FedNat Holding Company

events or circumstances or otherwise. Now I will turn the call over to FedNAT's Chief Executive Officer, Mike Braun. Thank you. Good afternoon and welcome to our third quarter 2020 conference call. Ron Jordan, our Chief Financial Officer, and Eric Fernandez, our Chief Accounting Officer, are on the call with me today. After my remarks, Ron will go into more detail on third quarter results, and then we will be glad to take your questions. As you know, our third quarter results were impacted by an unusually high number of severe weather events. The 2020 Atlantic hurricane season has been the most active since 2005, with 27 named storms. Hurricane Zeta, which hit Louisiana last week, set a record as the 11th named storm to make U.S. landfall during the 2020 season. In the quarter, we had net initial pre-tax weather-related catastrophic losses of 44.9 million, with the majority of that coming from Hurricane Laura and Hurricane Sally. Severe weather impacted all of our states, with the majority of losses being in Florida and Louisiana. I want to commend our staff, over 95 percent of which continues to be effectively working remote, for their dedication and commitment to providing the highest quality service to our policyholders and partner agents in their time of need. On today's call, I'm going to discuss the actions we've taken in response to this record cap activity to maintain an appropriate capital position at our insurance company while conserving liquidity at the holding company. I'll also discuss our initiatives to improve the profitability of our homeowner's business and build long-term value. These actions include raising rates in Florida and non-Florida markets and restricting new business and shrinking our book of business within Florida until our rates more adequately reflect our increased costs of doing business. We remain focused on improving our operational efficiency, including strengthening our team with the addition of a new chief operating officer and a new senior vice president of claims. In addition to the ongoing initiatives that our management team is pursuing, FedNet announced today that our board of directors has formed a special board committee to oversee a review of strategic alternatives to enhance shareholder value. The committee has retained Piper Sandler and Company as its financial advisor to assess potential strategic alternatives. Throughout the process that this committee will conduct, our management team and employees will remain focused on providing exceptional value to all of our stakeholders. As stated in the press release announcing the formation of the committee, our board and the committee has not set a timetable for conclusion of their strategic review. Turning now to the third quarter, The CAT losses we incurred in the quarter resulted in an adjusted operating loss for the quarter of $21.5 million, or $1.57 per share. Book value per share declined to $14.69 at September 30 compared to $16.18 at June 30. We took steps during the quarter to manage the capital position of our insurance companies and to ensure liquidity on the balance sheet of the holding company. Our comprehensive 2020 2021 reinsurance program that we renewed in july is an essential part of our maintaining our capital position and we benefit from having partnered with high quality long-term reinsurance partners other than co-participation the program included reinstatement premium protection which is serving us well in the wake of the multiple events experienced this hurricane season in addition to the coverage we purchased additional quota share reinsurance to help provide more protection and statutory surplus for our insurance companies. In July, we entered into a new quota share reinsurance treaty with Anchor Re, an affiliate of Sage Shore, our long-term MGU partner, to provide 50% quota share reinsurance on all non-Florida business written through Sage Shore. This treaty applies to enforce new and renewal business written from July 1, 2020 forward and has increased our capital efficiency as compared to the profit-sharing arrangement we have historically had in place on this book. We also purchased third and subsequent event reinsurance coverage following Hurricane Laura, consisting of an additional $39 million of reinsurance limit, which helped reduce the impact of our losses from Hurricane Delta. In October, following Hurricane Delta, we purchased $5 million of additional underlying non-Florida coverage, which will serve to reduce our net losses on Hurricane Zeta. On October 1, we increased the session percentage on our quota share program for FNIC's Florida business from 10% to 20%. In addition, with respect to the quota share treaty we have in place with Sage Shore, we have bounded an increase in the session percentage from 50% to 80% effective December 1. We are also exploring additional solutions, including more quota share for FNIC Florida and new reinsurance coverage for Maison. These actions will enable us to retain additional liquidity at the holding company heading into 2021 and also provide additional coverage for catastrophe losses subsequent to their respective effective dates. Importantly, we currently project that each of the carriers will finish 2020 with RBC ratios above 300%, withholding company liquidity at approximately $50 million. These projections factor in Hurricane Delta and Zeta, both of which hit Louisiana in October. I want to now turn to the actions we have taken to improve the profitability of our homeowners' business and build long-term value. Looking at the Florida homeowners' market, the environment continues to be very challenging. While the number of AOB lawsuits continues to decline sharply, the plaintiff's bar in Florida continues to find ways to bring litigation against insurers. We are continuing to raise rates while taking actions to further shrink our book of business within Florida until rates more accurately reflect the increased cost of claims and higher reinsurance costs in this environment. The rate increases in Florida include a 7.4% increase that took effect in June and an additional 5.6% increase that took effect in October. We have also filed for an additional 8.1% increase that, if approved as anticipated, will take effect in January 2021. We are continuing to reduce our overall book of business within parts of Florida, as shown in the 8.4% decline in our homeowners policies in force since last year's third quarter to approximately 217,000 at September 30th. 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 Orlando areas, until rates more fully reflect our operating costs. We are also non-renewing policies statewide that do not meet our profitability targets. In our non-Florida homeowners business, we are also focused on passing through our increased costs including reinsurance pricing, by raising rates to ensure that the growth that we are targeting is profitable. Excluding the impact of the severe weather events in the third quarter and the second quarter, attritional losses in our non-Florida homeowner's business continue to meet our expectations. Our non-Florida markets currently have a more favorable operating environment, including less litigation and more flexibility in terms of setting rates. Non-Florida policies in force were 152,000 at September 30 compared to 149,000 at June 30, reflecting our desire to limit our growth in these states at this time. The geographic mix of our policies at September 30 was 59% in Florida versus 41% in non-Florida. This compares to roughly 70% in Florida and 30% in non-Florida prior to the Mason acquisition less than a year ago. For a non-Florida business written through SafeShore, we have filed for an increase of over 9.5% in Texas taking effect in November and 9.9% in Louisiana to take effect in December if approved. Mason has filed for a 15.9% increase in Louisiana to take effect in November and has filed for a 12.3% increase in Texas to take effect in December if approved. Our overall rate increases in Florida and non-Florida are on track to generate over $65 million of incremental premium in 2021 as compared to 2020. We estimate when fully earned out in the fourth quarter of 2021, these increases will contribute over 70 million of go-forward annual incremental premium as compared to 2020. We remain committed to the prudent capital management while also maintaining our commitment to returning value to shareholders including through our dividend, which was announced today. As we said on our second quarter conference call, we typically do not repurchase shares during one season, and given recent storm activity, do not anticipate executing share repurchases at this time. Our board will continue to make decisions on repurchases and the level of our dividend based on the capital needs of the company. I will now turn over the call to Ron for more details on our third quarter financials.

Ron? Thanks, Mike, and good evening, everyone. As Mike mentioned, our results in the third quarter were impacted by two full retention events, along with several smaller events throughout the quarter. Our pre-tax net income was reduced by approximately $38 million net of all recoveries, and after factoring in incremental catastrophe claims handling revenue that arose due to the storms. Over 80% of the initial net cat losses stemmed from Hurricanes Sally and Laura, which together impacted Louisiana, Texas, Alabama, and the Florida Panhandle. We also incurred relatively minor losses from Hurricanes Hannah and Isaias. In aggregate, gross losses from all cat weather events totaled just over $246 million during the quarter, over 90 percent of which related to Louisiana and Florida. These gross losses were reduced by approximately 201 million of offsets, primarily under our excess of loss reinsurance treaties, though also through quota share coverages. Net of the additional CAT claims handling revenues mentioned a moment ago, these CAT losses added approximately 46 points to our loss ratio and combined ratio in the quarter, and reduced our after-tax earnings by over $24 million, or $1.79 per share. Consequently, our net loss in the quarter was $20.7 million, or $1.51 per share, compared to net income in last year's third quarter of $4.7 million, or $0.36 per share, which included only $7 million of pre-tax catastrophe losses. Adjusted operating loss for the third quarter was $21.5 million, or $1.57 per share. The primary adjustment between net income and adjusted operating income in the third quarter was $1.3 million of pre-tax investment gains. On a year-over-year basis, gross premiums written increased by 13% to $180 million, due to the Mason acquisition. But we're down 12 percent sequentially, primarily due to the shrinking of our Florida homeowner's book until our rates adequately reflect higher claims and reinsurance costs, as well as the slowing of growth in our non-Florida book as we implemented rate increases at both Mason and Sageshire. As Mike has already mentioned, Our mix of gross written premiums continued to shift towards non-Florida in the quarter with an approximate 60-40 split of Florida versus non-Florida. Non-Florida gross written premiums increased 76 percent from the third quarter of last year, spurred by a 23 million contribution from Maison. With respect to gross and net earned premiums, please refer to the tables provided on page seven of our release for the numbers. Gross earned premiums increased 38 million, or 26%, as compared to 3Q19, including 24 million from Maison. However, seeded premiums earned grew by almost 42 million, or 72%, resulting in a $4 million, or 4%, decline in net earned premiums, despite 13 million of NEP from Maison, NEP being net earned premiums. The major components of the increase in seeded earned premiums included $16 million of higher excess of loss reinsurance premium expense, and that's on a same-store basis, $10 million of additional excess of loss premium expense from the addition of Maison, and $15 million of seeded premium from the FNIC non-Florida quota share treaty with SageSure that took effect on July 1, 2020. Note that the higher excess of loss reinsurance premiums on a same store basis, all else being equal, have the effect of driving up our net loss ratio, net expense ratio, and combined ratio by approximately 19 percent on a relative basis as a result of the reduction to the net earned premium denominator in those calculations. As such, the gross loss ratio and gross expense ratio are certainly better points of comparison on both the year-over-year and sequential quarter basis. With respect to the new quota share treaty in place on our SageShare business, because the treaty mirrors the 50 percent profit share arrangement that was already in place, it had no impact on our net income. Rather, it impacts income statement classifications and delivers RBC relief as a result of being able to seed premiums and losses, whereas under the profit share, all the net activity was reflected in a single line item, commissions. To be specific, in the quarter, as a result of the new quota share treaty, seeded premiums increased by 15 million, seeded losses increased by 19 million, and commissions went up by 4 million, all of which next to a bottom-line impact of zero. Mike discussed the multiple rate increases we have taken this year in all our markets, including the main ones that we anticipate being approved in the coming months. But I think the overall point is worth reiterating. Based on these increases, we're on track to generate over $65 million of incremental premium in 2021 compared to 2020. These rate increases will enable us to either drive earned premium growth on flat policy counts, if circumstances indicate, or more likely will enable us to continue reducing our policy counts without reducing earned premiums. Either way, we expect these rate increases to help improve our projected margins, and we expect to file additional rate requests in 2021 driven by the elevated CAT and attritional loss trends experienced this past year. Turning to the investment portfolio now. During the quarter, we recognized 1.3 million in investment gains, which arose from both fixed income and equity securities. We've maintained our rigorous commitment to high-quality, liquid fixed income securities, which are also RBC efficient. Our September 30 portfolio consisted mainly of fixed income instruments, all of which were investment grade with a composite rating of A. Portfolio duration at September 30 stood at 3.0 compared to 3.5 as of December 31. We were pleased with our demonstrated ability to execute our investment thesis, preserving capital and maintaining liquidity as we look to mitigate risk across any economic scenario. In that same spirit, in roughly mid-October, we closed out our equity securities portfolio such that our investment portfolio as of today is 100% investment-grade fixed income securities. This action took potential equity market volatility in the weeks and months ahead off the table for us as we plan for year-end capital and liquidity. Continuing with our balance sheet, we ended the quarter with cash and cash equivalents of $49 million, backstopped by our $550 million high-quality, highly liquid bond portfolio. As Mike mentioned, factoring in fourth quarter storms that have already occurred, as well as quota share treaties that have already been bound with fourth quarter effective dates, we expect to finish the year with risk-based capital ratios of 300% or more in all our insurance carriers and with approximately $50 million of Holdco liquidity. We are continuing to explore the purchase of additional quota share reinsurance, which may further enhance our year-end liquidity position. In conclusion, in the third quarter, FedNet and our entire industry have had to manage our way through the most active hurricane season since 2005. Through it all, we continue to work hard to provide the highest quality service to our policyholders and agents in their time of need, while also using all the tools at our disposal to maintain appropriate capital levels and liquidity. At the same time, we remain focused on increasing the profitability of our homeowner's business through aggressively taking rate and shrinking our book in Florida. With that, I'll turn the call back over to Mike.

Thank you, Ron. Operator, if you can go open the line, we'll take some questions, please.

Ladies and gentlemen, if you have a question at this time, Please press star, then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from Greg Peters from Raymond James.

Good afternoon. Tough quarter, tough year. Can you, um, help us with the RBC calculations and specifically, um, you know, if we, if, you know, given the experience that you're having in the fourth quarter, um, what Demotech is saying about their rating on your company is the, the, your projected RBC satisfactory for their, their, a rating of your company.

Yeah, good afternoon, Greg. Just real quick before Ron goes into the details on the math, it's been a tough year. It's been a very tough year, both in terms of the amount of weather that we've incurred in Q2, the amount of weather in Q3, and then also the reinsurance spend went up significantly. To that, there's a lot of math there. We do have ongoing conversations with Demotech, and you need to be able to maintain 300 RBC to secure their rating. There's other criteria, of course, that they look at, but that's something. And we're confident that all three of our carriers will be at that place at year end, as Ron stated. Ron can explain the math far deeper than I. I'm not sure how deep you want to go.

Well, Ron, did you have some comments to make?

I think Mike covered it pretty well. We will be at or above 300 in all our carriers and with 50 million approximately of additional liquidity at the whole co as we head into 2021.

And so, okay, let's pivot then as we think about next year. This is obviously a tragic year for What kind of reinsurance costs should we factor in for next year? Because it would definitely seem like the reinsurers are also getting nailed with frequency and lower interest rates. So it feels like next year is going to be another year where you're going to have really steep reinsurance increases. But maybe... Maybe you're talking with your partners and maybe you have a different view.

A couple things. In terms of what Ron stated, in terms of the RBC, that includes the two weather events that have already occurred in Q4. So just to clarify, that includes Delta and Zeta. And then in terms of reinsurance, there's pressure on pricing. Our pricing went up over 20% in 2019. Our pricing went up over 20% in 2020. I think there's continued pressure on pricing. I don't think anywhere to that magnitude. So if reinsurance is about a third of our premium, 33%, a 10% increase is about three points. So we have passed through, specifically Florida is our core market, we've passed through that rate increase from 2019 to our policyholders via rate filings, but those policies renew very slowly, one policy at a time, so it takes a full calendar to after filing, after approving, and so on. It takes 18 to 24 months before you earn it out correctly. So reinsurance pricing, there is pressure on it, and we do pass that through to the policyholders, but the recovery on that's a bit slow. I don't believe that we'll have the same type of significant increase on reinsurance costs going into 2021 from 2020, but it's very early. That's speculative at this point. and we're managing our portfolio, assuming there is some pressure on that pricing. We do have a very robust panel of 75 reinsurers, and they all have different spots in our program, and we think that we're well-situated on a go-forward basis with those partners.

Okay. I guess my final question comes in two parts. It's just the loss ratios. You did call out adverse loss experience in FNIC. I was wondering if you could put some color around that. And then more broadly, just talk about the underlying loss ratio performance, X to CATS, X to reserves. Where is that? And, you know, when are we going to see some further improvement there?

Sure. I can talk about that. So, obviously, we had initial cat loss estimate of around 45 million, which we, you know, gave that figure in a 8K earlier in the month of October. The update to that, I would say, is that with factoring in claims handling of cats, that reduced the net effect, you know, down to about 38 million in the quarter. And so, that's the major you know, out-of-period items, so to speak, or that you would adjust for in the sense of an underlying. So speaking in terms of the overall underlying loss ratio on net earned premium, it was about 58%. And, you know, so... factoring in the seeded, as I said, the increase in XOL costs as well as the other quota shares that we entered in the period, of course, are reducing net earned and driving all of our net ratios a bit higher. But in terms of the underlying kind of attritional ratio that we think of in the Florida book, Greg, here in 2020, that's been about 42%.

Greg, to give you more context, 42%, and we were at 30% for multiple years. And then about four years ago, it started picking up significantly within Florida on FNIC's book. And here we are having taken about 40 points in rate, yet the attritional loss ratio continues to climb. So it's a challenging situation.

Got it. All right. Well, I'll let some others ask some questions. Thanks for the answers.

Thank you. Thank you. The next question is from Doug from Lenox Financial.

Good afternoon. When exactly did you retain the Piper company?

Doug, good afternoon to you. That just has been in the third quarter here just recently. And that was done by the board to evaluate our operations, the marketplace that we perform in, both within Florida and non-Florida. And obviously our Florida market's been very challenging for us. We've diversified into other coastal states, and unfortunately we really got hit hard on our non-Florida states with weather. So that's all occurred during the third quarter. Okay.

Okay. And can you comment some about what you're seeing happen with the state-run carrier Citizens?

Citizens is out there. They're competitive in the marketplace. They are starting to grow, and it appears to be significantly. There's some concern at the state level about that. But right now what we're finding is the Florida market is very hard, not a lot of capacity, and that's more true in certain parts of the state. including Tri-County and Solo, which is Seminole, Orange Lake, and Osceola, which is Metro Orlando. And I think you're going to see continued growth by citizens.

Okay. And what about the litigation environment? What is that like at this point?

Litigation is challenging within Florida. We see a remarkable difference between Florida and non-Florida claims. And while AOB reform was meaningful and that really addressed the third party suits, the litigation on first party suits is, is growing and it's, it's expensive. Uh, and once again, when I say expensive, it really impacts our results because of the amount of fees that are paid to the plaintiff's attorneys. It's, it's, it's a tough situation. Additional rate is needed until there's some type of reform.

And you had told us in your 8K that you have that 8.1% filing, which you thought might happen in January. Do you have a number in mind as far as how much the next rate increase might be?

Well, there will be another rate filing right behind it as we update our assumptions based on actual losses and trends. We need more rate. It's really unfortunate. The Florida property market is under significant stress. We're feeling it as well as others. Our plan was to diversify into other similar states, which has not been successful here in 2020. But until there's reform, you're going to see continued pressure. And we will be filing more rates beyond that 8.1% within Florida. I'm certain of it. I really can't quantify it. but I would anticipate that 8.1 that's pending with the regulators, we're hoping that becomes approved and effective in January. It's sad to see. It really is. Obviously, it hurts our shareholders. That's very clear. It's sad to see what's happening to the policyholders of our company, but all companies.

As far as some sort of update from Sandler, would you expect to – Give us an update at the next earning call. Would you think that something might come out sooner than that? Is there any kind of timeframe that the board has targeted?

Doug, there's no timeframe. The board is well aware that our stock is trading at such a discounted book. The market's not pleased with the performance, and we understand that, and the board understands that. The board is well aware of the challenges in our primary markets. and the board is also aware of our diversification efforts and the challenges that we've had with weather as well as increased reinsurance. They're aware. They are looking at everything and anything to assist in the process, to assist in evaluating what can be done to create shareholder value. I would not say that there's any one specific item that would come from it, and there's no specific timeframe. It's a public acknowledgment of the challenges that we face and that the board is looking into the situation with the assistance of a banker.

Okay. My final point is I would like to ask the board to consider buying some stock with their own money or the officers or directors of the company. The last time there was an insider purchase was over five years ago. And I think that that would really send a strong message to the investment community that the company and the board members believe in the future of FedNet. And I'm grateful for you folks hosting the call today.

So noted, Doug. Thank you very much. Thank you for your questions.

The next question is from Matt Caroletti from JMP Securities.

Hey, thanks. Good afternoon. Maybe can we start with, Mike, you spent some time talking about the XOL reinsurance in response to a prior question. Could you talk about the quota share a bit, in particular, both the increased quota share for FNIC as well as the ex-Florida, you know, going from 50 to 80 with Sage Shore? I mean, given the environment, I wouldn't think that reinsurers are kind of tripping all over themselves to get more you know cat exposed homeowners market share right now you know what what kind of where are the feeding commissions on this stuff versus you know your your cost of customer acquisition things like that like is it is there any spread is it negative spread just trying to get a feel for you know as you up these um you know ratios and feed more you know what where the impacts go yeah ron can give you more details in a moment but let me give you the overview

So obviously State Shore is a partner of ours as they've been in multiple roles for more than a decade, but as an MGU for about seven plus years. And they stepped up and took 50% quota share and not stepping up yet again to 80%. So it does multiple things. It aligns the risks, of course, and that's the objective. But it also gives us some RBC relief. So I'll defer to Ron in terms of the economics there. In terms of our Florida book of business, we have Swiss Re that's been a reinsurer on a quarter share level for multiple years, and they've stepped up as well. And once again, providing RBC relief is a big part of that so we can keep that capital within the holding company. And then with Mason, we're looking at possibilities there as well. But once again, what we're looking for is not only for the relief on the RBC, but ensuring that the economics work.

Ron? Yeah, I guess I would just add a couple of comments there. First of all, with the Saneshore, as you know, we've had a profit share arrangement in place for quite a long time. So, you know, you can really think of the profit share as fully encompassing any reinsurer's margin. related to that treaty. So in that sense, the quota share overlaying the profit share is costless, frankly, because the profit share already encompassed the economics of the underlying relationship, if that makes sense. And then on Swiss Re, just what I would say there is they're a long-term partner It's a great relationship. We really appreciate them. They have been committed to Fed Nat, and we enjoy their partnership and the like. So, you know, I think you're right. In a challenging environment, of course, they would be looking for additional margin, and we did renew the treaty back on July 1 on terms that were certainly modified from the year before. but I would say not materially so. And beyond that, we probably will refrain from, you know, giving any specifics on the terms. But hopefully that's responding to your question.

Yeah, yeah, absolutely. You know, a couple more numbers questions. You mentioned in the press release about, I think it was 65 million of additional premium that will come in the door over 20 and 21 from, you know, filed, you know, rate changes. Can you help us understand, how much of that goes towards either current, you know, increased costs of reinsurance you've already absorbed or will likely absorb, and how much of that might be left over for, you know, going towards lost cost trend and margin improvement?

Well, certainly, and Mike, I'll jump in first on this one, and Mike can add on or redirect. But, you know, as you know, our costs went up 20%. at renewal in 19 and 20% at renewal here in 20. So certainly a meaningful portion of the rate increases are us getting to catch up. This inherent lag is tough in this business with the regulated environment that we're in. But our reinsurance costs have gone up you know, roughly $10 million a quarter in this latest renewal from the prior. So, you know, that's $40 million a year, and I think that's a reasonable way to think of it vis-a-vis the $65 million.

Yeah, and Matt, I would add a little color on that in the sense that, once again, we're trying to catch up, trying to catch up to our elevated costs. So primarily in Florida, the attritional losses are It's been, unfortunately, just an endless staircase over the last four or five years with the industry, obviously with us, and obviously the reinsurance going up in 19 and 20. And for the record, appropriately so, based on the losses that they saw come out of Florida, primarily as it relates to Irma. Irma was an event that was big, and I think it exceeded many people's expectations. So I think hopefully we're getting closer to actual pricing. where we need to be with the reinsurers on XOL for next year. But these rate increases are with the attempt to get our, I would say, primarily in Florida, our traditional plus our reinsurance expense really at the 70% range.

Okay. The quick past question. If I plug in the, I think it's $27 million that you said for the Delta and Zeta, it brings the year to, let's call it round numbers, $129 million of weather and cats. Can you split that out, what's from Florida, not Florida, or even more specifically, what was the non-Florida stem from Mason versus, you know, legacy FedNASC?

You know, Ryan can probably give you the detail on that, but let me just say this. That number is a massive number in terms of net retained weather, and it far exceeded our expectations. So, once again, what we're trying to do is incorporate those new assumptions, these new trends. You know, I don't know that 2020 is going to repeat itself in 2021. It's been such an unusual year. Hopefully not. Yeah. in both Florida and non-Florida will help towards that cause. Uh, Ron, I don't know if he's got more of a breakdown.

Well, the 45 million this quarter, let me just say that the 45 million this quarter, uh, was roughly 25 million from Florida and roughly 20 million from the other States, which was, um, the vast majority of which was Louisiana, obviously, and our hearts go out to the folks there in Louisiana for the repeated hits that they took. Earlier in the year, there was kind of a good mix of, if you want to call it that, of Florida versus non-Florida. It was, I would say, roughly 50-50 in terms of the first six months of the year.

Great. And then just my last question, Mike, just kind of want to, you know, speaking to your investors on this call, you know, and understanding that, you know, you guys have been operating in a really tough neighborhood for a long time now. And a lot of this is there's a lot of companies much worse off than you and some have fared better. But this is surely not just a FedNet issue. You know, when I look back over, say, the past five years, you know, we've got, you know, you've doubled the size of the company on a net premiums basis, book value is down 9%, and aggregate EPS is a loss of almost $1.50. You know, the story has been a rate increase story for at least a couple years now, and so my question is, you know, what would you say to investors, you know, at this point that, you know, you could help them understand that there's light around the corner and that we're not on a hamster wheel of you know, an environment that we're not going to be able to get out, you know, kind of escape.

Yeah, Matt, great question. And, you know, numbers, you know, are not good numbers. So I'll add a couple things. Florida has been changing. We've been taking a break. And, honestly, we're going to continue to break until – and I don't know that – there are a few – There's new legislation. So I do think we're catching up to the rate that's needed, but I just want to clarify, every time we catch up, it does tend to move from the entire market. In Florida, I think we're working appropriately by financing the type of business in Florida over the last four years. Again, you know, TIV of roughly $20 billion plus to $50,000 plus policies. And it's really unfortunate because this is our home state. We've been here for 20 years. That's not what we wanted to do. But with the rate increases, that has been our response, as well as re-underrating the book continuously with new information. Now, in Florida, we're very hopeful, very much more positive. The attritional loss is non-Florida, both with Sage Shore, their great partner, and Mason. We're very happy. Both of those books are performing on the attritional loss perspective. Our claims environment non-Florida is remarkably different than Florida. It's incredible. But let's be real clear. 2020 has been terrible from a weather perspective for us, gross and net. So I am very hopeful in that sense. I hate to use the word hopeful, but I feel good about what we're doing non-Florida. But this weather, it's been a challenge. It's absolutely been a challenge. And until rates catch up in Florida or there's action in Tallahassee, I don't see our exposures growing much. So sorry to give you such a long answer, but in summary, I think our premiums will stay relatively flat and could increase on our total books of business. However, I do anticipate that our policy count and insured value will continue to decrease. Sorry for the wordy answer.

Oh, no, that's quite all right. I appreciate all the color on all my questions, and I wish you the best of luck on board. Thank you, Matt.

The next question is from Bill Grumo from Dowling and Partners.

Great, thank you. Maybe just a numbered question real quick. What was the surplus at 930?

Statutory surplus in the carriers is approximately 140 million at 930. Okay, all right, that's the 40 in the press release.

Okay, thanks. And when you say the 60 million of liquidity at the whole code, that's kind of cash and short-term investments? I was just trying to get an understanding of the mix.

Yeah, it's predominantly cash and short-term investments. We include, you know, if they've got intercompany receivables or something, you know, that are liquid, a tax receivable that is collectible within, you know, a certain period of time. You know, those types of items are in there as well.

Okay, perfect. And when you talk about the So you have the two storms in Q4. Can you just, Delta and Zeta, can you just maybe remind us what is your retention for the next event? So now, what does that look like if you were to have anything else in Q4?

Yeah, we have our core program in Florida is a ballpark of maybe $1.2 billion. Non-Florida, about $550 million. The retention is a approximately 25 programs. And we've used a lot of the limits throughout the year on all these different events. So we had, after Laura, we had re-upped on some limits. And after Sally, or I believe it was Delta, we re-upped on some limits. So we've got some holes in the reinsurance program. that we're looking to fill, but really the majority of the limit is there, and some of the big holes that we have is on top of the program, which is obviously of less concern.

So on that comment, would you say the lower layers, I think when you announced your reinsurance program, you said a lot of it was cascading, or the bottom of your tower, is that all cascading?

All the limits not cascading, so that's why we've had to re-up some limits throughout the season, and we're looking at that as we speak as well right now. Got it.

Got it. So with, I think, Ada in the water, I know it's down in Nicaragua, but the NOAA path has it coming towards Florida. It doesn't look like it's a hurricane, but given social inflation in Florida, anything that comes near it, maybe there's losses. So for that type of event, hypothetical event, let's call it right now, it would be the $25 million would be how we should think about the retention?

The retention is $25 million. There could be some holes exposed if it goes above $25 million. Once again... those numbers are hard to quantify based on the storms that we have. So with part of our program, it's a bit complicated, Bill. Some of our program is cascading. Other parts of the program is not cascading. Some of the program has single carrier group retention. Some have separate carrier retentions. So there's some additional exposure out there. Correct. which we're trying to mitigate, but it's hard to quantify at this time, or at least not really quantify with you today.

Okay. The one thing I might add, Bill, is $25 million would be it non-hurricane. If it was a hurricane, actually our retention in Florida would be 15 on the next event, and we're certainly not hoping for a hurricane to hit Florida. Okay. Not implying that.

Yeah, no, that's a great, thank you for that distinction. That's helpful. And sticking with this storm, when you, in your comments about the 300 RBC ratio, the liquidity at the holding company at year end, can you just help us frame out what are in that assumption? Is it we don't have any events after

delta and zeta and it's kind of a clean q4 i'm just trying to make sure how much kind of well you know once again go deeper i i don't think he can give you all the numbers that we're using he's got expectations on weather and obviously uh seasonal weather uh during q3 q4 and so on so he's got some expectations in there for weather um but but uh in terms of delta and zeta those those are a fact and they've occurred and he has that included in his assumptions.

Yeah, just absolutely. No, Bill, we did not say, well, two storms have happened, so let's just assume that we're going to have no cats the rest of the quarter. I don't think that would be a reasonable view to take when I'm trying to project RBCs and playing capital. So we do have an assumption for additional weather over the course of the quarter.

Got it. Would it be an assumption big enough to absorb ADA if it does come near?

I don't think Ron wants to go that deep in the math. Once again, we understand your question, but there's weather that we know occurs in Q4, and you can have actual weather that comes in less. or higher than that, but we try to have reasonable expectations.

No problem. Okay, understood. If I could just move on to a different subject. There's been some press reports about the Florida OIR looking at MGA fees, and I wonder if you had any thoughts on what they might be looking at and how it might impact the Florida market in general.

Well, all fees that are MGAs are reviewed and approved by the regulators. So we have no concerns on our fee structure. We think it's fair. And so I don't think it's really going to impact us in any way.

Okay. And the three-year statute of limitation on the IRMA claims, you know, passed in Q3. And I was just wondering what your experience was in that run-up.

Well, we had brand-new claims reported right up until the end. I would not say that it was massive at the end, but it ticked up, no doubt about it. But it was steady throughout the entire three years.

But you feel the IV and R that you have set aside should be sufficient to absorb it?

You know, Irma's been tough. Irma's been tough. We put out IV and R that we believe to be correct. But unfortunately, we've gotten that wrong over the last three years, as well as I think most within the Florida industry. So we're happy to be past the three years. We think, you know, most of that should be behind us on a growth basis. Obviously, on a net basis, we're well into our reinsurance program. But we try to reserve those correctly, and we try to – you know, handle those claims as best we can. But once again, Bill, as you know, Florida's a tough environment. Right.

Okay. And then last one for me. Just at the Holdco, when you think about servicing, you know, what the uses of kind of your liquidity at the Holdco, are the big items, just from my understanding, you know, to service your debt, you know, pay for the dividend and, you know, any type of possible capital that needs to be contributed to the subset support kind of the RBC ratio. Are those the big items to think about?

There's a combination of things, Bill. Absolutely. I mean, you have three different insurance companies and, uh, we've got other companies as well, other affiliates and, uh, and that, and that liquidity of the holding company, uh, is there for, for those purposes. Uh, we hate to be downstreaming it, uh, when we have these weather events and when, when bad things occur, uh, but we'd much rather be downstreaming it for growth initiatives. But that's the reality of the situation right now is that we've got challenges in our attritional market within Florida, our whole market, and as we've expanded outside of Florida, we've really gotten hit in terms of this weather. And, you know, we, like everyone else, hope we can get this weather season behind us pretty quick.

Understood. Sorry, if I could just speak on the strategic review, the timing of it, you did a lot of different reinsurance transactions. Was this strategic review on the table when you're negotiating the changes in the reinsurance, or did it kind of happen afterwards?

Everything that we talked about with the strategic review, this is a board initiative during the third quarter.

Okay. Okay. Great. Thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back to FedNet Holding Company CEO, Mr. Michael Braun. Thank you.

In conclusion, in the third quarter, FedNet and our entire industry have had to manage our way through the most active hurricane season since 2005. Through it all, we continue to work hard to provide the highest quality service to our policyholders and agents in their time of need. while also using all the tools at our disposal to maintain appropriate capital levels and liquidity. At the same time, we remain focused on increasing the profitability of our homeowner's business through taking rate and shrinking our book of business within Florida unless and until our rates more adequately are reflected of our costs. With that, we'll go ahead and end the call, and thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may disconnect. Thank you. Thank you. Thank you.