Fednat Holding Co (FNHC) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the 21st Century Holding Company's fourth-quarter and year-end 2011 financial results conference call. My name is Huey 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'll conduct a question-and-answer session.

(Operator Instructions). Please be advised that callers should limit their questions to allow others time as well; but you may reenter the queue with additional questions. These instructions will be repeated during that time as well.

And now, per the request of management, I will read the following Safe Harbor statement. Statements in this conference call that are not historical facts are forward-looking statements without limiting generality of foregoing words such as may, will, expect, believe, anticipate, intend, could, would, estimate or believe, or continue or the negative other variations thereof, comparable terminologies 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, 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 the 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 obligations to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise. And now I'll turn the call over to Michael Braun, President and Chief Executive Officer. Sir, the floor is yours.

Good afternoon, and thank you for joining us to discuss 21st Century Holding Company's fourth-quarter and full-year 2011 financial results. I am 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.

Our discipline focused on underwriting, risk management and expense control continues to translate into earnings results. We are pleased to report our second consecutive profitable quarter which included an underwriting profit for our insurance subsidiary. We reported fourth-quarter net income of $2 million or $0.25 per share.

Our loss ratio improved to 52.9% for the fourth quarter 2011 compared with 105.4% for the fourth quarter 2010 and 63.7% for the full year 2011 compared with 89% for the full year 2010. We are very encouraged by our results and the continued improvements we are seeing in our book of business and feel we are well-positioned as we head into 2012.

We also announced that we have been granted a 14% rate increase from the Florida Office of Insurance Regulation on our homeowners' assumption policies which account for about 10% of our total property book effective April 5. As these rate increases take effect and flow through our book of business we expect to see continued benefits.

During 2012 we expect to receive a single-digit rate increase on our voluntary book. And while we continue to see great demand in the market to write a lot of business, we are being prudent in our decision-making process and are focused on making sure that we're adding profitable policies to our book of business.

We continue to keep a watchful eye on our expenses which are down year over year. We have moved our corporate headquarters to a better and more efficient space for the Company at a significant cost reduction and we continue to look for other ways to be prudent and conservative in our spending.

We anticipate a successful renewal of our reinsurance program in July as our disciplined approach to underwriting has improved the quality of our book of business.

One final note before we open it up to questions. Based on your feedback -- from some of our investors, we will be changing our earnings release to four o'clock on our next earnings call and subsequent calls thereafter instead of at two o'clock and then we'll be having the earnings calls at 4.30.

Before we open it up to questions as well, there's a few questions that were e-mailed in -- just want to take a moment to answer those.

The first one is a question about our homeowner's book of business and if we're going to continue to write policies through the wind season and if we expect to grow it in 2012. The homeowner's book of business is doing much better; it's doing very well. We continue to have policies that we have non-renewed, like we have in 2010 and 2011, but the quantity of policies we're non-renewing is much lower now than it has been in years past.

In terms of writing policies, we were prudent with what we were writing. However, we're seeing a significant increase in demand in 2012, and we think that the business in 2012 could increase by -- our projection is 10%, but it could be more than that depending on how we do with our reinsurance, how -- a couple other variables. But there's significantly more demand out there for us to write more business, but we're writing it in a very managed manner.

In terms of our rate increases, how do we compare in the competitive landscape? And the answer to that is that we're competitive. We've had some significant rate increases in the last few years and those have occurred not only with us but with others in the market including Citizens. So we are competitive in the marketplace.

A question about the Citizens [depop] policies that we did in 2009 and what are our plans with those. Those were the last times we did the depop policies. We did it in 2004, we did it in 2009. I don't see policies looking -- for us to depop additional policies in the near future, but it's always possible. There's about 1.6 million policies in Citizens, but we're seeing an emphasis from Citizens to slow that growth and we're definitely seeing that from the agents as well that there's a significant demand to write the business in the voluntary market.

Another question about the FHCF contract, what drove the changes in the change in the FHCF? The FHCF is part of our reinsurance program. The FHCF is from the state and it affords us coverage at reduced rate. The big change that occurred this year is there's the traditional layer and then there's another layer which is called TICL, which was a temporary increase layer that afforded additional coverage. That's been in the process of being phased out for the past three to four years.

This year in addition to its being phased out, Demotech, which is the rating agency that we are in compliance with and we have an A rating with, has told us that they would not be giving credit on their reinsurance program to the TICL layer.

So we did not purchase the TICL layer from the FHCF. What that means is that we'll be buying more coverage from the private market and obviously the private market can be more expensive than the FHCF, but we think that we're well-positioned for that.

Those in the market were notified by Demotech in 2011, so we've had that in our business plan for some time now. And we feel that we're in pretty good shape in terms of our reinsurance program that we're going out to market shortly. And then there's a question about the investment portfolio, which Pete has.

Yes, there was a question talking about were we satisfied with our returns for the year. And it's been two years since we outsourced our investments, or two and a half years since we outsourced our investments and are we happy with the service we're receiving.

The total blended return this year was about 6.1%. Over the past two and three-quarter years, which is about the time we've outsourced the portfolio, the return is about 7.57%. We find this acceptable given the following factors.

85% of our portfolio is invested in fixed income products and that is up due to the large statutes. 74% of our fixed income portfolio has an A rating and the investment committee's number one philosophy when we're investing our unearned premiums and reserves set aside to pay future claims is capital preservation. Therefore we were looking for relatively safe investments that provide reasonable interest income.

The second part of the question -- are we satisfied with our -- the process we've set up. And the answer is yes. Number one, our portfolio is much better diversified. The diversification breakdown is we have about 7% of our portfolio in domestic broad equities, about 6% in small mid-cap equities, 1% in emerging markets and, as I mentioned, 85% in domestic fixed.

Within those asset classes we have additional economic sector diversification. So the overall diversification and portfolio monitoring is much improved from where it was a couple years ago.

And then one other question that came in, before we turn the call to those with additional questions, was about the commercial liability line. The commercial liability line, that's primarily written with small contractors, we used to write that through general agents and we've been gradually taking that in-house in 2009, 2010 and 2011, and the vast majority of that is what we call direct to retail. That means we're writing it through the retail agent and not with the general agent in the middle of that.

The program is doing very well. We wrote about $10 million in 2011 and we're projecting about a 10% growth in that program. But it continues to perform well. With those questions that we've already answered, we'll go ahead and open it up to additional questions.

(Operator Instructions). Douglas Ruth, Lennox Financial.

Congratulations to everybody at the Company for a great report. We were understanding that the Company now might be in the position to either start to pay a dividend or consider a stock buyback. I was wondering if you could offer some comments about that.

Yes, thank you for your question obviously, Doug. In terms of where we're at, what we told the Office of Insurance Regulation is that we would not be issuing any dividends until we had two consecutive quarters with an underwriting profit. So we are at that point right now, so we do have that ability. The Board has not made any decision to that at this point, but that's obviously something that's available to us on a go-forward perspective.

With interest rates very low and a lot of people really seeking out stocks that pay dividends, I think you would really enhance the shareholder value if you were to consider a dividend policy -- even something modest would really -- would be appreciated by the shareholders.

Yes, and we absolutely know that there's value associated with that. We're going to continue to look at our cash flow as well as the needs of the Company and the Board is very receptive to that on a go-forward. We haven't committed anything at this point, but the Board is receptive.

Okay. Could you talk some about what the status is with Citizens and what you think is happening in the state of the industry?

Yes, absolutely. In terms of Florida, Citizens is the largest carrier, it has about 1.6 million policies. We're seeing a significant demand for our products. We quoted over $400 million of premium last year in homeowners and we only bound about $24 million. We're very selective in what we're doing and we're very happy with the results that it's producing. It takes time for that to earn out through the book, which is what we've been talking about for the last year or so.

Citizens is trying to downsize a bit and I think that's just going to be a very gradual process. There were some proposals but did not pass in the recent legislative session that would accelerate that, but it continues to be on a glide path. And that means every year in January the rates in Citizens will go up about 10% and that's going to vary obviously by territory. But Citizens should become the market of last resort in a gradual manner.

There's no shortage of policies to quote out there, but we want to make sure as we look at each individual policy that it's going to be a policy that's profitable for us. And we feel that our rates are competitive in the marketplace as well.

I said earlier that I think that we'll probably have a single-digit rate increase this year. Last year we had a 19% rate increase, the year prior we had 20%. Right now preliminary indication is about 9.5%. That could change, but once again, the market is gradually moving up on pricing and as that happens Citizens will have less and less of the market and the private carriers will pick up more and more.

And again, we're grateful for the careful underwriting selection and encourage you to continue that strategy.

Well, thank you, Doug, absolutely. We feel very good about our book of business. As we go into the reinsurance purchase, which is starting right now, that will be completed by July 1, the model change in the FHCF -- without the TICL program -- we understand that our program that we purchased last year at about $40 million, $40.5 million would be as high as $44.5 million in today's marketplace.

The good news is that we have a better book of business. So our in-force premium has a slight uptick, but we actually expect our reinsurance buy to be fairly close to last year's total spend of about $40 million.

We don't know until we bind all the reinsurance on our program, but the rate -- I'm sorry, without TICL, in our reinsurance program and with the model change that is forcing carriers to buy more coverage, that's significant. So our underwriting is negating that increase and, on top of that, we anticipate having higher earned premium against that.

Yes, that's wonderful. I have two more questions. Can you talk a little bit about some of the new products that you're introducing?

Yes, what we're doing is the homeowners program that we have is -- we've continuously cleaned up the program in terms of rates, rules and forms. In terms of commercial, we have the commercial liability program and our intention is to roll out a property program to accompany that. That will probably be filed later here in 2012.

On top of that it's our intention to also have other commercial products, more like a general agency for our MGA where we can earn brokerage on selling some of these other products. So we have someone helping us with that and we think that will not only generate fee income for our Company, but also make us more relevant to the agent's needs.

And we're also looking at some of these other states that we've been a little bit slower on as of late, putting new efforts into those, primarily on the GL. The program -- the GL program was in a couple different states like Florida and Louisiana and Texas, but really we encountered some challenges and we've pulled back on that.

We feel that we have very good control of our program, so we're putting a new effort into getting into Texas and Louisiana and then Georgia with that GL program.

That sounds positive. My final question is, could you talk -- you're happy with the new offices and how they're working out for the Company?

Yes, absolutely. Our old offices were a tough environment to operate in. It was an old building with separate suites and we're in a much more modern building that's very conducive to the team environment that we operate in. And the rent is significantly lower. So we think it's not only good for us economically but it's good for our employees and I think morale and productivity has improved with it.

That's wonderful. We're looking forward to the next report and congratulations on this fine report today.

Thank you, Doug. Have a great day.

(Operator Instructions). William Meyers, Miller Asset Management.

Also congratulations, not just on a good quarter, but really on the whole turnaround process you've been going through. It's been pretty impressive to watch.

Thank you, William. You know we have about 110 people that work for the Company that have put considerable effort into it. And there's been no shortcuts and we really think that what we've done is good solid insurance on a day-to-day basis. So appreciate to hear that from you.

Okay. So I have one question, maybe two parts to it. Could you tell us a little bit more about how you managed your expense reduction? The year-to-year expense reduction is really very impressive. And can we assume that about something like we saw in the fourth quarter is a new run rate or should we be looking for something else as we go through this year?

Pete can give you more detail, but generally I'll say that our premiums are much more in line to where they should be. So our reinsurance is a huge expense. When we had those mitigation credits back a year or two that really just kind of exploded and took away about 30% of our premium. The rate increases have absolutely helped to get us back to more normal times.

And the big number -- I've had some people ask about gross written and the growth in gross written. Really the main thing that people should look at is the growth in net written after we cede off that reinsurance expense. So I think you're going to see more normalized ratios on where we are at now versus what we experienced back in 2009 and 2010.

Yes, William, looking at the operating expenses over the last year, early in 2011 we unfortunately went through some layoffs that reduced salaries by $1 million. We've also -- and in doing so we outsourced some functions that are done more efficiently and cheaper by third-party vendors. We've cut back in areas where we were spending money, little areas here and there, but it all adds up.

And then lastly, the biggest piece, our number one expense kind of after reinsurance is the loss -- and the loss adjusting expense on our book. And this kind of goes to what Mike was saying earlier about underwriting. As our underwriting has improved the frequency of the claim reports has dropped and our loss ratios are dropping to a more manageable level.

And also the denominator is getting bigger because of these rate increases. It's the loss over a larger amount of earned premium. So both the denominator is getting bigger and the numerator is getting smaller and I think that the ratios that we quoted here, barring a storm, are more normalized ratios going forward.

Okay, so -- but they could be affected by something like a major catastrophe. But in terms of the operating expenses there going forward should be roughly in line with last year?

I would say that the operating expenses, yes, in 2012 will be pretty similar to 2011. However -- I believe that one of our big operating expenses right now is with our actuaries, not so much looking at our reserve portfolio, but looking at our pricing. That's very expensive to file these rate increase filings.

As Mike mentioned, we're looking for a rate increase sometime this year in the 9% to 10% range. Once that rate filing is complete I think -- and Mike, correct me if I'm wrong -- the use of that kind of service will diminish and that's a very big expense.

Yes, absolutely. We've had some huge adjustments to our rates, which was very labor-intensive with our actuaries. So the fees associated with future rate increases we think will be much more in line with what we've been historically.

So you might -- so, William, at the end of the day 2012 might be better than 2011 on the OpEx piece, but marginally.

Okay. That makes sense and I really appreciate the level of detail. Thank you so much.

(Operator Instructions). Presenters, at this time I'm showing no additional questioners in the queue. I'd like to turn the program back over to Michael Braun for any additional or closing remarks.

Absolutely. We appreciate everyone taking the time to listen in to what we presented today. We feel very good where we're at today and that the Company is continuing to make big strides on a go-forward basis. If there's any follow-up questions, Pete and I are available and our contact information is on the website and the press release. So thank you very much.

Thank you, gentlemen. Again, ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.