Fednat Holding Co (FNHC) 2011 Q1 法說會逐字稿

Good afternoon, and welcome to the 21st Century Holding Company's first quarter 2011 financial results conference call. My name is Latoya and 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 conduct a question-and-answer session. (Operator Instructions). Also, we ask that you limit yourself to one question and allow others to get into the queue.

Statements in this conference call that are not historical fact are forward-looking statements 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 therefore comparable terminology are intended to identify forward-looking statements. The statements discussed on the 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 results, outcomes, and results may differ materially from what is expressed or forecast in forward-looking statements made on this call due to numerous risks and uncertainties, including, but not limited to, the risk and uncertainties described in this conference call, our press release today, and other filings made by the Company with the SEC from time to time.

Forward-looking statements made during the presentation speak only of the date on which they are made and 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events, or circumstances 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, operator. Good afternoon, and thank you for joining us today to discuss 21st Century Holding Company's first quarter 2011 financial results.

I would like to start off the call with the highlights of our results this quarter and a general outlook for 2011. Pete Prygelski, our Chief Financial Officer, is here with me. Following my remarks, we will open up the call, and Pete and I will be glad to answer your questions.

For the three months ended March 31, 2011, we reported a net of loss $2 million or $0.25 per share on 7.9 million average undiluted and diluted shares outstanding, compared with a net loss of $900,000 or $0.12 per share on 7.9 million average undiluted and diluted shares outstanding in the same three-month period last year.

For the three months ended March 31, 2010, the Company would have reported a net loss of $2.3 million or $0.29 per share on 7.9 million average undiluted and diluted shares outstanding if we had not realized a $2.2 million of net realized investment gains.

Gross premiums written increased $100,000, or 0.5%, to $27.1 million for the three months ended March 31, 2011, compared with $27 million for the same three-month period last year.

Homeowners gross written premium increased $1.3 million, or 6.1%, to $22.4 million for the three months ended March 31, 2011, compared with $21.1 million for the same three-month period last year.

Unearned premium increased $3 million, or 6.3%, to $50.1 million as of March 31, 2011, compared with $47.1 million as of December 31, 2010.

Net premiums increased $100,000, or 1.2%, to $11.1 million for the three months ended March 31, 2011, compared with $11 million for the same three-month period last year.

Total revenue decreased $2.7 million, or 16.8%, to $13.1 million for the three months ended March 31, 2011, compared with $15.8 million for the same three-month period last year.

Total expenses decreased $1 million, or 5.9%, to $16.3 million for the three months ended March 31, 2011, compared with $17.3 million for the same three-month period last year.

Our improved performance this quarter in written premium and earned is the result of both an improved book of business, as we continue to be more calculated in our risk management, and continued discipline in our underwriting, in which we only pursue business that is profitable for the long-term benefit of the Company.

We expect to see continued performance improvements for the remainder of 2011 driven by the following.

First, continued underwriting discipline and exposure management, which has improved our property book of business over the past few years. While we see a very strong demand in the market, we are focused on writing only the business that will have long-term benefit to the Company and our shareholders versus taking on less profitable business for a short-term bump in our performance.

Second, we continue to see the positive effect of the rate increases we have received over the past two years. Our latest increase, which was granted by the Florida Office of Insurance Regulation, on February 16, 2011, called for a 20% average state-wide increase on our voluntary homeowners program. This increase became effective on March 23rd for new business and April 14th for renewals. As the year progresses, we should see an increasing benefit from the rate increases, as rates return to a more adequate and normalized level.

Third, as we mentioned last quarter, we continue to realize benefits from the merger of our two insurance subsidiaries, which should also help improve our performance as we continue through 2011, and as a positive factor as we negotiate our reinsurance due to our improved capital structure.

And lastly, the Florida legislative session has recently approved and forwarded new legislation that would allow insurance companies to withhold full payment on certain claims until repairs have actually been made, shorten the length of time that claims can be reported, and narrow the definition of what is covered in a sinkhole claim. We are optimistic that Florida's new governor will sign this into law.

With that, we are glad to open up the call to your questions.

Thank you. (Operator Instructions). Our first question is from Douglas Ruth of Lenox Financial Services. Your line is open.

Hi, good afternoon. Could you talk -- do you think you are done adjusting the reserves that the point?

Reserves is something that we continuously look at, and that's done on a quarterly -- it is done on a monthly, quarterly, annual basis. But as we closed out the year and where we are at the quarter, we are comfortable with where reserves are, but that is something that is always open to be evaluated, but we are comfortable where we are at the moment.

Okay. Are you seeing any increase at all in the commercial general liability insurance sales?

Yes, we are seeing some opportunities there. There's a couple of different things. We see that there is opportunities from perhaps an improved economy, but we think that our distribution, primarily in Florida, is pretty aggressive in terms of our agency force that we have.

Our agents tend to -- where that was distributed more through general agents in the years past, we sell directly from the retail agent, and we think we have a better quality book of business that comes in, but we also think that we have better control that we can increase the volume as well.

And I think that that GL book, which has decreased over the last three, four years, has definitely stabilized and I think that we will see some improvement on that, but it is a better quality book than it has ever been and we see opportunities for growth there.

And to you think you could have year-over-year growth in that segment?

I do believe that we are seeing signs of that, yes. It is a bit early to say. But I can tell you in the last 90 days, we have seen a significant uptick in some of that premium coming in. And we carefully review what we have, but it looks positive at this point.

Okay. That's encouraging. Could you talk --

Also in the business that we are writing currently is better quality business which is being reserved. That particular business in the current year is being reserved -- it is a better quality book so you would expect that the development or the losses to be less than previous years.

It's a significant change improvement in our underwriting over the last few years, Doug, where we have much better control and quality selling it direct, and that is important to have strong underwriting. And we think that changes that we've made over the last couple of years will definitely pan out to be very positive for us.

We're optimistic that we will see the combined ratio come down. Could you talk some about the reinsurance costs for the year? What you --

The reinsurance, we are currently negotiating. That goes in effect in July. I feel very good about where we're at on our reinsurance program. There is more than enough capacity in the market for it.

I would say that prices looked like they were going down, maybe 5% or 10%, and then with Japan quake and some of the other events, the reinsurers have become more firm on their pricing and there's talk that they could go up. It is my belief that they will be fairly flat.

In terms of what we are doing with our book, I can't underestimate what we are doing with our book. Part of the pain that we are feeling now with our earnings is because we shed policies, so we have a lot of policies where we purchased reinsurance last July that we have shed before the reinsurance expense is done.

So, perhaps the policy we have nonrenewed in January and we have no premium on that -- we are continuing to pay for that reinsurance through July, but we don't have the benefit of the premium coming in on that policy. And what I'm trying to say is we've shed a lot of policies that are hurting us in the short-term but will help us significantly with our new reinsurance buy.

Last year, with the adjustment and the final numbers on our reinsurance, it came to approximately $45 million. That was down from about $52 million. This year, I feel very good, I think we will be below $40 million. I can't guarantee that and there is some more aggressive numbers that we're looking to achieve, but that's significant because you are going to see earned premium stabilize, which it has.

But these nonrenewals and us being very selective on the amount of business we are taking in, there is ample opportunity to write business. But us being very selective, that discipline, we think is the right thing to do, and I think that benefit is going to show fairly soon.

Well, we are -- I support you on that, that we only want to, you know, obviously sell insurance that you can make money on, and I'm grateful that you are doing what you are doing as far as that goes. Could you talk some about the investment portfolio and where you are with -- have you -- are you increasing the percent of the portfolio that is in stocks, are you decreasing it, or is it flat?

Doug, it is flat. Basically, we have an investment policy and we invest -- it is based off the Florida statutes, so about 90% of our portfolio is in fixed income and another 10% in equities. It fluctuates; we might be 92% fixed, 8% equities.

But by and large, we're 90% fixed, 10% equities. I don't see us reducing our equity position. I feel fairly confident with the managers we are using. I feel fairly confident with our asset class diversification, our sector diversification with the equities.

On the fixed income side, our average yield, excluding cash, was about 3.1% for the most recent quarter, and that compares to 3.9%last year first quarter, so it dropped slightly.

The reason for the drop was we rebalanced the portfolio and obviously rates moved down instead of the anticipation that eventually here they're going to have to move up to curb inflation, but they didn't so we kind of got caught in a little bit of a squeeze there, so we did lose some yield, but overall, the position of the portfolio and the way it's diversified, I'm comfortable with and I believe the investment committee is comfortable with.

That sounds encouraging. Could you comment some on the trend as far as what you have seen -- what you saw in April or is the trend positive or?

Well, I think in a generic answer to that, things continue to move in the right direction. And let me say what I mean by right direction. We are very careful with our underwriting. We have nonrenewed a lot of policies. That helps us with our loss and LAE, which as a percentage has been coming down. Where we are very encouraged with new legislation that appears to be -- will be signed by the governor, which I think will help the entire state, but would clearly help us.

In terms of GL, we think we have got very good quality distribution. We think we are writing all very good business in the lines of business, so we are very confident that -- but as I said earlier, I think what you are going to see is that rate increase. Let me just do rough math for you but 20% rate increase on an $80 million book, that is $16 million, that is significant, but it earns out extremely slow and each successive month, the earn-out is definitely better than the prior month.

We need to make sure that we continue to control our expenses, and our largest expense a reinsurance, a $5 million savings is almost -- what's that, about $450,000 a month that could be. Once again, I don't know what the reinsurance spend will be, but we think with our careful underwriting that we have done, we are clearly headed in the right direction.

Okay. And my last item is sort of more of a comment than a question, but I would encouragethe Company, for you two gentlemen, and perhaps the Board of Directors, to -- if you could consider buying some stock, I think it would really send a strong message that you are confident bout the future and you are confident about the decisions that you are making, and I just think with the stock trading at a fairly large discount to its book value, I think it is a very good buy at this time.

I appreciate what you are saying there, and I understand that you think that that would send out a good, strong vote of confidence, and I'm aware of that personally, and we will continue to evaluate what we do on a go-forward. I mean, there's nothingI'm going to commit to on the call at the moment.

Okay. Well, I'm grateful for the work that you are doing on behalf of the shareholders, and we are hoping to see the Company become profitable later in the year.

Thank you.

Thank you for answering my questions.

Thank you. (Operator Instructions). Our next question is from William Meyers of Miller Asset Management. Your line is open.

Hi, thanks for taking my question. I guess what I would be interested in is on the 20% increase with the linearity of that if it is mostly from renewals, would we expect about the same level of renewals each quarter or is there going to be some seasonality to that?

In terms of the book, we tend to write less business during the win season traditionally. With that, obviously, rate increase, it hits the entire book. And what we're seeing is that's an average. Some people actually may see a decrease, some people may see an increase of single digits, some people may see 30%, 40%, 50% plus percent.

But the big challenge, and as you know, is that it just earns out so darn slow, and it is significant, though, the 20%. And we incorporate that 20% -- that kind of puts us back to where we were in terms of rate about two years ago. These mitigation credits really eroded a significant amount of our premium. And now, really what's happened in the industry is now you're getting excessive base rates to offset for the excessive credits as they've impacted the underwriting on insurance companies and they've clearly impacted us.

But in terms of seasonality, we traditionally write less business over the peak hurricane months, which tend to be in August, primarily August but September, as well.

Okay. That's all for me. Thank you so much.

Thank you.

There are no further questions at this time. I will turn the conference back over to management.

Just want to thank everyone for the questions that we had today, but also any questions that may develop after the call, Pete and myself are always available. Thank you very much.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.