 1 million.

With about 65% of the plants in Florida, and the remainder of most of in South Carolina.

We will need additional claims history to estimate our total losses from the storm, which we will report on.

After we close on the third quarter.

I'll now turn the call over the Rod for more details on our second quarter financial results.

Thanks, Mike and good morning, everyone.

As Mike mentioned, our second quarter 2021 results were significantly impacted by higher than expected cat losses, the expenses from additional reinsurance purchases, including the reinstatement premiums and the recording of the evaluation allowance against the company's deferred tax assets second quarter also includes approximately $5 million of net.

Adverse impact from reserve strengthening primarily related to winter storm Yuri on.

Million or $2.90 per share.

Compared to adjusted operating loss of $28.1 million or $2 <unk> per share in the second quarter of 2020.

Presented in net realized and unrealized gains and losses.

As described in more detail in our press release and in our 10-Q.

There were 15 separate events, including convective storms and hail, primarily in Texas, Louisiana and Florida.

<unk> gross losses from these events are estimated to be approximately $90 million the.

Gross losses were reduced by recoveries of approximately $62 million consisting of $55 million related to reinsurance treaty excess of loss reinsurance treaties and $7 million under our quota share treaties.

Net of related affiliate of claims handling fees. These cat events added approximately 96 points to our loss ratio and combined ratio in the quarter.

And reduced our earnings by $1.35 per share.

Now I'll turn for the second large impact, which where the extra costs, we incurred in the quarter from additional reinsurance purchases and reinstatement premiums.

All of these expenses related to our 2000.22021 catastrophe reinsurance program, which ended on June 30.

Given the terms and conditions of the 2000.22021 program combined with the record number of retention events that occurred in that treaty year. We've made numerous backup purchases to replace the utilized limit and minimize exposure to subsequent events. In addition, we had co participations on reinstatement premiums.

In portions of the tower.

In the second quarter of these purchases and reinstatement premiums added a total of $17.3 million in incremental excess of loss ceded premium expense.

This extra spend in the quarter added 94 points to our combined ratio by reducing the.

Net earned premium denominator of that calculation of.

Of course, our reinsurance program reset on July 1, which gives us the clean slate starting in the third quarter, along with reduced costs for the new 'twenty 1 'twenty 2.

The year program as Mike mentioned, the initial overall cost of the new program is $288 million or <unk> $72 million per quarter.

$85 million of seeded ex oil cost was recognized here during the second quarter, which is $13 million higher than our expectations for the third quarter of 72 million debt I just cited.

The third major impact in the quarter was the booking of evaluation allowance against our deferred tax assets, which increased the quarter's loss by $17 million.

This amount the amount of the charge consists of the tax benefit for gone on the second quarter operating loss and the reversal of the tax benefit recorded during the first quarter.

Staying high level. This noncash charge is accounting driven and at the end of the day amounts to a timing difference with respect to when tax benefits and tax expenses will be recorded here in 2021, we are foregoing the recording of tax benefits against our losses, but when we generate cash.

<unk> income in the future, we'll be able to forgo recording any tax expense against that income until we are made whole on our 2021 loss.

Lastly, I'll mention 1 smaller impact in the quarter, which was the reserve development from first quarter 'twenty, 1 and prior.

In the second quarter, we increased ultimate loss estimates by $162 million across numerous catastrophe retention events, including the 5 named storms from the second half of 2020.

Approximately 90% of the increase was covered by related catastrophe reinsurance coverages after all recoveries and offsets including estimated catastrophe claims handling fees. The net impact on our second quarter 2021 earnings was approximately $5 million.

If 1 were to adjust our second quarter operating loss by the for impacts that I just discussed.

Which were of cats extra ex ol expense the tax charge and then the catastrophe reserve strengthening.

And then apply the federal tax rate to that result indicates that fed net.

Adjusted operating income in the quarter would have been approximately $10 million absent the items named.

In years, where of catastrophe losses approximate the models with higher ROE is attainable when cat losses come in favorably as compared to the models.

We continue to make strong progress in reducing the size of our book and the related total insured value.

Enabling us to reduce our total catastrophe reinsurance cost. This is reflected in the the Cline of our Florida of policy count and total insured value, which are down 22% and 18% respectively. When comparing June 30, 'twenty..1 to June 32020, we are continuing to shrink our book of business.

In Florida until rates are adequate and are managing our exposure in both Florida and on our Florida markets by raising rates non Florida policies. In force were 144000 at June 30, compared to 149000, just 3 months ago, reflecting our desire to limit growth in these states at this time.

On our geographic mix on a policy count basis at June 30 was approximately 56%, Florida, 44% non Florida as compared to a 61.39 split at June 30 of last year.

$11 million in the prior year, due primarily to a $70 million $75 million increase in ceded premiums, including the extra ex ol reinsurance costs I have described the remainder of the ceded premium increase was driven by additional quota share sessions in both Florida, and non Florida, which.

We entered in during the second half of 2020.

In F&I 6 Florida book, 40% quota share continues to be an effect representing $28 million of seeded premiums in the quarter compared to just $8 million in the second quarter of 2020, when only 10% quota share coverage was in place.

<unk> of approximately $40 million effective as of June 30, and we currently estimate that holding company liquidity is approximately $40 million heading into the third quarter.

At the end of the second quarter, we held total investments of approximately $424 million. In addition, we ended the quarter with total cash and equivalents of approximately of $111 million. We continue to maintain our discipline to invest in higher quality liquid bonds and a handful of preferred securities with no common.

Stock exposure in the portfolio and overall the portfolio has the duration of 4.0 and a composite of credit rating of AA minus.

And with that I will turn the call back over to Mike.

Thanks, Ron.

Operator, you can open up the.

On the line to any questions.

Ladies and gentlemen at this time of day, we'd like to ask the question. Please press star followed by the number 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A RASK day again Thats Star 1.

And your first question is from the line of Paul Newsome with Piper Sandler.

Good morning.

On the DTA am I correct.

The effectively.

In the future we should assume.

Sector of tax rate.

Close to zero on the DTA of student.

No.

Yes, that's correct Paul.

But would there be a couple of points of the.

Date taxes, whereas debt also part of the DTA.

There is also valuation allowances against the state income taxes, so zero on that side as well and again in both cases zero, if we have future losses, but also zero for a time when we begin to generate earnings again.

Great.

Could you talk a little bit the spin a little bit more about the holding company liquidity and how thats precisely constructing is.

Is it just all cash.

Debt capability.

How do you think of the holding company liquidity piece.

Sure.

It's not all cash there are short term working capital types of <unk>.

Components to it as well those would primarily consist of short term receivables that converted into cash in the near term.

We we certainly exclude.

Anything that's not cash.

Cash in the near term such as deferred tax assets for example, or long term tax receivables.

Buildings equipment et cetera. So.

We talk about this in the capital on liquidity section of our 10-Q, which was filed last night.

But as of 630.

As the calendar Cross 630, and we closed the books, we had $80 million of liquidity.

Our holdco as we define and we as we say they are in the 10-Q that included $59 million of cash and investments and so you can see that the other $21 million would have been.

Working capital of that converts to cash in the near term going forward.

So then.

As we close the books and record the results we determined the surplus infusions that were needed so that $80 million figure would be reduced by the $40 million of infusions.

It gets us to the ending 40 million number.

Is the.

On the DTA.

Asset for statutory purposes.

It's we have valuation allowances up for statutory reporting as well.

Great.

On some other folks ask questions. Thank you for the help.

Yes.

As a reminder, for you would like to ask a question. Please press star followed by the number 1.

The telephone keypad again Thats star 1.

We will pause again.

For them on mix of come out of.

Of the Q&A roster.

Okay.

Thank you operator with that what we'll do is go ahead and conclude the call today.

Just a brief overview of once again over the last 4 quarters.

<unk> incurred.

6 major weather events, our main reinsurance program had a $25 million retention.

That is massive.

Had 2 and the second on the third quarter.

Free and the fourth quarter and then 1 of the first quarter.

So you combine those up at the $150 million there were some some benefits on their some fees et cetera that brought that down a bit from quarter share, but nonetheless, a huge number and then on top of that we had subsequent.

So while reinsurance purchases of $40 million.

And it was the massive.

The expense that we've incurred and thats behind US we now have the new reinsurance program that is lower as a percentage of total dollars and lower as a percentage of premium.

We're also seeing.

Favorable movement in Florida on our Attritional loss ratio down year over year of in excess of 5 points.

I would say that's also occurring while some of the headwinds remain in Florida on the first half of the year, where all of a lot of lawsuits for pushed in before.

Insurance reform, but we expect to continue to see the Florida Attritional loss ratio drop and the reason for that is primarily driven by rate.

I would call it a tsunami of rate that we have thats rolling into the book.

That's in excess of.

Let's call it roughly $25 million per quarter.

With all of the different lines of business that we have.

So with that we'll go ahead and conclude so I just wanted to recognize our fed that team as well for providing the highest quality service to all of our policyholders on our partner agents, we did transition to a remote environment of about 14.15 months ago on.

Thank you ladies and gentlemen. This concludes today's conference call. We thank you for participating ex that you now disconnect your lines.

Q2 2021 Fednat Holding Co Earnings Call

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