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.