Fednat Holding Co (FNHC) 2010 Q4 法說會逐字稿

Good afternoon and welcome to 21st Century Holding Company's year-end 2010 financial results conference call. My name is Sayid and I will be your operator today. Please note that today's conference call is being recorded. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. (Operator instructions) Statements in this conference call that are not historical facts are forward-looking statements. Without limiting the generality of such 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 matters discussed on this call that are forward-looking statements are based on the current management expectations involving risks and uncertainties that may result in these expectations not being realized.

Actual events and outcomes results may differ materially from what is expressed or forecasted in forward-looking statements beyond this call due to numerous risks and uncertainties including, but not limited to the risk 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. Forward-looking statements made during this presentation speak only as of date on which they are made and 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statement 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 21st Century Holding Company. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us today to discuss 21st Century Holding Company's 2010 fourth-quarter and full-year financial results. I'd like to start the call off with the highlights of our results from both the quarter and for the year. I'll also discuss a few recent developments and provide you with an outlook as we head into 2011. Pete Prygelski, our Chief Financial Officer, is here with me. Following my remarks, we will open up the call and will be glad to answer your questions.

Our results for the fourth quarter were primarily affected by our decision to take a more conservative approach to our reserves. The Company reviews its reserve position on a monthly basis; however, annually we have performed a more in-depth review of our reserves and upon analyzing our position for the fourth quarter, we decided to take a $2.4 million charge to strengthen our reserves. For the three months ended December 31, 2010, the Company reported a net loss of $3.5 million, or $0.43 per share, compared to a net loss of $7.4 million, or $0.93 per share in the same three -- month period in 2009. For the 12 months ended December 31, 2010, the Company reported a net loss of $8 million, or $1.01 per share, compared to a net loss of $10.3 million, or $1.29 per share in the same 12-month period the prior year.

Net premiums earned increased $1.2 million, or 12%, to $11.5 million for the three months ended December 31, 2010, as compared to $10.3 million for the same three-month period the prior year. Net premiums earned decreased $2.9 million, or 6.1%, to $45.1 million for the 12 months ended December 31, 2010, as compared to $48 million for the same 12-month period in 2009. Gross premiums written decreased by $5.3 million, or 18.1%, to $24.1 million for the three months ended December 31, 2010, as compared to $29.4 million for the three months ended December 31, 2009.

Total revenues remain strong this quarter as we continue to see the results of our disciplined approach to underwriting and the rate improvements of the last 18 months take effect. Total revenues increased $1.4 million, or 11.2%, to $14.3 million for the three-months ended December 31, 2010, as compared to $12.9 million for the same three months in 2009. Total revenues increased $1.7 million, or 3%, to $60.6 million for the 12-months ended December 31, 2010, as compared to $58.9 million for the same 12-month period in 2009.

As we mentioned, 21st Century Holding Company recently merged its two wholly-owned insurance Company subsidiaries, Federated National Insurance Company and American Vehicle Insurance Company, in January. As part of the merger the Company agreed with the Florida Office of Insurance Regulation to, among other things, better distribute its book of business throughout the entire state versus our current concentration in south Florida. The merger yields the benefits of scale and provides better use of our capital from a regulatory, rating agency and operations perspectives. We will benefit from the reduction of redundant regulatory filing administrative expenses. We will also have the increased flexibility with our reinsurance program and anticipate more favorable terms on the Company's upcoming reinsurance treaties.

We've also recently announced that we received approval from Florida's Office of Insurance Regulation for an approximate 20.2% statewide rate increase on our voluntary homeowners insurance program. This rate increase provides for increased opportunities to grow revenue by writing more business that is profitable. It also allows us to diversify our risk concentration as the rate environment continues to improve. We think these factors, together with our continued discipline in underwriting, will improve our overall performance in 2011.

Before we open up the call, I'd like to address some questions that we recently received via e-mail. The first one regards reinsurance, and wants to understand why it varies from year to year. The reinsurance program varies year to year from a -- for a couple of different reasons. It's based on our exposure, so as that exposure changes from one year to the next that impacts how much reinsurance we purchase. It also is based on the models that we use. We take our data and we utilize models to determine how much reinsurance we need. It's supply and demand, where there's prices that we negotiate with reinsurance companies. So there's a lot of different things involved in that and the reinsurance program has shifted down considerably over the last few years, whereas $52 million two years ago, $45 million last year, and we're getting ready to negotiate this upcoming season, which we think we should have at reasonable terms.

Next question that came in, there's a few questions about rates, trying to understand the difference between the rates that we took in -- that were increased in November, and now that we're taking additional rates. The rates that were in November was on our -- was on our assumed business that we took from Citizens, so that's one portion of our book of business. That went up approximately 14.9%. And now we're taking rate on our voluntary business, which is the majority of our business, that's effective March and April, and that is approximately 20.2% statewide average. So that rate of the 20% does not go on top of the 14.9%, it's a separate book of business. The 20% goes on top of a rate increase that we received back about 15, 16 months ago in November of 2009 and that was about 19%.

Another question is about the difference between the Citizens policies and the voluntary. Our voluntary policies are underwritten one policy at a time versus Citizens, they're more -- it's more of a bulk underwriting where we model the data and things like that, so it is easier and I think the book is always -- it's a better book when you can do it on a voluntary basis.

Do we need additional rate increases is another question that we received and that is something that we will always look at on an annual basis but I don't think you're going to see the need for huge rate increases where we had a 19%, a 20% increase. Those two big increases really, more or less, negated some of the effects of the mitigation credits and the other rate reductions that were required for us to take over the last couple of years. So with those rates, we're fairly close to where we were about two, three years ago in terms of rates. So the big increases, I think, are behind us.

Are our rates competitive in the marketplace? And for the most part, they are competitive. There's different parts of the state where we're more competitive than other parts, but that really varies by territory.

And will the recent rate increase impact growth, that's another question. It will impact growth but there is so much demand for business to be written and so many carriers, including ourselves, are not writing it because the rate is insufficient where our expected losses -- our expected expenses on this policy are a loss, so we are not writing a lot of business. As our rates increase, most people's rates are increasing in the marketplace, as well, including Citizens, so I think the tide's lifting all those. So I think there's great opportunity for us to write business on a go-forward basis and with an in -- with the higher rate, with the recent rate increase, it allows us to write more policies, as well.

There was a question on the expected rate of return on the investment portfolio, I think that Pete would be answering.

Yes, just to give you a snapshot of our portfolio, it's 90% fixed income and probably 10% equities. Not -- we don't really have a set goal for rate of return, although in the last year we've earned close -- a yield on the fixed income portfolio of about 3.7%. But our philosophy is just basically with our investment portfolio to have preservation of principal while earning slightly above market rate return and protecting our capital.

With that we -- two last questions that we received ahead of time is the marketplace and the general liability, how is the economy impacting that? And that program has gotten much smaller over the last three years, and we're not seeing it contract like we've had in prior years and I think that we're at the bottom in terms of where that program is in terms of the size and now we're seeing some increased demand for that product. So I think the economy's picking up a little bit more and we're seeing some more slight increase on some of that demand for that product. So we're hopeful that's going to -- we can continue with that program -- grow that program.

And then the last question is about automobile, where do we stand on our automobile program? Our automobile program is a very small program. It's difficult to write auto in Florida and that's why we keep it small. We're going to -- we're going to keep it small for the foreseeable future. There's some pending legislation that may prove to be favorable. If that's the case, that would allow more opportunity for us to write that product. But at this point we are going to continue just keeping it as a very small line of business.

With that, we'll be glad to open up the call to your questions.

Thank you. (Operator instructions) We have a question from Douglas Ruth from Lenox Financial.

Thank you for answering my questions. Do you think you're done now with the major adjustment of the reserves? Do you think they're at approximately the appropriate level?

Yes, what we do is we do a continuous analysis of our reserves. We do it on a monthly basis and we do it on a quarterly basis. But at year end, we go through a much more thorough, so we're comfortable with where we're at right now.

Okay. Do you think -- will the Company -- do you think the Company could be profitable for 2011?

Well, we're not putting specific guidance out there but clearly we've been moving in that direction. We have shed some policies that were not profitable. We've been very restrictive on the policies that we're taking in to ensure profitability. So for the most part the business that we're writing every day is coming in as profitable business. I think that from a -- the different components of the reinsurance and the non-cat costs associated with the policy we're clearly headed there. So we're not comfortable giving a specific number of what we're looking at for 2011, but we're absolutely seeing the trend continuing. There's going to be some bumps perhaps in some of the quarters, but we see the trend favorable in 2011 over 2010.

And is 2011, the first quarter, is that tracking better than the first quarter of 2010 then?

Well, we're not -- we can't give you specifics on where we're at, but in terms of writing business we see great opportunities to write business. Rates are much more favorable on our homeowners program. We have got great -- I think we've very good underwriting on our property and our liability lines. We're confident that we're heading in the right direction. There is going to be some quarters that are better than other quarters, but we're confident that we're absolutely heading in the right direction.

Okay. Can you buy back stock at this point in time?

No, we--when we had an arrangement when we put the capital in the insurance company that we would not put capital -- return capital through a dividend or a buy back to our shareholders until we have two consecutive quarters of underwriting profitability. So, once again we're confident that we're heading in that direction, but at this point we will not be issuing a dividend and we will not be issuing a stock buy back. At that point, the board would re-evaluate that -- once we have regulatory approval the board will re-evaluate that on an ongoing basis.

Okay. And I have read that the reinsurance for some of the other carriers has been like 5% to 10% lower. Can you give us any indication of what you might see for your reinsurance costs for 2011?

Well, there's a lot of variables in terms of the reinsurance. In terms of our exposure, I think we've done a fantastic job with our exposure where we've actually shed about $150 million of what's called PML over the last about 15 months, 18 months. So that means we need about $150 million less of reinsurance than we did about, let's say, 18 months and our premium has not gone down in this same level. So, we've shed the need for as much reinsurance as we had two years ago and you saw that we bought less last year and I think that our book -- our in-force premiums have stabilized quite a bit. I think we've -- the exposure has continued to come down. So I think we're going to do very well with our portfolio in the reinsurance business with the reinsurers.

But now you're asking about pricing. Up until a few weeks ago, we had all indications that there was ample capacity and that pricing may be coming down. We've heard from perhaps 5% to 10%. In terms of Japan, that's a major event. They're talking about $200 billion to $300 billion. But perhaps it's going to be somewhere between $10 billion and $30 billion of insurance losses. So it's -- we're not sure exactly where we're going to wind up on pricing. Obviously the reinsurers want the pricing to be higher than where we are, but we feel comfortable with what we're going in, not only with our portfolio, but also with -- we still believe, even with the events in Japan, that there's ample capacity.

There's another moving variable, which is the model changes, and there's been some big model changes that will affect not only us as a carrier, but also the reinsurers. In terms of it's impacting a lot of Florida writing -- property companies, it's impacting companies that write in all the coastal states. But it's actually having a very neutral effect on us, some of these model changes. So once again, we feel very comfortable going into this upcoming reinsurance purchase that we're going to do well with it and once that's complete, we're going to release that to all of our shareholders.

Overall that sounds pretty positive. In your report you talk about a major insurance company that went bankrupt in 2005 or 2006. Who was that in Florida?

Well, there's been signif -- there's been frequent companies that unfortunately have gone down. Back in 2005 -- I'm not sure exactly what you're referring to, but Poe had three different companies that went down in 2005,2006. Just recently two more companies are not participating any more. They're under regulatory control. So Florida's a challenging market but we're confident with where we are. With the recent merger I think our capital is -- we've got strong capital with a statutory surplus of about $40 million, and our gross written about $90 million, $95 million. So we're in a very good shape in terms of gross written premium and then in terms of net written premium, as well. So we're confident we're heading in the right direction.

As a value investor, I appreciate that some of the management and some of the board members bought stock in the recent past, and I hope that you will consider this low stock price an opportunity, and that we might see some more insider purchases. I think that, that would send a strong message to the investment community if management and board members bought stock.

Absolutely. I appreciate that comment. Thank you.

Okay. And finally, I'm grateful for what you folks are doing. It seems to me that you're making good decisions, and as an investor it looks to me like you're doing the right thing for the shareholders, and I'm grateful for that.

All right. Thank you very much.

That's the end of my questions.

Thank you.

Thank you. Our next question comes from Jason Hurr, private investor.

Hey, Michael.

Hi, Jason, how are you?

I'm doing okay. So a couple quick questions. What was the in-force policy count at the end of December 2010?

We're at about 42,600 roughly.

So you've actually dropped policy count, which is why your revenue is down then?

Throughout 2010, the revenue count has been fairly flat. I don't see us really contracting much more. I would say that we're going to be staying through 2011 in the low 40,000, 42,000 range. Our peak was in the mid-50,000s back in 2009. So the book, we feel, is a better quality book and it is a little smaller. And the in-force premium is actually -- has not contracted nearly as much as the number of policies so it's a much better book.

Is there going to be any more assumption of policies from the state?

I don't see that in the foreseeable future. I think that we have a pretty good program that we're writing on a voluntary basis. That's always a valuable -- available to us, as well as everyone in the market. There's 1.3 million policies in Citizens. There may be opportunities for us, but as we are getting -- going into the wind season in about 90 days that's not something that we're looking at, but we're always open to that on a go-forward basis.

Okay. What was the -- what initiated the merger of the holding companies?

Well, there's different things that we have. Unfortunately, Federated, which is our company that writes property, we've had underwriting losses in there for quite sometime so that company has been strained from a capital perspective. We have two different, I would call it, silos of capital, Federated National and American Vehicle. They both had approximately, let's say, $20 million of capital. Clearly, it's much better to have them together. It's better for --

You share the capital because you'd already taken a loan out of it before so --

Correct. So now it's one entity that has $40 million. It's better from a regulatory perspective, it's better from a rating agency perspective and really it's something that gives us more flexibility from a reinsurance perspective. Not only flexibility, but also it gives us -- we're a better credit risk. Let's just say if our reinsurance purchases -- and I'm going to just use a rough number of $30 million, we're a better credit risk having $40 million in statutory surplus versus $20 million in statutory surplus. So that, plus also just the flexibility. So we think that -- we think it was a good decision and it's going to help us with this reinsurance purchase for sure.

And do you have enough adequate capital for the future or are you going to have to raise some time?

We have adequate capital in the insurance companies. Generally speaking -- or statutorily you can write as high as 10-to-one gross and four-to-one net but that is not really a realistic number. I would say five-to-one gross and two-to-one net. We're well below that so let's just use roughly $40 million of stat surplus you're talking we could write up to $200 million of stat -- of premium based on that stat surplus. We always look at the idea of looking at additional capital for different opportunities. There's nothing specific that we have in mind at the moment, but we're always looking at different options and if something's available that we could do something, we would obviously do that if we could find benefit for our shareholders.

Okay and last thing, where is the growth going to come from in the future? Because I -- you said that you're going to keep the policy count roughly the same. I haven't necessarily heard where the top line's going to grow except for the price increases.

Well, I think where the opportunity's going to be in terms of Florida property, like I said, there's 1.3 million policies in Citizens. There's a lot of policies there. As their rates continue to go up currently Citizens is on what is called a glide path. Their rates are going to go up 10% per year depending on different variables, but there's talk that it might jump up 25% this year. That has to be approved by the legislators. But if that happened that would obviously create more opportunity for us.

We're quoting a tremendous amount of business and unfortunately we've said no very frequently. With our recent rate increase we think we're going to say no less frequently. And the reason for that is, we think that we have the ability to write more policies that are profitable. So it's very challenging when our rates are inadequate to write business because we not only have an existing book of business that we're trying to get profitable and we've not renewed policies that were not profitable, but we want to ensure that we're adding properties that are profitable, as well.

Hey, Jason, this is Pete. Let me add that our reinsurance -- what we [seed] to reinsurance is still considered on the top line because you take your gross minus your [seeded] you get your net premiums --

No, that's how your net's improved for the quarter but basically your problem is on the top line where I can actually see from a combination of rates and policy total you're down on the gross line.

Right, you're talking about gross and what Mike said is the answer.

Yes, and that's how you increase your net, which is -- yes.

And the net's only going to get better because of what Mike said to the previous caller about the changes in our book and the reduction of our PML the reinsurance, the net is going to get better again this year.

The biggest challenge we had, Jason, was that our gross was being eaten up so much by reinsurance expense because our rates were so suppressed. So now we've had -- now we're on our second big rate increase and the reinsurance market's been fairly stable. So our ratios are going to go -- are heading back and have made a lot of improvement over the last year-and-a-half, two years, they're going back to a more traditional place where they should be.

Okay, thanks.

Thank you.

Thank you. (Operator instructions) Our next question comes from WIlliam Myers from Miller Asset Management.

Hi, WIlliam, how are you? WIlliam, are you there?

Pardon me, Mr. Myers, your line's open. If you have your phone on mute can you un-mute your phone, please? (Operator instructions) I'm showing no further questions at this time.

Okay, thank you, operator. I just want to thank everyone listening in. We appreciate the questions. There's challenges, obviously, in the marketplace, I think that we've addressed and we're moving -- the Company and continuing move in the right direction. Pete and I are always available if you need to reach out to us for additional questions. So thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. That concludes our program for today. You may all disconnect, have a wonderful day.