Q1 2022 Fednat Holding Co Earnings Call

Good morning, and welcome to fed met holding company's first quarter 2022 Conference call. My name is Howard and I'll be your conference Cooperator. 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 vet nets website at.

Www dot fed net dot com.

Now I'd like to turn the call over to Bernie Joe Kelley for fitness Investor Relations Bernie.

Good morning, and thanks for joining FET nuts first quarter 2022 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.

Spare and see in 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 on our 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.

Today 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.

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

Or otherwise.

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

Thank you good morning, and welcome to our first quarter 'twenty to 'twenty.

2022 conference call, Ron Jordan, our Chief Financial Officer, and Erick Fernandez, Our Chief Accounting officer on the call with me today.

After my remarks, Brian will go into more detail on the financial results of the quarter and then we'll be glad to take some questions before I review, our first quarter results I wanted to give an update on the proposed action plan that we submitted to the Florida office of insurance regulation on April 29.

Plan had been requested by the Florida, Hawaii are on and the downgrade by demo task of training of F. N I C, which inhibits their ability to obtain or maintain or books of business that are no longer acceptable to some in the secondary mortgage markets. We believe the lack of an a rating also prevents us.

From complaining the appropriate excess of loss reinsurance program for the treating year beginning July 21, I'm sorry July one 2022. It is a proposed action plan.

As approved by the Florida, Hawaii.

And other right here lighters and other impacted states then it could result in the company, becoming much smaller as a result of vacating, our non Florida states and significantly reducing policies in force within Florida.

Proposed plan May result, in additional capital coming into the holding company Orange our insurance carriers. If approved the proposed action plan would be expected to enable us to obtain excess of loss reinsurance on a significantly smaller Florida only book of business. Our action plan is currently being.

Reviewed by the Florida, Oh, IR and we will provide an update on the outcome of the review when it as well.

We are of course disappointed with these latest developments as we announced last November our strategy is to exit our non Florida markets, including the run off of it makes an insurance company and to refocus on the improving homeowners market and Florida, where fed Nat once established 30 years ago, and where we continue.

To have a significant market share strong underwriting and claims processing capabilities and strong agent relationships.

Completion of this transition from Peru.

That said that would be a financially stronger company right size to our current capital and surplus position.

With less exposure to weather frequency and therefore less volatility in our underwriting results.

Turning to the quarter, our financial results were impacted by $31 million of that.

Catastrophe losses, including $19 million and net catastrophe losses from severe weather events that impacted Florida with the remaining pertaining to our non Florida business, which we are in the process of exiting while we ended the first quarter was $47 million of liquidity at the holding company.

Ongoing underwriting losses, driven primarily by catastrophe weather losses, and the uncertainty uncertain outlook for maintaining appropriate capital levels at <unk> and.

And I see with outside capital Infusions led in part to the downgrade from demo Tech and the action by the phone.

During the first quarter, we continued the orderly runoff of Nissan's insurance operations as part of our exit from our non Florida markets in January we began non renewing Masonic Louisiana policies.

Expiration dates of each appropriate policy and in March we began to non renew makes sense, Texas policies and non renewal Nissan's, Florida policies is currently planned to begin effective July 2022.

<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 as we discussed on our last conference call in March.

Her began making offers on coverage in December 2021 to all F. N I C policy holders in Texas, and Louisiana to renew policies on two alternative insurance carriers partners of same store that are not affiliated with that now.

A high percentage of such policyholders have been accessing the alternative coverage accelerating the reduction of our book of business in these states. During the first quarter same store policies in all states continued to be non renewed by us.

To the extent that the policy holder does not accept.

The alternative.

Coverage I'm, sorry, they will be renewed if they did not accept the alternative coverage. However that is no longer the case beginning here in the second quarter.

Beginning may one 2022 in Texas, and Louisiana June one in Alabama, and Mississippi in July one in South Carolina, all policies not renewed on an alternative carrier partner Sates Shaw will be not renewed.

By SMIC.

Beyond these actions the future status of non renewal.

F&I two policies written through St. Sean will depend on the approval of our proposed action plan by the Florida, Ohio and state regulators in Louisiana, Texas, South Carolina, Alabama and Mississippi.

Yes.

I want to stress that got net commitments honoring all commitments to our policyholders past present, and future and all policyholders and agents, we won't see the same professional service, but they have always received from bad debt.

Before I turn the call over for one to give more details on the first quarter's results I will move to briefly discuss the environment.

Lauren homeowners market and our performance during the first quarter. The environment continues to have its challenges as a result of the dramatic actions taken by us and our underwriting and rate actions over the past five years. We are now experiencing positive trends in our attritional loss ratios in both new business and renewal.

All business areas. It is renewed at increased rates.

Integrated from our actions to shrink our Florida book until rates more accurately reflect the.

Increased cost of doing business.

Clothing higher reinsurance costs from the end of 2017, our Florida book has declined by almost 44% from 272000 policies in force to a 152000 policies at March 31 this year.

We increased F&I seats rates by a cumulative 90% over that same time period restarting rate adequacy in our book.

F&I six average premium per policy in Florida increased by $176 in the first quarter compared to the fourth quarter of 2020 and.

$607 higher than the first quarter of 2021.

This increase translates into approximately $83 million.

And more premium on the 137000 F&I C policies in Florida as of March 31.

Compared to last year. Most importantly, these rate increases helps improve the attritional loss ratio and F&I Sneeze, Florida book, which dropped to approximately 32% for the first quarter of 2022.

Compared to 38% year.

This clearly demonstrates why we decided to shift our strategy to exit non Florida markets and refocus on the Florida homeowner.

Now I'll turn the call over to Ron for more details on our first quarter financials.

Thanks, Mike and good morning, everyone as Mike mentioned, our first quarter 2022 results were impacted by $29 2 million of catastrophe losses, which were primarily from 11 large storms that affected, Florida, Texas, Louisiana and South Carolina.

Aggregate gross losses from these first quarter events are estimated at approximately $32 million.

Gross losses were reduced by ceded losses of approximately $2 million under quota share treaties and by the accrual of $1 million of related claims handling revenues.

Approximately $10 million of these net catastrophe losses are related to books of business that the company is in the process of running off including F&I <unk> non Florida book and May signs book of business. In addition, the company recorded approximately 2 million of net adverse reserve development in the quarter related to Hurricane Lora, which hit Luisa.

In August of 2020.

If one were to adjust our first quarter operating losses for the impact of the cat events and reserve strengthening and then apply the federal tax rate. It indicates that fed that's adjusted operating result in the quarter would have been income of approximately <unk> <unk>.

$2 3 million or 13 cents per share.

With the change in strategy to refocus on the Florida market, our Attritional loss ratios have improved reaching 27, 8% in the first quarter of 2022 compared to 36, 5% in last year's first quarter excluding.

Excluding the impact of catastrophe losses, our first quarter 2022, combined ratio was approximately 118% as compared to 157% in the prior year quarter on a comparable basis, a decline of 39 points driven primarily by lower excess of loss reinsurance COO.

Ross and the benefit of rate increases that continue to earn into the book.

We have continued to make disciplined progress on our Florida exposure management strategy, Our Florida policy Count at March 31.

The 152000 policies is down 5% sequentially from fourth quarter and down 23% from a year ago.

The total insured value of our Florida book at March 31 is down over 13% from a year ago.

Importantly, we believe that our rates have largely caught up with our higher cost of doing business in recent years as a proof 0.1st quarter 2022, gross written Florida premiums decreased 4% from last year's first quarter, while policy count decreased 23%, reflecting the impact of our price increases.

Outside of Florida, as Mike discussed, we continued to execute the run off of these books in the first quarter.

Non Florida policy Count at March 31 was down 20% from December 31, and 36% compared to March 31 of last year.

This non Florida runoff will accelerate in the second quarter as we began non renewing sage her policies that do not voluntarily take the alternate offer of coverage as already described by Mike.

Turning now to our balance sheet and capital position, we maintained surplus in monarch national and May saw consistent with RBC ratios of 300% or above we also maintained our commitment to having appropriate liquidity at the holding company with $47 million of such liquidity at March 31.

At the end of the first quarter, we held total investments of approximately $276 million, reflecting in part a decline in carrying value of $14 2 million following the feds rate increase actions.

We ended the quarter with total cash and investments of approximately $92 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 composite credit rating of a.

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

Thanks, Ron.

Operator, if you can go ahead, and we will take a few questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue simply press the pound key.

And if you have a question or comment at this time. Please press Star then one on your telephone keypad.

Our first question or comment comes from the line of Doug Ruth from Lenox Financial services Youre line is open.

Good morning, Mike Ron and Eric.

Could you offer s'more color or comments about the the plan is there anything else you could tell us about it.

Yeah. Thank you Paul.

Yeah, there's not a lot we can share publicly at this point, but clearly.

Last few years have been very challenging for the company.

In 2020.

Had five different hurricanes, which was very taxing and.

And it has impacted us and you've been a materially negative way and then that that pain is extended into 2021.

So there's nothing specific that we can share with you at this point, Doug, but once again, what we're trying to do is.

Adjusted the company.

Tobacco, Florida.

We're trying to have proactive meaningful conversations with the with the O I R. And also just once again coming back to a smaller balance sheet.

And until our policies in force so that's the objective generally.

And we look forward to giving more information at the appropriate time.

Okay, and then do you have a timetable when you might expect to hear back from the old way or.

Yeah, there's no specific timetable, but I would say.

Hopefully, we can share more publicly in the coming weeks.

I think it's something that's coming in the coming months I think it's in the coming weeks.

And once again, it's all it's a hot item for the company and the regulators.

Have been receptive to what we're looking to accomplish but it does take time for review.

Once again to make sure that Oh.

Oh why are as comfortable what we're proposing.

Okay, and what about the special session coming up or what are your thoughts about what you see and what you are hearing.

Yeah, it's a bit early so we'll know more obviously in the next two weeks.

But clearly the Florida property market has been very challenging for the last number of years and it's an industry that has had massive losses underwriting losses I believe of about $4 billion combined when you combine 2019 2020 in 2020, one our reaction to Florida has been too sure.

The policy count and also take rates up so our rates are up about 90% cumulatively over the last five years.

And I think the legislators are trying to come up with a solution that is less focused on the right action and perhaps identifying some of the drivers social inflation litigation.

Things like that are come to come to the front of mind, but then there's also talk about the reinsurance community.

And their pricing all of Florida their lens on Florida. So there's there's potentially talk about expanding the reinsurance that we purchased from the state of Florida Hurricane Cat Fund.

So it's a bit early but well known about two weeks time.

Three weeks on Max what what the results are.

Okay, and what I'm worried about the state of Florida, and the relationship that you're having with the homeowners and the agents.

They have changed now that you're really just focusing on the state of Florida.

Yeah, you know, it's very difficult to.

T K, everyone in Florida to the.

The whole community.

A lot of people are dealing with inflation.

And.

It's very difficult for them, so they're seeing massive price increases.

And their Homo insurance policies.

And they are also seeing a lot of people that are being canceled.

So it's very difficult.

Policyholders, it's very difficult on the agents, it's very disruptive people are having a lot of trouble finding coverage citizens.

It is growing exponentially and this is the state insurance company and it's that's very unfortunate.

And then what about the the reinsurance I mean do you have like a dollar amount that you think you might need to spend for the 2022 'twenty 'twenty three time period.

Yeah, that's a good question there Doug as well.

Part of that is as we shrink our reinsurance spend really becomes a fixed cost and for correct terminology and as ceded premium. It is a variable expense, but really when you get when you go. After you go through hurricane season, It really becomes a fixed cost. So we have dropped significant premiums.

Significant policies over the last year.

And yet that that cost.

Really stays flat so it's really impactful us over the last year through March we dropped.

About about 100000 policies.

And also.

That $100 million of premium.

A lot of rate increases have rolled in so it's difficult. When you have this big reinsurance expense to shrink the book as aggressive as you might want and Theres an opportunity once a year.

When you re <unk>.

Launched a new.

Reinsurance program.

And once again I think our cost on that reinsurance program was approximately $275 million.

What we think if we can work this plan.

That cost would drop significantly I don't want to quantify but it would be a much smaller program.

Policies much smaller program off of in force premium amongst smaller need for reinsurance.

And I think just an opportunity for us to to be better set up for success on a go forward basis. So once again nothing's been approved we're having dialogue with our regulators.

And we're trying to to move forward.

Best we can in a difficult situation.

Okay and then my last question is and I'm grateful for the answers to these questions. How is the current quarter progressing it.

Has there been any significant weather events or anything to be concerned about above and beyond what might be normal.

Yeah, you know in terms of Q1, we had a lot of weather and I'm not sure. How you define march but it could have been one of the more active more.

<unk>.

March or end of decade, plus if not many decades.

So April was much quieter may.

May is.

Only you know roughly the first 10 days of the month here.

So we've had some weather absolutely but.

Every day, our portfolio shrinking significantly.

So so nothing specific to bring up.

We talk about Q2, a lot more rate continues to earn in on these policies a lot less policies are enforced with each passing day I believe we're dropping roughly.

400 defined more policies per day on average that's not a specific number but just when I look at the month in aggregate.

It's just a significant reduction in policies so.

We've made a lot of progress in our downsizing, but once again as you shrink when you have that high reinsurance costs.

There is some challenge there.

Okay, well I'm grateful for the answers to the questions and we're hoping for the past here going forward.

Alright, Thank you and have a good day.

Thank you I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.

Thank you all for participating on today's call before we close I want to recognize the hard.

Ongoing work by and dedication by the fed that team.

They continue to provide exceptional service to our policyholders and to our partner agents, particularly in their time of need. So just wanted to thank them for their efforts and wish everyone. A good day. So thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

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