FedNat Holding Company

Good morning and welcome to FEDMAP Holding Company's fourth quarter 2020 conference call. My name is Victor and I'll be your conference operator this morning. At this time, all participants will be in listen-only mode. 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 FedNet website at www.fednet.com. Now I'd like to turn a call over to Bernie Kilkelly for FedNet investor relations. Bernie.

Thank you, Victor. And, uh, good morning, everyone. Uh, welcome again to FedNet 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 and 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 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 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. FedNet 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 percent of which continues to work remotely, for their dedication to meeting that commitment. In the fourth quarter, we had a pre-tax Tax-to-fee 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 in 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 discussed in our earnings release yesterday, FedNet 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. FedNet 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 pre-tax. The company has an 80% quota share treaty in place with Anchoree, an affiliate of our managing general underwriter, Shadeshore, which extends from July 1, 2020 to June 30, 2021. One, depending on the profitability of the business seeded into this treaty over the remainder of its term, we may be able to recover a portion of the URI losses. Though no, not necessarily in the same quarter in which URI occurred. We are continuing discussions with Sage Shore and Anchoree 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 advisor 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 three 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 our insurance at all three 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 for 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 homeowner's 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 homeowner's 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 environment. 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 homeowner's book, and if approved, will take effect in March, and 7% on our dwelling fire, that if approved, would 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, enforced 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 enforced. We continue to limit new business throughout Florida, plus the hotspots such as Tri-County and Metro Orlando areas. And we are also non-renewing 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 Sage Shore, a rate increase of 9.5% took effect in Texas in November, and 9.9% increase took effect in Louisiana in January. For Mason, 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 into 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 in 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.