FedNat Holding Company

Good morning and welcome to the Fed Nat Holdings Company second quarter 2021 conference call. My name is Pasha 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, and thank you to everyone for joining FedNet's second quarter 2021 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 those 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 second quarter 2021 conference call. Juan Jordan, our Chief Financial Officer, and Eric Hernandez, our Chief Accounting Officer, are on the call with me today. After my remarks, Juan will go into more detail on the final financial results for the quarter, and then we will take questions. Our second quarter 2021 results were significantly impacted by three factors. The first was higher-than-expected catastrophe losses given by 15 separate weather events. These events are primarily convective storms and hail events impacting Texas, Florida, and Louisiana. The pre-tax impact of these CAT losses was approximately $23.5 million net of reinsurance recoveries and fee income. The quarter's results were also impacted by higher than expected expenses from additional reinsurance purchases and reinstatement premiums as we worked to minimize the impact of CAT losses on our statutory capital. As you may recall, we communicated this item at the time of our first quarter earnings fall. These increased our expenses on a pre-tax basis of $17.3 million. The third factor was a one-time non-cash charge of $17 million for the recording of a valuation allowance against our net deferred tax assets. Ron will discuss this item in more detail, but as I stated in our earnings release yesterday, We expect these deferred tax assets to be realized in the future. However, the timing of this recognition will depend on the timing of pre-tax income as we earn it in future quarters. Turning back to the extra purchases and reinstatement premiums in the second quarter, those were made under our 2020-2021 reinsurance program. As you know, this program was stressed by a record high number of severe weather events in the second half of 2020, along with Winter Storm URI in Texas in February, which drove backup purchases and additional reinstatement premiums. We started with a clean slate on July 1 with our new reinsurance tower for 2021-2022. This new tower has a lower overall cost compared to the previous year's total expense, resulting from a progress we have in our initiatives to reduce our total insurance values and overall size of our book. With the growth of our non-Florida business, we also benefited from separating the overall program into two reinsurance towers. We continue to work with a large number of our long-term, high-quality reinsurance partners, and we appreciate their continued support. The overall cost of the new 2021-2022 program is is expected to be approximately $288 million. This compares to overall cost for last year's program of $311 million, which included approximately $41 million in additional purchases. The new program provides a total of $1.4 billion of single event coverage, which is approximately $100 million higher than last year's program. We also have a lower retention of $10 million per event in our main reinsurance program and a separate $8 million retention in our Sage Shore book of business, compared with $25 million in last year's program. We now have $2.25 billion of aggregate reinsurance coverage within our two reinsurance towers, versus $1.9 billion in last year's single tower. As I mentioned, a major reason for the expected reduction in our reinsurance costs is the progress made in our initiatives to reduce our total insured exposure and raising rates and restricting business in both our Florida and non-Florida markets until rates more adequately reflect our increased cost of doing business, including reinsurance costs. Looking at the Florida homeowner's market, the environment has been challenging, but we are encouraged by portions of SB 76 reform legislation that was signed by the governor on June 11th and became effective on July 1. In particular, we are pleased with the measures to reduce the time limits for filing certain claims from three years to two years, and more significantly, initiatives to better control plaintiff attorney fees. We are cautiously optimistic that some of the issues driving increased costs have been addressed. At the same time, we believe the significant rate increases that have rolled into our book much better reflect the increased costs and have enabled us to achieve improved attritional loss ratios. In the current environment in Florida, we continue to focus on reducing the number of policies we have while keeping in-force premiums relatively flat through rate increases. Our Florida policies in-force decreased to 180,000 at the end of the second quarter, down 9% sequentially from 197,000 at the end of the first quarter. This represents a significant reduction of over one-third on the book of business since 2017, and we had 272,000 policies enforced. Our rate increases in Florida include a recent 6.7 percent increase that took effect in March, a 7 percent increase that was implemented in April, and an additional 3.9 increase that is expected to take effect in September. As a result of these initiatives, our average premium for policy increased by $177 in the second quarter compared to the first quarter of 2021. This was also $432 higher than the second quarter of 2020. This increase translates into approximately $72 million more in premiums on the 180,000 policies in force in the second quarter of 2021 as compared to last year with decreased risk. Turning to our non-Florida bucket business, we are continuing to manage our total insured exposure, including concentrations in key areas such as Houston, New Orleans, and Charleston. Our non-Florida policies and force continue to decline as well, as shown by a 3% decrease sequentially, $244,000 at June 30 from $149,000 at March 31. We continue to file rate increases to pass through our increased cost of doing business. Business written through our Sage Shore managing general underwriting partner includes Inflation Guard, which is currently producing a 5 percent increase in all states due to the increase of primarily labor costs. Sage Shore also implemented a 6.9 percent rate increase in South Carolina effective in April on new business and in May on renewal business. Also expecting to take an additional 6.9 percent in South Carolina in the near future. and more rate filings thereafter. Texas has a recent rate increase of 9.5% to be effective in August on new business and November on renewal business. This is in addition to a recent 9% increase in Texas effective in April on new and on renewal business in May. For Louisiana, an increase of 15% to be effective in September on new business and in October on renewal business. This is in addition to the 9.9% increase that was affected in December of 2020 on new business and in January on renewal business. For Maison, a rate increase of 15.9% took effect in Louisiana in December of 2020, followed by an additional rate increase of 11.1% in July of 2021, and an 18.9% increase expected to take effect in November. A 12.3% increase took effect for Maison in Texas in February and we expect to file for additional rate increases later in 2021. Our non-Florida markets continue to have more favorable operating environment, including less litigation. Excluding the impact of severe weather events, we continue to be pleased with our underlying performance and profitability of our non-Florida homeowner's business. Our non-Florida traditional loss ratio, excluding capacities, is generally in the mid-20s compared to approximately 40% for Florida. As a result of our expansion and more favorable non-Florida markets, our non-Florida insured 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 a track to generate over $75 million in incremental gross earned premiums in 2021 as compared to 2020, based on our fourth quarter 2020 book of business. We anticipate that when fully earned out in the second half of 2022, these increases will contribute over $224 million of cumulative increases in premium in 2021 and 2022, and $156 million of incremental premium annually thereafter, as compared to the fourth quarter of 2020 book. We continue to be proactive to maintain appropriate capital position within our three carriers, through additional reinsurance purchases and capital infusions. At the same time, we maintained approximately $40 million of liquidity at the holding company level heading into the third quarter. This was in large part due to the capital raises we completed in March and April, including a common stock offering of $17 million and a convertible notes offering of $21 million. As you 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 work of the committee is ongoing, and the committee continues to work with Piper Sandler as a financial advisor. Before I turn the call over to Ron, I want to briefly mention Hurricane Elsa, which was a third quarter event making landfall in Florida on July 7th. This event has not had a significant impact to date. We have received approximately 150 claims, totaling approximately $1 million, with about 65% of the claims in Florida and the remainder mostly in South Carolina. We will need additional claims history to estimate our total losses from the storm, which we'll report after we close on the third quarter. I'll now turn the call over to Rod for more details on our second quarter financial results.