Fednat Holding Co (FNHC) 2011 Q3 法說會逐字稿

Good afternoon and welcome to 21st Century Holding Company's third-quarter 2011 financial results conference call. My name is Jonathan, and I will be your operator today. Please note that today's call is being recorded. (Operator Instructions). We ask in the interest of time and fairness that you limit yourself to one question to allow others an opportunity. However, you may reenter the queue as time allows.

Please also note that 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, variation, 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 expectation, involve risks and uncertainties that may result in these expectations not to be realized. 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 call over to 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 third-quarter 2011 financial results. I'm joined on the call by Pete Prygelski, our Chief Financial Officer.

Our full financial results for the quarter can be found in our earnings press release on our website. I will go over some brief highlights from the quarter, and then Pete and I will open up the line for questions.

You have heard us talking over the last two years about initiatives undertaken to improve our underwriting results and return to profitability. These include enhanced analytical approach to underwriting all new business, reevaluating our existing policies, and managing our geographic diversity. At the same time, we also focused on maintaining tight control over our operating expenses and taking a more conservative approach to risk retention. We have been steadily building positive momentum in our quarterly results, and today we are pleased to announce a quarterly profit.

Highlights of the third quarter include net income of $428,000 or $0.05 per share compared with a net loss of $1.3 million or $0.16 per share a year ago and a net loss of $800,000 or $0.10 per share last quarter. Significantly improved underwriting results -- our core underwriting business continues to benefit from our more disciplined long-term approach to exposure management. We continue to write and renew more profitable business and remove non-profitable business from our book of business.

Our loss ratio improved to 60.9% from 74.6% in the third quarter of 2010, a substantial improvement. Accelerating flow-through of rate increases to premiums -- increases that we received earlier this year on both our voluntary and assumed books of business are being realized. The latest was the 13.9% increase on the homeowner policies that we received -- that we assumed from Citizens Property Insurance Corporation in 2009. Continued flow-through of those rate increases will have a growing positive effect on revenue going forward as we continue to write new business and renew our existing policies at the higher rates.

Continued reduction of our operating expenses -- we saw a 9% reduction of operating and payroll expenses versus prior year, and we continue to keep tight control over our operating expenses going forward.

We are pleased with our results this quarter and our efforts undertaken to get back to the core fundamentals of our business. The combination of our improved underwriting and reduction in operation expenses position us well for 2012. We remain focused on creating a book of business that produces favorable underwriting results that can be sustained over the long term to generate attractive returns for our shareholders.

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

(Operator Instructions). [William Myers], Miller Asset Management.

Congratulations on the profits in the quarter. I guess, despite that, my job is to be critical, and so my first question is I see on your automobile line you have a higher loss ratio than on the other lines. I'm wondering whether the automotive business is a good business for you to be in, and any color you can give on that would be great?

We do have a small book of auto premium. The majority of our business by far is homeowners, and homeowners is performing very well.

In terms of the auto, because it is such a small book, it is subject to volatility as well. One claim can really spike things one way or the other. But it's a small book of business that we do not really see growing much in the near future. There's challenges in Florida with PIP legislation and things like that that really are not attractive for growing that book. But we do see some small opportunities on that that will exploit where we can some niches in the market, but I really don't see that book having a material growth over the next year.

But you definitely will see the continued control of our ratios on homeowners, and even the [GL] has some volatility on it, but it is substantially lower than where it has been in years past.

Okay. Fine. And then you are listing total cash and investments over $143 million, and I was wondering if you could explain, how does it work in terms of what has to be -- what does the state of Florida require you to keep in reserve against future loss payments, and how would we know how much would be available for use for acquisitions, stock buybacks, dividends, that kind of thing? Can you explain that?

There's two separate questions there, I think. Generally, in terms of what we have in reserves, that is a much larger number that is about -- Pete can give us the number on that. But what we have is actuaries that help us not only look at what we have in case individual files, but bulk reserves, which is IBNR. So that plus our statutory surplus, as well as prepaid premiums, make up the total amount of the cash and investments. But I think Pete can answer that in more detail.

Yes, William, at the end of the third quarter, if you look at the cash in the holding company, which would be unencumbered cash, so to speak. So if we were able to issue a dividend or we were able to do a buyback, there is about $5.6 million in unencumbered cash. The rest of it is in the insurance company either as surplus or marked for payment of future claims, which is all invested funds.

Okay. And what exactly is the surplus?

The surplus as of -- do you mean what is the number, or what does it represent?

What does it represent? Is it something that can be at some point transferred to that unencumbered cash? I don't need the number; I need what it represents.

The statutory surplus is about $35 million, but what that means is really it is just the assets minus the liabilities (multiple speakers) in the insurance company itself. The majority of the liabilities is really just reserves, both case and bulk. But in terms of getting the cash out of an insurance company, that's a pretty difficult process. That is subject to obviously the ORI, and that is a very difficult process, taking money out of an insurance company.

Okay. Well, that is what I wanted to know, and I appreciate the answer. Thank you.

Douglas Ruth, Lenox Financial Services.

Congratulations on the improved results. You told us what you were going to do and then you did it. I feel that you should be credited for that.

Thank you very much, Doug.

Could you comment some on what you are seeing with Citizens and the state of the industry in Florida at this point?

Well, the Florida property market is a difficult market to operate in. Citizens is by far a very big -- one of the largest competitors. They have about 1.5 million policies. They continue to grow. The new governor, Rick Scott, is proposing some type of legislation for the spring to control that, to shrink it. And I think I have said in the past that I believe Citizens is required in the marketplace, but it is far too big. I think probably a more realistic size would be maybe 250,000 policies.

They are making -- they are doing certain things to encourage people to not come in, including the increases that they have taken. Also, they have beefed up the language in the policy explaining to people that if they do take a policy with Citizens that they could be on the hook for potential assessments, individual policyholders. So I think those are big steps.

There is no shortage of policies to be quoted in this marketplace. We quote a high amount of policies every day, and we are not writing as much as we would like to. I will give you an example. In the month of October, obviously there's two components, new and renewal. But for new business we only wrote about $1.8 million, yet we probably quoted about 10 times that. And really what it is is the challenge of where we find that the rate that we have is not profitable for a policy, so we will not take the policy. Or sometimes there is the case where we do have interest in taking the policy, but it could be cheaper elsewhere, including Citizens.

So there is a great appetite for people to place business. We have a very good system where we analyze it, and we are committed to taking business that is profitable.

I appreciate the discipline, and I hope you will never change that. Should Citizens, should they be raising the rates faster because, in effect, they are not supposed to be doing what they are doing?

Well, they are on a glide path, which means that they are supposed to be going up about 10% per year. There just came out some press today that they are looking at commercial ads, that they may go up 20% perhaps. But primarily homeowners, the number is about 50% where rates should go up. Now that really varies from territory to territory. But at January 1 in about seven weeks from now, the rates are going to be going up about 6%, not 10% because of the way they have weighed it. It is no more than 10% in any one territory, but the blended average is coming out around 6% and some change.

So yes, their rates are too low. They don't buy the required reinsurance that the private market does obviously. They have been able to build up surplus over the last couple of years because that huge expense they don't incur. They do buy it from the FHCF, but they really have not bought much from the private market. So their rates will continue to go up.

All right. Going into the Q4 quarter, would you expect a higher than 5% increase in revenue from the homeowners insurance?

I think what you are going to see is that there is a couple of pieces there. Obviously I have said that we have our normal course of business that renews. We do still have some business out there that we non-renew, and we are writing business. The in-force book has been fairly stable for the last year to year and a half of it, about $43,000 risk and about $80 million of premium. This is the homeowners book. And that really has not changed significantly.

Now the reason for that is because like I said we have non-renewed certain policies and have brought business in. But the margins on the new business are significantly greater than the policies that we have been shedding. Once again, back to the month of October, we are seeing business coming with a margin of over 15%, new business only that is. So our existing book of business will definitely continue to improve. We could ramp up more production, but that is not what we are doing. We are looking to steadily write profitable business.

Please don't change that. I have got a couple of more questions. I don't know if you want me to get back in the queue or keep asking questions.

No, keep on. That would be great.

Okay. Can you comment some -- I'm not sure if this has come up yet, but on the employment contracts for you and Pete, I know that they are closer to the end than the beginning. Is their talk from the Board about renewing the employment contracts of the senior executives?

Yes, there is. We are aware of that, and the Board is aware of that. And yes, there are conversations going on between us and -- Pete and I individually with the Board. Yes, that is underway, and that will be worked out in the coming -- probably in the coming next one or two months.

So there might be an announcement before the end of the year?

I don't know specifically when that would occur but --

As soon as it occurs -- this is Pete -- as soon as it occurs, it will be filed. There will be an 8-K on them. So like Mike said, the Board and the compensation committee when they meet, I mean I think their goal is to get it done by -- for all of us to sit down by the end of the year. And, as soon as we do and have it ironed out, we will definitely -- there will be an announcement.

Okay. And what about the building? You had talked that you might move from your current property to a new property. What is the status of that?

Yes, we are moving. We have signed a lease, and we are going to a new location. We are located in Broward, which is the Fort Lauderdale area. We think we are going into a much better building and actually more favorable terms.

Our current rent is about $55,000 a month, and we are going down to -- it is about 18,500 square feet at about $20 a square foot. So it's going down significantly, about $25,000 a month decrease. And it is a much better design for us, for the Company. I think it works well for our employees, and it works well for our visitors that we get, all of our vendors and when we do get customers. But, at the same time, I think we are mining -- remaining committed to keeping our expenses down.

You are going to go from $55,000 a month to $30,000 a month?

Yes.

And then we will be at approximately the same size?

Yes, it is similar, but it is a much better layout. It is one large suite. So yes, it is a much better layout for us.

Okay. And then my final question is more of a comment in that I think myself and some of the other investors on the call believe that the stock is undervalued, and we, the investment community, would really appreciate if the management and the Board of Directors would show faith in the Company by buying some stock. I think that would really move the price of the stock up quicker. So I think it would really be a nice holiday gift for everybody there.

Yes. And you have mentioned that in the past, and Doug, I appreciate you saying that. We do believe in the Company, and I think that you are going to see the financial results much more favorable on a go forward basis. Hopefully that will reflect in the price of the stock as well.

Okay. Thank you for answering my questions, and congratulations, again, on the improved results.

(Operator Instructions).

Well, it looks like we have no further questions. With that, we can wrap up the call. We appreciate the questions that came in. For everyone that is listening as well, thanks for taking the time out of your day.

We feel very good where we are headed. We have had some struggles obviously in the past, but we are clearly on the right path, and it's nice to be back into a profitable quarter. We have got less than two months left in the fourth quarter, and we see things trending favorably, and we are very encouraged about 2012.

So thank you, and everyone, have a nice day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.