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.