Q3 2021 Fednat Holding Co Earnings Call
Good morning, and welcome to fed Nat holding company's third quarter 2000.
2021 conference call.
My name is scheme and I will be your conference. Operator. This morning at this time, all participants will be in listen only mode. Before we begin today's call I'd like to remind everyone. This conference call is being recorded as well as broadcast live via webcast. Additionally, today's call will be available via.
A webcast replay later this afternoon and accessible by visiting the Investor Relations section of <unk> website at Www Dot Fad net dot com now.
Now I'd like to turn the call over to Bernie kill Kelly for Fed net Investor Relations Bernie.
Thank you.
Good morning, and thank you all for joining <unk> third 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 and a more meaningful efficient comparison to prior year's results are non-GAAP and reconciliations from the GAAP measures to the non.
<unk> 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.
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 yesterday and other filing.
<unk> 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 <unk>, Chief Executive Officer, Mike Braun.
Thank you.
Morning, and welcome to our third quarter 2021 Conference call Bryan Jordan, Our Chief Financial Officer, and Erick Fernandez, Our Chief Accounting officer are on the call with me today. After my remarks, Ron will go into more detail on the financial results of the quarter and then we will take questions.
Before I review, our third quarter results I wanted to discuss the shifts and said that strategy that we announced yesterday.
We announced our intent to refocus our operations on the Florida property market.
Which has been our historical focus since the company's founding in 1992.
Geographic expansion strategy that was launched in 2013 to write homeowners insurance in coastal markets outside of Florida, and then accelerated in 2019 was well intended given the challenges we're facing in the Florida homeowners market.
The acquisition of Mesa on insurance.
Or extend the expansion of F&I <unk> non Florida book ended up being poorly time due to the unprecedented number of catastrophe weather events that have affected our Texas and Louisiana books of business.
The impact of these catastrophic weather losses put a strain on said that capital position and further action was necessary.
Therefore, exiting the non Florida markets.
Focusing our efforts on the improving Florida homeowners market, where we believe pricing is the most appropriate relative to the increased costs that we have seen in a number of years in conjunction with the decision to focus on Florida.
Excuse me I said that has elected to commence an orderly runoff of Masonic insurance operations.
We'll be filing appropriate documentation with its insurance regulators in Louisiana, Florida, and Texas concerning a withdrawal plan, which is subject to regulatory review, we expect to began non renewing may signs, Louisiana policies on the expert duration dates of each appropriate policy beginning.
In January 2022, and May sounds, Texas policies, beginning in February 2022.
Non renewal of Masonic, Florida policies is expected to begin in June 2022.
F&I.
Non Florida book has been written through our third party managing general underwriter Sage <unk> and Sage owns the renewal rights to these policies after careful coordination and collaboration with Sage or we expect that in December 2021, same store will begin making offers a coverage to SMIC policyholders to.
A renew policies on alternative insurance carrier partners of same store in Texas, and Louisiana that are not affiliated with the company.
SMIC policies in South Carolina, Alabama, and Mississippi that were written through St. Sure will continue to be renewed by SMIC until such time as <unk> affiliates obtain.
The necessary licensing in those states, possibly in the second quarter of 2022.
We expect the transition to be smooth, though obviously subject to appropriate regulatory approvals.
We expect the process of running off the Mesa book and transferring the Sage sure policies to take approximately 18 months to complete.
Our commitment to honoring all existing policies.
<unk> the same in all policyholders and agents will receive the same professional service. They have always received from fed Nat.
Upon completion of the transition, we expect said Matt to be right sized for our current capital position and therefore, a financially stronger company.
We anticipate that we will have approximately $450 million of in force premiums exclusively in Florida with less exposure to weather frequency and therefore less volatility in our underwriting results.
We expect the benefits of the transition to begin to materialize immediately in the form of lower capital requirements and lower exposure to catastrophe weather losses.
Over the past five years, we have taken dramatic actions to shrink our Florida homeowners book until rates more accurately reflects the increase of doing business, including attritional losses weather events and higher reinsurance costs.
Our exposure management efforts have reduced our Florida book by over a third from 272000 policies.
For us in 2017 to 168000 at the end of the third quarter.
At the same time, we have increased F&I seeds rates.
Most 70%.
In that time period, restoring rate adequacy in our book.
Insurance reform legislation in recent years, including <unk> reform legislation passed in 2019, and SB 76 that went into effect in July have also provided some health improving our attritional loss ratios. So we believe now is the right time to refocus on our historical roots in Florida or fed Nat continues to have.
Significant market here strong loan underwriting and claims processing capabilities and strong agent relationships.
Turning now to our third quarter results, we reported a net loss of $24 8 million or $1 42 per share in the third quarter of 2021.
<unk> 227 million or $1 51 in the third quarter of last year.
This year's quarterly results were impacted by approximately $20 million of catastrophe weather events, including Hurricane Ida and other smaller named storms that impacted Louisiana, Texas and Florida.
The claims handling infrastructure, we have in place.
Perform admirable admirably to handle the massive influx of claims from Ida and other events.
We also generated organic capital and liquidity to help soften the blow of these storms to fed Nat on a consolidated basis, Ron will provide more details on the impact of the catastrophe events in his remarks.
Looking at the Florida homeowners market. The environment continues to have its challenges, though we are pleased with the trends. We are seeing an improved attritional losses in both our new and renewal business as they renew at increased rates. These increases include a six 7% increase that took effect in March.
And a 9% increase that was implemented in April.
We have a five 7% increased spending that is expected to take effect in November.
As a result of these initiatives F&I Ice's average premium per policy increased by $109 in the third quarter compared to the second quarter of 2021 and $482 higher than the third quarter of 2020.
This increase translated into approximately $74 million more in premiums on the 154000 F&I <unk> policies in force in the third quarter of 2021 compared to last year with decreases Lewis.
Importantly, the end result of these increase is that the attritional loss ratio and F&I. It is Florida book dropped to approximately 39% for the third quarter of 2021 as compared to 44% a year ago.
Demonstrating why we are much more comfortable with the Florida market now than we were just a few quarters ago.
We remain cautiously optimistic about potential benefits from portions of Sp's 76 reform legislation that became effective on July one we are pleased with portions of the legislation such as measures to reduce the time limits for filing claims from three years to two years.
And to better control plane of attorneys fees, which are significant issues driving increased costs at.
At the same time, we believe the significant rate increases that have rolled into our book reflect these increased costs and have enabled us to achieve an improved attritional loss ratio.
We are maintaining appropriate capital position that said, Matt insurance company and monarch National insurance company with a capital infusion into F&I see a $20 million as of September 30.
<unk> elected to not infuse any additional surplus interface on in the third quarter and we do not anticipate needing to make any capital infusions in the future.
We continue to maintain approximately $40 million in liquidity at the holding company level.
Heading into the fourth quarter.
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 as its financial adviser.
Now I'll turn the call over to Ron for more details on the third quarter results.
Thanks, Mike and good morning, everyone.
As Mike mentioned, our third quarter 2021 results were impacted by significant cat losses from several named storms, including Hurricane Ida and other smaller events, including Elsa Fred and Nicolas.
In total our third quarter net income was reduced by approximately $20 million or $1 15 per share net of all reinsurance recoveries and affiliated fees.
Does we are not recognizing any tax benefits from our deferred tax assets here in 2021, the impact of the cat losses in the third quarter was the same on both a pre tax and an after tax basis.
Aggregate gross losses from these third quarter events are estimated at approximately $599 million 575 of which is attributable to hurricane Ida. These.
Gross losses were reduced by ceded losses of approximately $562 million consisting of $558 million under our excess of loss reinsurance treaties and $4 million under our quota share treaties.
The resulting $37 million of retained catastrophe losses within our insurance subsidiaries was partially offset by the accrual of $17 million of earnings primarily related claims handling and other revenues and affiliated entities driven by the significant size of Ida.
Net of the related affiliated claims handling fees. These cat events added approximately 38 points to our loss ratio and combined ratio in the quarter.
If one were to adjust our third quarter operating loss for the impact of the cat events and then apply the federal tax rate. It indicates that fed Nat suggested operating loss in the quarter would've been approximately $4 4 million or <unk> 26 per share with the change in our strategy. Mike just described to refocus on our Florida markets.
And with the approved and pending rate increases that are rolling into our book, we expect fed Nat to achieve ex cat earnings improvement in 2022 to illustrate the future benefits of the strategy shift I would point out that since the beginning of 2020, our non Florida business has contributed.
Almost 70% of our net catastrophe losses before fee offsets, despite representing less than 40% of our in force premium.
Going forward, we will continue to work to achieve low double digit ROE in years, where catastrophe losses approximate the models with higher ROE 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, which enabled us to reduce our total catastrophe reinsurance costs for the 'twenty one 'twenty two treaty year, our Florida policy Count at September 30 is down almost 7% sequentially from June 30, and down almost 23.
<unk> from September 30 of 2020, the total insured value of our Florida book.
At September 30 is down over 17% from a year ago we.
We have continued to manage our exposure in Florida over the past few years until rates adequately reflected our cost of doing business. Importantly, we think we have largely accomplished that objective and now expect to begin bearing the fruit of our disciplined approach other than normal ongoing exposure management.
Pruning, we expect our Florida policy count to level out and perhaps increase slightly such that in the coming quarters rate increases will begin to add to our gross written premium rather than in air quotes funding exposure management initiatives as they have done in recent years.
Despite the intentional shrinking of our policy count gross earned premiums declined less than 3% from last year's third quarter due to the strong growth in average premium.
Per policy, resulting from our rate increases.
Net premiums earned in the third quarter declined to $54 million from $83 million in the prior year due entirely to a $24 million increase in ceded premiums driven by increases in the percentages of quota share reinsurance in effect.
As communicated in previous earnings calls this reduction in net earned premiums is largely offset by corresponding reductions in loss and LAE.
In Commission expense.
Our net loss ratio net expense ratio and combined ratio are of course elevated by the higher level of ceded premiums. So it's worth pointing out that our gross expense ratio continues to perform well at less than 26%.
Turning now to our balance sheet and capital position, we continue to maintain surplus in fed Nat insurance company and monarch national consistent with RBC ratios of 300% or above.
We made a capital infusion to F&I <unk> of approximately $20 million effective as of September 30, We also maintained our commitment to having appropriate liquidity at the holding company and we currently estimate that holding company liquidity is approximately $40 million heading into the fourth quarter.
As Mike discussed, we elected to not make any capital infusion into may sign in the third quarter, and we do not anticipate needing to make future capital contributions to make time.
<unk> capital of course remains part of the fed Nat consolidated group and.
Will be redeployed within our structure at the appropriate time subject to regulatory approval.
At the end of the third quarter, we held total investments of approximately $355 million. In addition, we ended the quarter with total cash and equivalents of approximately $167 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.
So overall the portfolio has a duration of three nine and a composite credit rating of AA minus.
And with that I'll turn the call back over to Mike.
Great. Thank you Ron.
Operator with that we'll go ahead and take any questions that there is an analyst asked a.
Question for Us.
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, while we compile the Q&A roster.
Yeah.
Our first question comes from the line of Paul Newsome with Piper Sandler Your line is open.
Good morning.
I was hoping you could help me with some modeling questions related to.
The expense levels prospectively, given the run off.
Are there expenses that.
We will incur that.
Mark.
Lead to the runoff itself.
Could be.
All of these in the short term and if we.
Think about it.
Longer term.
Where do you expect things like your general and administrative expenses.
Commission levels of expenses to run.
Respectively give us.
We will run off.
The focus in the Florida.
Yeah, Hey, good morning, Paul This is Mike <unk>.
Iran can go a little deeper on the math.
But I don't think theres going be any significant costs to exit the market.
As you know in our business the vast majority of our expenses are variable expenses.
So acquisition and overhead that's commissions to agents as well as commissions to our to our management company to run the business, there's a personal losses. So as the books decreases those attritional losses would obviously decrease.
Proportionately and then Theres also.
The weather not whether retain and once again I would say those would be in line.
The only fixed.
Fixed costs would be reinsurance, what we call <unk> ranch excess of loss.
It is a variable expense, but it is kind of locked in for a period of time and what that means as at September 30.
That that we did lock in that expense. So we do anticipate.
The book will gradually.
Strength in the beginning of 2022.
I don't think it will significantly.
Our expense ratio for the ceded premium.
And then just to clarify in terms of staffing we.
We have about 360 employees and do not see much if any change on our staffing levels.
What I mean by that is is based on.
That book of business is handled organically and we're pretty.
Mean, and lean with our staffing I'll put it that way.
And any folks that have been specifically committed to they may sign business.
Could easily transition over to the other business that we have both with <unk> and IC as well as MNI soon.
And then just in the same is true for.
Sure.
And claims and obviously all the other departments within the company really support all functions.
HR accounting and so on so not sure why don't if you want to go deeper on the math, there, but really.
Most of our expenses are.
Variable expenses.
Yes, I guess, just a couple of things to add.
In terms of the commission and acquisition costs.
One thing I will say is that.
With the St Sure book.
Acquisition costs have been higher there given that we of course pay an MGA fee over to <unk>. So I do think is that book becomes a smaller percentage of our total our overall.
Weighted average commission and other underwriting expenses.
Trend down to be more in line with just the Florida.
Market place.
I think that's that's probably the only additive comment.
With the general and administrative expenses have been running sort of 23 to 24 million years has had a good run rate prospectively.
Yes, it really is.
Those costs really did not go up as we increase in size very very much at all and I really don't expect them to come down too much.
As we as we contracted a little bit outside of Florida, consistent with the remarks that Mike just made.
Great.
Yes.
Ask your questions I appreciate the help and the insight.
Yes, no absolutely I appreciate that.
Again to ask a question you will need to press star one on your telephone.
So we draw your question press the pound key.
Yes, operator.
While we're waiting to see if anyone else joins any other analysts during the Q I just did want to share an email.
From a long term shareholder.
Doug <unk>, who is not able to get on the call. He was just asking for an update on the Florida marketplace.
I just want to elaborate a little bit I have said repeatedly over the last three or four years that we have no desire to write the Florida business grow the Florida business until our rates more accurately reflect.
It reflects our increased cost of doing business.
Why the change of heart in Florida, and the answer is our costs are up 70%.
I don't think I don't say that.
That's a good thing to our policyholders so all of the hard working people throughout the state of Florida, but its a reality that their rates had to go up because of the operating environment in which we are.
Our.
Operating in so so we do feel that we're doing.
Correct service to our policyholders, it's unfortunate rates had to go up like that.
Hopefully there'll be more reforms at the state level to bring those costs down but with those elevated costs. We feel that rates are now more accurate than they have been in a number of years.
And we're seeing that Florida is a hard market, it's a difficult market, but a lot are not cures are writing. However, we are seeing signs that things are going to be changing in the near future.
I encourage people to look at very go away. He runs citizens property Insurance Corporation. He did a presentation to the banking and insurance Commission.
The Senate, Florida Senate and he talks about numerous investors trying to get into Florida numerous investors.
And how one company in particular.
Tried to take policies out of citizens about 23000, and only got about 10000 of those so I think the Florida market is changing I think the rates are more accurate I think <unk> reform.
Has has taken a small bite of the Apple I think Sp's 76 has taken a small bite at the Apple.
The truth is.
Great.
I have really changed materially to reflect these increased costs. So I just wanted to stress that.
And then the.
Other question that Doug had sent over via the email.
Was separate from the Florida marketplace as the non Florida market, our thoughts on the non Florida market I think the expansion into other states with the same lines of business and the same risks was appropriate at the time, our Florida market was really under under attack with increased costs. So once again.
We are still exposed to <unk>.
Homeowner type policies and coastal states in the last 15 months has been absolutely brutal I've been doing this for 20 plus years.
And that was off the charts, what we saw so we do have a new capital position and we do need to respond appropriately. So I think that shrinking that non Florida book.
Same store book and they've been a very good partner, but once again.
The weather has been very on kind of that book.
And also with <unk>.
The weather has been very unkind, we have to respond so those two books of business represent approximately $270 million of premium.
And that would reduce us down to the $450 million much more appropriate for our capital base. So.
With that I'll return it back to the operator to see if we have an analyst questions.
Yes, we do have another question from the line of Paul Newsome with Piper Sandler Your line is now open.
I apologize for another modeling question, but.
Other income has been an important component of your revenue and there's a little bit.
Difficult I think for outsiders to model could you talk about sort of what the outlook is for that.
It will continue.
Continues to be an important component of your profitability.
Yeah, absolutely Paul So, Florida is an MGA state and what that means is as opposed to Andrew the way the regulators in the state of Florida attracted capital was to create this MGA model, where not only do you have a carrier where you have affiliates in these affiliates perform work.
So we have always had an MGA within our business model since we've been writing property.
And I can tell you that what we have found is that our policyholders are best service.
When we have our folks handling these claims and doing as much as possible.
So what we do is we do charge fees for those services and they are based on market pricing, what we see that others will get so Fortunately I do believe.
Obviously theres some some financial benefit on a consolidated basis, but I truly believe there is a significant benefit to our policyholders and all of our partners to make sure that we can handle these claims.
Quickly as possible with the goal being to hand, it off as little as possible one of the challenges in Florida.
Is when you have smaller companies when there's multiple people handling a claim so we're trying to.
Get out to the policy holder as quick as possible when they have a claim primarily of weather claim.
Help with Remediated that we've done an incredible amount of targeting after Ida.
And then doing wherever we can to move that claimed through our process and try to get that policyholder whole as quick as possible back to their original position. So that's the intent in terms of specifics on modeling that it's tough because it's really dependent on weather, but obviously I defer to Ron on best ways to communicate that.
And I'll just add on a few remarks there.
Another one of the notable contributors fall through the other income line specifically is.
Brokerage income that we earn.
From our internal reinsurance broker that's involved with the placement of our ex ol.
Sure each year, and certainly that will continue to be a meaningful income stream.
Certainly over time, our <unk> spend will come down.
As we become a Florida centric and so brokerage income would come down with that.
Brokerage income was particularly elevated as youll recall.
During the treaty year that ended June 30, because we had a lot of backup purchases and additional ceded premium and and that contributed to elevated brokerage income, particularly in the first half of 2021.
Kind of reset as of July one along with the new reinsurance tower and so Q3 is certainly much more indicative of the.
The run rate currently.
Based on the current.
Treat a year that we're in.
Paul also out.
Theres a table in our 10-Q.
Youll be able to look at with respect to other income to get a little little detail into that number.
Great. Thank you very much.
Thank you Paul.
I am showing no further questions at this time I would now like to turn the conference back to Mike Braun.
Thank you very much. Thank you all for participating on today's call before we close I want to recognize our site and that team will continue to provide exceptional service to our policyholders and partner agents.
Particularly in times of need the dedication and hard work of our team has enabled said that to maintain our high quality reputation for close to 30 years and we look forward to continuing to meet the highest standards of customer service as we refocus on our historical home market in Florida, So with that I just want to thank everyone. Once again into the follow up.
Questions. Please reach out to myself Wow.
On ore body and I don't have a great day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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