Fednat Holding Co (FNHC) 2012 Q1 法說會逐字稿

Good afternoon and welcome to the 21st Century Holding Company's first-quarter financial results conference call. My name is Amy, 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).

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, believes, 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 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 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 the 21st Century Holding Company. Please go ahead, sir.

Good afternoon and thank you for joining us to discuss 21st Century Holding Company's first-quarter 2012 financial results. I am joined on the call by Pete Prygelski, our Chief Financial Officer.

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

First-quarter net income was $1.1 million or $0.13 per share. Earnings from insurance operations improved to $0.13 per share for the first quarter 2012 compared with $0.08 per share for the fourth quarter 2011 and versus a loss of $0.25 per share in the first quarter of 2011. Book value increased to $7.61 per share, compared with $7.32 per share in the prior quarter and $7.09 per share in the first quarter of 2011.

Gross written premiums increased by $4.2 million or 15.2% compared with the same three-month period last year. Continued improvement of the underwriting results -- our loss ratio improved to 44.7% for the first quarter 2012 compared with 75.8% for the first quarter 2011.

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

(Operator Instructions). Douglas Ruth, Lenox Financial Services.

Congratulations, Mike and Pete, on a very nice report. I have a few questions for you. I was wondering if you could tell us why you feel the book of business is better today than it was a year ago?

The book of business continues to have significant improvements, and what's different about the book today is that everything we've been writing in the business for the last couple of years, we've improved our analytics to ensure that profitable policies are coming in. Policies that were in our book of business can become unprofitable for different reasons as we model them, and we've had a fairly robust process of nonrenewals over the last couple of years.

Those nonrenewals have been negated by new business that came in, but in 2010 that was about $12 million of premium that was nonrenewed, which is substantial. 2011 was another $12 million, and this year, it's about $8 million. And really, we see the non-renewals slowing significantly. There will always be some nonrenewals, but I would say they'd be pretty much immaterial on a go-forward after 2012.

New business has replaced that, so the book has appeared to be fairly stagnant over the last 2 to 3 years, but it has changed considerably. And now what we are also seeing is that the volume is increasing significantly. Where we've been around 44,000 to 45,000 policies, we are up at about 49,000 policies. So we continue to see great demand for our products, but we remain committed to the discipline of only writing those policies that we know are accretive to our book of business.

That sounds wonderful. And can you give us an update as far as what is happening with the reinsurance and the reinsurance costs?

Yes, absolutely. I said on the last call that we anticipated our reinsurance spend to be approximately $40 million. We stand by that.

At this point, while we won't know until we truly purchase it, which happens from now up until July 1, it looks favorable. There's two things -- all of the incumbents in our program have expressed interest to stay in the program; we believe that the pricing will be stable.

And on the last call, when I said that $40 million, I think it will be around $40 million -- last year's program at today's prices, meaning the change primarily in the FHCF -- that's the cover that we get from the state -- had we had that same program this year, it would have been about a $44 million spend.

So the reason why it's staying flat as opposed to increasing is because, once again, we knew where the FHCF was having heading generally because of the TICL layer contracting -- the TICL layer, which is the TICL, which is the temporary increase layer -- we knew that was coming through. So those policies that were profitable when that was available, in many cases, they became unprofitable.

So we continue to move in that direction. So in terms of the reinsurance, I think we're in very good shape in that regard.

That sounds wonderful. And what is -- could you talk about the status of what's happening with Citizens?

Yes. Citizens has about 1.5 million or 1.6 million policies. I think that the Board of Citizens has become much more aggressive in containing the growth. I've seen numbers that they are trying to get it down to about half that size -- specifically, where they are trying to shed around 678,000 policies.

There is different ideas. Currently there's an idea out there to -- well, I should say there is something where they are waving off on a ceding commission that was recently enacted by Citizens. But there's some other ideas, as well, to create incentive for the private carriers in the state to go ahead and take some policies.

But even if policies aren't taken out of Citizens, I think the marketplace has changed a bit as well, because Citizens' prices -- theirs continues to go up just like everyone else. And also, what we're seeing is they are truly making some big changes to become a residual market -- the market of last resort, as it was designed to be.

They've recently enacted where to go into Citizens, you have to show proof that you don't have a voluntary offer that's no more than 15% in price. That's something new that used to be in place years ago, so that really creates a demand for the voluntary market.

Do you believe that your Company will pick up some of the marketshare from Citizens now?

Absolutely. Once again, our volume of quoting has risen dramatically, and I would also say that in the last 60 days, we are seeing premium coming in ahead of plan. So I see no reason why that would slow down. And once again, it's quality business. No, I would expect that to stabilize at this higher level. You know, there's always moving elements in the marketplace, but things have moved favorably for us in the market.

Okay. Two more questions. What is the status of your commercial general liability insurance at this point?

The commercial general liability is a program that used to be written through general agents. We brought in-house for the most part gradually from 2009 till 2012, and now over 90% of it is what we call direct to retail, and that's where we underwrite it versus the general agents.

When that program was bigger, some problems came into that program; bringing it in the house and shrinking it, it has improved significantly. Where that program was really a loss in LE in excess of 80%, it's hovering around 60%, and I think it's performing very well.

That sounds encouraging. With three quarters now of profitability, is there talk about either starting to pay a cash dividend or consider a stock buyback?

Well, absolutely. Every Board meeting that we have, that is discussed. And we have to look at the needs of the capital within the insurance Company and within the holding Company, and also the desire to get a return back to our shareholders.

So I can tell you that a robust conversation did occur, and at this most recent Board meeting we have not declared a dividend. But once again, we continue to look at the opportunity of utilizing the capital effectively in the company, and we are on that side at this point.

We know -- the Board knows that there's a strong desire for a dividend, and I believe that will come at some point. I just can't tell you specifically, but you've mentioned on a few calls, and I know it's important to you, and I know it's important to other shareholders.

So we do continue to balance that between the two. It's important that we have the capital and we use it wisely, but also, any capital that we can return to our shareholders we know is what our shareholders want.

Okay. Well, you've done a wonderful job, and thank you for answering my questions.

Thank you for the questions, Doug.

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

Hi, and also, congratulations on the quarter. That was a great set of questions from the previous analyst.

I'd like to follow up on the last question and just see if it's possible to get any color, or if you could help us understand, how much of your cash is really required because of state regulations that you really have to keep it against possible future payments? And how do you -- just a little color on how -- without telling us when you will make the decision, on how the decision might be made? What are some of the variables that go into that decision, if you don't mind?

Absolutely, and I think Pete can give you better numbers on that. But generally speaking, there's two different types of capital that we have -- statutory capital and free capital. The statutory is within the holding -- I'm sorry, within the insurance Company, and it's fairly restricted. Currently, that's where the majority -- obviously, that's where the majority of the capital is.

Outside of that is capital in the holding Company -- whether it's through the MGA, or agency, or the adjusting Company, that would be available for dividend. One of the items that we've looked at is to have a captive in-house, and what I mean by a captive is, some of the others in the marketplace -- they are able to retain a lot more risk and issue a special dividend at the end of the storm season, assuming there's been no storms. So where we are paying on some of our lower layers of our reinsurance program, let's just say, 50% to 60% rate online for some of those covers, some of our competitors are unable to retain that, and upon completion on of the storm season, do a special dividend.

So we're looking at that as an idea; that would require capital. There are some other strategic initiatives that we're looking at that would require some capital, so it is a balancing act.

In terms of the actual amounts, like I said, the vast majority of the capital we have is statutory capital, which would not be available for options without the OIR's approval, but capital outside the insurance Company would be.

Okay, that was really helpful. I appreciate your taking my question.

Thank you.

(Operator Instructions). I am not showing any additional questions in queue, sir.

Thank you very much for everyone that has dialed in, and also, specifically, to Doug and William for the questions. Just one other note that I want it out there is that we are actually looking to change the name 21st Century Holding Company. That would be something that would be coming out in our proxy in the near future.

We're looking at changing it to Federated National Holding Company, and the reason for that is, really, is that's how we conduct business for the most part. Not many people really know us as 21st Century Holding Company, so I think it just kind of clarifies a bit of our marketing initiatives and some of our branding. So that's something that will be coming out to shareholders in the near future.

In terms of the marketplace, we continue to see great opportunities for writing business, yet we remain committed to being disciplined to writing good business. We've got great risk management, great underwriting, great marketing, great claims handling -- a great Company all the way around, and we are going to continue to operate in the best interests of our shareholders and policyholders. So thank you very much.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and had a wonderful day. You may all disconnect.