Fednat Holding Co (FNHC) 2017 Q1 法說會逐字稿

Good day, and welcome to Federated National Holding Company's First Quarter 2017 Financial Results Conference Call. My name is Catherine, and I will be your operator today. Please note that today's call is being recorded. (Operator Instructions)

Statements in this conference call that are not historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as anticipate, believe, budget, contemplate, continue, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, possibility, possible, potential, predict, probably, pro forma, project, seek, should, target or will or the negative thereof or other variations thereon and similar words or phrases or comparable terminology are intended to identify forward-looking statements. The 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 risk and uncertainties described in this conference call, our press release issued yesterday and other filings made by the company with the SEC from time to time. Forward-looking statements made during this conference call speak only as the date on which they are made, and Federated National Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise.

Now at this time, I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of Federated National Holding Company. Please go ahead, sir.

Good morning and thank you for joining us to discuss Federated National Holding Company's first quarter 2017 financial results. I am joined on the call by Ronald Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer. Our financial results can be found in our earnings press release. I will go over some brief highlights and then we will open up the call for questions.

Q1 2017 highlights as measured against same 3-month period last year, except where noted: 7.4% increase in gross written premiums to $146.1 million; 10.4% increase in Florida homeowner policies to approximately 280,000; 56.3% increase in non-Florida homeowner policies to approximately 20,900; 34.7% increase in total revenue to $92.9 million; $5.2 million of claims from tornadoes in Florida and Louisiana; net income of $3.1 million or $0.23 per share; 1.7% increase in book value per share, excluding noncontrolling interest, to $16.54 as compared with $16.26 at December 31, 2016; total loss reserves at March 31, 2017 of $154.3 million; repurchased 396,446 shares of common stock at weighted-average price of $16.62 since January 1, 2017.

Our results for the quarter include $4.8 million in claims, net of our reinsurance programs, related to the recent tornadoes that impacted the Florida Panhandle and the State of Louisiana. We continue to expand our business including entering the Texas homeowners markets during the first quarter, and continue focus on the fundamentals including stringent expense control and providing best-in-class service to our partner agents and policyholders.

Our 5.6% statewide average rate increase that went into effect on our Florida homeowners book of business in August, 2016 continues to earn out more with each sequential quarter and should be earning out the entire approximately $25 million of annualized additional premium later this year. This increase will help offset the higher costs that we have experienced in settling claims over the past few years primarily associated with those that have an assignment of benefit, AOB.

We are in the final stages of securing our hurricane reinsurance program for the upcoming 2017 wind season and intend to purchase a similar program as last year with our approximate 75 reinsurance partners, and again free of alternative type instruments such as catastrophe bonds, at pricing that appears to be more favorable than last year. Our capital position remains strong and we look forward to continuing to assist -- continuing our consistent track record of being there for our policyholders when adversity comes their way.

Also, I'd like to take a moment just to introduce Ron Jordan, our CFO, to all of our shareholders. He has recently joined the company and we are very pleased with that, and also to acknowledge the fantastic job that Erick Fernandez has done over the last 9 months as the interim Chief Financial Officer, and he is now serving as the Chief Accounting Officer. So we're very excited with the team that we have in place. So with that, we'd like to open up the line to the questions that you have.

(Operator Instructions) And our first question comes from Ron Bobman with Capital Returns.

Got a handful of questions and then -- a handful of specific questions. If it gets too long, I'll circle back obviously. In no particular order, any cat activity of note? Last quarter, you -- on the last call, you commented mid-call about mid-Q1 sort of cat activity. I'm curious if there's any sort of insight you could give us about mid-Q2 sort of cat activity, the absence or the existence of any losses.

Yes. Since April 1, Ron, nothing to report at this time.

There's comment in the press release about new state premium growth, and I'm just wondering qualitatively if you could sort of talk about which states represent the geographies where you're generating the most new business growth.

Sure. Non-Florida, we have about 20,000 policies. Louisiana, I believe it to be around 13,000. Alabama and South Carolina are some smaller states there. And we've just brought on Texas, which is coming on at about $100,000-a-week of premium. This is all written through a partner that we have, which is an MGU, and I think they do a fantastic job. They have distribution in multiple coastal states, both with A.M. Best paper and with our non-A. M. Best paper. So we're just tapping into their distribution into further states.

Okay. And so we're talking about homeowners here. Is that correct?

Correct. This is homeowners that we're talking about.

Okay. So, I'm sorry, should I think is Louisiana being the state where the rate of growth is the most significant or at least the sizing of it is the most significant?

Well, I would say that we've been in Louisiana for about 2 years and we're still seeing some growth there. It slowed from what the growth that we saw a year-or-so ago. South Carolina, we're having a little uptick of business there, which is pretty steady. Alabama, it's just a small coastal state for us. And, like I say, Texas…

What's 100k per week as far as PIF, roughly?

They're coming in under $2,000 a policy. I can circle back and give you the more specifics on that. It's mostly business down in the Houston area, the Galveston area. We're trying to, with our partner, stay in the southern part of Texas. Obviously, when you get into Texas there's challenges just like there are in Florida. There's a lot of hail, obviously, up in the Dallas area, we're mindful of. The market is very competitive in the San Antonio area. And there's litigation in the state and there's pockets of litigation as well. So what we're trying to do is stay initially close to the coastline.

Shifting to auto. Can you give us an update on the auto programs, sort of the status of the various MGA relationships? Any cancellations? Any new ones?

Yes, during the -- yes, as you know, Ron, we did cancel some of the GAs going back to Q2, 3. In terms of Q4 -- I'm sorry, in terms of Q1, we had a GA that converted a program from a pricing structure to a more favorable pricing structure in Georgia. In terms of -- I think that it bodes well for the program, the new pricing structure in Georgia. The auto that we're writing is primarily in Texas and Georgia. As you know, those have been some tough markets. The new pricing is significantly higher in Georgia. I'm going to say approximately 40% higher than the older program. And it's being well received within the market.

Wow. 40% up. That's shocking. I'm sorry, so it sounds like in Q1 there was no GA or MGA changes. I mean as far as cancellations. They've got rate changes, as you mentioned.

Correct. No new GAs and no termination of GAs.

Okay. And then, any -- the auto dipped in Q4 of 2016, volume-wise, in totality, and then it picked up significantly in Q1 of 2017. What's that sort of reversal, basically, attributable to?

In terms of the…

The total volume. Seasonality?

Yes. This is Erick. Yes. So what you saw there is a little bit of lumpiness quarter to quarter. There are, as Mike mentioned, several different programs and they kind of ramp up and down over several quarters. Part of what we have, from a structure perspective, is certain caps that we work with. And so that's a little bit what you're seeing. The other piece of it…

Premium caps?

On average -- say that again.

You said certain caps. Premium caps?

Premium caps under the reinsurance contract.

Yes. The other piece of it, on average, the term is roughly 6 months. So if you look at Q3 2016 in total we had written of $21.5 million. A lot of that renewed in Q1 2017. So that's part of what you're seeing there. So hopefully that answers your question.

Okay. And how about the status of the reinsurance relationships? I know the auto market has been tough for nearly everybody; insurers and reinsurers included. So what's the sort of -- any changes of note, of late, looking backwards? And any concerns or fears or likelihood that reinsurance availability is going to change our ability to support these MGAs?

Well, so I'm assuming you're speaking of the reinsurance only in this context as it relates to auto. These programs need to perform. If these programs are not performing, if they're causing problems for us or the reinsurers it absolutely jeopardizes the individual reinsurance program if it's running hot. There's no way about it. And if that's the case, that individual program would be terminated, subject to statutes in the specific states to run it off. So these programs need to perform. Otherwise, the auto programs would be terminated on a case-by-case basis. And the intention is for them to perform, to have the rate and take the rate as appropriate, and write sustainable profitable business.

I'm sorry, but looking forward, what's your expectation that the current programs that are in place, the GA relationships and then the supporting reinsurance programs, are likely to hold or likely to be eliminated in part or in whole?

Ron, I think they're likely to hold subject to the programs as we renew them. So I don't want to say with certainty that it's a given that these programs are definitely renewing the reinsurance contracts. And I don't want to say that they're definitely not renewing. We need to perform. We've had some problems in our auto programs. We're working through those. We think we can do it sustainable and profitable, but we have had some challenges, and we need to prove that in order to keep the reinsurers on the programs.

And our next question comes from Christopher Campbell with KBW. Our next question comes from Douglas Ruth from Lenox Financial.

I have several questions and I'll ask a few and then if you want, I'll circle back as well. Mike, could you explain how the company reserves the subrogation?

Yes. In terms of the reserves, you see that where our reserves have picked up significantly over the last 1, 1.5 years. Subrogation's become a hotter topic as of late that we're hearing in the space. We do pursue subrogation opportunities. And then for everyone's benefit, salvage and subrogation is on auto as well as homeowners when we pay out a claim and there's an opportunity to recover from somebody else or to be reimbursed. So in the auto space, if a car is -- we take possession of a vehicle on a car that's totaled, obviously if we can auction it off and recoup some of the money spent, that's how we operate. In terms of the property space, in terms of Florida homeowners, typically, if you have a condo and we have a water loss that originated in another unit, we may pay our individual unit and pursue the other unit.

But I would say that the subrogation, those opportunities tend to, in the property space, average around 1% of claims paid. And if you look at the competitors in this space, most people hover around the 1%. We have been actively looking at performing better on that for the last year or so and have assembled the team that we think will move us to perhaps 2% or 3%. And we believe that 2.5% to 3%, 3.5%, in that range, is the top of the margin that we can achieve. So we're hopeful that we can achieve that in the latter half of 2017. So we will pursue it where it's appropriate.

The accounting rules on that do allow you and actually even tell you to reserve based on your expected net losses and claims net of recoveries from sal and subro. So we definitely, as we continue to strengthen that function, as Mike just alluded to, it will work its way into our reserves.

Okay. And then, we've heard a lot about AOB. Can you tell us what you see from AOB from your perspective? And maybe talk about frequency and severity some.

Yes. Sure, Doug. In terms of AOB, it's just, I would say, it's plateaued. We're seeing an uptick in frequency, a slight uptick in frequency and a slight decrease in severity. Geographically, it's spreading throughout the state. About 2/3 of the activity is concentrated in Tri-County, but we're definitely seeing it expand throughout the state. But I would say that some of the opportunistic behavior that we've seen with some of these folks is being tempered a bit as they've ramped up their businesses, and I think that they're showing some reasonableness that we haven't seen in the past. But it's here. AOB is here. It's in Florida.

It's -- unfortunately, the legislative session just ended last Friday. Not only did they not tackle any type of reform for work comp or PIP, which is auto, unfortunately, nothing was addressed as it relates to AOB. So therefore, you're going to see the entire State of Florida, its citizens that buy policies from insurance companies, including Federated National, and everyone else is going to increase their pricing because of these costs. So we do have our 5.6% that has been in effect since last August. We do have a 6.5% additional, which is pending with the OIR, the Florida Office of Insurance Regulation. That's pending and we're hopeful that, that will be approved and would like to see that roll out in the market in early August.

Okay. And could you tell or give us some commentary about what you're seeing with the reinsurance purchase for the next year?

Yes. We feel real good about the reinsurance purchase. We're buying a similar type program that we did last year. It's a similar limits because our program has not grown by that much in terms of from last year to the current year. And I think there is plenty of capital that's still in the reinsurance space. Pricing appears favorable. It could be 5% down. But I don't know that all Florida companies will enjoy that.

And what we're hearing is not only from the retail agents where there's a bit of a flight to quality within the Florida market where people are getting nervous with dealing with the smaller companies because of the noise associated with what Demotech said at year-end. So agents are very nervous about that where, when you're placing business with a company that has $25 million or less of capital, agents are very concerned. And it's our understanding that the reinsurers are a bit concerned on that as well.

So we're -- all insurance companies in Florida have benefitted from the ample supply of reinsurance capacity. It appears that some of the discipline is coming to that market and differentiating between the different type of Florida carriers. But we feel good on the reinsurance program and we think pricing, at this point, appears to be favorable.

Okay. And can you offer some commentary about the stock buyback? Is the company planning to continue to do this?

So we had a $10 million authorized buyback. We exhausted approximately 50% of that. And we were active in the market during Q1. And the board, we're evaluating that again on a go-forward basis. But, clearly, the stock has been low compared to historical terms and low as it relates to book value so we think that created an opportunity. And that opportunity may present itself on an ongoing basis.

Okay. And then what's happening with Monarch at this point in time?

Monarch, unfortunately, has rolled out very slow. We are behind our production goals significantly. But the market has absolutely changed and we have held steadfast on our discipline to write sustainable profitable business. But it's just -- it has been disappointing that it's only a $13 million book of business here in Florida. However, we think the opportunity for the expansion is approaching based on what we're hearing and seeing in the marketplace.

And in terms of pricing, we've just recently filed for a -- we have to file on an annual basis where we certify our rates, and our homeowners line is going up approximately 1% and our condo line is coming down approximately 1%. So they're relatively flat. However, there's a lot more in the filing than just a flat filing, where we're really trying to make it more competitive non-Tri County. So outside of South Florida. We're trying to make it more competitive. But we don't want to chase the market down as the market is coming up.

So it's been frustrating that we haven't been able to ramp it up quicker and better. But, once again, I believe the market is coming to where we are, in terms of pricing, with Monarch. And I thought that would result in more premiums in the latter half of '16, which it did not. But I think that we're in a similar period. I'm more hopeful the market is coming to us in '17 based on the rate filings that we're seeing with numerous competitors, based on the impacts of AOB. I believe it will find its spot in the market better as 2017 progresses.

Okay. And what is happening with your relationship with Allstate and with Geico? How have they been progressing?

Yes. Allstate is a huge partner, a huge book of business. We're very happy with them. And there's no change to that partnership or relationship. They're our largest concentration of sources of policies or agents. And Geico is another fantastic partner that we have. That premium is coming in, in Florida and outside of Florida, of approximately $175,000 to $200,000 per week. Nothing new to report on that. We're real happy with that partner as well. As well as our other partners. Non-Florida, we do have Progressive that comes into our book of business in our non-Florida through our MGU. And our independent agents, we've got a strong healthy relationship with them as well.

And what kind of production is coming from Progressive?

Progressive non-Florida, it's pretty small. We don't track that specifically just because it's been on a smaller side. But I would say that it's probably in the $25,000- to $50,0000-a-week range. But that will pick up more. That's an existing partnership. Like I say, that's been coming for MGU for a bit of time. And, once again, I think they're strong out there, very similar to Geico, with their advertising, and they do generate a lot of activity in terms of doing quotes on their auto side. So we're hopeful we can expand that partnership with them.

Okay. And then my final question is when do you all think you'll hear back on the pending rate increase for the August 1 date?

Hopefully soon. We're very hopeful on that. There's been some Q&A back and forth. But we have no reason to be concerned at this time, and I think we'll hear back in due time and, when we do, we'll be putting out an 8-K to announce that. And once again, I'd like to get that effective August 1 as the old rate increase comes off. And I think we'll still be competitive. The 5.6% and 6.5%, that comes out to 12.1%, which is compounded to 12.5%. We're seeing many of our competitors catching up a bit right now, filing for high single-digit, low double-digit rate increases. So I don't think it's going to inhibit our ability to write business.

Okay. I've got one more question. In Florida, at this point, how much insurance are you writing per week now?

Florida, FNIC, which is Federated National, approximately $2 million a week of binders. And Monarch, $80,000 to $100,000 a week of new business binders, which is fine. We're not trying to grow in an adverse market if the opportunity is not there. So we're happy with the production. The production is significantly less, as you know, Doug, than we had years past, but that's not necessarily a bad thing.

(Operator Instructions) And our next question comes from Christopher Campbell with KBW.

Was there any reserve development in the quarter? And if so, was that favorable or adverse? And can you quantify that by line of business?

It really was a very quiet quarter from a development perspective, less than $200,000 overall. Some plusses or minuses, but I don't think there's really a specific attention to.

Okay. Second question was on the -- what would the auto combined ratio be excluding commission income for 1Q?

Auto combined. I don't have that at my fingertips.

Yes. This is Erick. It continues to be roughly 110%, and then factoring in, as you mentioned, the commission income, the 5 points and the 5 points for admin fee and the claims handling, it kind of net-net back to, roughly speaking, 100%. So it continues to be at a high level, around the same number as it's been the last couple quarters.

Okay. Just switching to homeowners. The attritional gross loss ratio was steady at about 36.1%. What drove the unusually high consolidated loss ratio if we're looking at it ex cat?

Give me a second to…

So one thing you've got to, just right off the top, that you need to factor in is the gross cat losses related to tornadoes that Mike mentioned as part of his highlights and was alluded to in the press release. So that's $5.2 million gross and then $4.8 million net reinsurance. So that's kind of, to me, the big highlight as it relates to loss ratios. As Ron just alluded to, from a prior year development perspective, we did have some movement across lines of business and across accident years. But net-net, it was roughly $200,000 so there wasn't any movement there.

Okay, that makes sense. Now another question. Will your 10% quota share go away when you renew your reinsurance program?

Right now, we don't anticipate the current reinsurer to renew the terms. So we're expecting to convert it to excess of loss. However, we are receiving quotes for quota share at this time, and we are evaluating those and we'll be making the decision here in the next 4 to 6 weeks.

Okay. And then just one final question on auto. Are you pushing any rates to that book? And if so, how big? And also, what are the average terms for that book?

Sure. The average term -- I think I alluded to this earlier -- is roughly, across all the different programs that we have within auto nonstandard, is 6 months. And then, from a rate perspective, Mike alluded to this earlier, we started up a new program and that starts up roughly -- essentially has an additional 40% from kind of our old program in the State of Georgia. And I think, obviously, with starting that program at a much higher premium level, we feel good about, not necessarily right this minute, but as we look ahead into Q2, Q3 and think about sustainable business, we think that the loss ratio can come down to a good number that we think we can make money, the reinsurer can make money and all parties can have profitable business there.

And we have a follow-up from Ron Bobman.

Yes. If I heard -- I think it was Erick giving some of the details about the auto combined ratio with and without the sort of collapsing of the commission and the -- I think I heard you say 5% for claims servicing, I guess. So am I right to assume that the auto business was breakeven from a dollars of profitability in Q1 '17?

Yes. Ron, let me add to that and add to what I mentioned earlier. So yes, it continues to be, roughly speaking, breakeven. So we kind of talked about there's 2 parts to auto. There's kind of the insurance side of it and then FNU or the MGA side. So from an insurance perspective, we continue to have an underwriting loss, but that's made up from the FNU or the MGA side, we continue to make money. When you kind of combine the 2, we're roughly speaking breakeven across the last couple quarters. Saying that, we do feel, with what we've kind of mentioned earlier about some of the rate increases and starting up the program a little bit higher premium, we can start lowering the loss ratio and get the loss ratio in a place where we can kind of sustain that business long term.

So what was the exact amount of dollars that was made or lost in the quarter from the auto business, excluding investment income?

If I think about the last couple quarters, it's plus or minus, I would say, less than $500,000. Let me be clear. On a net basis because obviously that's heavily -- there's a heavy quota share on that business, I would say in any one quarter, plus or minus $500,000 in either direction.

What was the amount in the first quarter of this year?

A loss of less than $500,000. I don't have the exact amount, but that's -- hopefully that helps.

You're in 2 businesses. You sell auto insurance and you sell homeowners insurance. Okay? It is an embarrassment that you can't tell your shareholders how much money you made or lost in each of these 2 businesses. We've been asking for this for over a year. Okay? And it's completely unacceptable for you not to be prepared, for you to not to be prepared to provide us the amount of profit and loss for these 2 units split. And I mean…

Ron, we hear you on that. This is Ron speaking. One thing I will tell you is I've been here about 3 weeks now. We definitely hear the appetite for it. There's more going on in terms of a company being ready to publicly disclose that line-of-business-type information beyond just a willingness to do it. We want to make sure that all of the infrastructure is in place, all of the controls that need to be in place, all that sort of thing. And that's something that we're working towards. And, as that line of business grows, we're definitely heading in the direction of being able to give more reporting. But we hear you and we're working to be responsive.

I appreciate you answering my question. I recognize you're new. I'm optimistic that you're going to make a meaningful contribution. And any frustration and critical commentary, frankly, is directed at the other members of the management team because we've been asking for this for over a year. And this is not an overly-complex mix of businesses with tremendous geographic spread all over the world in different currencies. You're in 2 lines of business in a handful of states; one core, one not core. Neither are performing well. And for you to be unable as a company, as a board, as an executive management team, to communicate the dollars of profit with precision for each line of business; it's pathetic. And I'm optimistic that it improves. Obviously, you can tell from my tone I view it as long overdue. So thank you.

Thank you, Ron.

I'm showing no further questions at this time. I'd like to turn it back to Mr. Braun for closing remarks.

All right. Well, thank you. Thank you, everyone who has participated in the call today. And if there's follow-up questions feel free to reach out to either of the 3 of us. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.