FedNat Holding Company

Good morning and welcome to FedNet Holding Company's third quarter 2021 conference call. My name is Kim 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'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 all for joining FedNet's third 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 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 third 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 the financial results of the quarter, and then we will take questions. Before I review our third quarter results, I want to discuss the shift in FedNet strategy that we announced yesterday. We announced our intent to refocus our operations on the Florida property market, which has been our historical focus since the company's founding in 1992. The geographic expansion strategy that was launched in 2013 to write homeowners insurance in coastal markets outside of Florida and then accelerated in 2019 was well-intended given the challenges we were facing in the Florida homeowners market. The acquisition of Mason Insurance To a lesser extent, the expansion of FNIC's non-Florida book ended up being poorly timed due to the unprecedented number of catastrophe weather events that have affected our Texas and Louisiana books of business. The impact of these catastrophic weather losses put a strain on FedNet's capital position and further action was necessary. We are therefore exiting the non-Florida markets and refocusing our efforts on the improving Florida homeowners market, where we believe pricing is the most appropriate relative to increased costs that we have seen in a number of years. In conjunction with the decision to focus on Florida, Fed Nat has elected to commence an orderly runoff of Mason's insurance operations. Mason will be filing appropriate documentation with its insurance regulators in Louisiana, Florida, and Texas concerning a withdrawal plan, which is subject to regulatory review. We expect to begin non-renewing Mason's Louisiana policies on the expiration dates of each appropriate policy beginning in January 2022, and Mason's Texas policies beginning in February 2022. The non-renewal of Mason's Florida policies is expected to begin in June 2022. FNIC's non-Florida book has been written through our third party managing general underwriter, Sadeshore, and Sadeshore owns the renewal rights to these policies. After careful coordination and collaboration with Sadeshore, we expect that in December 2021, Sadeshore will begin making offers of coverage to FNIC policyholders to renew policies on alternative insurance carrier partners of Sadeshore. in Texas and Louisiana that are not affiliated with the company. FNIC policies in South Carolina, Alabama, and Mississippi that were written through Sadeshore will continue to be renewed by FNIC until such time as Sadeshore's affiliates obtain the necessary licensing in those states, possibly in the second quarter of 2022. We expect the transition to be smooth, though obviously subject to appropriate regulatory approvals. We expect the process of running off the Mason book and transferring the Sage Shore policies to take approximately 18 months to complete. Our commitment to honoring all existing policies remains the same, and all policyholders and agents will receive the same professional service they've always received from FedNet. Upon completion of the transition, we expect FedNet to be right-sized to our current capital position and therefore a financially stronger company. We anticipate that we will have approximately $450 million of in-force premiums exclusively in Florida with less exposure to weather frequency and therefore less volatility in our underwriting results. We expect the benefits of the transition to begin to materialize immediately in the form of lower capital requirements and lower exposure to catastrophe weather losses. Over the past five years, we have taken dramatic action to shrink our Florida homeowner's books until rates more accurately reflect the increase of doing business, including attritional losses, weather events, and higher reinsurance costs. Our exposure management efforts have reduced our Florida book by over a third from 272,000 policies in force in 2017 to 168,000 at the end of the third quarter. At the same time, we have increased FNIC's rates by almost 70% cumulatively, In that time period, restoring rate adequacy in our book. Insurance reform legislation in recent years, including AOB reform legislation passed in 2019 and SB 76 that went into effect in July, have also provided some help improving our attritional loss ratios. So we believe now is the right time to refocus on our historical roots in Florida, where FedNet continues to have significant market share, strong underwriting and claims processing capabilities, and strong agent relationships. Turning now to our third quarter results, we reported a net loss of $24.8 million, or $1.42 per share, in the third quarter of 2021, compared to $20.7 million, or $1.51 in the third quarter last year. This year's quarterly results were impacted by approximately 20 million of catastrophe weather events, including Hurricane Ida, and other smaller nanostorms that impacted Louisiana, Texas, and Florida. The claims handling infrastructure we have in place has performed admirably to handle the massive influx of claims from Ida and other events, and has also generated organic capital and liquidity that helps soften the blow of these storms to FedMed on a consolidated basis. Ron will provide more details on the impact of the catastrophe events in his remarks. Looking at the Florida homeowners market, The environment continues to have its challenges, though we are pleased with the trends we are seeing in improved nutritional losses in both our new and renewal business as they renew at increased rates. These increases include a 6.7% increase that took effect in March and a 9% increase that was implemented in April. We have a 5.7% increase pending that is expected to take effect in November. As a result of these initiatives, FNIC's average premium per policy increased by $109 in the third quarter compared to the second quarter of 2021 and $482 higher than the third quarter of 2020. This increase translated into approximately $74 million more in premiums on the 154,000 FNIC policies enforced in the third quarter of 2021 compared to last year with decreased risk. Importantly, the end result of these increases is that the attritional loss ratio in FNIC's Florida book dropped to approximately 39% for the third quarter of 2021 as compared to 44% a year ago, demonstrating why we are much more comfortable with the Florida market now than we were just a few quarters ago. We remain cautiously optimistic about potential benefits from portions of SB76 reform legislation that became effective on July 1 We are pleased with portions of the legislation, such as measures to reduce the time limits for filing claims from three years to two years, and to better control plaintiff attorney fees, which are significant issues driving increased costs. At the same time, we believe the significant rate increases that have rolled into our book reflect these increased costs and have enabled us to achieve an improved attritional loss ratio. We have maintained appropriate capital positions at FedNet Insurance Company and Monarch National Insurance Company with a capital infusion into FNIC of $20 million as of September 30th. FedNet elected to not infuse any additional surplus into Mason in the third quarter, and we do not anticipate needing to make any capital infusions in the future. We continue to maintain approximately $40 million in liquidity at the holding company level heading into the fourth quarter. As you know, last November, a 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 its financial advisor. Now I'll turn the call over to Rob for more details on the third quarter results.