Fednat Holding Co (FNHC) 2008 Q1 法說會逐字稿

Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the 21st Century Holding Company First Quarter Financial Results Conference call. (OPERATOR INSTRUCTIONS)

Statements made in this conference call or in documents incorporated by reference that are not historical fact are forward looking statements. Forward looking statements are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as may, will, expect, believe, anticipate, intend, could, would, estimate or continue or the negative other variations thereof or comparable terminology are intended to identify forward looking statements. The risks and uncertainties include, but are not limited to, the risk and uncertainties described in this conference call or from time to time in our filings with the SEC. Thank you.

Furthermore, the unaudited consolidated financial statement of 21st Century Holding Company for the three months ended March 31st, 2008 and 2007 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instruction for Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements do not include all information and notes required by GAAP for completed financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31st, 2007. Thank you.

I will now turn the conference over to Peter Prygelski, CFO. Mr. Prygelski, you may begin your conference.

Thanks, Operator. Before we open it up to questions, I just wanted to read a brief statement which was in the press release.

For the three months ended March 31st, 2008, the Company reported net income of $4.3 million or $0.54 per share on an average undiluted shares outstanding of 7.9 million as compared to net income of $842,000 or $0.11 per share on 7. -- around 8 million undiluted shares outstanding in the same three month-period as last year.

On a diluted basis, the Company reported earnings of $0.54 per share for the three months ended March 31st, 2008, again based on 7.9 million average diluted shares outstanding as compared to $0.10 per share based on 8.1 million average diluted shares outstanding for the same three-month period last year.

That's all I really have for opening statements. We can go right to the Q&A session, Operator.

Thank you. (OPERATOR INSTRUCTIONS) David Starkey, Smith Barney.

Can you tell me the -- the numbers were, obviously, a bit of a surprise on the revenue side which caused the stock to pull back, I believe, today. Is this a sustainable level of profitability for the Company on the basis of basically not going after business you don't think is profitable?

This is Mike Braun. And the answer to that is, there's two pieces. We have our gross premium is down because our rates are down and that's because the state has afforded us re-insurance at very affordable rates.

The other piece of it is the level of competition. The state has funded, through a capital build-up program, some existing and new participants in the market and we're absolutely feeling the impact of that but we're committed to writing profitable business, absolutely. The policies that we write, we feel that they are profitable. Some people are aggressively grabbing some market share and that might be a short-term challenge for us but we're confident in our business plan.

Was there anything unusual in this quarter's profitability number that was like a reimbursement from the state or anything like that?

No. We have nothing on the revenue side that was one time. You could see in the press release that we had a $600,000 kind of a tax credit from last year and an over-provision but that's it, $600,000. Other than that, there's no one-time gains in there.

Can you talk a little bit about the FAS-115 write-off situation?

Yes. Every quarter we evaluate all our securities. In the first quarter of '08 we wrote down two securities and that was about -- the total was $1.6 million write-down and we believe right now that that should be all. One was a financial company and one was a pharmaceutical company.

And your investments are mostly in where now, in terms of where you are putting all the cash?

Most of our investments now are -- or 90% of our portfolio is in fixed income or actually in short-term investments, short-term paper.

And these 2½%, 3% money market fund rates, is that going to hurt your, obviously, investment income going forward?

I think our yield for the first quarter was 4.3%, somewhere in that neighborhood. I think that some of the cash we have is sitting in 3% money market right now. We have --- there's going to be an impact but, like I said, a lot of it is in corporate bonds and treasuries and there is a significant portion in cash right now. So there will be a slight impact. It will be moving from the mid-5's maybe to the mid-4's short-term but --

No problem. And the business so far in the current quarter running approximately what it was in the last quarter?

There's two different lines. The primary line that we write has been property in the past and there's, yes, there's absolutely competition there that's impacted us and it is continuing to impact us.

The other line that we have is liability and that is not seeing rapid growth at this point. It's more stable. It's not really contracting so much but we see a lot of growth opportunities with our liability line. We're looking at other products that we can sell to our existing distribution through our general agents in multiple states. We're in about a dozen states. So there's additional products that we'll be bringing on line to distribute through them but we've been looking at that for the last year and those things do take time.

We want to ensure that we do remain committed no matter what product we write, that it's profitable. So that analysis does take some time but we anticipate those are going to be coming out in the latter part of this year and going out to our general agents as well as expanding to additional general agents in additional states with our current product.

I wanted to add one thing. If you look at our balance sheet now that -- our book value is about $10.69. We're debt free. We did our best this quarter to take a hard look at all the securities we owned, cleaned that up. We are taking a conservative approach with our investment portfolio, that's why there is some in cash and it's only making 3% but we are really taking a conservative approach and really tightening up the balance sheet.

Great. Have you done anything or thought about any stock buyback with some of this cash given your paying 6% plus in a dividend, you're only making 3% or 4% on it on the investment side?

That's a decision that would come from the Board of Directors. There's nothing that we can announce right now.

When is that next meeting?

June 3rd.

I'm sure that will be talked about given the current size of the dividend. It will actually save you some money to do that. Okay. Thank you so much for your help. Appreciate it.

Thank you.

Greg Dirk, R. Dirk and Company.

Just wanted to ask you what's going on with Ted Lawson and his wife. Are they out of the picture totally and are they going to be selling their stock or have you announced anything about that?

Ted and Michelle, they founded the Company. They've been a huge part of our success for the last 20 plus years. As the press release indicates, that Ted is moving on, really retiring and pursue other interests. He will remain on the Board. I don't know what he is going to do with his stock. That's a personal decision on his part. But I think he feels comfortable with the Company and confident where we are.

Thank you very much.

Rick Sherman, Oppenheimer & Company.

Couple questions, is some of your cash in any way tied up in any auction rate preferred securities?

No. We had limited exposure to that last year in the third or fourth quarter, maybe a $1 million or $2 million, but actually we got all the money out of that probably four to six weeks before that liquidity disappeared so we have no exposure to it currently.

Secondly, what is the -- what is the derivative lawsuits that have been filed against the officers of the Company? What is the claim?

It's basically very similar to the original lawsuit. We feel that it's without merit and we're defending it and we're moving down that path. But it's very similar as the original one and I really don't know what I can say on that.

Well, can you give me a little color on the original one? I'm not really up to speed on that.

The original one, I think that's out there in the public that you can get that. But basically we over-guidanced and the stock reacted negatively and the suit was a result of that.

So it had to do with guidance. I didn't see that. So I just see the derivative. I was just wondering if it had anything to do with your investment policy in any way.

It has nothing to do with investment policy at all.

So basically I don't think you really answered the previous caller's question relative to on an ongoing basis. Do you look for this quarter, as a runrate, to be relatively indicative of going forward or do you expect it to be lower or higher or relative to the amount of business you write?

Well, we don't issue guidance on a go-forward basis but clearly we're writing less business. That's impacted us in this quarter. The marketplace is very competitive in our largest product. But, once again, we feel confident that our other products as they come on line later this year into the next that we feel comfortable with our business plan.

We could be more aggressive, perhaps, in writing business out there but we don't want to write business that is not profitable. We don't see any value in the volume of writing -- it's not about the gross, it's about what we actually earn from it. So we feel comfortable that we're writing quality business that's earning us, making money.

Just so you know, I'm a shareholder, I totally concur with that philosophy so I wasn't looking for guidance relative to earnings, which I think eventually it would be wise if you lose that fear and you're going -- if you ever want to get covered, you're going to ultimately have to start giving guidance again.

But I don't think it's -- guidance relative to earnings, I think, are a separate issue relative to guidance as to whether you think you're going to write business at the same level as the previous quarter, or less in the previous quarter or more in terms of the revenue number. You know? You're not talking about profitability then. You should have a very -- if it's the philosophy of the firm that we're only going to write profitable business and whatever that ultimately means from a competitive standpoint, then that's the statement I think would be helpful to make.

Absolutely. In terms of guidance in the future, that's something we can look at but right now, there's a lot of people that -- we're competing against the state, which is citizens, and we're also competing against people that have effectively borrowed money from the state. And when you borrow money from the state, you have to ensure that you are maintaining certain minimum net written ratios. And if you don't, you're in default.

So we think that the market has really changed considerably and we're still writing in it but there's a lot of competition and there's -- so competition means that, yes, we could lose business in the future as well as we could gain business. That will only tell as we move forward.

I think projection-wise, our revenue projections going through the rest of '08 are, maybe, right around what we made in the first quarter. I don't think you're going to see a huge, huge tail-offs but I think it's going to be -- as compared to '07 it might not be as -- the growth might not be there.

Well, that's understandable. That's somewhat helpful.

The rest of '08 is certainly a challenge; but keep in mind, once again, while one product is very competitive there, we do have confidence in our other products that we have and that we're bringing on line. A lot of those will take some time. We, once again, we're confident that our business plan of writing profitable business is the way to go.

At least on the expense side, now that you're going to write less business, is there anything that's happening on the expense side to tighten that up?

I think we run pretty lean, to be honest with you, in terms of our organization. We have a staff of about 100. Like I say, we write business through independent general agents as well as independent agents. A lot of those are variable costs. Our fixed costs, I think, we do a very good job of controlling.

Thank you very much.

Harold [Dive], 21st Century Holding Company.

I'm not with 21st Century Holding. I guess I mis-understood the operator. I'm representing myself. My question has to do with dividends and with the greatly increased profitability which was wonderful. Congratulations.

I don't know how your decisions have been made in the past on the level of dividends but is there any reason to expect that in the future the dividend might change either up or down due to either the volatility of the financial industry or anything that you see on the horizon that would affect the profitability of the Company?

The dividend is not something we can speak to today. That's a Board decision. The Board will meet in June and I am confident that will be up for discussion. Anything that the Board decides will be announced shortly thereafter, whatever that might be.

I'm just going back, though. Has the Board typically made a new decision every quarter or every year on what the dividend should be or do they kind of look at a standardized kind of approach?

I think the Board understands that the investing community puts the value on the dividend and, once again, the Board will decide what's right for the Company whether it's maintaining, increasing, decreasing, whatever that might be, that's a decision by the Board.

Alright.

(OPERATOR INSTRUCTIONS) Steven Banker, Newmark.

One of the earlier questions that was posed related to revenue and profitability and I'm trying to understand that a little bit better. First quarter '07 higher revenue, less profitability; this quarter less revenue, higher profitability, what's the blink, if you will?

The big difference between first quarter '07 and first quarter '08, at the end of '06 we had our actuaries look at our loss rate and our reserving methodology and, if you remember, I don't know if you were following the stock then but in the beginning of '07 we had -- they felt that we needed to strengthen our reserves. So if you look at the expenses in the first quarter of '07 it was about $14 million in loss and loss adjustment expense as compared to $7 million this year which is, you know, speaks well of what we did with the reserve strengthening.

Our actuaries now are -- here every month independent actuaries are helping us with the reserve and there has been no increases to the reserve since third quarter of '07, actually. So we're on a good runrate with that. So that's the primary difference, that $7 million pick-up right there.

Gotcha. And so on a going forward basis, I think what the previous caller had asked was, if you were to maintain the current revenue levels, can you maintain the same amount of profitability that you showed in this quarter?

Well, the number one expense that we have is re-insurance and that's really -- it varies from year to year. We buy a lot of re-insurance and we buy it from two places, from the state and the state just completed their session and they were looking at cutting back some of their coverage, their capacity. And we also buy from the private market. So we go in and we finalize those by approximately July 1 and then at that point those really kind of become a fixed cost over the next 12 months. They can vary. There's factors that can make them vary over the 12 months but, for the most part, they are fixed.

That's really the biggest thing that will impact us. The re-insurance market has been storm free for a few years so we have reason to believe that the rates should be favorable for us.

Good. And, again, on the revenue side, when you think about growing the Company, is it from a total organic standpoint or can you look to acquire other companies that would add revenue and also position you for a more favorable area?

I would say everything available to us. In terms of -- we traditionally have done organic. In terms of acquiring others, that can be a possible, as well. But in the past we've participated where we've taken policies from the state; that's something that we might look at that we may be looking at in terms of the future after the storm season through Fall. So, yes, we're always looking at different opportunities. If it's right for our shareholders, that's what our interest is. So if there's opportunities, we'll definitely take them.

Final question, just in terms of the new management changes, is there any particular direction that you'll favor as opposed to how Lawson and where he has positioned in the Company?

No. I think what Ted and Michelle thought of the Company, and Ted's been the CEO for quite awhile, I think he's done a great job with us. My intention is to continue that and continue to grow. But, once again, I think I've indicated a few times on the call here, as we grow, it needs to be profitable.

Our main market, currently, is property which is -- there is some very aggressive pricing out there. So we're not going to chase the premium there and that forces us to look in other areas, as well. But as we ramp up new products, I can assure you that we're taking a very hard look to ensure that they are priced correctly. So it's going to be a continue of, yes, property is going to be a big part of it and liability is going to be a big part of it.

We have two insurance companies; they have more surplus than they have ever had. Federated and American Vehicle, both, are in the best financial position that they've ever been. And, once again, as Peter stated, our book value is $10.69. So not only are we going to protect that, we're going to grow it profitability.

Good quarter, guys.

Bob Sterling, Private Investor.

How are you doing in California?

California, we've been there for about three or four months and it's coming on line and we're taking it slow to ensure that it's done correctly. We have one general agent out there and that's the game plan with California. I think as time moves forward it will prove to be a big state for us but we're going slow with it.

Well, that's what Ted had said at the last conference call he was on, that it was going to be as important, or more important, than all the rest of the states combined. So what is your business plan out there?

Well, what we want to do is we currently have, like I say, the one general agent. We're -- we've got -- we're admitted in -- I'm sorry. We're right on the surplus with California so we will ramp that up. We've got the commitment with the one general agent. At some point it will go to additional general agents.

But, once again, it's a big market and we want to ensure that we can handle everything from a legal perspective, a claims perspective, underwriting perspective, so we're going about it pretty methodical and it will continue to increase. I think California is going to be a big part of our Company in the future.

You have a strong balance sheet, you've got good reserves, you're profitable, your revenues are shrinking because you're in a very competitive market, what does your business plan include that's going to increase shareholder value?

The main thing is, is to ensure that we can use our surplus in a profitable manner and what that means is, the property market within Florida has been a big piece of our business. Tri-County is a big part of it. And that's where the state has been most aggressive with their rates.

So we're shifting our emphasis to other parts of the state. And from the property perspective there's a lot of people coming into the market. We're also looking at doing other products with Federated. We still have our automobile book. It's a very small automobile book with both American Vehicle and Federated, but the main thing we're going to see growth is going to be over time is with our liability line. And we feel very comfortable that we have good general agents out there representing us and that it's going to be a win-win for them as well as us to write profitable business. But, once again, we're ramping these things up. We could go faster but we want to ensure that we're doing it correctly.

Thank you.

Carl [Wilke], North Point Capital.

You answered my questions already from a previous caller.

Thank you.

Patrick Graff, Private Investor.

I see that you indicate, of course, rates are down in Florida and your numbers show a 50% drop in that line of business, homeowners insurance. You did indicate that commercial general liability insurance was a big factor going forward but it seemed that you show drops in almost every state in that line of business except for three, Alabama, Arkansas and California. So what are you doing to prop that line of business up in Virginia, Texas, South Carolina, Louisiana, Kentucky, Georgia?

Great question. One of the things we're actually working on is with American Vehicle and what I mean by that is utilizing someone else's A.M. Best rated paper. We feel this will give us the opportunity to go into this a little deeper. We think that we can -- actually more premium really with that printing. We're looking at probably starting it in the State of Texas and expanding it to other states. So we'll have an admitted, a non-admitted, depending on the different states there, but having that printing arrangement, we think, will be good for us. And, plus, appoint new general agents in new states and new territories but also new products for our existing general agent.

Could you talk about the automobile line of insurance? That seems to have dropped by 80%, 85% for the first quarter 2007?

That's been the plan for about, I think it's been roughly around, I want to say, four years. And more specifically, we have not been actively writing that product in approximately three, four years. We have only been renewing that book of business. So there's going to be accretion on that where it falls off.

We are looking at auto, whether or not we should ramp it up in Florida or another state. We haven't abandoned that. We're just letting it run itself down for the time being. We've actually started writing commercial lotto with our liability line, as well. So those are all part of the products that we expect to diversify what we're selling.

Is there any thought to just getting rid of that particular line or you're just not sure what you're going to do with it?

Well, when you get rid of a line, you have to surrender the license so there is value to having the license. The tail on that can be inconsistent from one quarter to the next based on any one loss when you have very little earned premium. So it can be inconsistent in some regards but we do not want to lose that license and we're looking at resurrecting it at some point, whether it's in Florida or another state; but we need maintain that license with both companies.

Thank you very much.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Just in quick closing, if I could. We appreciate everyone taking the time to call in. We think that there's a bright future for our Company. We have a lot of good things going. We're very proud that Ted and Michelle have done a great job with our Company and we have a great management team. They've instilled a management that's deep and has a lot of expertise and a lot of good people in this Company. So we feel confident in the future. Yes, there are some challenges in our property book of business but with time, once again, I think we're going to be doing quite well. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.