Fednat Holding Co (FNHC) 2009 Q2 法說會逐字稿

Good day, and welcome to the 21st Century Holding Company Second Quarter Financial Results Conference Call. Today's Conference is being recorded.

Statements 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 results and events 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 risks and uncertainties described in this Conference Call or from time to time in our filings with the SEC.

Furthermore, the unaudited consolidated financial statements of 21st Century Holding Company for the quarter ended June 30th, 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 1001 of Regulation S-X. These financial statements do not include all information and notes required by GAAP for complete 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, 2008.

After today's prepared remarks, we will conduct a formal question-and-answer session. If you would like to ask a question today, you may do so by pressing the star key followed by the digit one on your telephone keypad.

And participating in today's Conference is Mr. Michael Braun, Chief Executive Officer; and Mr. Peter Prygelski, Chief Financial Officer.

Mr. Braun, you may go ahead with your prepared remarks.

All right, thank you very much. What I'll do is -- just going to start by reading some of the highlights in the press release that went out earlier today.

For the three months ending June 30, 2009, the Company reported a net income of about $785,000, or $0.10 a share; compared to a net loss of about $2.5 million in the last year, or $0.31 per share, in the same three-month period. For the six months ending June 30, 2009, the Company reported a net income of about $1.1 million, or $0.14 per share; versus net income of about $1.8 million, or $0.23 per share, the same six-month period last year.

Net premium earned decreased $1.2 million or 7.7%, to $14.3 million for the three months ending June 30, 2009, compared to $15.5 million for the same three-month period last year. Net premiums earned decreased $5.9 million or 17.3%, to $28.2 million for the six months ending June 30, 2009, compared to $34.1 million for the same six-month period last year.

Total revenues increased $1.7 million or 11%, to $17.1 million for the three months ending June 30, 2009, compared to $15.4 million for the same three-month period last year. Total revenues decreased $2.7 million or 7.7%, to $32.8 million for the six months ending June 30, 2009, compared to $35.5 million for the same six-month period the last year.

Those are just some highlights from the press release. And with that, we'll be glad to go ahead and open up for some questions.

(Operator instructions)

While we're waiting for -- if there's any questions, just to elaborate a little bit more -- you can see that our book of business has grown a bit, the homeowners' book of business. And that's a result of some of the assumptions that we've done, of policies from Citizens Property Insurance Corporation earlier in the year. But also, we're seeing further reduction in premium from the mitigation credits that have been mandated by the State of Florida.

Also, with American Vehicle, we've got the two insurance companies. We have some growth initiatives that we're working on to grow the artisan general liability book of business that we have -- some inland marine products, also some products where we're supplementing our existing book of business, where we really aren't taking risks but acting more as general agent with worker's compensation.

Ray Dirks, Dirks Associates.

Hi, there. I was wondering if you can elaborate or comment on the outlook for the hurricane season, which has been commented upon by the so-called experts out in Colorado, which now say, I believe, that the -- many fewer hurricanes are likely this year. And of course, we haven't had any yet, so -- even started. Maybe there's one going to start soon. But could you give us a little color on that, please?

Sure. We purchased approximately $345 million of reinsurance in the event that there is a hurricane, anything that impacts us. And we spent approximately $53 million for that cover. In the event of a hurricane, we have a retention of $5 million. So the first $5 million, we'd be responsible for 100%. And for the next $345 million, we have coverage on.

In terms of the activities of the upcoming -- with the weather, what may or may not happen -- obviously, we can't be -- we don't know specifically, but we think, with our reinsurance program, that we're adequately protected in the Company in the event it happens.

Okay. And if there -- let's say, if you do have this fairly -- well, let's say you get hit for $5 million, and that's all for the whole year, how would your earnings likely develop in this third quarter particularly, but also through the fourth quarter?

Well, obviously, that would be an immediate impact to earnings. So in other words, if it occurred during the third quarter, that would be an immediate impact of up to $5 million.

Right.

In terms of the expense of the reinsurance program -- that's allocated over the entire 12 months -- third quarter, fourth quarter, first and second. But any type of retention that we have on an event would hit us immediately in that particular quarter.

And compared to last year, how would that [compare] to, let's say, in the third quarter? And what's your experience on that?

Well, last year, we had -- the retention on it was $3 million if we had any events. Fortunately, nothing happened last year. But the cost of reinsurance has gone up this year.

Yes.

And the other side of that is also -- the mitigation credits has reduced our premium in that program. So it's definitely impacted -- we have the two insurance companies -- it's definitely impacted Federated National, having those mitigation credits, as mandated by the State.

So the impact is negative, but it's not going to put you into the red, or anything like that, is it? It looks like -- in terms of just the Florida situation, I thought you were working things out on a favorable way there, [favorable way], rather.

Well, the mitigation credits have been a big challenge for us. While we don't give specific guidance on a go-forward, our increased reinsurance costs will impact us in the third quarter. We're reacting to the mitigation credits by -- we've modified our underwriting, we've modified our distribution, our book of business, a lot of the characteristics. Our intension is to ensure that we have a profitable book of business for that homeowners'. But it's absolutely impacted us. And in the third quarter, it's going to be a big impact on Federated National in the third quarter for the third and, really, the fourth quarter. But as we move forward, we're taking actions, like I said, with our underwriting, our distribution, our policy selection, assumption of policies, things like that; as well as rate action to correct that book of business, the problems that have occurred because of these mitigation credits.

Right. Okay. And how about the impact -- if you don't have any hurricanes, let's say, this year, then what would that mean for earnings over the next six months of this year, and then in the next year? Well, forget next year, but this year?

Yes. Well, once again, we're not giving any projections of earnings out there. But the increased reinsurance costs and the mitigation credits will impact the Company in a significant manner in the third and fourth quarter, more in the third [and] in the fourth. And as we move into the first and second, as the book continues to realign, and we -- everything we do takes time, in terms of policies. In the State of Florida, to nonrenewal policy, in some cases, it's 100 days; in some cases, it's 180 days, so as we modify it.

In terms of, like I say, the rate increase, we've asked the State for approximately a 15% rate increase. We're hopeful that that will kick in later on this year. That will help us, obviously, offset the cost of reinsurance, and also some of these mitigation credits. And we're also looking at further depops of policies from the State of Florida, Citizens, as well as a new program for condominium. But it's -- that's the intension with the program.

And where do you stand on book value per share?

I think Pete has that.

We're $9.68. It's up about -- it's up $0.17 from first quarter.

Okay. All right. And what is your expectation longer term on trying to -- on the rate of return that should be earned on something -- on book value?

Well, obviously, we've been impacted in the last year, in 2008. We've had impact. We've had some write-downs in our investments. And then, in the latter part of 2008, we also were hit with some mitigation credits that really have turned into bigger credits. So as we correct these, I think that will really flow through. We're talking about primarily Federated National, in this case.

Right.

That will -- we anticipate that being -- returning to a positive for Federated in 2010. 2009's a challenge for Federated, based on these mandated credits which have resulted in big discounts of premium.

Right.

And do you think you will have a chance to increase your dividend, perhaps next year, if you -- if that comes to pass there, with the --

That's something the Board evaluates every quarter. At this point, the current dividend that we have in place was the $0.06. And when the Board meets again in September, in the beginning of September, the Board will discuss that. I would anticipate that as the Company improves, the finances improve, that the probability of an increase in dividend may be there. But that's a decision that won't be made until that Board meeting. And like I say, as the finances improve each quarter -- and like I say, in 2010, Federated should be stronger -- we'll reevaluate it at that point. But that's evaluated on quarter-by-quarter basis by the Board of Directors.

Okay, thank you very much, appreciate it.

Thank you for your questions.

(Operator instructions)

Well, at this point, if there's no further questions, we can give it a moment here.

But just really in closing -- I think we've gone over the major items, which is that Federated National has had some struggles with the mitigation credits, and we're taking corrective action. A lot of that just takes time for it to work its way through. American Vehicle -- we have a lot of growth initiatives there as well, in terms of having other lines. So if there's any other questions out there --

Casey Alexander, Gilford Securities.

Yes, hi. Where do these mitigation credits show up in the statement of operations? I mean, do they show -- I see this large increase in gross premiums ceded. Is that -- are you just reinsuring much more of your book? Or is that where these mitigation credits are showing up, in the deduction of net premiums written? Where do they show up? I'm not sure I know where to find these things.

It's in the gross written, has been reduced by these credits. In other words, a policy may be $1,500. And after credits on that policy, it might come down to $1,000. So the premium, the gross written in that case, would be the $1,000. So you really don't see that. In the Q that we have, it is broken out there. And --

Well, in this quarter, you have $33 million in gross premiums written. And how much was that reduced by mitigation credits?

Mitigation credits currently in force is approximately $23 million. So our book, on an annualized basis -- our in-force book, without the mitigation credits, would have been approximately $23 million higher.

For the quarter, or for the year?

Well, for the year. For the year.

For the year. So it's maybe six bucks a quarter -- $6 million a quarter that it's impacting the gross premiums written?

Approximately, yes.

That's about right.

Okay. And the other one that I had -- the regulatory assessments recovered -- I mean, this has become -- is becoming a pretty significant figure, although it kind of feels sort of one-time-ish. Is there a runoff to that? Just the very title of it makes it feel like that that's sort of a one-time line, and at some point in time, that's going to run off. Is that true, or does that just continue on?

There's two different types that we have. Back from the storms of 2004 and 2005, we were basically given an invoice from the State, whether it was through FIGA or Citizens, or the FHCF. And where we would basically go ahead and front that money, and then recover that, we would go ahead and file that to recover that in our rates, and recover it in the rates.

With our book contracting, it has taken longer -- when it has contracted in 2007 and '08 -- it has taken a lot longer to recover those assessments. So those assessments will come to an end at some point, absolutely.

There's another type of assessment, which is basically a pass-through, where we would add basically 1%, let's just say, as an example. If it's a $100 policy, there'd be -- now it'd be $101 -- we collect that dollar and pass it along to the State. And I believe the one on the FHCF goes for approximately 10 years. That's subject to change, obviously. But there's two types of assessments.

But it does have some sort of a runoff aspect to it, then, eventually?

Yes, absolutely. It should be ending. The ones that we're recouping, recovering, that we have fronted, should end in the next six to 12 months, correct.

Okay.

Lastly, the MGA fees -- the more policies you write, the more MGA fees there are. And the gross premium written is going up. So why aren't the MGA fees following the gross premium writtens going up, unless -- the one reason that you wouldn't is if you were writing policies for an outside company. But the commissions are way down, so that wouldn't be the answer to that. Also, why are the MGA fees not trailing up with the premiums written?

Well, I think you will see that trend up. Once again, the book in the second quarter was smaller than the year prior. Now the book is starting to increase, because of those -- the depops that we've taken. The book -- our book was as high as about $135 million, the homeowners' book. In the first and second quarter, I believe it was, with the mitigation credits, everything brings that premium down. I would say that it was about $60 million, $70 million of in-force premium, dramatically different. So as the book grows due to rate increases, as well as more policies, then you'll see the MGA fees increase. But --

Somehow, I'm just not seeing that. I mean, the homeowners' premium breakout is $28 million in the quarter versus $19 million last year. But the MGA fees are lower than last year.

The book is -- the quantity of policies that we have is less, the total number of policies that we have is less, and the premium in force is less.

Okay.

So once again, I do anticipate that that would increase.

So it's the premium per policy that's been going up?

The premium per policy has been coming down dramatically. Once again, back to 2006, our average premium was close to $3,000. Our average premium now is about -- want to say about $1,700. So the average policy -- average premium per policy has come down considerably.

All right. Well, maybe I'll call you on the outside. Because clearly, I'm going to need to be better educated on this one, because I'm not going to get it off of this call.

All right. Well, do you have other questions?

No, that's it.

All right, thank you.

Thanks.

Robert Sterling.

Gentlemen, I'd like to go back to this wind mitigation credits. From what I heard -- and correct me if I'm wrong -- these things would drop right to the bottom line?

They drop right to the bottom line. We don't --

So they're taking $6 million a quarter out of your bottom line?

It's significant, yes. These are mandated by the state. And it's become a bit of a hotter issue. Because it's taking profitability, it's taking surplus away from the insurance companies in the state of Florida, those that write. It's made our business considerably harder.

Has this been litigated? Is this constitutional? They can -- do they go ahead, and then after the fact, they change the -- they say, well, rebate that money?

This is --

Like you can do that in a department store also? Someone buys a dress, and they catch her outside, and they say go back and have them give you another $100 back for it? I don't understand.

It's a significant challenge for us. And this is -- the legislators of the State of Florida passed it. And the OIR forced the implementation of it. They're looking at -- they're evaluating it, because it's -- the State is starting to understand the significance of these mitigation credits. We're not seeing the corresponding relief in our reinsurance costs, with the reduction in our premium, for our policyholder.

So why don't you just wind down your business and liquidate it?

Well, the homeowners' book -- we have done it for 10 years, and we feel that we can make money at it. When we take these sharp turns, as the State imposes new things, new guidelines on us, it takes some time to react. But long term, we think it's a profitable business to be in.

But how can that be, if they can turn around and change the rules on you at any time?

We're a regulated entity, and the State of Florida has -- the Department of Insurance has that authority. It's a risk of our business.

And they do it after you've already written a premium? They can say, go ahead and rebate so much -- a third of it back?

No, not -- I think you're saying that it's midterm. It's our existing book of business as it comes up for renewal. We have to apply these mitigation credits. And we also -- any new business that comes in, we have to apply these mitigation credits. So it's not -- the State's not mandating it from a midterm perspective. However, it's based on a policy-effective date. So we think that the vast --

Is it an arbitrary number? They come in and they say, do this much back? Or does it -- if you haven't had a hurricane for a year or two, then they say well, we're lucky, so go ahead and rebate this much? I mean, I don't understand.

These are credits that the State -- they did a study back in -- I believe it was 2001. And then basically, they're saying that if you harden a house -- and I think in general, the theory may be good. I think the credits are high. The theory is, if you reinforce your roof, if you put a new roof on, if you use strats, if you put shudders on the house, those are all things that should reduce the exposure of that house to a storm, how much damage it should have. And that theory, I think, is a legitimate theory. What I think is the problem is that these credits are much larger than I think should be out there. And therefore, it's taken a stable book of business with predictable earnings, and has made it -- dramatically changed it in short order.

So therefore, we are reacting by underwriting to make sure that we can get some profitable policies in. But it takes time to switch out that book of business, as these credits really impact us and our profitable policies. Some of our policies have gone from profitable to unprofitable. Some have gone from profitable and remained profitable. So there's -- it's impacted us.

So going forward, what's your strategy with these things?

To write profitable business. We're concentrating on only taking in the business that's profitable, and we're also concentrating on not having risks in our book of business that is unprofitable. It just takes time, though. There's a lot -- there's regulations on how we can get off risks, and there's regulations of how we can take risks. So we have to manage accordingly.

So what -- are you looking for people that don't tie on their roofs, or what?

No.

With shudders on?

Not at all. What we're looking for is that the policy is profitable. Whether the wind blows or does not blow, we buy a significant amount of reinsurance.

Right.

We want to ensure that based on our non-cat loss, our projected non-cat loss, our agents' commissions, all our expenses, and our reinsurance costs -- at the end of the day, we want that policy to be profitable. And that's what we model it on.

And if you were just to wind down your business and liquidate, how long would that take?

Well, we'd have to apply to the state. That's something that State Farm has been trying to do with the State for, I believe, a year or so. But that's not our business [plan]. We think that this book can be profitable, and we're making all the steps -- we're taking the appropriate steps and working with the credits. We've had to modify our business plan.

And going forward, what's -- this used to be a very profitable company. Are you going to get back there?

I think that -- yes, I think that we'll be profitable with that line of business. Absolutely. However, due to the challenges, it's significantly impacted us short term. It's not a market that we want to abandon. It's impacting the industry in the state of Florida. We still think there's a way to make profit in this book of business, with this business. However, it's become, obviously, more difficult. But there's -- with most lines of business in insurance, there are cycles to it.

Yes.

And right now, we're in a hard part with -- it's -- we're in a hard part with -- the hard part of the cycle, but we will get there.

Well, is there any part of your business that is nice and profitable, you can point to?

Well, we've got the two insurance companies, obviously. We just went over with Federated National, and American Vehicle has the liability line of business. And basically, you've seen a decrease in that business based on the slowing of the economy. Really, the construction business has really -- it's decreased significantly, almost come to a halt. But we're working on new lines of business, we're working on the kind of program, we're working on assumption of new policies -- voluntary, as well as some of the assumption from the Citizens -- State of Florida. So yes, we are taking those actions to bring the profitability into the program.

And are you going to assume more policies from Citizens? I mean, you did last year, at the end of the year, if I remember right.

Yes. I anticipate taking more policies in late 2009 here.

The same amount would -- what did you take last year?

Took about 15,000 policies. I would say we would take up to that amount. Could be -- it's hard to say, because we model the policies to ensure profitability with our existing book of business. So there's a million policies in there. But there's not -- I'm not saying there's a million profitable policies. So -- and then whatever policies we target, there's other carriers that can go ahead and try to assume those policies as well. So I would anticipate, in the latter part of this year, somewhere between 5,000, 10,000, as high as 15,000 policies we'll assume from Citizens. But like I say, we've got to go through the process first, as we analyze it and compete with other carriers.

Well, I know you don't give guidance. But what I sort of heard through [the thing] is you don't expect to be profitable in the third and fourth quarters?

Federated National will be significantly impacted by these mitigation credits and reinsurance costs in the third quarter, and less so in the fourth quarter. Federated National's -- that's their -- that's Federated's business. It's had a huge impact on it. I think the bulk will be in a much better shape as we're in 2010, into the first quarter.

Okay. Okay. Thank you.

Thank you.

Charles Berger.

Some of my questions regarding the depop have already been answered. But can you give me any idea, or explain a little further about the attrition rate you were referring to, about other companies taking some of the depop away from you? Or --

Well, basically what happens is we start with -- let's say there's a million policies, approximately, in the Citizens, which is the State. And we model those million policies. And through a variety of reasons, they get sorted out pretty quick. And we can come down to -- at any given point, I would say there's -- it could be 5,000, 10,000, 15,000, 20,000, 25,000, 30,000 policies, based on what we're looking for. So we model it from an underwriting perspective and a profitability perspective. And we identify those policies, and we assume those policies from the State. And once again, we compete with other carriers for those policies. We also -- the insured can say that they don't want us to assume the policy, and the agent can also say that.

So that's where I'm coming up with, later this year -- the plan is that we should be able to assume -- I know I'm giving a big range -- 5,000, 10,000, 15,000 policies. It's a big range because there's so much uncertainty about how many policies we'll get.

Well, what's been the attrition rate from the last three depops that you've gone through?

Well, we've taken -- we did January, March, May and June. Those all total about 15,000 policies total. And I would say that we identified about -- real rough number, maybe a three-to-one, maybe about 45,000, 50,000 that we were interested in at that time. And once again, through the insured agent and other carriers, we wound up with about 15,000.

Oh, so that's after the attrition, then?

Yes --

It's --

-- of actual policies that we get out, yes.

Right. And you expect to renew those policies, or is there a further attrition rate when they come up for renewal?

Well, at any point, they're not obligated to stay with us. But we anticipate that they'll stay with us. We're -- when we assume a policy, we're committed to them for at least three years. But sure, they can go elsewhere. That's possible. But we anticipate that the vast majority of them will renew with us.

And what percentage of your book is this 15,000?

Well, we have approximately, I would say, 4,800 policies in force, and about 15,000 of them are Citizens policies that we've assumed in the last year.

Okay, thank you very much.

Thank you.

And gentlemen, at this time, we have no further questions in the queue.

All right.

Well, thank you very much, everyone, for their questions. And I think we covered a lot of ground here. And we appreciate everyone dialing in and listening. So if there's any further questions, they can always reach us here at the Company. Thank you.

And that does conclude today's presentation. Thank you for your attendance.