Fednat Holding Co (FNHC) 2011 Q2 法說會逐字稿

Good afternoon, and welcome to the 21st Century Holding Company's second quarter financial results conference call. My name is Karen, and I'll 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)

I'll now take a moment to read the Safe Harbor statement. 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 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 current management expectations involving risks and uncertainties that may result in these expectations not being realized.

Actual results -- actual events, outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements made on this call due to numerous risks and uncertainties, including, but not limited to the risks and uncertainties described in this conference call, our 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 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 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.

Good afternoon, and thank you for joining us to discuss 21st Century Holding Company's second quarter 2011 financial results. I'm joined on the call by Pete Prygelski, our Chief Financial Officer. I would like to start off with the highlights from our second quarter, and then we'll be happy to answer your questions.

We are highly encouraged with our performance in the second quarter. Core operating results improved substantially. We have built solid momentum in our underwriting as we continue to write and renew more profitable business and remove non-profitable policies from our book of business. Continued discipline in underwriting and exposure management is paying off, both in terms of improving underwriting profits and lower reinsurance costs. Our loss ratio dropped to 63% this quarter from 93.6% a year ago and 75.8% in the first quarter. We recently put in place a new reinsurance program at a significantly lower cost based on the quality of our book of business and our exposure management. We estimate a 16% reduction in reinsurance costs for our 2011, 2012 program, which was effective June and July of 2011.

In tandem with improving underwriting results, we realized a 14% reduction in operating expenses in part from the recent merger of our two insurance subsidiaries. In the second quarter, we continue to see the beneficial effect of our prior rate increases on our operations as rates return to a more adequate and normalized level. We also recently received a 13.9% rate increase from the Florida office of insurance regulation and our homeowner policies assumed from Citizens Property Insurance Corporation in 2009 to be effective August 21. As the year progresses, we will see an increasing benefit from our multiple rate increases as they continue to flow through our book of business.

And now an overview of our financial results for the quarter. Full financial details are in the press release that we issued earlier today. In the three months ended June 30, 2011, the Company reported a net loss of $800,000, or $0.10 per share. Compared with a net loss of $2.3 million, or $0.30 per share in the same three-month period last year. Second quarter 2011 results included $500,000 of net realized investment gains, compared to $1.6 million in the second quarter of last year. Excluding these gains from both quarters would further show the strength and improvement of our underwriting results as evidenced by the year-over-year and sequential quarterly improvement in the loss ratio. As previously stated, the loss ratio this quarter was 63%, we are pleased and encouraged by this performance.

The reduction in the net loss this quarter, reflects discipline in underwriting and exposure management. Significant operating expense reduction and the continued flow-through of approved rate increases. For the six months ended June 30, 2011, the Company reported a net loss of $2.8 million, or $0.35 per share, compared with a net loss of $3.3 million, or $0.42 per share in the same period last year. Gross premiums written increased $400,000, or 1.5%, to $28 million for the second, compared with $27.6 million for the same period last year, reflecting continued improvements in writing and renewing a higher-quality and more profitable policies in our book of business.

Homeowners gross written premium increased $400,000, or 1.6%, to $22.6 million for the quarter, compared with $22.2 million last year. Gross premiums written increased $500,000, or 1%, to $55.1 million for the 6 months ended June 30, 2011 compared with $54.6 million for the same period last year. Homeowner's gross written premium increased $1.7 million, or 3.7%, to $45 million for the 6 months ended June 30, 2011 compared with $43.3 million last year. Unearned premiums increased $6.7 million, or 14.2%, to $53.8 million as of June 30, 2011, compared with $40.7 million as of December 31, 2010.

Net premiums earned increased $800,000,or 7.1%, to $11.7 million for the second, compared with $10.9 million for the same period last year. Net premiums earned increased $900,000, or 4.1%, to $22.8 million for the 6 months ended June 30, 2011 compared with $21.9 million for the same period last year. Total revenues decreased $800,000, or 5.7%, to $14.2 million in the second quarter, compared with $15 million last year. Total revenues decreased $3.5 million, or 11.4%, to $27.3 million for the 6 months ended June 30, 2011, compared with $30.8 million for the same 6-month period last year.

In summary our second quarter results show positive trends on both revenue and expenses which will increasingly flow through our income statement with each sequential quarter. Our underwriting business continues to strengthen as we are writing more profitable business while containing expenses. All of this is a result of our prudent decisions over the past few years to take a more disciplined approach to exposure management. Looking forward, we will see an increasing flow-through of our prior rate increases, as well as the positive effect of our 13.9% rate increase on our homeowner's policies assumed from Citizens. In addition, as I already mentioned, we have recently put in place a new reinsurance program at a significantly lower cost.

Before we open it up to questions, there was a few questions that were e-mailed in, and someone had asked about if we're currently writing business. And the answer is yes, we are. We've been writing business continuously, and we're very selective in terms of what we're writing, both in terms of new business and renewals to ensure that what we're writing is profitable business for our Company.

Another question was, what's the status on the consent order that we had signed back in January? We are in compliance with all terms of the consent order. The biggest item that people have asked about is the tri-County. We committed that we would have tri-County exposure, the policy count below 40% at the end of the year and we are actually at 37% at the end of July. So, we're ahead of schedule on that. That's, once again, the discipline of our tri-County, making sure that we're controlling that book, but also the success of our marketing team to expand our program throughout the state.

Highway senate bill 408, change your business, there's a few things that does. It really kind of attempts to rein in some of the challenges associated with sinkholes in the industry. We don't have a lot of exposure in some of those sinkhole areas. So as -- it won't impact us perhaps as much as other companies, but it effects everybody, all the insurance companies in the state, I believe, in a positive way. In terms of these claims, it limits claims, what you can do in terms of a hurricane, down to 3 years from 5 years. It controls some of the other expenses associated with public adjusters, as I've said.

And also ACV, which is actual cash value is something the department is allowing insurance companies to implement in their forms versus what is called paying replacement costs or full costs. What that does is it ensures the insurer, the claimant, is made whole and that the property is brought back whole. It can take away from the potential for abuse of those policy limits. And also, it also reduced the time frame of long-term policy holders. If we're interested in not renewing them it drops them from 180 days to 120 days.

Another question that I received was, how did the reinsurance cost compare to the prior year and why is that different? The reason it's different is because last year was $46.2 million, this year it's $39.3 million. That's a significant reduction, and that expense has been decreased by $7.2 million approximately. There's some adjustment dates in terms of our current reinsurance program, but right now that number we believe is $7.2 million. So, effective July 1, our reinsurance cost drops by $600,000 per month. That's significant. And what I'm saying is that the reinsurance expense of July -- the third quarter, as of July 1, it basically is going down by $1.8 million. So, our expenses that we've controlled throughout our program, we anticipate that, that will be another $1.8 million benefit in the third quarter.

The composition of our reinsurance program continues to shift, and what that is, is the FHCF is where we buy insurance from a state entity, and they continue to raise their prices and exit the market on what's called some of the optional layers. There's a layer that was called TICO. There's another one called TICL, there is another one that is called LAC, and then there's a traditional cover. But basically the FHCF is trying to contract, and they've been doing this over numerous years, by making their prices more expensive and limiting coverage so that the private market can step in and offer more -- participate more. It's much better for everyone in the industry, and it's less risk to the state.

So, our FHCF costs dropped significantly from about $19 million down to about $12 million, and our private insurance stayed relatively flat. So, our private insurance actually picked up a lot of the cover that used to be covered by the state. Those were the questions that we had ahead of time. So with that, Pete and I will be glad to open it up to our callers.

Thank you. (Operator Instructions)

Our first question comes from the line of Douglas Ruth from Lenox Financial Services.

Congratulations. That's a material improvement in the operating results.

Thank you. We definitely feel that we've made significant headway, and we think that it continues to improve with each subsequent quarter from here.

That's wonderful. I was wondering if you could comment maybe just not for 21st Century, but also sort of for the industry. With the rate increases now, do you feel that the rates now are fair for both the homeowner and for the insurer, or do rates still need to go higher, do you think?

I think the rates are much closer than they've ever been; and the long answer that I can give you that I'll try to keep as short as possible is that there was an over correction. After the storms of '04 and '05, rates went up quickly. One could argue that they went up to where they needed to be. But because they went up so quick, the state reacted and really suppressed rates by forcing rate decreases as well as mitigation credits. So, we're in an imperfect world right now that I think some of these credits are a bit excessive. However,, they are required by statute, and, therefore, what you're seeing is base rates have gone higher than they would have been without that.

So, the short answer is I believe that you will -- that our rates are a lot closer to where they need to be, and I don't think you're going to see significant rate increases that we've received. That's not going to continue in the future. As you know, we've gotten a rate increase of 19%, 20% and one at 14.9% and one at 13.9%. Those are all very big increases. However, there's a lot more business that we could be writing. If our rates were a bit higher, that would allow us the opportunity to write more business, and that's why you see Citizens is the largest insurer in the state of Florida with about 1.4 million policies.

So, there's great opportunity to write business, but the challenge is making sure that you're writing it profitably. So, I think our rates are much closer than they've been in the past; and they will be continued to be adjusted in the future, but they're much closer.

What percentage of the business does Citizens have now, do you think?

They're the largest by far. You're talking 1.4 million. There are certain hot spots where they really are dominant. That is the tri-County, which is Dade, Broward, Palm Beach. They have a pretty big exposure over in Tampa and Saint Pete. But also in the sinkhole areas, which has traditionally been Pasco, Fernando and Citrus. But with some of the challenges with these sinkholes, it's -- the sinkhole areas have kind of expanded into other counties. So, they're the largest by far, and then behind that, you have some of the private carriers that make it up.

But they're about -- they're over 20% of the market, and I don't -- I think that they're kind of as large as they may be give or take another 100,000 or so policies, but I think that you're going to say their rates are on a glide path where their rates are going to continue to increase. They're known that those rates are too low, but not to shock all of the policy holders, they are implementing them at a cap of 10% per year. So, those rates need to go up by about 50%. So, you could argue that they're going to go up 10% per year for next 5 years. There's a lot more detailed math around that, but their rates are -- the tide of rate increases is lifting all boats, lifting the rates of Citizens and lifting the rates of the private market, but Citizens will eventually become much more actuarially sound.

Okay. And what is the competition now? Are you -- is it still a pretty competitive market, or how easy or hard is it now for you to sell the policies?

Well, I would say that the market is -- a big competitor is Citizens. Their rates are cheaper than a lot of carriers in a lot of territories. The big boys, the nationals have really kind of not been in the market, active in the market, and really have non-renewed over the last 5 years. The market is really controlled by domestic carriers like ourselves, but there's some bigger ones, obviously. There's ample opportunity to write business, but a lot of people are continuously holding back, including us, by not writing more business. You need to ensure it's profitable before you write it.

I respect and appreciate that. What about the commercial business? The commercial general liability? What's the state or status of that business now?

The commercial liability is a program that I feel has come a long way with us. We used to distribute that mostly through general agents, and now we distribute it mostly what we call direct to retail. That means from us to the retail agent. We have a much tighter control over that over the last 2 or 3 years. We've contracted the book by making sure that we can underwrite it more thoroughly, better controls in place.

So, that program has contracted significantly over the last 3 to four 4 for two reasons, both because of our underwriting and our change in distribution. But the other is honestly because of the economy, and building is the builders, and contractors is a big component of our business, and they just aren't working like they used to. So, that book is about $10 million, and I don't see that contracting from there. I think that we have a pretty -- it's more stable where we're at, and I think there's going to be some opportunities for us to grow it, but we are not chasing top line on that. We're careful to ensure what we're writing, once again, is profitable business. There's more business out that there that we could write and some of the business that we see getting written for the price that it is out there, we think is inadequate, and that's not business we're chasing.

Again, I'm grateful that you're not. We don't want revenue without profits. My final thought is more of just a statement. I think that the investment community would really appreciate if the management and the Board of Directors would consider showing their faith in the Company by considering buying some stock. I think that the stock is undervalued at this level, and we could really see a pretty material increase in the stock price. So, I'm hoping that you'll consider that possibility.

Absolutely, and I appreciate you making that statement, and myself and the rest of the board will absolutely take that into consideration.

Okay. Thank you, and congratulations again on the improvement in the results.

Thank you for the questions. Thank you.

Thank you, sir. And our next question comes from the line of William Meyers from Miller Asset Management.

We just covered a lot with the last questioner, so if you could give us some idea what the mile posts would be and a time line towards profitability under these new improved margins that you're seeing?

We feel very good where we're headed. We're very careful with what we're seeing in terms of on a go-forward basis, but I think that it's evident that the second quarter is much improved over the prior year, and I think you're seeing a lot of the fundamentals have absolutely taken hold. A lot of things have taken time to earn out in the book and show itself in the book.

The one thing I can say to you is the third quarter has a $1.8 million reinsurance expense, less of a reinsurance expense. That's significant. We had an $800,000 loss in the second quarter, and we're anticipating a $1.8 million reduction of expenses in the third quarter. We think that's significant. We can never guarantee what's going to happen with our book of business in terms of losses and things like that, but we feel very good about that. So, the next 4 quarters, each of those quarters, the expense is decreased by $1.8 million for reinsurance.

On top of that, we see that the rates that are in our book of business are going to continue to earn out favorably. And just to remind everyone, when we have a rate increase that's approved, it takes time. It's a very slow process. We're literally on day one. You have 1 out of 365 policies that are correct. And day two out of 365. It's a slow process that really takes about 12 to 15 months before all of your policies are now priced correctly and earning out correctly. So, I think you're going to see our expenses continue to be contained, and I think you're going to see continued improvement on our margins.

And if I could ask one more. Last year, you were reluctant to write new policies during the wind season. Is that going to be true again this year? How is that going to work this year?

We do write policies right now. We're selective. We are located in South Florida. We watch the weather. We're very aware of that. We're very -- our number one expense is reinsurance. So, we're constantly managing our exposure. Every policy, we want to know what our CAT, non-CAT and acquisition cost is to ensure that we're writing the correct business, and we're confident we are. I think you'll see us write more business as we clear hurricane season. Officially it ends December 1, but clearly the peak of the season ends before then, I would say by approximately October 1, October 15 is well past the peak. I think you'll see traditionally the third quarter tends to be our slower season when we write business, but our earn-out should remain fairly consistent.

Okay. Thanks again. Congratulations on the quarter.

Thank you very much.

Thank you. (Operator Instructions) Our next question comes from the line of [Kevin Hart], a private investor.

The question I have is I know that some recent regulations expired that were put in place by our former Governor, and that prevented the rates from going up. Do you see any other regulations coming up that might have an impact on the business?

I apologize I got your name wrong there, Kevin. Right now the legislators meet every May, and those usually get signed in by June 1. I think the majority of what they wanted to cover was covered in the house bill 408, the senate bill 408. I don't see any significant changes from now until next May or June. I can't say with certainty, but I can tell you that I think the legislature -- both houses are controlled by republican, large majority, tend to be more business friendly and less -- as well as the Governor, who's clearly indicated that he wants to see less government in the insurance business. There's been some talk even of privatizing Citizens, dismantling it, things like that.

I honestly don't believe Citizens should go away. I think 1.4 million policies is way too much. I think the correct amount of policies may be around 250,000 policies. There's clearly some policies that are just not insurable. I think you're seeing the FHCF contracting to a more manageable level. The state does not need to be exposed to a financial catastrophe by having so much out there. So, I don't see anything specific on the horizon with any changes in the legislation. I think that we've made some -- the legislations more favorable today than it was 2, 3, 4 years ago.

All right. Thank you.

Thank you for your question.

Thank you, and our next question comes from the line of [Jason Herr], a private investor.

Question for you, how much of a benefit did you realize in the second quarter from lower reinsurance rates?

Zero. Our reinsurance starts July 1.

But wouldn't the state of Florida start June 1?

Yes. FHCF goes June 1 to June 1, and private goes July 1 to July 1, and we pay more on our private than we do on our public.

Yes, but I would have thought on amortization of the policy, it looked like you would have recognized $0.5 million in the month.

In terms of -- I'm just asking Pete there -- the FHCF. Whatever the expense of -- let me answer it this way.

It's $6 million lower, which over 12, if you straight lined it, it would have like 500.

Yes. The total of the FHCF last year from June to June was 19. This year, correct, $12 million. So, that's amortized according to those applicable months.

So, you have already got $0.06 worth of the Benny in the Q2 results?

It's not a straight-line $500,000. It's probably -- I forgot the exact number. It wasn't $500,000, it might of been closer to $400,000 of that benefit. It's not a flat, just divide by 12. So, it's about $400,000.

Okay. But still that would be $0.05 worth?

On a pre-tax basis.

Which you have NOLs right now, so it's -- you're dropping straight, isn't it?

Yes. So, to speak, we still -- that's not the way we do it, but yes. Topically, expense -- it comes off the premium.

So, even when you get your full cost Benny and maybe your breakeven max, right? I'm having a hard time seeing. I tell you what, I'm having a hard time seeing the earnings ramp. Because my next question is going to be, what is your policy count this year versus last year?

Fairly flat, about 43,000, which was last year, but we've probably non-renewed, I'm going to say around 7,000 to 8,000 policies. What we've done is we have shed the non-profitable policies, and what we've written have been profitable policies.

Which is why you're staying flat, roughly, on the revenue side, too?

Correct. But it's a significantly different book. And the challenge that we've had in Q2, the big challenge that we have is a lot of the policies that we've non-renewed were policies that were not profitable. We had bought the reinsurance for those policies and then we go and non-renew them December, January, February, March and so on. So, we have absolutely no revenue coming in on those policies, which we're still incurring a huge reinsurance expense on those. So, that is something peculiar about Q1 and more specifically about Q2 that now we don't have to carry that large reinsurance expense on those policies that we were upside down on.

Okay. But you still need more policies at the end of the day, and you actually need to significantly ramp it up to make your business significantly profitable?

Well, I think there's a great opportunity to write a lot of business out there. But what we are focused on is making sure that each policy that we are adding is profitable.

I'm going to go -- but as a Board Director, you need to look at what's best for the shareholders. So at this point, do I go marginally profitable business or a slow ramp-up, or do I go out and try to sell for book. And honestly, you've had 12 straight quarters of losses, which is unacceptable.

Well -- and you've made your frustrations clear, and I understand that. The shareholders and our policy holders need to make sure that we're financially stable and that we are making money, and I think there's been circumstances as to why we were in that situation, and I think all of those issues have been addressed. When I say -- in terms of the profitability of the policies, and we've made all the changes that we've needed to make, and I think they will continue to earn out more favorably on a go-forward.

I think I would just like the Company and the Board to be more shareholder friendly.

Okay.

That's all.

I appreciate that and we understand. I respect your opinion and we clearly are looking to create value for our shareholders. So, I appreciate that statement.

Thank you, sir. And we have no further questions in the queue at this time. I would like to turn the conference back over to Mr Michael Braun for any final remarks.

Pete and I just want to thank everyone for calling in with the questions or listening in. We're always available if other further questions might arise. So, thank you very much. We look forward to the third quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.