Fednat Holding Co (FNHC) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the 21st Century Holding Company's 2009 year end financial results conference call. I will be your Operator today. Please note that today's call is being recorded. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session, instructions will be provided at that time.

Statements in this conference call or in the 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 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 press release issued today and other filings made by the Company with the SEC from time-to-time.

Furthermore, the consolidated financial statements of 21st Century Holding Company for the year ended December 31st, 2009, have been prepared in accordance with Generally Accepted Accounting Principles for annual financial information and with the instructions of Form 10-K and Rule 1001 of Regulations S-X. 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise.

Now at this time I would like to turn the conference over to Michael Braun, Chief Executive Officer and President, of 21st Century Holding Company. Please go ahead, sir.

Thank you. I just wanted to go ahead and welcome everyone to our call. We appreciate you dialing in today. We'll start with just a brief overview and then open it up to some questions. Basically we had issued two separate press releases today, one containing the announcement that we're going to be acquiring a HomeWise Insurance Company, which is news that we're very excited about. HomeWise is located in Tampa, and they really offer a great opportunity for our Company in terms of diversifying our risk. We've been traditionally a South Florida Company and HomeWise really has a book of business that goes into other parts of the state that really will help us diversify it from a reinsurance perspective.

Our reinsurance is our number one expense being a property writer in the State of Florida. They also have business that they write in Florida, I'm sorry in Louisiana, which is very-- once again it's good, the more diversification the better in that regard. They have a well managed team there, we look forward to that. We-- it's Dale Hammond and his team, I think they look forward to working with us and I know we sure look forward to working with them.

The other information that we put out today was our 2009 results. 2009 was very challenging year and I think we've touched on that in the past that the biggest challenges that we had in 2009 were the-- an increase in reinsurance expense that really hit the second half of the year. It materially affected us in the third and fourth quarter. And also the credits associated with wind mitigation. Once again as I've said in the past that that's a program that was very well intended to encourage people to go ahead and fortify their houses so they'd be less resistant to damage in the event of a storm, but it's a big amount of premium that in terms of credits that we've given that has impacted us. It's about 24% right now at year end of our premium has been given back in the form of credits.

So in 2009 we also had rate increase of approximately 19% on our voluntary book of business and that made a big improvement towards getting us back towards profitability. Also improved underwriting. But the wind mitigation credit that's something that once again had hit us really hard in the beginning of the year and it took away the ability for the Company to generate the capital of the surplus and the insurance Company. That has resulted in something that we put in the press release as well that we just received correspondence from Demotech that they're concerned about the capital level within Federated. And we are looking at that and actively looking for a solution to that issue.

The-- I don't think that that letter is unique to us within the state. A lot of carriers have experienced difficulty with surplus this year. It's a challenge, but I think that we've got some resources available that will help with that challenge. That's just a brief overview but we'll go ahead and turn it over to questions and Operator, if you can open it up?

(Operator Instructions) We'll go to William Myers with Miller Asset Management.

Hi, thank you for taking my questions, this is my first time on your call. You have $142 million listed on your balance sheet as total cash and investments, so I am wondering why the $10 million increase in capitalization for subsidiary, I believe it is, why that-- would that be any problem at all? Is that-- does that-- if you shift the money to the subsidiary, does it still appear on your balance sheet? Thanks.

Well, basically the subsidiary is what has a statutory surplus, and that's what is referring to within Federated. Federated has approximately $21 million at year end of statutory surplus, so the Demotech that's what they're referring to. Cash and cash equivalence things like that include a lot of different things. It does include surplus but it also includes both Federated, American Vehicle, which is the other insurance company and the holding company. So that would include prepaid premiums, case reserves things like that, IBNR, so there's a lot of different things that go into that.

Okay. Well then I guess I'm trying to get a better idea of what the cash and investments represent. How much-- is there some way of giving me an idea how much of that is available for purposes other than reserves for losses. Is there any way you can break that down for us to just have a little bit better idea than what you just said?

This is Pete Prygelski. Basically we-- if you're talking about free cash which to me means cash outside of the two insurance subsidiaries.

Okay.

You're looking at about $10 million in free cash, cash outside the subsidiaries, outside the two insurance companies.

Okay. Okay if that's the level of detail you can give, that at least is helpful. And I think that's all for me, thank you very much.

Thank you for calling in.

And your next question will come from [Doug Eden], a private investor.

Yes, good afternoon. Can you hear me okay?

Yes, hi Doug, thanks for calling in.

Hi, sure I have a couple of questions, one is related to the first question that the other caller just mentioned. So it seems like free unencumbered cash you have is about $10 million. So is that-- when you say you're exploring options, is this going to be internally funded within 21st Century Holdings or are you looking to raise external capital to meet (inaudible)?

There's a lot of different things that we're looking at. I mean really we don't want to leave any-- not look at any option that might be available to us. So there's that possibility, but clearly we've got some capital, we have capital inside the Company that we could use for it.

Okay. Okay. So not in-- it's an issue but not a concern.

Well it's something that has been given to us and we're exploring the best way to respond to that.

Okay. Secondly, after you all rejected the merger overture I think in the fall of this past year by the other company, Homechoice, Homeowners Choice, the announcement that you all released mentioned that there was going to be a share buyback, and I wanted to know in the first quarter of 2010, has there been any shares purchased? And how the Demotech additional capital needs letter may impact share buybacks in the future as well as the dividend?

I'll answer that, Doug, this is Pete again. We initiated the buyback around October 29th of 2009. We bought back pretty much every day that the market was open from 10/29 through December 2nd, we bought back a total of 67,000 shares. We spent about $285,000 of the $4 million that was authorized. At that point on in December, we aggressively started pursuing strategic acquisitions. We looked at several of them, we wound up with HomeWise. At that point we suspended the buyback, not canceled it, because again this-- even the HomeWise acquisition has to go through due diligence and regulatory approval.

So we suspended the buyback in hopes that we're going to use a majority of our free cash to fund this acquisition. After the acquisition is funded, we'll then as we do monthly and quarterly at Board meetings look at the best use for our capital whether that's continuing to buyback with money left over after we make this purchase, increasing the dividend or we'll go through all the scenarios. But right now for the long term, long-term accretiveness to our shareholders, we feel this potential transaction with HomeWise is going to be extremely beneficial and accretive to our shareholders this year as well as the out years.

Okay. That's helpful. Thank you. So and in the announcement that you just released it mentioned $100 million was of revenues, additional revenues, is that just from the HomeWise acquisition on a run rate basis?

Yes, that's correct. The HomeWise, there's two different insurance companies in their organization and HomeWise has approximately $40 million but also we mentioned that there's what's called renewal rights, where we would be-- have the ability to write a substantial amount of business from their other carrier. Business that works well for our Company models well. So aggregate is approximately $100 million. There's a lot of variables that can move there in terms of how it shakes out with the insured and the agent, things like that, but we feel that's a pretty sound number.

Okay. So as it relates to that, for 2010, year end 2000-- or the full year 2010, what would be your expected gross written premiums with the combined entities as well as operating earnings?

Well, there's going to be some seasonality in terms of converting a lot of that business over. I don't know that we've got a hard number that we're releasing, Jim?

We don't-- I don't know if you've been on the call before, Doug, we don't really release the earnings number. But we're projecting $100 million in annualized premium from the HomeWise purchase and our premiums should remain flat. So we're looking at $180 million in gross written.

So yours would remain flat even with the 19% rate increase in assuming the more of the citizens policies?

There'll be some more in that regard. But yes, I mean there's not going to be substantial growth with Federated.

Okay. And one final question, just in terms of using the free capital, with the shares trading for awhile now at approximately 50% of book value, wouldn't it make sense to continue buying back shares as opposed to making acquisitions of companies that the ROE is going to be I would imagine significantly less than the tremendous discount to book? In other words, don't you get a huge investment by buying back shares at this discount?

There's a full analysis that we do and that we will continue to do in reference to this acquisition. We're looking at-- we have capital, what's the most affective way to use it between the different entities.

Yes and, Doug just to clarify. We continue to look at this and I'm not-- we haven't released, specifically we haven't released the terms of the deal with HomeWise because we're going through due diligence. So what we did was-- that's why I said I wanted to make clear that we haven't canceled it, that we're just suspending it so we can assess the best use of the cash. And I'm not saying that we're not going to resume it and I'm not saying that we're not going to use some of the cash to fund this deal, use some of the cash for a buyback. So the deal-- the (inaudible) is just suspended as we get through this due diligence which we expect to take about 30 to 45 days.

Okay.

So stay tuned is the message. I don't want you to think that we're just saying well the stocks at half of book value, why aren't you guys buying it back. I mean that-- it's on our radar.

With the $30 something million approximately of revenues from HomeWise, how many policies does that equate to, is that 30 something thousand policies?

Yes, ballpark. And it really varies the farther-- there's different types of policies in terms of condos and things like that, those are individual units versus single family houses. But also in different parts of the state the premium is higher, traditionally South Florida.

Of course. So in terms of before HomeWise what percentage of your business-- what percentage do you pay out in reinsurance costs, you said it was a high percentage because (inaudible)?

It's significant, it's over 50%. Traditionally we've been in the mid-to-upper 40s, it went in the 60s this year basically because of the suppression of premium associated with the mitigation credit but also because the reinsurance costs went up. We're confident that we can-- with the acquisition of HomeWise, their distribution is better and we're confident that our reinsurance as a percentage of premium is going to be much more manageable.

Okay, yes that makes sense. So their-- your percentage was if the 50s of your $80 million, but when you add their $100 million at a lower percent your weighted average reinsurance cost. you're saying will go down something more manageable where you can make a profit?

It significantly benefits us from a reinsurance perspective in that regard. Yes, in terms of our percentage of premium spent on reinsurance, we're-- is going to be much more favorable.

Thank you.

And once again this is subject to the whole due diligence process and customer regulatory approval from the State of Florida, both of which we anticipate-- there's the cat cycle, the reinsurance season starts June 1, and our goal is to have this well under-- completed before then because that's where we start out our new reinsurance contract.

Right and so-- and the DOI will approve this subject to your maintaining the A rating, the A Demotech rating, correct?

They don't rely on Demotech. Other state-- the Department of Insurance has their own criteria, and we'll have to present them with all the information that we have and they'll do their due diligence as well and they'll make their decision if they approve us or not.

Okay, very good. So it sounds there's a lot of exciting things, good luck for you for this new year.

Yes, thank you very much.

Next question will come from [Charles Vergue], also a private investor.

Hi, there. I wish you could explain a little bit further on your strategic plan and growth initiatives like how they performed by line in 2009 and what your expectations for 2010. In other words, is the condo line increasing and the marine line?

Yes, the inland marine is a smaller line, it's not by any stretch, the condo line is the commercial habitational which we started I believe was October, and we've been averaging I would say roughly $200,000 to $250,000 a month in premium. That's coming along nice. And really the, once again the big thing with that is the way it models into our existing book of business. There's-- I would say for not only for home owners within the State of Florida but for condo, there's far more demand than there is supply. We could be writing a lot more business without a doubt. But what we're trying to do is be prudent with that and write it correctly. I have no doubt that we could be writing $1 million a month on that line, but we are not.

So the other things that we have is American Vehicle, which we-- that's in multiple states as well. That's exposed a lot to-- its the general liability artisan program that we continue-- we had in 2009 that we had the agreement with an A rated carrier where they were able to help us expand into some new markets, that's going to take time. But that once again helps diversify us outside of Florida.

Okay. Thank you very much.

Thank you.

(Operator Instructions) Your next question will come from [Kevin Wagner], private investor.

I believe my question was answered by responses to Mr. Eden's questions.

Thank you for calling in.

Yes, thank you.

And seeing no further questions in the queue, at this time I would like to turn the conference back over to Management for any additional or closing remarks.

Well we just want to thank everyone for dialing in, and those that had the questions as well we appreciate that. Obviously it's a challenging market that we operate in, but we feel that we're sticking with the fundamentals and very excited about the future. I think that our business, our normal business, is absolutely moving in the right direction that we have and I think that we look-- we're very excited about the acquisition with HomeWise and hope to have that closed as quick as possible. So thank you, very much, everyone.

And ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.