Fednat Holding Co (FNHC) 2020 Q4 法說會逐字稿

Good morning, and welcome to and FedNat Holding Company's Fourth Quarter 2020 Conference Call. My name is Victor, and I'll be your conference operator this morning. (Operator Instructions)

Before we begin today's call, I'd like to remind everyone that this conference call is being recorded as well as broadcast live via webcast. Additionally, today's call will be available via webcast replay later this afternoon and accessible by visiting the Investor Relations section of FedNat's website at www.fednat.com.

Now I'd like to turn the call over to Bernie Kilkelly for FedNat Investor Relations. Bernie?

Thank you, Victor, and good morning, everyone. Welcome again to FedNat's Fourth Quarter 2020 Conference Call. Our earnings release and prepared remarks include references to non-GAAP measures, such as adjusted operating income. We use these non-GAAP measures to provide greater transparency in a more meaningful, efficient comparison to prior year's results. Our non-GAAP and reconciliations from the GAAP measures to the non-GAAP measures are available in our earnings release.

Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, estimate, expect, predict, project and other similar words or phrases 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 yesterday and other filings made by the company with the SEC from time to time.

Forward-looking statements made during this conference call speak only as of today's date. And FedNat specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances otherwise.

Now I will turn the call over to FedNat's Chief Executive Officer, Mike Braun.

Thank you. Good morning, and welcome to our fourth quarter 2020 conference call. Ron Jordon, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer, are on the call with me today. After my remarks, Ron will go into more detail on fourth quarter results, and then we will take your questions.

As you know, our results in the fourth quarter and full year 2020 were impacted by an unprecedented number of severe weather events. The 2020 Atlantic hurricane season had 30 named storms, the highest on record and 12 named storms that made landfall in the U.S. FedNat remains committed to providing the highest quality service to our policyholders and partner agents in their time of need. I want to commend our staff, over 95% of which continues to work remotely for their dedication to meeting that commitment.

In the fourth quarter, we had a pretax catastrophe losses of $31 million, driven primarily by Hurricanes Delta, Zeta and Eta. The majority of these losses were in Louisiana and Florida.

Our fourth quarter results were also impacted by reserve strengthening and our discontinued commercial general liability book of business. We strengthened prior year reserves by $12 million after-tax due to recent trends that emerged during 2020 relating to construction defect claims that have resulted in higher-than-expected claims and litigation costs. As we've discussed in our earnings release yesterday, FedNat expects to incur claims from Winter Storm Uri in February, which caused heavy residential damage in Texas. We again commend our employees who are working diligently to provide the highest quality of service to our policyholders and partner agents who were affected by this storm. FedNat expects to incur claims in excess of our aggregate reinsurance retention of approximately $23 million for this event, along with a co-participation of approximately $18 million. As a result, our total exposure to Uri is expected to be $41 million pretax.

The company has an 80% quota-share treaty in place with Anchor Re, an affiliate of our managing general underwriter SageSure, which extends from July 1, 2020, to June 30, 2021. Depending on the profitability of the business ceded into this treaty over the remainder of its term, we may be able to recover a portion of the yearly losses, though no -- not necessarily in the same quarter in which Uri occurred. We are continuing discussions with SageSure and Anchor Re to increase the reinsurance limit in the treaty or to add additional reinsurance.

As you know, in November, FedNat announced that our Board of Directors formed a special Board committee to oversee a review of strategic alternatives to enhance shareholder value. The committee retained Piper Sandler as its financial adviser to assess potential strategic alternatives. The work of the committee is ongoing, and as part of its ongoing work, the committee is actively exploring options to strengthen the company's capital position. Any such potential financing would be subject to market and other conditions, and there can be no assurances about the timing or certainty of such a transaction.

During the process, our management team continues to focus on executing our strategies to improve our operations and improve the company for future growth and earnings and book value. In particular, we have taken action in 3 main areas. First, during 2020, we maintained an appropriate capital position at our insurance companies, while working to conserve liquidity at the holding company. As a result, we ended the year with RBC ratios in excess of 300% at all 3 insurance companies and $59 million in capital at the holding company. Second, we purchased additional reinsurance coverage to help provide more protection and statutory surplus relief from our insurance companies. Ron will discuss the additional quota-share reinsurance we purchased in more detail in his remarks. Third, we have continued our initiatives to improve the profitability of our home loans business and build long-term value. This includes raising rates in Florida and non-Florida markets, and restricting business and shrinking our book of business within Florida until rates are more adequate.

Looking at the Florida homeowners market, the environment continues to be challenging. While the number of AOB lawsuits continues to climb sharply, the plaintiff's bar in Florida continues to find ways to bring litigation against insurers. So we are continuing to raise rates to more accurately reflect the increased cost of claims and higher reinsurance costs in this agreement.

The rate increases in Florida include 7.4% that took effect in June, and an additional 5.6% that took effect in October. We have also filed for another 6.7% on our homeowners book, and if approved, will take effect in March; and 7% in our dwelling fire that, if approved, to take effect in April. We are continuing to reduce our book of business in Florida, as shown by a 14.1% decline in homeowner policies in-force since the end of 2019 to roughly $207,000 at December 31, 2020. This represents a significant reduction of the book since 2017 when we had 272,000 policies in-force. We continue to limit new business throughout Florida, plus the hotspots such as Tri-County and Metro Orlando areas. And we are also nonrenewing certain policies statewide that do not meet our targets.

In our non-Florida homeowners business, we are focused on passing through our increased costs, including reinsurance pricing by raising rates to target profitable growth. For our non-Florida business written through SageSure, a rate increase of 9.5% took effect in Texas in November and 9.9% increase took effect in Louisiana in January.

For Maison, a rate increase of 15.9% took effect in Louisiana in December and a 12.3% increase took effect in Texas in February. Our non-Florida markets currently have a more favorable operating environment, including less litigation and more flexibility in terms of setting rates. Excluding the impact of severe weather events, we are pleased with the underlying performance and profitability of our non-Florida homeowners business. Our non-Florida attritional loss ratio excluding severe weather, is about 25% compared to approximately 40% in Florida or about 15 points better. As a result of our expansion in the more favorable non-Florida markets, our non-Florida exposure is now nearing 50% of the company's total.

An overall rate increase in Florida and non-Florida are on track to generate over $90 million and incremental gross premiums in 2021 as compared to 2020, assuming a flat book. We anticipate that when fully earned out in the first quarter of 2022, these increases will contribute over $230 million of a cumulative incremental premium in 2021 and 2022, with $140 million of incremental premium annually thereafter as compared to 2020 based on the current book of business.

Now with that, I'll turn over the call to Ron for more details on the fourth quarter's financials.

Thanks, Mike, and good morning, everyone. As Mike mentioned, our fourth quarter and full year 2020 financial results were impacted by a record number of severe weather events. Primarily due to this impact, in the fourth quarter of 2020, we reported an adjusted operating loss of $1.96 per share compared to a loss of $0.59 in last year's fourth quarter. For the full year, we reported an adjusted operating loss of $5.21 compared to a loss of $0.03 in 2019.

In the fourth quarter, our pretax losses from cat events were $102 million on a gross basis and $31 million net of recoveries. For the full year 2020, our pretax losses from severe weather events were just over $450 million gross and $139 million net of recoveries. It was clearly an unprecedented year in terms of catastrophe losses. As Mike mentioned, our fourth quarter results were also impacted by reserve strengthening in our discontinued commercial general liability line, which had a pretax impact of just over $16 million. Overall, net prior year reserve strengthening in the quarter was approximately $11.5 million pretax.

Excluding cat losses and the net reserve strengthening, our fourth quarter adjusted operating measure would have been approximately $2 million of income, representing a low single-digit ROE based on our December 31 stockholders' equity. As already discussed, rate increases are on the way to restore greater profitability to the book, and I'll come back to this topic at the conclusion of my remarks.

Consolidated gross written premiums in the fourth quarter grew 12% year-over-year to $168 million. This increase was due primarily to the acquisition of Maison completed last December when it contributed only 1 month of premium to last year's fourth quarter. The percentage of gross written premiums coming from non-Florida markets increased to 35% in the fourth quarter of 2020 compared to 28% in the prior year quarter.

Non-Florida policies in-force were $154,000 at December 31, compared to $152,000 at September 30 of this year, our smallest sequential quarter increase in quite some time, reflecting our desire to limit our growth in these states at this time. The geographic mix of our policy count at December 31 was approximately 57% Florida and 43% non-Florida. This compares to roughly 75% Florida, 25% non-Florida prior to the Maison acquisition, just a bit more than a year ago.

Gross premiums written in our Florida homeowners business were flat in the fourth quarter compared to the same quarter in 2019, and gross premiums earned declined just 2% despite the 14% decline in the number of Florida policies in-force as we continued to increase rates while reducing our exposure.

Average premium per policy rose 12% in our forward book over that same period, with 8% growth across all our states of operation. Net premiums earned in the fourth quarter declined to $63 million from $95 million in the same quarter last year, due primarily to large increases in ceded premiums from new quota share reinsurance treaties in both Florida and outside Florida, as well as higher cost of excess of loss reinsurance. Effective October 1, we increased the session percentage on our legacy Florida quota-share treaty from 10% to 20%, and then entered an additional treaty for 10% on November 15. Inclusive of another 10% layer entered effective December 31, we now have 40% quota-share in place on our Florida book through June 30 of this coming -- of this year. Effective December 1, we increased the session percentage for our quota-share treaty with Anchor Re from 50% to 80% on our non-Florida business written through SageSure. Effective January 1, we entered into a new aggregate excess of loss program on our Maison book of business, which provides sideways protection in the event we incur a number of middle-sized events.

Our net loss ratio in the quarter was 127%, including 44 points from cats and 18 points from net prior year reserve strengthening. Excluding the effect of cats and reserve strengthening, the underlying loss ratio would be approximately 65%. This ratio and our expense ratio are both being driven upward in part by our higher excessive loss reinsurance costs. Compared to the fourth quarter of 2019, higher XOL costs in the fourth quarter of '20 have caused our net loss and expense ratios to be 30% higher on a relative basis versus they would have -- where they would have landed, absent the increase in XOL costs. So clearly, the denominate impacts on these ratios are a real factor.

Turning now to our balance sheet and capital position. We took action in the fourth quarter to maintain appropriate statutory capital in our insurance companies and to maintain liquidity at the holding company. All of our insurance carriers ended the year with RBC ratios in excess of 300%, and we had $59 million in noninsurance liquidity at the holding company at December 31.

As has long been disclosed in our public filings, the terms of our outstanding debt preclude us from declaring a dividend when our debt-to-capital ratio exceeds 35%. Cat losses over the second half of 2020 have pushed us over that threshold. As a result, we do not anticipate declaring dividends in the foreseeable future. At year-end 2020, our total investments were $491 million compared to (inaudible) 2019. The decrease was primarily due to the need to fund our net retentions over the course of the year from the unprecedented year of cat losses that we endured in 2020. We ended the year with $103 million in cash and cash equivalents on a consolidated basis.

I'll wrap up by returning to the topic of rate increases. Mike has already mentioned the gross premium benefits that are on the way from rate increases, over $90 million in 2021 and $140 million in 2022, as compared to calendar 2020 as a baseline. In order to frame these impacts from an even more tangible or immediate perspective, one could use the fourth quarter of 2020 as a baseline instead of the full year 2020. Compared to fourth quarter 2020, the first quarter of 2021 will benefit from almost $7 million of higher gross earned premium. That figure increases to $15 million in 2Q, $21 million in the third quarter and $26 million in the fourth quarter, again, all as compared to the fourth quarter of 2020 just ended. Suffice to say that very real earnings benefits are on the way related to these rate increases, beginning here in the first quarter of 2021.

Now I'll turn the call back over to Mike.

All right. Ron, thank you for that. Operator, if we can go ahead and open it up for questions, please.

(Operator Instructions) Our first question will come from the line of Greg Peters from Raymond James.

So I would like to spend a minute -- and I know you talked about it in your comments, but spend a minute on the reinsurance purchases you've made. And how we should be thinking about events that might happen from this point going forward? And when you think about the first and second quarter, things like hailstorms, tornado events -- though -- and weather like that is pretty commonplace in Texas and other states in the South, and it will generate industry losses. When I think about FedNat, what should I think about your retention, if, say, for example, we're sitting here in April, and there's a huge hailstorm that goes through Houston. What would we think about your retention being on a per event basis based on the reinsurance that you've now put in place?

Yes. And the short answer is $10 million, generally speaking, per event for the -- we have cover in excess of $10 million for that events. So what we have done is we've tried to be prudent to buy additional reinsurance. The loss of cascading reinsurance with so many events, 5 events and now Uri being the 6th has created challenges, and the significant spend on our part to buy replacement coverage. So we would have coverage above $10 million through the end of May for an event.

Got it. And then sticking on the topic of reinsurance. Obviously, a lot of moving pieces here, but is there any perspective you can provide regarding your big cat annual renewal? And what we should be thinking about in terms of costs there? And more importantly, I mean, given the frequency and severity, I imagine you're going to do more to protect the balance sheet from a recurrence of this frequency that we had last year. So any perspectives you could provide on that would be helpful.

Yes, absolutely. So one of the challenges as we've grown from a Florida carrier through a non-Florida carrier is some of the reinsurers that were specific to Florida have been less interested in the lower layers. So effective this year with our July 1 renewal, we will be splitting the cat tower. So our SageSure book will have a separate cat tower. And that's been in the market for, I believe, 2, 3 months, and most of that program has been completed. So July 1 forward, our SageSure reinsurance program will be a separate tower. And then our non-SageSure business, which is primarily Florida, which is all 3 carriers, FNIC, MIC and MNIC, as well as MIC non-Florida would be in the other tower. So in terms of the total spend last year before buying additional limit, we spent approximately $265 million. And we've bought additional cover to replace some of those holes from the lack of cascadence.

So in terms of total spend, I think it will be a decrease in our total spend based on the optimization that we're doing with our portfolio, and how we're non renewing policies and where we're writing policies and so on. So it's too early to say where the reinsurance pricing is. Clearly, at January, the renewals for the reinsurance were less than expected because more capital has come in. But clearly, Florida is a peak zone. Clearly, coastal states are a peak zone, and we recognize that. So on a total spend, I think we're in pretty good shape there.

While I'm not saying that rates are going down, I recognize that rates may increase, but our book is smaller. And with us splitting our non-Florida SageSure book off, I think we'll benefit there. And once again, to pay for this reinsurance, which, once again, in an absolute spend, I think, should go down. We have massive rate increases, massive rate increases. These rate increases in Florida, statewide, are nearing 50% over the last 4 years. Ron said, we have over $90 million that will gross earn-out in 2021, including $7 million in Q1 versus Q4. So we find the challenge to be the weather in terms of non-Florida, and we find the challenge in Florida would be the attritional loss ratio. But that attritional loss ratio, we find stabilizing in Florida as well. So I'm throwing a lot out there, Greg, at your question. I'm happy to go deeper on any of that.

No, I appreciate the commentary. As I'm thinking about this and looking at your results, and not only your results, let's be honest, the industry has been clobbered last year as a result of everything that's happened. And Texas is clearly an issue for a lot of different carriers. I'm just -- I guess one final question I'd have for you just on this is, do you find any change in tone with the regulators? Do they recognize the pain that you're going through? And do you suspect a little bit more sympathetic to try and make it right for you and being more sensitive to rate filings? Or are they just agnostic in just plowing through business as usual?

Yes. In terms of Florida, in terms of the regulator, the Florida OIR, I think, they've done an incredible job, a very good job. I think they're in a very difficult situation. I commend the OIR for being in a tough spot by trying to protect everyone who's a resident in the state of Florida and help contain price increases. However, unless there's a reform by the legislators, it's -- their job is that much more difficult. And I would say they're forced to, therefore, give rate increases. We find the Florida OIR to be fair and reasonable. We find them to be accommodating with the reality of the situation. I think they've been very proactive trying to inform the state legislators on the abuses that we see in Florida. And the abuses that we see are primarily related with litigation. So I'm hopeful there's some type of litigation reform in 2021. But the truth is, Greg, I don't anticipate that happening this year. I don't.

Therefore, we will continue with -- we're limiting our business in Florida, where we're continuing to write new business in Florida, not a lot. But the business that we're writing looks good. And we're continuing to shed policies with nonrenewals, which absolutely improves the profitability of our existing book of business. We're happy with those moves. Unfortunately, these rate increases that we talk about are good for our stakeholders, that is our shareholders, but they're bad for our policyholders. They're bad for all residents in the state of Florida. And I hate to say it, if the situation could be improved, would not be necessary.

So it's an unfortunate situation. We're going to continue to take rate and limit our new business until there's either reform or once again, as our rates catch up with these inflated costs. But in terms of the attritional loss ratio in Florida, that increase, which was pretty steady over the last 4 years, I believe it's slowing. And it's not that the abuses are slowing or stopping, but we've got so much premium working through the book to offset those abuses.

Got it. And I guess the final question. Given your pre-announcement or preview of the Texas losses, I know you commented on your RBC ratios at year-end and the cash flow liquidity sitting in the holding company. Do you have any view on how things might change when you report first quarter results?

Yes. So there's a couple of things there. So in terms of the amount of weather that we incurred in 2020, it's truly amazing the amount of weather that we've experienced. And now with Texas, once again, I think the loss would have been a tiny fraction had it not been for the lack of power. With the grid going down, that really created a problem where you had homes that we're not able to stay warm and then you have all these water losses. So in terms of where we're at on capital, we are committed to support our carriers with the appropriate levels of capital. We have affiliated companies that generate significant fees to support our business, to support our carriers, to support our policies, our policyholders and facilitate with claims. So there's a lot of fees being generated. Unfortunately, the underwriting losses have exceeded that when you get these big weather events.

So I feel that the second half of 2021, Greg, with less of a spend on reinsurance. Once again, I'm not stating the rate online, but the absolute spend. So with a -- that, plus all these rate increases taking effect, the second half of '21 really improves as those rate increases take hold. But once again, it's just been the amount of weather that we've endured while our costs have increased so much, our costs related to the attritional losses and our costs associated with reinsurance.

(Operator Instructions) Our next question will come from the line of [Steve Hill from Hill Partnership.]

A question for you guys on the disclosure regarding the special committee, about them reviewing options to strengthen the capital position. Kind of 2 questions on that. Is that the path they've decided after reviewing all options available?

The committee was formed in November. Formally, it was -- I should say when we announced it. But honestly, it was something in the work in process before then to see what we could do to create value. But clearly, the committee, their lens has been impacted by the amount of weather that we've been experiencing. So with Q2 last year having a lot of weather and then Q3 being Laura, Sally; Q4 Delta, Zeta, Eta, these impacts their analysis and then now with Uri in Q1. So the special committee that we have formed is continuing to do their work to try to create value for our shareholders. And I would say that it would -- creating value, a portion of that is ensuring we have adequate capital based on recent events. Yes, you have to assume that's part of the analysis, absolutely, more so now than it was before all these weather events occurred.

Yes. I guess I'm trying to -- there's a strategy wheel of things that can happen, right? And if you're going in a position of strengthening a capital position that's -- as opposed to a complete sale of the company as the strategic alternative or M&A, it's a little bit indistinct. Is the strengthening capital position could be selling assets accretively? It could be raising capital. I'm just curious if you guys are going to get more specific. And I guess the reason the question comes up is the concern for existing shareholders, who have literally been through the storms with you. Would be that you go to a third-party capital source as opposed to the folks who are sitting here that could be supportive, right, and not diluted. So I'm just trying to make sure that the shareholder voice is heard as those alternatives are assessed and that it's fair from a shareholders perspective.

Steve, I hear you loud and clear. You're a very large shareholder. You've been through the tough times with us, absolutely. The committee is -- their focus is to look out for our shareholders. That's what they're looking to do. Whatever is the best outcome for our shareholders is what they're evaluating. I cannot get more granular than that. But once again, they're also looking at the capital of the company. Once -- as we sit here today, we have sufficient capital to support our business. We have the latter half of '21, really a lot of premium rolling in, but we want to make sure we're well positioned, if there's additional headwinds before those rate increases roll in, in a more meaningful manner. So I hear you, Steve. I can't give you anything specific other than to say the committee is working diligently to try to create value for our shareholders.

Yes. Mike, I appreciate that. You've got a bridge period to get to that, the holy grail, and we don't know what happens with weather. It's just -- hopefully, the normal preemptive rate of shareholders to be able to provide that bridge becomes part of the conversation. So with that, I'll drop off.

No, I appreciate that, Steve. And if you have a follow-up, obviously, please do not hesitate.

Once again -- our next question will be from Bill (inaudible)

Just a quick follow-up on the Texas event. Mike, can you just maybe help us understand what types of claims you're getting in Texas? Was it -- I'm guessing a lot of pipe burst, but is that actually what happened? Texas is kind of unique in its losses. And maybe -- what's the average size of some of these losses that you're seeing in Texas?

Yes. So if you look at the Insurance Journal yesterday, I believe they are putting numbers out there in the $15 billion to $18 billion to $20 billion range. The losses we're seeing is water. It's water all day. And once again, had it not been for the loss of power, I think these losses would be far less than what we're experiencing. The majority of the losses that we're seeing are in the Houston area, and we have a sizable book in Houston with our SageSure partners. So it's a sizable event. It's being compared to a hurricane, but we're seeing some big losses. Specifically, when you get pipes, that one on the -- if you have a second floor bathroom and those come down, they can get pricing. So we're seeing the gamut of it, some more than others. But I think the comparison of hurricane is fair in terms of a $20 billion event. And in terms of the average severity, I think, it's comparable to what you're seeing out there in the media.

Got it. Is it -- you have kind of a unique perspective, I think, than maybe some in Texas because you've experienced hurricanes in Florida. Is the demand surge for contractors and everything match prior events that you've seen?

Yes. So demand surge is a part of our business. And once again, when you need a plumber, there's a price. When you need a dry out guy, there's a price. When all your neighbors need a plumber, then they all need a dry out guy, there's an increased price. Absolutely. So after a hurricane, we do see demand surge for labor and for material. And I think that's happening right now in Texas as well. Typically, that spike diminishes with time. In other words, the demand for these plumbers and dry out remediation services will decrease with time and some of that spiking will dip down.

Got it. And your claims handling services business, that will participate and will react to this event, correct? Just -- I think you said so, but I wanted to confirm that.

Yes. So we have multiple claims organizations. We have our desk adjusting and our cat adjusting and our field adjusting. We've got a lot of resources, though we do utilize external vendors as well. Just because you can't be ready for every residence, perhaps it's located in a distant location or just because there's such a spike in claim activity. So the majority of what we're doing, we're able to do in house. However, we absolutely utilize our third-party contractors that have partnered with us over the years, and they're a big part of our process.

Got it. Okay. And I appreciate the conversation about the rate increase. I wonder if you could talk about the other side. You're pushing through rate in Florida. How have your retentions held up? I'm guessing a lot of people are increasing rates. So I just wonder how you're doing in that environment?

From a shareholder perspective, it's very frustrating that we're seeing elevated increasing -- increases in our costs. It's litigation from a shareholder perspective. From a policyholder perspective, it's very frustrating as well. People are seeing 50% increases. These are working people. And it doesn't need to happen. The policyholder is not getting the big upside. It's the litigation that's getting the big upside. It's very unfortunate, and it doesn't need to happen. We need reform in Florida. So we're seeing our prices have doubled in Orlando over the last 4 or 5 years. It's driven by litigation, and 50% relative to Florida as a state.

So it's unfortunate, the regulators doing admirable job trying to inform and educate people. There's multiple things that are being proposed in the legislative body, which meets really for the month of March and April. I unfortunately don't see something big happening, which is too bad. So therefore, rates continue to increase. And at some point, I would assume that it would be addressed. I'm hopeful that there's some reform in '21, but I don't think it will happen. And hopefully, there'll be more opportunities in '22 for it to reform. But until then, we have no choice but to pass-through the rate increase.

And let me say it again. With our rates, when they go up, we have to incur the expense, then we file for the rate, which takes time. The review takes time and then we have renewal offers and then policies gradually renew over 12 months. You're talking 18 to 24 months. So we're in that period where we've had huge increases in expense and we haven't seen the increase in premiums, earned premiums. And then while we're most vulnerable because of these increased costs, but yet not realizing the increased premiums, we get hit by 6 weather events. It's -- the timing is unfortunate. It really is. And things look very much better on the latter half of '21. But once again, hopefully, we can get there with Florida with the legislators. I think the tort reform you've seen in Texas in 2017, I think that was great, and it created value for the residents in the state of Texas. And I hope Florida can do something like that as well.

Perfect. And when you're talking to the reinsurers for quota share and different structures, have you seen their view change on how much cat they're willing to put into the quota shares or caps at all? Has that changed further and this is...

I think there's always been -- the reinsurers have always kind of been divided into 2 buckets, either non-cat and cat. It really -- you don't find a lot that like to go into both buckets for a variety of reasons. So there's only so much cat that goes into quota share. Some quota share doesn't want cat, others weren't minimal cat. And then you have your cat writers that are on an XOL, primarily on an XOL basis. So it's -- there's different types. And that's why we have such a big relationship with 75 reinsurers is to try to find that matching point with all of them.

Got it. Okay. And just one #1 real quick. What was your surplus at year-end '20? And I'm all done.

And with that, I got to cut you off, Bill. Ron, do you have it handy because we got a couple more calls we're trying to get to. Do you have it handy, Ron?

Yes. FNIC, $106 million; Maison, $39 million. And the FNIC is inclusive of Monarch since it's stacked under there. So the sum of the 2, $145 million stacked surplus.

Our next question will come from the line of Doug Ruth from Lenox Financial.

Could you talk a little bit about the status of Citizens? What you think is happening with them now?

Citizens in Florida continues to grow. Everyone may recall, they were at about 1.5 million policies back about 6, 7, 8 years ago. Then they got down to the low 400,000. My understanding is they're approximately 600,000 right now. And there -- it's speculation. They may end up at 800,000 to 1 million policies at the end of this year, subject to a lot of variables.

Citizens is competitive in the marketplace. They are -- obviously, have some tax benefits being a state entity, and also that they don't have to purchase certain reinsurance to protect their balance sheet, so their competitor and their competitors.

And do you think that there's something that maybe the Florida legislature could do to make it so that Citizens is less competitive against FedNat and other carriers?

Doug, there's a lot of things they can do. Do I think that anything is going to change? The answer is no. Once again, right now, to stay with a carrier, basically if you have a private market that's willing to take you, you're supposed to go to the private market, but that doesn't always happen, number one. Number two, before you go into Citizens (inaudible) at the prior market will take you at not more than a 15% premium, you're not supposed to go into Citizens. But really, in terms of policies, most people are staying put in their private carriers, if they get a renewal offer and others will move if the private market won't take them and Citizens is a competitive option. So they're out there. I don't see anything changes in the near future.

And the next question will come from the line of Matt Carletti from JMP.

Mike, I was hoping you could talk briefly about -- it's very early days in the Texas event. And kind of how you came to your estimate? And did you just get there because that's the next net exposure you can take? And if there -- if it is a bigger number than you think, it all goes to reinsurance? Or is there potential additional net exposure should the loss be bigger than you think?

Yes. So Matt, good question. To that, what we're saying is we're going to go over our retention, okay? So we're stating that. And then unfortunately, we have a hole in the program, the cat tower because we did a lot of strengthening at year-end. So we really took reserves up at year-end. And as we finalize those numbers, not much after that do we go and get hit with Uri. So to clarify, the $18 million co-participation there, it's basically where we think we've got a hole from really relating to Delta, Zeta and Eta. So the $18 million could increase or decrease, but I don't anticipate it shifting with all the information that we have right now. We think $18 million is the right number. But that's, once again, Laura was our first event, which was very big, and Sally was our second bet, which was the second biggest. But Uri is coming in. I think you're going to see a big event with Uri. We're not putting a gross number out at this point. But it's well above our retention.

All right. So if I'm hearing you right, if there were to be movement on the net number for Uri, it would more likely come from development on last year's storms that move kind of where the gap in your program might be as opposed to where Uri itself falls on a gross basis, is that right?

You are correct. You are correct. So any gap from Uri and layer 1 would be based on movement from Delta, Zeta and Eta. We've got a lot of bulk reserves, we believe, on all 3 of those. So we're comfortable with our reserves on those events. With all best available information, we're comfortable with the $18 million.

Okay. Great. And then my other question relates to kind of expenses and how we should about that, mostly because of the moving pieces with the additional layers of quota share that are getting added on. And I could be wrong, but I presume that those are at not as good terms to you as kind of a lot of the stuff placed earlier when there wasn't storm pressure. How should we think about where expenses fall or expense ratios fall with all those new programs in place?

Yes. I'm sure Ron can go deeper on that, but let me just give an overview of the quota share. We feel to be reasonable terms based on a historical perspective as well as today's perspective. Of course, we always and better terms but I think they could be categorized as reasonable. Ron, do you want to go deeper?

Yes. I guess my main comment with respect to the quota shares. Yes, I talked about how -- when our XOL cost go up, that drives our net expense ratio up and our net loss ratio up. The same phenomenon really does not exist on the quota shares because you've got pro rata types of reductions happening on the premium line, the loss line and the expense line. So I would not expect quota shares to significantly move our net ratios.

With that said, Matt, I'm sure what you're getting at is it's not free, right? I mean the valuers of quota share are doing it because they do expect to make some money. So is there a bottom line cost to those additional treaties? Sure. It doesn't -- it's not going to evidence itself in the form of higher expenses or a higher expense ratio.

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Mike Braun for any closing remarks.

All right. Well, thank you. Thank you, everyone, for participating on today's call. Before we close, I want to again recognize our FedNat team. Our team, including our staff and partner agents continue to provide the highest quality service to our policyholders in their time of need and are doing this in the midst of an ongoing pandemic. Their efforts and dedication will help FedNat maintain our quality reputation, continue to build value for our company. So appreciate all the question-and-answer and participation today, and everyone, have a very good day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.