Q4 2021 Fednat Holding Co Earnings Call
Good morning, and welcome to fed Nat holding company's fourth quarter 2021 Conference call. My name is Liz and I'll 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 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 <unk> website at Www Dot fed Nat Dot com.
I would like to turn the call over to Kelly for Fed Nat Investor Relations Bernie.
Thank you.
Good morning.
And thanks, everyone for joining FET nuts fourth 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.
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.
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 earnings 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 fitness, 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 fed that's Chief Executive Officer, Mike Braun.
Thank you good morning, and welcome to our fourth 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, Ron will go into more detail on the financial results of the quarter and then we will be glad to take questions.
Before I review, our fourth quarter results I want to give an update on the shift in fed that strategy that we announced in November .
We announced them, we are exiting non Florida markets and refocusing our efforts on improving homeowners market in Florida, where fed that was established 30 years ago, and where we continue to have a significant market share strong underwriting and claims processing capabilities and strong agent relationships.
As part of the exit from our non Florida markets, we have begun an orderly runoff of my songs insurance operations.
<unk> has filed the appropriate documentation with its insurance regulators in Louisiana, Florida and Texas.
In January we began non renewing make someone's policies in Louisiana on the exploration dates of each appropriate policy and in March we are beginning to non renew Masonic Texas policies.
Renewal of Nissan's, Florida policies is expected to begin in July 2022 at that time, we expect the run off of my son's business to be substantially completed by the end of 'twenty to 'twenty two.
F&I <unk> non Florida book was written through our third party managing General underwriter same store and same store owns the renewal rights to those policies last December sales for began making offers a coverage to F&I C.
Policyholders in Texas, and Louisiana to renew policies on two alternative insurance carrier partners.
Sure that we're not a feeling where I said that up through the first quarter of 2022 same store policies in all states have continued to be renewed by F&I scene.
The policyholder policyholder did not accept the alternative offer of coverage. However, beginning in the second quarter, most notably with Texas and Louisiana, beginning May one 2022, we will began non renewing also sure policies that do not accept the alternative offer coverage. In addition, we will.
I'll begin dominating all policies in Alabama.
On May one 2022, and then South Carolina on July one 2022.
As such the pace of the one off will accelerate substantially in the second quarter. We expect the process of transferring <unk> non renewing the same store policies to be substantially complete by June 32023, or.
Our commitment to honoring all existing policy remains the same and all policyholders and agents will receive the same professional service that we may always have received from past that.
Upon completion of this transition, we expect fed math to be a financially stronger company that'll be right sized to our current capital and surplus position. We anticipate we will have approximately $450 million of in force premium exclusively in Florida with approximately 113.
Surplus within our three carriers based on year end 2021 we will have substantially less exposure to weather frequency and therefore less volatility in our underwriting results. The benefits of the transition have already begun to materialize in the form of lower cat exposure and capital.
Our requirements, we have maintained appropriate capital positions of F N I C and monarch with a capital infusion into F&I <unk> of 17 million as of December 31.
After a year and infusions, we have $40 million of liquidity at the holding company.
Heading into the first quarter.
No in November 2020, 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 work of the committee is ongoing on the committee continues to work with Piper Sandler as its financial adviser.
Turning now to the fourth quarter results, we reported a net loss of $8 6 million or 49 per share in the fourth quarter of 2021 compared to a net loss of $38 1 million or $2 77 per share in the fourth quarter of the prior year.
This year's fourth quarter results were impacted by approximately $8 4 million of cat weather from seven storms that impacted Florida, Texas and Louisiana.
Important to note that $3 million, the $8 $4 million in cat losses were from the books of business that we are running all S. Treatment protocol previously announce our fourth quarter 2021 results were also impacted by $4 4 million of reserve strengthening related to the third quarter 2021 and acquire acts.
And in quarters.
This strengthening was primarily due to the multiple hurricanes that occurred in the second half of 'twenty 'twenty well, we had some gaps in our reinsurance program Ron will provide more details on the impact of the cat events and reserve strengthening in his remarks.
Looking at the Florida homeowners market. The environment continues to have its challenges, but we are seeing positive trends in our attritional loss ratios in both new and renewal business as each policy renews at the increased rates. We are seeing the benefits of the dramatic action, we've taken over the past five years to <unk>.
Our Florida homeowners book until rates more adequately reflect the increased cost of doing business, including attritional losses weather events and higher reinsurance costs, Our Florida book has declined by over 40% from 272000 policies in force in 2017.
<unk> hundred 60000 at the end of 2021 .
At the same time, we have increased F&I sees rates by approximately 70% cumulatively over that same timeframe restoring rate adequacy in our book insurance reform legislation in recent years, including <unk> reform legislation passed in 2019 and S 76 at one.
In fact in July of 'twenty, one I've also provided somehow improving our attritional loss ratios are rate increases in EF and Ics, Florida book during 2021, including a six 7% increase.
That took effect in March a 9% increase in April and a five 7% increase in November as a result of these increases <unk> average premium per policy in Florida increased by $64 in the fourth quarter compared to the third quarter of 2021 and $541 higher.
In the fourth quarter of 2020.
This increase translates into approximately $80 million more in premiums on the 146000 policies that were enforced at year end 2021 compared to last year with decreased exposure.
Most importantly, these rate increases help improve attritional loss ratio and F. In ice's more to bulk which dropped to approximately 31, 6% for the fourth quarter of 2021 as compared to 42% a year ago.
And there are still substantial rate increase benefits out in front of us for 2022 that are not yet captured and these results clearly demonstrates why we are much more comfortable with the Florida market now than we were just a few quarters ago.
We continue to be cautiously optimistic about potential benefits from portions of STI 76 reform legislation that became effective last July we are pleased with portions of the legislation such as measures to reduce the time limits are funding claims from three years to two years and to better control plane of attorney fees, which are significant drivers of it.
Increased costs.
At this time, we will continue to monitor our results and implement additional rate increases and it's warranted to ensure that our rates are adequate. So we can continue to achieve an improved attritional loss ratio. These rate increases include a 6% that is taking effect in March of 2022 for renewables.
I'll turn the call over to Ron for more details on our fourth quarter financial results.
Thanks, Mike and good morning, everyone as Mike mentioned, our fourth quarter 2021 results were impacted by catastrophe losses, primarily from seven large storms that affected Florida, Texas and Louisiana.
Aggregate gross losses from these fourth quarter events are estimated at approximately $10 6 million gross losses were reduced by seat.
Ceded losses of approximately $3 5 million under our quota share treaties and by the accrual of 300000 of related claims handling revenues, resulting in $6 8 million of cat losses through the last line of our income statement related impacts on sliding scale ceding commissions in the Florida quota share treaties of approximately 1.2.
<unk> brought the total impact from four acute cats to $8 1 million or <unk> 46 per share on both a pre tax an after tax basis on a consolidated GAAP basis.
This equates to approximately 15 points to our loss ratio and combined ratio in the quarter as mentioned by Mike approximately <unk> 3 million of this net impact stemmed from our run off books of business from our strategic shift announced back in November which are fed that insurance companies non Florida book and the entire book of Mace.
An insurance company as a result of this run off our exposure to catastrophe weather losses outside of Florida is declining literally on a daily basis and more on that in a moment.
Our fourth quarter 2021, net income was also impacted by $4 4 million or 25% 20.
<unk> 25 per share of reserve strengthening net of reinsurance recoveries and other offsets. This reserve strengthening added approximately eight points to our combined ratio in the quarter and pertain broadly to all accident quarters from three Q 'twenty, one and prior.
It was driven primarily by the multiple hurricanes that occurred in the second half of 2020, and specifically from additional net retention of losses from those events due to gaps in excess of loss reinsurance coverages during the 'twenty 'twenty to 2021 treaty year.
With respect to the non core lines that we exited around three years ago yearend Reserve studies were favorable in both the C. G L and auto lines of business and benefited the quarter by approximately $3 million in total.
If one were to adjust our fourth quarter operating loss for the impact of the catastrophe events and reserve strengthening just discussed and then apply the federal tax rate. It indicates that fed Nat suggested operating result in the quarter would have been operating income of approximately.
$4 1 million or <unk> 24 cents per share.
With the change in strategy to refocus on the Florida market, we are drastically reducing our catastrophe exposure.
As shared on last quarter's call since the beginning of 2020, our non Florida business has contributed almost 70% of our net catastrophe losses, despite representing just 40% of our in force premium.
With the approved in pending rate increases in Florida Rolling into our book, We expect our Florida book to achieve ex Cat earnings improvement in 2022, if one assumes a flat book with year end 2021, Florida rate increases that are either already implemented or are taking effect later this month our.
To generate an additional $80 million of gross earned premium in 2022 as compared to calendar 'twenty one.
In 2022 much of this benefit will continue to offset reductions to gross premium that are a result of our exposure management. However, a portion is expected to fall to the bottom line in the form of lower Attritional loss ratios.
Going forward, we will continue to work to achieve low double digit ROE ease in years, where it catastrophe losses approximate the models with higher Roe's attainable when cat losses come in favorably as compared to the models.
We have continued to make disciplined progress on our Florida exposure management strategy, Our Florida policy Count at December 31 is down over 4% sequentially from September 30, and down almost 22% from December 31, 2020, the total insured value of our Florida book at December 31 is down.
Don't over 15% from a year ago importantly, we believe that our rates have now largely caught up with our higher cost of doing business in recent years by the latter part of 2022, we expect our Florida policy count to begin to level out so that in the following quarters the rate increases, earning in will begin to add more meaningful.
<unk> to our gross written premium.
As a proof point, we're seeing some of this already fourth quarter 2021, gross written Florida premiums increased two 9% from last year's fourth quarter as compared to steady reductions in our risk appetite for the last several years.
Outside of Florida, we continue to execute the run off of these books non Florida policy count is down almost 10% from <unk> 21, and 22% compared to year end 2029.
Non Florida total insured value is down over 8% sequentially and almost 20% versus year end 2020, and we expect the pace of run off to accelerate further in the second quarter of 2022.
Particularly with respect to the F N I C. Non Florida book as Mike has already described.
Turning now to our balance sheet and capital position, we maintained surplus in F N I C and monarch national consistent with RBC ratios of 300% or above.
We made a capital infusion to F N I C of approximately $17 million effective as of December 31 via the assignment to F. N I C of the whole COSE investment in a surplus note for mace, an insurance company that the whole co had held since December 2019.
We also maintained our commitment to having appropriate liquidity at the holding company after you're in infusions holding company liquidity is approximately 40 million heading into 2022.
Nissan ended the year with approximately $31 million of statutory surplus Masonic capital 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 fourth quarter, we held total investments of approximately $333 million. In addition, we ended the quarter with total cash and equivalents of approximately 83 and a half 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.
Overall, the portfolio has a duration of 396 and our composite credit rating of a one notch higher than where it was last quarter.
And now I'll turn the call back over to Mike.
Alright, Thanks, Ron and then with that operator, we'll go ahead and queue up some questions of if there's some questions as well.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Again that is star then one if you'd like to ask a question at this time.
Our first question comes from Douglas Ruth with Lenox financial.
Hi, Good morning, Mike and Ron and Eric Congratulations on the improved report.
Very welcome news.
Yeah. Thank you good morning to you Doug.
Could you talk some about the pricing in Florida, and what Youre seeing.
Yeah in terms of pricing within Florida, our rates are up substantially.
And.
I would say that the market is a very hard market. So I think that our rates have moved up perhaps on.
On the aggressive side compared to some of our peers.
So we're finding in.
In lieu of those rate increases that others, maybe should've taken that theyre just restricting underwriting. So we're finding that the that our prices have gone up significantly.
And we're finding it.
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The competition is much less than it used to be.
Florida Domestics.
Appear to have less appetite and.
The national carriers appeared to.
<unk> had a very reduced appetite for the last 20 years and I really don't see much change in that.
And then of course their citizens citizens continues to grow and citizens as a is mistaken insurer.
But they are out there growing and they have competitive prices.
Frequently so so we are running into them.
And for everyone's benefit citizens peaked at I believe 1.55 million policies background six seven years ago.
And then there were as low as maybe 400000 450000 back about 345 years ago.
And I believe they're going to approach 900000.
At the end of.
During the first quarter here. So the market is much harder pricing is up substantially.
And were seeing less competition.
From multiple carriers, primarily the Florida domestic I should say less appetite.
So is there or are there some people that we'd prefer to deal with a company like fed Nat verses citizens is is that possibly some of the customers that you might be getting now.
Yeah, absolutely there are definitely people that would prefer not to be in citizens.
It's hard to ignore citizens when there so competitive on the pricing.
Avid advantages to their pricing that the private carriers don't have.
There's caps on how much they can increase their rates.
There's caps on or I should say limits to the reinsurance that they purchase and Theres actually talk right now I'm not even buying reinsurance.
You know, we don't know what theyre going to purchase or what theyre not going to purchase Theres clearly advantages.
To being.
You know with the cheapest carrier, which can be citizens frequently, but some people would prefer to be in the private market market for a variety of reason and then we're also seeing some E&S writers come in.
The benefit of E&S is you can really strip out coverages and provide the policyholder with less coverages.
And the policyholder gets a cheaper price.
For that for that.
For less coverages.
Okay, I understand what you're saying and then in general are you happy with the Florida book of business at this time or is there more work to do maybe you can give us a little color there.
Yeah. That's a good question and the answer is yes more pleased with the book than we have been at about three or four years.
If you go back in time, you've probably heard me say repeatedly that that we're restricting business in Florida, and our appetite until our rates more accurately reflect our cost of doing business.
Thank you.
Rental rates.
Robert Blake more accurately now than in the last three or four years reflect our increased cost of doing business and theres continuous pressure on that we need to monitor.
But we're seeing less pressure for further rate.
Actual neither I'm, not saying that there's going to be no additional rate need it.
But I think that the lion's share of the movement has already occurred in our pricing. So our pricing is up roughly 70% plus that already includes.
Some active weather that we've been incurred that already includes higher attritional losses based on the social inflation that has taken place in Florida and that already includes higher reinsurance costs. So our reinsurance costs have gone up because of increased weather because of the social inflation as well.
So I believe our rates are more more accurate today than they have been in multiple years.
Very encouraging then my last question is there any pending meaningful legislation reform that could help the company.
Yeah.
The legislative session ends in a little over a week I should say and there is multiple things that theyre looking at.
Theyre looking at perhaps more controls on what's called ACD, that's that's depreciation or actual cash value.
Theres some ideas about.
Litigation and so on but at the end of the day.
I don't think it's in the states interest to have citizens continue to balloon.
So I think that it's in the states interest.
Two supports a healthy home insurance market.
For the 21 million people that live here, which I believe is projected to grow by another $4 million in the coming years.
You need this so that people can afford to stay in their house they sell their house, so that the new person who's buying the house can find insurance and I think youre going to see massive growth with citizens.
Unless one of two things happens and that wouldn't be that citizens take up their rates quicker.
Which I'm just not sure that's going to happen.
If we can get more help on keeping our rates competitive with citizens and the easiest answer for that.
As us being able to purchase more reinsurance from the state.
Via an entity that they have which is called the Florida Hurricane Cat Fund, it's a very big fun about $17 billion in capital.
I should say total exposure that they could have about $17 billion. It's mostly funded Conversely citizens has.
As many times that size.
And I believe is less than $10 billion of capital.
So I think it's in everyone's best interest to keep the Florida domestic carriers are strong and the best way to do that has helped us keep our prices competitive.
Either more legislative reform poor, helping contain our costs with reinsurance.
Or Conversely are helping.
Citizens write business at less favorable pricing. So those are those are two things that can occur and the other option is the continued growth of Vienna, E&S excess and surplus which has a lot less protection for policyholders, but once again, you can kind of offer policies at less rate because there.
It's more restrictive in terms of the terms so theres a lot of things there Doug that are happening, but what we're doing is we're trying to price our books.
As.
As best we can with all information today.
I would like to be able to take premiums down if possible, but there has to be a reason to do that.
And I sure hope that rates don't continue to go up, but we're going to monitor it regardless and make the appropriate adjustments.
Okay, well I appreciate.
He answered my questions. Congratulations on the improved results and it seems like you understand what's going on and Youre doing the very best that you can for the shareholders and I'm grateful for that.
Thank you.
As a reminder, if you'd like to ask a question at this time that is star then one.
I'm showing no further questions in queue at this time I'd like to turn the call back to Michael Brown for closing remarks.
Thank you all for participating on today's call before we close I want to recognize the dedication of fed next team who continue to provide exceptional service to our policyholders and partner agents, particularly in their times of need the hard work of our team has enabled <unk> to maintain our high quality.
For 30 years, 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 everyone have a great day and if there's follow up questions feel free to reach out. Thank you.
This concludes today's call.
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Yes.
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