FedNat Holding Company

Holding Company's first quarter 2021 conference call. My name is Josh and I'll be your conference operator this morning. At this time, all participants will be in a 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's website at www.fednet.com. Now, I'd like to turn the call over to Bernie Kilkelly for FedNet Investor Relations.

Bernie? Thank you. Good morning. Welcome again to the conference call for FedNet's first quarter of 2021 earnings. Our earnings release and prepared remarks include references to non-GAAP measures such as adjusted operating income, 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 or otherwise. Now I will turn the call over to FedNAT's Chief Executive Officer, Mike Braun.

Thank you. Good morning and welcome to our first quarter 2021 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 first quarter results and then we will open up the call to questions. Our results in the first quarter of 2021 were significantly impacted by higher than expected catastrophe losses, primarily from winter storm Uri, which caused heavy residential damage in Texas during February. We are proud of our dedicated team who are committed to providing the highest quality service to our policyholders and partner agents affected by Uri and the multiple other weather events over the past year. Our first quarter was also impacted by a much higher seeded reinsurance premium expense from our multiple late season purchases after we encountered a record five hurricanes during the second half of 2020. This extra reinsurance expense will continue in the second quarter until we have the July 1 renewal of our excess of loss reinsurance program. The net impact of said net in the first quarter from URI and the other smaller CAT events is approximately $18.3 million pre-tax, plus an elevated reinsurance expense of $13.6 million. Ron will provide more details on our total exposure to policyholder claims from URI and additional reinsurance that we purchased to reduce the impact from potential future large weather events. This weather storm was the sixth major severe weather event that we experienced since the third quarter, including five hurricanes. These catastrophe weather events have been very unusual in their frequency and severity and have significantly contributed to challenging times for the company financially. We have proactively taken action to protect our balance sheet by ensuring that we maintain ample liquidity at the holding company and appropriate capital positions within our three insurance companies. As you may know, last November, our board of directors formed a special board committee to oversee a review of strategic alternatives, including exploring options to strengthen the company's capital position. The company retained Piper Sandler & Company as its financial advisor. Since our last quarterly conference call in early March, we have completed two capital raising transactions through Piper Sandler, which together grows proceeds of $38.1 million. These included a common stock offering in March and April, which raised $17 million, and a convertible notes offering in April, which raised $21 million. As a result of these transactions, we have increased our holding company liquidity. Holding company liquidity is currently approximately $68 million, following the capital raises and after a capital infusion of $23 million into our insurance companies effective as of March 31. The work of the board's strategic review committee is ongoing and the company is continuously evaluating our capital position to ensure appropriate capital adequacy and liquidity. During the first quarter, FedNet continued to execute on our strategies to improve our operations, pricing, and book of business to position the company for future growth in earnings and book value. In particular, we have continued our initiatives to improve the profitability on our homeowners' business, including raising rates in Florida and non-Florida markets, and restricting new business and shrinking our book within Florida until rates are more adequate. Looking at the homeowners' market, the environment continues to be challenging. While the number of AOB lawsuits continues to decline sharply, our overall litigation against property insurance companies in Florida continues at levels that are far above the rest of the country. Insurance legislation was passed by the Florida legislator last week that, if signed by the governor, will go into effect on July 1. We are encouraged by portions of the legislation, but do not believe the issues driving rate increases have been fully addressed. We will therefore remain cautious in Florida and continue our current initiatives to reduce our exposures in the state until we see evidence of potential benefits in the second half of 2021 and beyond. We will continue to see great increases to more accurately reflect the increased costs stemming from excessive litigation as well as higher reinsurance costs. Our near-term goal in Florida in this environment in 2021 is to continue reducing the number of policies that we have while keeping in-force premiums relatively flat through rate increases. Our rate increases in Florida include 6.7 percent that took effect in March and 7 percent that was implemented in April. Our Florida policies in force continue to decline as shown by a 4.9 percent decrease from 207,000 policies at December 31, 2020, to 197,000 policies at March 31. This represents a significant reduction of over 27.5% of the book since 2017 when we had 272,000 policies in force. We continue to reevaluate risk in our existing book based on new information to identify policies that do not meet our targets, along with limiting new business statewide. As a result of these actions, our average premium per policy increased by $110 in the first quarter compared to the fourth quarter of 2020 and increased almost $300 per policy compared to the first quarter of 2020. This increase translates into over $50 million more in premiums in the first quarter of 2021 compared to last year with decreased risk. In our non-Florida homeowner's book, we are also targeting profitable businesses by continuing to pass through our increased costs, which include increased claims from weather activity and higher reinsurance costs. For our non-Florida business written through Sage Shore, a rate increase of 9.9% took effect in Louisiana in January, and we expect to file for additional increases in that range later in 2021. Sage Shore also had a 9% rate increase in Texas that takes effect in May, and it's planning for a similar increase later in 2021. For Mason, a rate increase of 15.9% took effect in Louisiana in December, and 12.3% increase took effect in February in Texas. And we expect to file for an additional rate increase later in 2021. Our non-Florida markets continue to have a more favorable operating environment, including less litigation and more flexibility on setting rates. Excluding the impact of severe weather events, we continue to be very pleased with the underlying performance and profitability of our non-Florida homeowners' business. Our non-Florida attritional loss ratio, excluding catastrophes, is generally in the mid-20s compared to approximately 40% for Florida, or about 15 points better. As a result of our expansion in more favorable non-Florida markets, our non-Florida insurance exposure is now just under 50% of our total on the basis of total insured value. Our overall rate increases in Florida and non-Florida are on track to generate over $90 million in incremental gross earned premiums in 2021 as compared to 2020, based on our fourth quarter 2020 book of business. As delineated last quarter, we anticipate that when fully earned out in the first quarter of 2022, These increases will contribute over $230 million of cumulative incremental premium in 2021 and 2022 and $140 million of incremental premium thereafter annually as compared to 2020 based on our fourth quarter 2020 book of business. We are continuing to optimize our existing book of business to non-renew policies and reduce new business. Before I turn the call over to Ron, I want to comment on the status of the reinsurance program's renewal for 2021-2022. We are separating out the reinsurance program on our non-Florida book of business with Sage Shore and expect to main two reinsurance programs with a very large number of our long-term partners. We anticipate their continued support and appreciate their partnership. The reinsurance industry is well capitalized, and we will continue to work with a large number of high-quality reinsurance partners. Our reinsurance renewal process is well underway, and the majority of our limit secured. We expect a reduction in the total cost of our CAT program beginning July 1, 2021, compared with the cost for the 2020-2021 program, which was approximately $270 million. but ended up with $44 million of additional reinsurance expense associated with multiple catastrophe events that drove our subsequent reinsurance purchases. Our expected reduction for the 2021-2022 treaty year is a result of our continued exposure management efforts to reduce our total insured value and the overall size of our book. In addition, the expense associated with our subsequent reinsurance purchase for the 2020-2021 year will have been recognized by the end of this second quarter. None of this expense will carry over into the third quarter. Now I'll turn over the call to Ron for more details on our first quarter financial results.

Thanks, Mike, and good morning, everyone. As Mike mentioned, our first quarter results were impacted by higher than expected CAT losses, mostly from winter storm URI. We reported adjusted operating loss per share of $1.35 compared to operating earnings per share of $0.30 in the first quarter of 2020. The after-tax impact of CAT losses was $0.72 per share in this year's first quarter, factoring in related claims handling revenues, versus $0.46 per share in last year's first quarter. Most of the remaining delta in our earnings pertains to catastrophe reinsurance expense which I will discuss in a few moments. Going deeper on Winter Storm URI, FedNet's aggregate reinsurance retention was approximately 23 million for this event. We also had a co-participation of approximately 18 million, which includes 8 million of reinstatement premiums triggered by URI. Excluding these reinstatement premiums, our total exposure to policyholder claims from URI is estimated to be 33 million. Of that 33 million, we ceded approximately 19.4 million of net retained losses to Anchor Re. So the net impact of Fed Nat in the first quarter from URI was approximately 13.7 million pre-tax. As we announced in an 8K filing last week, we also had 4.6 million in other pre-tax catastrophe losses during the quarter. This brings the total impact of catastrophe losses in the first quarter to 18.3 million partially offsetting this amount, our $5.2 million of catastrophe claims handling and other revenues that we expect to be generated related to these first quarter events. As such, the net impact to our bottom line was approximately $13.1 million pre-tax for an after-tax impact of $10.3 million, or $0.72 per share. I'd also like to go deeper regarding the other meaningful impact in the quarter, which is what I'll call extra seeded premium related to our catastrophe reinsurance program. As a result of the terms and conditions under which our 2020-2021 catastrophe reinsurance program was placed, combined with the record number of retention events thus far in the treaty year, we made numerous backup purchases over the past eight months or so in order to replace utilized limits. In addition, we had co-participations on reinstatement premium in portions of the tower. We disclosed these purchases along the way as they unfolded. The most recent example is the $13 million of spend on a backup purchase and $8 million of reinstatement premium that were triggered by Winter Storm URI for a total of $21 million. These costs are being recognized over the period of coverage extending through the second quarter. In the first quarter, the cumulative impact of these various backup purchases added a total of $13.6 million in excess of lost seeded premium expense. That is on top of the $270 million base cost of the tower at inception last July. The normalizing adjustment for this quarter related to these extra costs would be approximately $10 million or $0.70 per share after tax, nearly as large as the CAT loss impact already discussed. And due to the $21 million worth of extra seeded premium costs I just mentioned from URI, we anticipate the impact of the backup purchases and reinstatement premium expenses will be even larger in the second quarter, amounting to almost $21 million pre-tax. Incremental gross earned premium from the earn-out of implemented rate increases will help offset a portion of these higher costs. Of course, our reinsurance program will reset effective July 1, which will give us a clean slate beginning in the third quarter, which we expect will reduce reinsurance costs going forward. Returning to our first quarter results, excluding the impact of CATS and the extra XOL seeded premiums, we estimate that we generated a mid-single digits ROE in the quarter. Combined with the additional gross earned premium that we expect to realize from filed rate increases, we anticipate FedNet will begin to gain ex-cat earnings growth beginning in the second half of 2021 on our way to a much more profitable 2022. Consolidated gross written premiums in the first quarter grew roughly 1% year-over-year to $174.2 million. with growth-ridden premiums in both Florida and non-Florida markets remaining essentially flat. This reflects the trend toward an overall increase in average premium per policy as we raise rates while decreasing our policy count and property exposure. Non-Florida policies in force were $149,000 at March 31 compared to $154,000 at December 31. reflecting our desire to limit our growth in these states at this time. Our geographic mix at March 31 was approximately 57% Florida and 43% non-Florida on a policy count basis, compared to roughly a 70-30 split prior to the Mason acquisition in December of 2019. Consolidated net premiums earned in the first quarter declined to $39.7 million, from 105.9 million in the first quarter of 2020. This was due to an almost $70 million increase in seeded premiums, with over 23 million of that coming from catastrophe reinsurance, including the extra costs from backup purchases that I have already described. The remainder of the seeded premium increase was driven by additional quota share sessions in both Florida and non-Florida, which we entered into in the second half of 2020. Over the course of the second half of 2020, we increased the quota share percentage in FNIC's Florida book from 10% to 30%, with an additional 10% taking effect on the last day of the year. As a result, 40% quota share was in effect for all of the first quarter of 2021, representing $28.2 million of seeded premium compared to just $7.9 million in the first quarter of last year. For non-Florida markets, our quota share treaty with Anchor Re on FNIC's non-Florida book was increased to 80% effective December 1, 2020, driving $24.3 million of seeded premium in the first quarter compared to zero in the first quarter of last year. Our current quota share treaty with Anchor Re continues at the 80% session rate and, as previously disclosed, contains certain aggregate loss limits. Note that these seated quota share premium figures are net of CAT reinsurance allowances that are built into the various treaties. And, of course, losses and operating expenses are also lower as a result of corresponding sessions and or allowances pursuant to these treaties. My last comment on reinsurance is to highlight the previously disclosed aggregate excess of loss coverage that we purchased during the first quarter on our Maison book of business. which provides sideways protection in the event we incur a number of middle-sized events over the course of calendar year 2021. Winter Storm Uri was such an event and moved Mason one event closer to having recoveries under this treaty. Our net loss ratio in the quarter was 120.8%, including 33 points from CAT losses. Excluding the effect of CATS, the underlying loss ratio would be approximately 88%. This ratio and our net expense ratio are both being driven upward by our higher excess of loss reinsurance costs, including the extra XOL costs I spoke of earlier in my remarks. As a result, the net expense ratio was 68.2% in the quarters. It is important to understand that our XCAT gross loss ratio and gross expense ratio are meeting our expectations, though with continued room for improvement. The gross loss ratio, excluding catastrophe losses, came in at approximately 36.5 percent, and the gross expense ratio came in at 26.0 percent, for a combined total of 62.5 percent. Turning now to our balance sheet and capital position, As Mike discussed, we recently executed two capital raising transactions to help maintain appropriate statutory capital in our insurance companies and liquidity at the holding company. All of our insurance companies ended 2020 with RBC ratios in excess of 300%. At March 31, we maintained those RBC levels in our carriers, and our holding company liquidity was approximately $71 million. which included approximately $15 million net of related expenses raised from the March common stock offering. We currently estimate that holding company liquidity is approximately $68 million following the $20 million net of expenses raised in the April notes offering offset by a capital infusion of $23 million to our insurance companies effective as of March 31st. As disclosed in earlier periods, the terms of our outstanding debt preclude us from declaring a dividend when our debt-to-capital ratio exceeds prescribed thresholds. As a result, we do not anticipate declaring dividends in the foreseeable future. At the end of the first quarter, our total cash and investments were $485 million. We continued to invest in high-quality liquid bonds and a handful of preferred securities with no exposure to common stock in our portfolio. During the first quarter of 2021, unrealized gains declined $7 million, primarily as a result of rising treasury rates, a trend that over the long term will be helpful to restoring a higher book yield on our fixed income portfolio. And now I will turn the call back over to Mike. Thanks, Ron.

Operator, with that, we'll go ahead and open up the call to questions, if you could.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Paul Newsome with Piper Sandler. You may proceed with your question.

Good morning, and thanks for the call. Maybe we could start off on a little bit of an optimistic note about the litigation. And could you give us your thoughts, litigation, the litigation reform, pardon me, that's going through the Florida legislature. Could you give us a sense of kind of exactly how that might help claims prospectively? What are the details there that would make claims necessarily possibly fall prospectively?

Yeah, well, good morning, Paul. They did recently pass legislation. I think the intent is to control some of the drivers that are pushing up premiums. I think it's some progress, but we've seen some progress in the past in Florida that's been mitigated by the behavior adapting. So we're a little concerned in that regard, and we're going to remain cautious. But there's some attempts to contain the incentive with these roofers, the contractors, the public adjusters, how they're signing people up, as well as some of the litigation, trying to control that. So we're hopeful, but we're cautious. So we still have some concerns on these expenses continuing to increase until we can find comfort that our Our rate that we're charging is adequate. Until that time, we're going to not only hold our line in terms of our enforced premium, but really take it as an opportunity with these rate increases to drop our policies in Florida, having a less policy count as well as less exposure, what we call total insured value.

One of the criticisms I've heard about the reform, and I have not looked at it in any detail at all, is that it might end up causing a lot more sort of organizational costs and adjustment costs related to making it just more complicated. Do you see that in there as part of the equation for the reform?

Yeah, Paul, there's absolutely more data submission to the state. There's certain behaviors that need to be documented on the adjusting side. And we welcome those as long as it's a good investment to contain the expenses that are just continuing to increase. So the expenses are really driven by litigations. Litigation is driving our attritional loss ratio, and litigation is driving our reinsurance spend because they're feeling it as well, our reinsurance partners. So we welcome those opportunities to build out more infrastructure if so needed or to supply more data to the state if so needed if it achieves the objectives. of returning the market to predictable expenses versus ever increasing expenses.

Great. And then I wanted to turn to the second quarter to maybe sharpen our pencils on this side a little bit more. Should we be thinking of the additional $21 million pre-tax of reinstatement and other premiums is sort of an add-on just on top of whatever we think the run rate is for the company's earnings in the second quarter? Or are there other pieces to that that we should be thinking about when we think about trying to figure out kind of the both the total but also kind of the run rate perspective?

Yeah, I guess I'll jump in and Mike can add any thoughts that he has. But You know, the 21 million of extra XOL costs in Q2 compares to 13.6 million of such costs in Q1. So the delta there is around 7 million. So, you know, if you're starting with a normalized Q1, you know, there's a $7 million headwind. Well, I'm sorry, a normalized Q1, it's the full 21 million. If you're starting with... you know, with leaving a Q1 that has the 13.6 million in it, then it's just an incremental 7 million. Other comments that I would make about Q2 is that typically seasonality-wise, the Florida loss ratio and non-Florida loss ratio, you know, probably ticks up a bit in Q2 versus Q1. But the other thing on the positive side is with respect to these rate increases, Again, assuming a flat book, there's an incremental $7 million or so of gross earned premium that comes online in Q2 that did not exist in the Q1. And that was my earlier remark, and that rate increases would help offset some of that $7 million of incremental XOL costs in the second quarter.

Yeah, and Paul, just to add on that, This elevated reinsurance expense, we believe, will end at the end of Q2. So last year it was approximately a $270 million XOL reinsurance spend, and then an additional $45 million. That comes out to approximately $315 million. We believe our new XOL program will be nowhere near that number. And let me clarify on reinsurance. We believe the reinsurance market has lots of capital, ample capital, no doubt about it. And there's discipline there. And we respect that and appreciate that. There's some pressure on the lower layers, working layers below the FHCF on pricing. But keep in mind, we have a smaller book of business, a significantly smaller book of business. So to your point, yes, reinsurance or seeded premium will be elevated through Q2. And then as we reset July 1, we think there will be a significant benefit.

The only other piece will be the new convertible debt will show up in the second quarter as well, both in the interest expense and the added dilute shares. Anything else besides that?

Well, and Ron can give you a little bit more on the math there, but in terms of the dilution of the shares, you know, we look at that, and it's very difficult for us to raise this capital to create dilution, but we think it's paramount that we have ample capacity of capital in our holding company. Unfortunately, you know, we had a record five hurricanes last year. Now with Yuri, we have had six very big events. So we don't take that lightly. We really don't. But once again, it's paramount that we have ample liquidity in our holding company, appropriate capital in our assurance companies. So until a lot of this rate is rolling in, it's massive rate that's rolling in, in Florida because of litigation primarily, non-Florida more because of just the weather that we've been experiencing. So, yes, we feel optimistic on the future, but we want to make sure we have sufficient capital for any type of challenges that we experience in the meantime.

I'm sorry. I just meant that the interest expense line will go up a little bit as you incur the new convertible debt and the diluted shares outstanding will rise a little bit because of the conversion. I think that's the only other piece that we have to think about prospectively when we think about second quarter results. That's sort of my question.

Paul, that's fair. And also on the interest expense, I'll just point out that on our 100 million notes that are outstanding, that coupon rate went up from 7.5% to 7.75%. So there's a slight uptick in interest expense on the $100 million in notes as well.

Great. Thank you. I'll let some other folks ask questions, but that's great. That's very helpful.

Thank you, Paul.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Doug Ruth with Lenox Financial. We'll proceed with your question.

Good morning, Mike and Ron. Could you talk some about the strategy for the book of business here in 2021 now? Yeah, good morning, Doug.

In terms of the book of business, within Florida, we're down significantly in terms of policies.

We're down significantly in terms of exposures, you know, insured value over the last three years, four years, and that's going to continue. Yeah. during 2021 until we feel that the rates have more stability in them relative to our costs. So we think our enforced book, which is about $725 million, will stay somewhat slight, both the portion that's within Florida, because we're going to take those rate increases as an opportunity to reduce our policy costs. And once again, in Florida, there's been just a lot of challenges with the ever-increasing costs. So we want to make sure that we have very good rates for that. And just to clarify, we're seeing that some of these costs are stabilizing, but once again, we do want to make sure those are permanent and sustainable before we change our course of action. And really, non-Florida, similar strategy. taking lots of rate just because of the weather that we've endured as well as the reinsurers that want to be paid appropriately for that. So non Florida, it's not driven by litigation. It's just really been a lot of hurricanes and tornado and hail for that matter. Um, so, so the intent is to make sure that we're priced adequately, um, and lowering our exposures both in and outside of Florida for two very different reasons. but maintaining the enforced premium somewhat close to where it is currently.

Okay. Well, thank you for answering my question. We're looking forward to working through the tough second quarter and looking for better news in the third quarter.

All right. Thank you, Doug.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Braun for any further remarks.

Great, thank you for all of you for participating on today's call. Before we close, I want to again recognize our FedNet team, including our staff and our partner agents. Roughly a year ago, we transitioned to a remote working environment and are now gradually converting back to a hybrid approach in the coming months as more staff returns to the office. The health and safety of our team and our policyholders continues to be our top priority. It is a testament to the dedication and hard work of our team that FedMed's operations have continued to run smoothly and that we continue to meet our highest quality standards of customer service. Their efforts and dedication will continue to help FedMed maintain our quality, reputation, and building long-term value for our company. So thank you very much, everyone. Have a great day.

Thank you. Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. you Thank you. Bye. Thank you. Thank you. music music Thank you. Good morning and welcome to FedNet Holding Company's first quarter 2021 conference call. My name is Josh and I'll be your conference operator this morning. At this time, all participants will be in a 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's website at www.fednet.com. Now, I'd like to turn the call over to Bernie Kilkelly for questions. FedNet Investor Relations, Bernie.

Thank you. Good morning. Welcome again to the conference call for FedNet's first quarter of 2021 earnings. 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 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, or otherwise. Now I will turn the call over to FedNAT's Chief Executive Officer, Mike Braun.

Thank you. Good morning and welcome to our first quarter 2021 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 first quarter results and then we will open up the call to questions. Our results in the first quarter of 2021 were significantly impacted by higher-than-expected catastrophe losses primarily from winter storm Uri, which caused heavy residential damage in Texas during February. We are proud of our dedicated team who are committed to providing the highest quality service to our policyholders and partner agents affected by Uri and the multiple other weather events over the past year. Our first quarter was also impacted by a much higher seeded reinsurance premium expense from our multiple late season purchases after we encountered a record five hurricanes during the second half of 2020. This extra reinsurance expense will continue in the second quarter until we have the July 1 renewal of our excess of loss reinsurance program. The net impact of said net in the first quarter from URI and the other smaller CAT events is approximately $18.3 million pre-tax, plus an elevated reinsurance expense of $13.6 million. Ron will provide more details on our total exposure to policyholder claims from URI and additional reinsurance that we purchased to reduce the impact from potential future large weather events. This weather storm was the sixth major severe weather event that we experienced since the third quarter, including five hurricanes. These catastrophe weather events have been very unusual in their frequency and severity and have significantly contributed to challenging times for the company financially. We have proactively taken action to protect our balance sheet by ensuring that we maintain ample liquidity at the holding company and appropriate capital positions within our three insurance companies. As you may know, last November, our board of directors formed a special board committee to oversee a review of strategic alternatives, including exploring options to strengthen the company's capital position. The company retained Piper Sandler & Company as its financial advisor. Since our last quarterly conference call in early March, we have completed two capital raising transactions through Piper Sandler, which together grows proceeds of $38.1 million. These included a common stock offering in March and April, which raised $17 million, and a convertible notes offering in April, which raised $21 million. As a result of these transactions, we have increased our holding company liquidity. Holding company liquidity is currently approximately $68 million, following the capital raises and after a capital infusion of $23 million into our insurance companies effective as of March 31. The work of the board's strategic review committee is ongoing and the company is continuously evaluating our capital position to ensure appropriate capital adequacy and liquidity. During the first quarter, FedNet continued to execute on our strategies to improve our operations, pricing, and book of business to position the company for future growth in earnings and book value. In particular, we have continued our initiatives to improve the profitability on our homeowners' business, including raising rates in Florida and non-Florida markets, and restricting new business and shrinking our book within Florida until rates are more adequate. Looking at the homeowners' market, the environment continues to be challenging. While the number of AOB lawsuits continues to decline sharply, our overall litigation against property insurance companies in Florida continues at levels that are far above the rest of the country. Insurance legislation was passed by the Florida legislator last week that, if signed by the governor, will go into effect on July 1. We are encouraged by portions of the legislation, but do not believe the issues driving rate increases have been fully addressed. We will therefore remain cautious in Florida and continue our current initiatives to reduce our exposures in the state until we see evidence of potential benefits in the second half of 2021 and beyond. We will continue to see great increases to more accurately reflect the increased costs stemming from excessive litigation as well as higher reinsurance costs. Our near-term goal in Florida in this environment in 2021 is to continue reducing the number of policies that we have while keeping in-force premiums relatively flat through rate increases. Our rate increases in Florida include 6.7 percent that took effect in March and 7 percent that was implemented in April. Our Florida policies in force continue to decline as shown by a 4.9 percent decrease from 207,000 policies at December 31, 2020 to 197,000 policies at March 31. This represents a significant reduction of over 27.5% of the book since 2017 when we had 272,000 policies in force. We continue to reevaluate risk in our existing book based on new information to identify policies that do not meet our targets, along with limiting new business statewide. As a result of these actions, our average premium per policy increased by $110 in the first quarter compared to the fourth quarter of 2020 and increased almost $300 per policy compared to the first quarter of 2020. This increase translates into over $50 million more in premiums in the first quarter of 2021 compared to last year with decreased risk. In our non-Florida homeowner's book, we are also targeting profitable businesses by continuing to pass through our increased costs, which include increased claims from weather activity and higher reinsurance costs. For our non-Florida business written through Sage Shore, a rate increase of 9.9% took effect in Louisiana in January, and we expect to file for additional increases in that range later in 2021. Sage Shore also had a 9% rate increase in Texas that takes effect in May, and it's planning for a similar increase later in 2021. For Mason, a rate increase of 15.9% took effect in Louisiana in December, and 12.3% increase took effect in February in Texas. And we expect to file for an additional rate increase later in 2021. Our non-Florida markets continue to have a more favorable operating environment, including less litigation and more flexibility on setting rates. Excluding the impact of severe weather events, we continue to be very pleased with the underlying performance and profitability of our non-Florida homeowners' business. Our non-Florida attritional loss ratio, excluding catastrophes, is generally in the mid-20s compared to approximately 40% for Florida, or about 15 points better. As a result of our expansion in more favorable non-Florida markets, our non-Florida insurance exposure is now just under 50% of our total on the basis of total insured value. Our overall rate increases in Florida and non-Florida are on track to generate over $90 million in incremental gross earned premiums in 2021 as compared to 2020, based on our fourth quarter 2020 book of business. As delineated last quarter, we anticipate that when fully earned out in the first quarter of 2022, These increases will contribute over $230 million of cumulative incremental premium in 2021 and 2022 and $149 million of incremental premium thereafter annually as compared to 2020 based on our fourth quarter 2020 book of business. We are continuing to optimize our existing book of business to non-renew policies and reduce new business. Before I turn the call over to Ron, I want to comment on the status of the reinsurance program's renewal for 2021-2022. We are separating out the reinsurance program on our non-Florida book of business with Sage Shore and expect to main two reinsurance programs with a very large number of our long-term partners. We anticipate their continued support and appreciate their partnership. The reinsurance industry is well capitalized, and we will continue to work with a large number of high-quality reinsurance partners. Our reinsurance renewal process is well underway, and the majority of our limit secured. We expect a reduction in the total cost of our CAT program beginning July 1, 2021, compared with the cost for the 2020-2021 program, which was approximately $270 million. but ended up with $44 million of additional reinsurance expense associated with multiple catastrophe events that drove our subsequent reinsurance purchases. Our expected reduction for the 2021-2022 treaty year is a result of our continued exposure management efforts to reduce our total insured value and the overall size of our book. In addition, the expense associated with our subsequent reinsurance purchase for the 2020-2021 year will have been recognized by the end of this second quarter. None of this expense will carry over into the third quarter. Now I'll turn over the call to Ron for more details on our first quarter financial results.

Thanks, Mike, and good morning, everyone. As Mike mentioned, our first quarter results were impacted by higher-than-expected CAT losses, mostly from winter storm URI. We reported adjusted operating loss per share of $1.35 compared to operating earnings per share of $0.30 in the first quarter of 2020. The after-tax impact of CAT losses was $0.72 per share in this year's first quarter, factoring in related claims handling revenues, versus $0.46 per share in last year's first quarter. Most of the remaining delta in our earnings pertains to catastrophe reinsurance expense which I will discuss in a few moments. Going deeper on Winter Storm URI, FedNet's aggregate reinsurance retention was approximately 23 million for this event. We also had a co-participation of approximately 18 million, which includes 8 million of reinstatement premiums triggered by URI. Excluding these reinstatement premiums, our total exposure to policyholder claims from URI is estimated to be 33 million. Of that 33 million, we ceded approximately 19.4 million of net retained losses to Anchor Re. So the net impact of FedNat in the first quarter from URI was approximately 13.7 million pre-tax. As we announced in an 8K filing last week, we also had 4.6 million in other pre-tax catastrophe losses during the quarter. This brings the total impact of catastrophe losses in the first quarter to 18.3 million partially offsetting this amount, our $5.2 million of catastrophe claims handling and other revenues that we expect to be generated related to these first quarter events. As such, the net impact to our bottom line was approximately $13.1 million pre-tax for an after-tax impact of $10.3 million, or $0.72 per share. I'd also like to go deeper regarding the other meaningful impact in the quarter, which is what I'll call extra seeded premium related to our catastrophe reinsurance program. As a result of the terms and conditions under which our 2020-2021 catastrophe reinsurance program was placed, combined with the record number of retention events thus far in the treaty year, we made numerous backup purchases over the past eight months or so in order to replace utilized limits. In addition, we had co-participations on reinstatement premium in portions of the tower. We disclosed these purchases along the way as they unfolded. The most recent example is the $13 million of spend on a backup purchase and $8 million of reinstatement premium that were triggered by Winter Storm URI for a total of $21 million. These costs are being recognized over the period of coverage extending through the second quarter. In the first quarter, the cumulative impact of these various backup purchases added a total of $13.6 million in excess of lost seeded premium expense. That is on top of the $270 million base cost of the tower at inception last July. The normalizing adjustment for this quarter related to these extra costs would be approximately $10 million or $0.70 per share after tax, nearly as large as the CAT loss impact already discussed. And due to the $21 million worth of extra seeded premium costs I just mentioned from URI, we anticipate the impact of the backup purchases and reinstatement premium expenses will be even larger in the second quarter, amounting to almost $21 million pre-tax. Incremental gross earned premium from the earn-out of implemented rate increases will help offset a portion of these higher costs. Of course, our reinsurance program will reset effective July 1, which will give us a clean slate beginning in the third quarter, which we expect will reduce reinsurance costs going forward. Returning to our first quarter results, excluding the impact of CATS and the extra XOL-seeded premiums, we estimate that we generated a mid-single digits ROE in the quarter. Combined with the additional gross earned premium that we expect to realize from filed rate increases, we anticipate FedNet will begin to gain ex-cat earnings growth beginning in the second half of 2021 on our way to a much more profitable 2022. Consolidated gross written premiums in the first quarter grew roughly 1% year-over-year to $174.2 million. with growth-ridden premiums in both Florida and non-Florida markets remaining essentially flat. This reflects the trend toward an overall increase in average premium per policy as we raise rates while decreasing our policy count and property exposure. Non-Florida policies in force were $149,000 at March 31 compared to $154,000 at December 31. reflecting our desire to limit our growth in these states at this time. Our geographic mix at March 31 was approximately 57% Florida and 43% non-Florida on a policy count basis, compared to roughly a 70-30 split prior to the Mason acquisition in December of 2019. Consolidated net premiums earned in the first quarter declined to $39.7 million, from 105.9 million in the first quarter of 2020. This was due to an almost $70 million increase in seeded premiums, with over 23 million of that coming from catastrophe reinsurance, including the extra costs from backup purchases that I have already described. The remainder of the seeded premium increase was driven by additional quota share sessions in both Florida and non-Florida, which we entered into in the second half of 2020. Over the course of the second half of 2020, we increased the quota share percentage in FNIC's Florida book from 10 percent to 30 percent, with an additional 10 percent taking effect on the last day of the year. As a result, 40 percent quota share was in effect for all of the first quarter of 2021, representing $28.2 million of seeded premium compared to just $7.9 million in the first quarter of last year. For non-Florida markets, our quota share treaty with Anchor Re on FNIC's non-Florida book was increased to 80% effective December 1, 2020, driving $24.3 million of seeded premium in the first quarter compared to zero in the first quarter of last year. Our current quota share treaty with Anchor Re continues at the 80% session rate and, as previously disclosed, contains certain aggregate loss limits. Note that these seated quota share premium figures are net of CAT reinsurance allowances that are built into the various treaties. And of course, losses and operating expenses are also lower as a result of corresponding sessions and or allowances pursuant to these treaties. My last comment on reinsurance is to highlight the previously disclosed aggregate excess of loss coverage that we purchased during the first quarter on our Maison book of business. which provides sideways protection in the event we incur a number of middle-sized events over the course of calendar year 2021. Winter Storm Uri was such an event and moved Mason one event closer to having recoveries under this treaty. Our net loss ratio in the quarter was 120.8%, including 33 points from CAT losses. Excluding the effect of CATS, the underlying loss ratio would be approximately 88%. This ratio and our net expense ratio are both being driven upward by our higher excess of loss reinsurance costs, including the extra XOL costs I spoke of earlier in my remarks. As a result, the net expense ratio was 68.2% in the quarters. It is important to understand that our XCAT gross loss ratio and gross expense ratio are meeting our expectations, though with continued room for improvement. The gross loss ratio, excluding catastrophe losses, came in at approximately 36.5%, and the gross expense ratio came in at 26.0%, for a combined total of 62.5%. Turning now to our balance sheet and capital position, As Mike discussed, we recently executed two capital raising transactions to help maintain appropriate statutory capital in our insurance companies and liquidity at the holding company. All of our insurance companies ended 2020 with RBC ratios in excess of 300%. At March 31, we maintained those RBC levels in our carriers, and our holding company liquidity was approximately $71 million. which included approximately $15 million net of related expenses raised from the March common stock offering. We currently estimate that holding company liquidity is approximately $68 million following the $20 million net of expenses raised in the April notes offering offset by a capital infusion of $23 million to our insurance companies effective as of March 31. As disclosed in earlier periods, the terms of our outstanding debt preclude us from declaring a dividend when our debt-to-capital ratio exceeds prescribed thresholds. As a result, we do not anticipate declaring dividends in the foreseeable future. At the end of the first quarter, our total cash and investments were $485 million. We continued to invest in high-quality liquid bonds and a handful of preferred securities with no exposure to common stock in our portfolio. During the first quarter of 2021, unrealized gains declined $7 million, primarily as a result of rising treasury rates, a trend that over the long term will be helpful to restoring a higher book yield on our fixed income portfolio. And now I will turn the call back over to Mike. Thanks, Ron.

Operator, with that, we'll go ahead and open up the call to questions, if you could.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Paul Newsome with Piper Sandler. You may proceed with your question.

Good morning, and thanks for the call. Maybe we could start off on a little bit of an optimistic note about the litigation. And could you give us your thoughts, litigation, the litigation reform, pardon me, that's going through the Florida legislature. Could you give us a sense of kind of exactly how that might help claims prospectively? What are the details there that would make claims necessarily possibly fall prospectively?

Yeah, well, good morning, Paul. They did recently pass legislation. I think the intent is to control some of the drivers that are pushing up premiums. I think it's some progress, but we've seen some progress in the past in Florida that's been mitigated by the behavior adapting. So we're a little concerned in that regard, and we're going to remain cautious. But there's some attempts to contain the incentive with these roofers, the contractors, the public adjusters, how they're signing people up, as well as some of the litigation, trying to control that. So we're hopeful, but we're cautious. So we still have some concerns on these expenses continuing to increase until we can find comfort that our Our rate that we're charging is adequate. Until that time, we're going to not only hold our line in terms of our in-force premium, but really take it as an opportunity with these rate increases to drop our policies in Florida, having a less policy count as well as less exposure, what we call total insured value.

One of the criticisms I've heard about the reform, and I have not looked at it in any detail at all, is that it might end up causing a lot more sort of organizational costs and adjustment costs related to making it just more complicated. Do you see that in there as part of the equation for the reform?

Yeah, Paul, there's absolutely more data submission to the state. There's certain behaviors that need to be documented on the adjusting side. And we welcome those as long as it's a good investment to contain the expenses that are just continuing to increase. So the expenses are really driven by litigations. Litigation is driving our attritional loss ratio, and litigation is driving our reinsurance spend because they're feeling it as well, our reinsurance partners. So we welcome those opportunities to build out more infrastructure if so needed or to supply more data to the state if so needed if it achieves the objectives of of returning the market to predictable expenses versus ever increasing expenses.

Great. And then I wanted to turn to the second quarter to maybe sharpen our pencils on this side a little bit more. Should we be thinking of the additional $21 million pre-tax of reinstatement and other premiums is sort of an add-on just on top of whatever we think the run rate is for the company's earnings in the second quarter? Or are there other pieces to that that we should be thinking about when we think about trying to figure out kind of the both the total but also kind of the run rate perspective?

Yeah, I guess I'll jump in and Mike can add any thoughts that he has. But The $21 million of extra XOL costs in Q2 compares to $13.6 million of such costs in Q1. So the delta there is around $7 million. So if you're starting with a normalized Q1, there's a $7 million headwind. Well, I'm sorry, a normalized Q1, it's the full $21 million. If you're starting with... with leaving a Q1 that has the $13.6 million in it, then it's just an incremental $7 million. Other comments that I would make about Q2 is that typically seasonality-wise, the Florida loss ratio and non-Florida loss ratio probably ticks up a bit in Q2 versus Q1. But the other thing on the positive side is with respect to these rate increases, Again, assuming a flat book, there's an incremental $7 million or so of gross earned premium that comes online in Q2 that did not exist in the Q1. And that was my earlier remark, and that rate increases would help offset some of that $7 million of incremental XOL costs in the second quarter.

Yeah, and Paul, just to add on that, again, This elevated reinsurance expense, we believe, will end at the end of Q2. So last year it was approximately a $270 million XOL reinsurance spend, and then an additional $45 million. That comes out to approximately $315 million. We believe our new XOL program will be nowhere near that number. And let me clarify on reinsurance. We believe the reinsurance market has lots of capital, ample capital, no doubt about it. And there's discipline there. And we respect that and appreciate that. There's some pressure on the lower layers, working layers below the FHCF on pricing. But keep in mind, we have a smaller book of business, a significantly smaller book of business. So to your point, yes, reinsurance or seeded premium will be elevated through Q2. And then as we reset July 1, we think there will be a significant benefit.

The only other piece will be the new convertible debt will show up in the second quarter as well, both in the interest expense and the added dilute shares. Anything else besides that?

Well, and Ron can give you a little bit more on the math there, but in terms of the dilution of the shares, you know, we look at that, and it's very difficult for us to raise this capital to create dilution, but we think it's paramount that we have ample capacity of capital in our holding company. Unfortunately, you know, we had a record five hurricanes last year. Now with Yuri, we have had six very big events. So we don't take that lightly. We really don't. But once again, it's paramount that we have ample liquidity in our holding company, appropriate capital in our assurance companies. So until a lot of this rate is rolling in, it's massive rate that's rolling in, in Florida because of litigation primarily, non-Florida more because of just the weather that we've been experiencing. So, yes, we feel optimistic on the future, but we want to make sure we have sufficient capital for any type of challenges that we experience in the meantime.

I'm sorry. I just meant that the interest expense line will go up a little bit as you incur the new convertible debt and the diluted shares outstanding will rise a little bit because of the conversion. I think that's the only other piece that we have to think about prospectively when we think about second quarter results. That's sort of my question.

Paul, that's fair. And also on the interest expense, I'll just point out that on our 100 million notes that are outstanding, that coupon rate went up from 7.5% to 7.75%. So there's a slight uptick in interest expense on the $100 million in notes as well.

Great. Thank you. I'll let some other folks ask questions, but that's great. That's very helpful.

Thank you, Paul.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Doug Ruth with Lenox Financial. We'll proceed with your question.

Good morning, Mike and Ron. Could you talk some about the strategy for the book of business here in 2021 now? Yeah, good morning, Doug.

In terms of the book of business, within Florida, we're down significantly in terms of policies.

We're down significantly in terms of exposures, you know, insured value over the last three years, four years, and that's going to continue. Yeah. during 2021 until we feel that the rates have more stability in them relative to our costs. So we think our enforced book, which is about $725 million, will stay somewhat slight, both the portion that's within Florida, because we're going to take those rate increases as an opportunity to reduce our policy counts. And once again, in Florida, there's been just a lot of challenges with the ever-increasing costs. So we want to make sure that we have very good rates for that. And just to clarify, we're seeing that some of these costs are stabilizing, but once again, we do want to make sure those are permanent and sustainable before we change our course of action. And really, non-Florida, similar strategy. taking lots of rate just because of the weather that we've endured as well as the reinsurers that want to be paid appropriately for that. So non Florida, it's not driven by litigation. It's just really been a lot of hurricanes and tornado and hail for that matter. Um, so, so the intent is to make sure that we're priced adequately, um, and lowering our exposures both in and outside of Florida for two very different reasons. but maintaining the enforced premium somewhat close to where it is currently.

Okay. Well, thank you for answering my question. We're looking forward to working through the tough second quarter and looking for better news in the third quarter.

All right. Thank you, Doug.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Braun for any further remarks.

Great, thank you for all of you for participating on today's call. Before we close, I want to again recognize our FedNet team, including our staff and our partner agents. Roughly a year ago, we transitioned to a remote working environment and are now gradually converting back to a hybrid approach in the coming months as more staff returns to the office. The health and safety of our team and our policyholders continues to be our top priority. It is a testament to the dedication and hard work of our team that FedNet's operations have continued to run smoothly and that we continue to meet our highest quality standards of customer service. Their efforts and dedication will continue to help FedNet maintain our quality, reputation, and building long-term value for our company. So thank you very much, everyone. Have a great day.

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