Fednat Holding Co (FNHC) 2010 Q3 法說會逐字稿

Good afternoon and welcome to 21st Century Holding Company's third quarter 2010 financial results conference call. My name is [Javon] and I will be your operator today.

(Operator Instructions)

Statements in this conference call or in documents incorporated by reference that are not historical fact are forward-looking statements. Forward-looking statement are subject to certain risks and uncertainties that could cause actual events or 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 risks and uncertainties described in the conference call, our press release issued today, and other filings made by the Company with the SEC from time to time.

Furthermore, an unaudited, consolidated financials statements of 21st Century Holdings Company for the quarter ended September 30, 2010, have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions for Form 10-Q and rule 1001 of regulations as such. These financial statements do not include all information, and notes requested 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 31, 2009.

21st Century Holding Company specifically disclaims any obligation to update or revise any forward looking statement whether as a result of new information, future developments or otherwise. Now at this time, I would like to turn the call over to Mr. Michael Braun, Chief Executive Officer and President of 21st Century Holding Company. Please go ahead, sir.

Good afternoon and thank you for joining us today to discuss 21st Century Holding Company's third quarter 2010 financial results. I would like to review the highlights of our financial results, as well as provide our outlook for the Company. Following my remarks, Pete and I will open up the call to your questions.

While we experienced a loss in the quarter, our net earned premiums and total revenue grew at double-digit rates and we experienced lower losses on our property book than we experienced during the same quarter last year. We also incurred a lower reinsurance expense as a result of negotiating coverage at more favorable terms. Looking forward, we are encouraged by the consistent, positive trends that we are seeing and the solid momentum that we have built over the last few quarters, and we see continuing into 2011.

Now, for the financial highlights. For the three months ended September 30, 2010, the Company reported a net loss of $1.3 million, compared with a net loss of $4 million in the same three month period last year. For the nine months ended September 30, 2010, the Company reported a net loss of $4.5 million, compared to a net loss of $2.9 million in the same nine month period last year.

Year-over-year, third-quarter results improved due to a more disciplined underwriting and the positive effects of the 19% rate increase that went into effect on our voluntary book last November. Net premiums increased $2.1 million or 22.2%, to $11.6 million for the three months ended September 30, 2010. Compared with $9.5 million for the same three month period last year. Net premiums earned decreased 4.2 or 11% to $33.5 million for the nine months ended September 30, 2010, compared to $37.7 million for the same nine-month period last year.

We continue to see very high demand in the Florida market for our homeowners products. We typically write few policies in the third quarter, during the active win season. While we continue to measure a maintained and measured disciplined approach, we have significantly increased writing business in the fourth quarter. Total revenues increased $2.5 million, or 19.1%, to $15.5 million for the three months ended September 30, 2010. Compared with $13 million for the same three month period last year. Total revenue increased $300,000, or 0.7%, to $46.3 million for the nine months ended September 30 2010, compared with $46 million for the same nine-month period last year.

While we are pleased with the momentum and the positive trends that we are seeing in our third quarter results, we continue to operate in a challenging rate environment. And as our more disciplined and measured approach to underwriting -- and as such, our disciplined and more measured approach to underwriting is even more important.

On the reinsurance side, while our costs were lower this quarter, due to more favorable terms, we tend to take a more risk adverse approach to buying reinsurance than some of our competitors. We currently retain $5 million per catastrophic event, which represents a conservative 8% of the Company's capital. While no hurricanes hit the state of Florida this year, it was the third most active hurricane season on record. While a higher retention would have resulted in lower reinsurance costs, it would've exposed our shareholders and policyholders to significant risks in the event of a hurricane hitting the state of Florida. We believe in the prudent purchase of reinsurance to protect our shareholders capital and policyholders surplus.

As we move into the end of 2010 and the beginning of 2011, we see a number of factors that we anticipate will have a positive effect on our results going forward. The first is rate increases. As you know, last November we received a 19% rate increase on our volunteer homeowners program, which is now fully incorporated into our book of business.

Also in August of this year, we received and implemented a 14.9% rate increase on the homeowners book of business that we assumed from Citizens, during 2009. We've also recently applied for an additional 14.9% rate increase on our voluntary homeowners book of business, and hope that will be approved by the OIR in the next few months. The second factor that we've already discussed is our disciplined approach to risk management and underwriting. Writing and renewing only those policies that match our return standards and turning away business that does not fit our risk profile. The third factor that we continue to have an effect on a result is a strong demand for homeowners insurance in the Florida market.

Before Pete and I open up to questions, we have received a few questions before hand that we'd like to address. The questions include an update on the premium growth initiative, continue to multi-state diversification, improved investment portfolio management and approval of assuming more policies from Citizens.

In terms of growth initiatives, we continue to see growth both in Florida on our property book, as well as in other states. Our property book is only in Florida and our artisan book is in primarily Florida, but also other states. We continue to push forward with that. The recession has been difficult on a lot of contractors and that's who we target is small contractors, so that's been difficult, but we continue to move forward with that and we have a good distribution with our agents.

In terms of investment portfolio management. Pete can go in much greater detail as we have questions, but that has been a very sound, well diversified strategy that our investment committee has implemented and is not only resulted in positive returns, but it has also diversified our risk.

In terms of approval to assume policies from Citizens, we did assume policies from Citizens in 2009 of about 12,000. We've taken policies from Citizens since 2004, so we're very familiar with the process. But, we've had a lot of problems in that book that is not performing the same as our voluntary. At this point, we don't anticipate taking any more policies from Citizens in the near future. We have additional rate, but clearly our voluntary book of business we feel much more comfortable with.

Next item is some other questions as when are we going to be returning to profitable, when would we start to repurchase and when will we start the dividend? We do anticipate turning to profitability. It's been difficult and has taken longer than we anticipated, and it's taken longer than we've anticipated based on what again, in terms of property, just the rates. We feel they're inadequate rates and that's why we're asking for more from the state. Also some of the challenges that we've had with the economy, as I said, about the AVIC artisan program. We had a very, very large reinsurance cost and you saw that last year in the last two quarters of '09 and the first two quarters of '10. And it's become much more manageable this year.

So, once we sustain profitability for two consecutive quarters, we will, the Board will reevaluating the dividend, as well as the stock buy back. That decision will be made at the appropriate time, but our Company understands and has a history of doing both the buy back and declaring a dividend. And I think that I personally feel strongly about that as well that our shareholders want that, and I'm confident that the Board will evaluate it at the appropriate time.

Another question basically is, why are others able to make money when we're not making money in the last few quarters? And the big reason for that is really risk retention. As I've indicated earlier, a big reason, a big part of Florida is the ability to sustain hurricanes. We've been writing property over 10 years, we've paid over $350 million of catastrophic claims and the reason why we've been able to do that while we're still here as a small company is because we have reinsurance. We've gone through numerous storms, we've been battle tested and we clearly appreciate our partners in the reinsurance community. Reinsurance is expensive. If we bought less reinsurance, clearly, it would benefit us in the short-term, but as I've indicated earlier, this is a very active season. We're fortunate that none of these hit Florida.

Our capital of the four publicly held companies in the state of Florida, we're putting 8% of our book value, this is based on second quarter numbers when these decisions were made, we're putting 8% of our book value as a retention. The other companies wanted that about 16%, one's at about 33%, and one's at about 60%. We think that's very high levels of risk and our goal as long-term viability and long-term strength for our policyholders and our shareholders. And we think that our reinsurance program, while expensive, is critical to our long-term success. And really, the reason that we struggle with that, in the past, has been inadequate rate. We've sharpened our underwriting much tighter because of the inadequate rate, and the reinsurance market is stabilized, but we've not skimped on that reinsurance.

In terms of managing our reinsurance, our need for reinsurance, and I don't want to get too technical, but basically, over the last 18 months has been flat. In other words, it's been around roughly $280 million. It really hasn't moved. But in the meantime, we've added about $20 million of premium. We've gone from about $57 million $77 million in our voluntary book. And what's important about that is, we've been able to add a significant amount of premium to our book of business, without increasing our reinsurance costs need. So, that's important.

So, we feel that we manage our business well and there's been a lot of challenges with the mitigation credits and the erosion of premium. Our mitigation credits, you go back 18 months, reduced our premium of about 28%. That's significant.

I don't know many businesses that can take that kind of hit of having a 28% reduction in their top line premium revenue and not have that impact. So, we fully have addressed that, we reacted to that and are underwriting. I'm confident that the business that we are writing is performing much, much better and clearly we're heading in the right direction. So, with that, Pete and I would be happy to open it up to questions.

Thank you. (Operator Instructions) And our first question comes from William Myers from Miller Asset Management.

Hi, thanks for taking questions. I think you said that your losses for this quarter were less than a year ago. And I'm wondering whether the losses this quarter could be modeled as a long-term average or whether you would think they would be above or below average?

While I would say that, really what's changing is, with the return of adequate premium as we get closer , our loss in LAE comes down significantly. When we had the erosion of premium and that happened rather quickly at the end of 2008 and early 2009, basically just basic numerator denominator, as that denominator decreased, it really spiked our percentages very excessively. So, we're seeing a pattern back to more normal non-cat losses, loss in LAE.

Okay I guess that's it for me. I'll go back in queue. Thanks.

Thank you for your call. Thank you for your question.

(Operator Instructions) And sir, I'm showing no questions in the queue.

All right. Well, we appreciate that we had the one call in, but we appreciate all the people that are listening and even at a later time. Pete and I are always available. Our contact information is out there. But, we go through -- we've went through another hurricane season, and once again, a big expense that we have is reinsurance. We would think we model that very well and we have adequate protection . And also, we just really concentrate on the basics, which is solid underwriting. So, our objective is long-term value, and that's what we're working on. So, we thank everyone for their questions and for listening in. If you have any questions please call us. Thank you.

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