FedNat Holding Company

Thank you. Good morning.

And thanks everyone for joining FedNAT's fourth 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 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 earnings 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 FEDMAT 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 FedNet's Chief Executive Officer, Mike Braun.

Thank you. Good morning and welcome to our fourth 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 be glad to take questions. Before I review our fourth quarter results, I want to give an update on the shift in FedNet strategy that we announced in November. As we announced then, we are exiting non-Florida markets and refocusing our efforts on the improving homeowners market in Florida, where FedNet was established 30 years ago, and where we continue to have a significant market share, strong underwriting and claims processing capabilities, and strong agent relationships. As part of the exit from our non-Florida markets, we have begun an orderly runoff of Mason's insurance operations. Mason has filed appropriate documentation with its insurance regulators in Louisiana, Florida, and Texas. In January, we began non-renewing Mason's policies in Louisiana on the expiration dates of each appropriate policy. And in March, we are beginning to non-renew Mason's Texas policies. The non-renewal of Mason's Florida policies is expected to begin in July 2022. At that time, we expect the runoff of Mason's business to be substantially completed by the end of 2022. FNIC's non-Florida book was written through our third party managing general underwriter, Sadeshore, and Sadeshore owns the renewal rights to those policies. Last December, Sadeshore began making offers of coverage to FNIC policyholders in Texas and Louisiana to renew policies onto alternative insurance carrier partners of Sateshore that were not affiliated with FedNAP. Up through the first quarter of 2022, Sateshore policies in all states have continued to be renewed by FNIC to the extent the policyholder did not accept the alternative offer of coverage. However, beginning in the second quarter, most notably with Texas and Louisiana, beginning May 1, 2022, we will begin non-renewing all Sage Shore policies that do not accept the alternative offer of coverage. In addition, we will begin non-renewing all policies in Alabama on May 1, 2022, and in South Carolina on July 1, 2022. As such, the pace of the runoff will accelerate substantially in the second quarter. We expect the process of transferring and or non-renewing the Sage Shore policies to be substantially complete by June 30, 2023. Our commitment to honoring all existing policies remains the same, and all policyholders and agents will receive the same professional service that they always have received from FedMAT. Upon completion of this transition, we expect FedMAT to be a financially stronger company that will be right-sized to our current capital and surplus position. We anticipate we will have approximately $450 million of in-force premium exclusively in Florida, with approximately $113 million surplus within our three carriers based on year-end 2021. We will have substantially less exposure to weather frequency and therefore less volatility in our underwriting results. The benefits of the transition have already begun to materialize in the form of lower CAT exposure and capital requirements. We have maintained appropriate capital positions at FNIC and Monarch with a capital infusion into FNIC of $17 million as of December 31. After year-end infusions, we have $40 million of liquidity at the holding company heading into the first quarter. As you know, in November 2020, 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 its financial advisor. Turning now to the fourth quarter results, we reported a net loss of 8.6 million or 49 cents per share in the fourth quarter of 2021, compared to a net loss of 38.1 million or 277 per share in the fourth quarter of the prior year. This year's fourth quarter results were impacted by approximately 8.4 million of weather from seven storms that impacted Florida, Texas, and Louisiana. It is important to note that 3 million of the 8.4 million in CAT losses were from the books of business that we are running off, as previously announced. Our fourth quarter 2021 results were also impacted by 4.4 million of reserve strengthening related to the third quarter 2021 and prior accident quarters. This strengthening was primarily due to the multiple hurricanes that occurred in the second half of 2020. Well, we had some gaps in our reinsurance program. Ron will provide more details on the impact of the CAAT events and the reserve strengthening in his remarks. Looking at the Florida homeowners market, the environment continues to have its challenges, but we are seeing positive trends in our attritional loss ratios in both new and renewal business as each policy renews at the increased rates. We are seeing the benefits of the dramatic action we've taken over the past five years to shrink our Florida homeowners book until rates more adequately reflect the increased cost of doing business, including attritional losses, weather events, and higher reinsurance costs. Our Florida book has declined by over 40% from 272,000 policies enforced in 2017 to 160,000 at the end of 2021. At the same time, we have increased FNIC's rates by approximately 70 percent cumulatively over that same timeframe, 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 of 21, have also provided some help improving our traditional loss ratios. Our rate increases in FNIC's book during 2021 included a 6.7% increase that took effect in March, a 9% increase in April, and a 5.7% increase in November. As a result of these increases, FNIC's average premium per policy in Florida increased by $64 in the fourth quarter compared to the third quarter of 2021 and $541 higher than the fourth quarter of 2020. increase translates into approximately $80 million more in premiums on the 146,000 policies that were enforced at year-end 2021 compared to last year, with decreased exposure. Most importantly, these rate increases helped improve traditional loss ratio in FNIC's Florida book, which dropped to approximately 36% for the fourth quarter of 2021 as compared to 42% a year ago. And there are still substantial rate increase benefits out in front of us for 2022 that are not yet captured in these results. This clearly demonstrates why we are much more comfortable with the Florida market now than we were just a few quarters ago. We continue to be cautiously optimistic about potential benefits from portions of SB 76 reform legislation that became effective last July. 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 drivers of increased costs. At this time, we will continue to monitor our results and implement additional rate increases as warranted to ensure that our rates are adequate so we can continue to achieve an improved attritional loss ratio. These rate increases include a 6% that is taking effect in March of 2022 for renewals. Now I'll turn the call over to Ron for more details on our fourth quarter financial results.

Thanks, Mike, and good morning, everyone. As Mike mentioned, our fourth quarter 2021 results were impacted by catastrophe losses, primarily from seven large storms that affected Florida, Texas, and Louisiana. Aggregate gross losses from these fourth quarter events are estimated at approximately 10.6 million. Gross losses were reduced by seeded losses of approximately 3.5 million under quota share treaties and by the accrual of 300,000 of related claims handling revenues, resulting in 6.8 million of CAT losses through the loss line of our income statement. Related impacts on sliding scale seeding commissions in the Florida quota share treaties of approximately 1.2 million brought the total impact from 4Q-CATs to $8.1 million, or $0.46 per share, on both a pre-tax and after-tax basis on a consolidated gap basis. This equates to approximately 15 points to our loss ratio and combined ratio in the quarter. As mentioned by Mike, approximately $3 million of this net impact stemmed from our runoff books of business from our strategic shift announced back in November, which are FedNet Insurance Company's non-Florida book, and the entire book of Mason Insurance Company. As a result of this runoff, our exposure to catastrophe weather losses outside of Florida is declining literally on a daily basis, and more on that in a moment. Our fourth quarter 2021 net income was also impacted by $4.4 million, or 25 cents per share, of reserve strengthening, net of reinsurance recoveries, and other offsets. This reserve strengthening added approximately eight points to our combined ratio in the quarter and pertained broadly to all accident quarters from 3Q21 and prior. It was driven primarily by the multiple hurricanes that occurred in the second half of 2020 and specifically from additional net retention of losses from those events due to gaps in excess of loss reinsurance coverages during the 2020 to 2021 treaty year. With respect to the non-core lines that we exited around three years ago, year-end reserve studies were favorable in both the CGL and auto lines of business, and benefited the quarter by approximately three million in total. If one were to adjust our fourth quarter operating loss for the impact of the catastrophe events and reserve strengthening just discussed, and then apply the federal tax rate it indicates that FedNet's adjusted operating result in the quarter would have been operating income of approximately $4.1 million, or $0.24 per share. With the change in strategy to refocus on the Florida market, we are drastically reducing our catastrophe exposure. As shared on last quarter's call, since the beginning of 2020, our non-Florida business has contributed almost 70% of our net catastrophe losses despite representing just 40% of our enforced premium. With the approved and pending rate increases in Florida rolling into our book, we expect our Florida book to achieve ex-cat earnings improvement in 2022. If one assumes a flat book with year-end 2021, Florida rate increases that are either already implemented or are taking effect later this month are expected to generate an additional $80 million of gross earned premium in 2022 as compared to calendar 21. In 2022, much of this benefit will continue to offset reductions to gross premium that are a result of exposure management. However, a portion is expected to fall to the bottom line in the form of lower attritional loss ratios. Going forward, we will continue to work to achieve low double-digit ROEs in years where catastrophe losses approximate the models. with higher ROEs attainable when CAT losses come in favorably as compared to the models. We have continued to make disciplined progress on our Florida exposure management strategy. Our Florida policy count at December 31 is down over 4% sequentially from September 30 and down almost 22% from December 31, 2020. The total insured value of our Florida book at December 31 is down over 15% from a year ago. Importantly, we believe that our rates have now largely caught up with our higher cost of doing business in recent years. By the latter part of 2022, we expect our Florida policy count to begin to level out so that in the following quarters, the rate increases earning in will begin to add more meaningfully to our gross written premium. As a proof point, we're seeing some of this already. Fourth quarter 2021 gross written Florida premiums increased 2.9%. from last year's fourth quarter as compared to steady reductions in our risk appetite for the last several years. Outside of Florida, we continue to execute the runoff of these books. Non-Florida policy count is down almost 10 percent from 3Q21 and 22 percent compared to year-end 2020. Non-Florida total insured value is down over 8 percent sequentially and almost 20% versus year-end 2020. And we expect the pace of runoff to accelerate further in the second quarter of 2022, particularly with respect to the FNIC non-Florida book, as Mike has already described. Turning now to our balance sheet and capital position, we maintained surplus in FNIC and Monarch National, consistent with RBC ratios of 300% or above. We made a capital infusion to FNIC of approximately $17 million, effective as of December 31, via the assignment to FNIC of the Holdco's investment in a surplus note from Mason Insurance Company that the Holdco had held since December 2019. We also maintained our commitment to having appropriate liquidity at the holding company. After year-end infusions, holding company liquidity is approximately $40 million heading into 2022. Maison ended the year with approximately $31 million of statutory surplus. Maison's capital remains part of the FedNAC consolidated group and will be redeployed within our structure at the appropriate time subject to regulatory approval. At the end of the fourth quarter, we held total investments of approximately $333 million. In addition, we ended the quarter with total cash and equivalents of approximately $83.5 million. We continue to maintain our discipline to invest in higher quality liquid bonds and a handful of preferred securities with no common stock exposure in the portfolio. Overall, the portfolio has a duration of 3.96 and a composite credit rating of A, one notch higher than where it was last quarter. And now I'll turn the call back over to Mike. Thank you.

All right, thanks, Ron. And then with that, operator, we'll go ahead and queue up some questions if there's some questions available.

If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Again, that is star, then one, if you'd like to ask a question at this time. Our first question comes from Douglas Root with Lenox Financial.

Good morning, Mike and Ron and Eric. Congratulations on the improved report. It's very welcome news.

Yeah, thank you. Good morning to you, Doug.

Could you talk some about the pricing in Florida and what you're seeing?

Yeah, in terms of pricing within Florida, our rates are up substantially. And I would say that the market is a very hard market. So I think that Our rates have moved up perhaps on the aggressive side compared to some of our peers. So, we're finding in lieu of those rate increases that others maybe should have taken that they're just restricting underwriting. So, we're finding that our prices have gone up significantly and we're finding that the competition is much less than it used to be. The Florida domestics, appear to have less appetite, and the national carriers appear to have had a very reduced appetite for the last 20 years, and I really don't see much change in that. And then, of course, there's citizens. Citizens continues to grow, and citizens is the state insurer, but they are out there growing, and they have competitive prices frequently. So we are running into them. And for everyone's benefit, citizens peaked at, I believe, 1.55 million policies back around six, seven years ago. And then they were as low as maybe 400,000, 450,000 back about three, four, five years ago. And I believe they're going to approach 900,000 at the end of, during the first quarter here. So the market is much harder. Pricing's up substantially. and we're seeing less competition from multiple carriers, primarily the Florida domestic, I should say less appetite.

So are there some people that would prefer to deal with a company like FedNet versus Citizens? Is that possibly some of the customers that you might be getting now?

Yeah, absolutely. There's definitely people that would prefer not to be in Citizens. Though it's hard to ignore citizens when they're so competitive on their pricing. They have advantages to their pricing that the private carriers don't have. There's caps on how much they can increase their rates. There's caps on, I should say, limits to the reinsurance that they purchase. And there's actually talk right now of them not even buying reinsurance. You know, we don't know what they're going to purchase or what they're not going to purchase. There's clearly advantages to being with the cheapest carrier, which can be citizens frequently, but some people would prefer to be in the private market for a variety of reasons. And then we're also seeing some ENS riders come in. And the benefit of ENS is you can really strip out coverages and provide the policyholder with less coverages, and the policyholder gets a cheaper price for less coverages.

Okay, I understand what you're saying. And then in general, are you happy with the Florida Book of Business at this time? Is there more work to do? Maybe you can give us a little color there.

Yeah, that's a good question. And the answer is, yeah, more pleased with the book than we have been in about three or four years. If you go back in time, you've probably heard me say repeatedly that that we're restricting business in Florida and our appetite until our rates more accurately reflect our cost of doing business. I think our current rates, probably more accurately now than in the last three, four years, reflect our increased cost of doing business. And there's continuous pressure on that. We need to monitor it, but we're seeing less pressure for further rate action needed. I'm not saying that there's going to be no additional rate needed, but I think that the lion's share of the movement has already occurred in our pricing. So our pricing's up roughly 70% plus. That already includes some active weather that we've incurred. That already includes higher attritional losses based on the social inflation that has taken place in Florida. And that already includes higher reinsurance costs. So reinsurance costs have gone up because of increased weather, because of social inflation as well. So I believe our rates are more accurate today than they have been in multiple years.

That's very encouraging. Then my last question, is there any pending meaningful legislation reform that could help the company?

Yeah. The legislative session ends in a week, I should say, and there's multiple things that they're looking at. They're looking at perhaps more controls on what's called ACV. That's depreciation or actual cash value. There's some ideas about litigation and so on. But at the end of the day, I don't think it's in the state's interest to have citizens continue to balloon. So I think that it's in the state's interest to support a healthy home insurance market for the 21 million people that live here, which I believe is projected to grow by another 4 million in the coming years. You need this so that people can afford to stay in their house. They sell their house so that the new person who's buying the house can find insurance. And I think you're going to see massive growth with citizens unless one of two things happens. and that would be that citizens take up their rates quicker, which I'm just not sure that's going to happen, or if we can get more help on keeping our rates competitive with citizens. And the easiest answer for that is us being able to purchase more reinsurance from the state via an entity that they have, which is called the Florida Hurricane Cat Fund. It's a very big fund, about $17 billion in financing, and capital, I should say total exposure that they could have about $17 billion. It's mostly funded. Conversely, Citizens has as many times that size and I believe has less than $10 billion of capital. So I think it's in everyone's best interest to keep the Florida domestic carrier strong. And the best way to do that is help us keep our prices competitive, either more legislative reform, or helping us contain our costs with reinsurance, or conversely, helping citizens write business at less favorable prices. So those are two things that can occur. And the other option is the continued growth of E&S. E&S is excess and surplus, which has a lot less protection for policyholders. But once again, you can offer policies at less rate because there's less it's more restrictive in terms of the terms. So there's a lot of things there, Doug, that are happening. But what we're doing is we're trying to price our book as best we can with all information today. I would like to be able to take premiums down if possible, but there has to be a reason to do that. And I sure hope that rates don't continue to go up, but we're going to monitor it regardless and make the appropriate adjustments.

Okay, well, I appreciate the answer to my questions. Congratulations on the improved results, and it seems like you understand what's going on, and you're doing the very best that you can for the shareholders, and I'm grateful for that.

Thank you.

As a reminder, if you'd like to ask a question at this time, that is star, then 1. I'm showing no further questions in queue at this time. I'd like to turn the call back to Michael Braun for closing remarks.

Thank you all for participating on today's call. Before we close, I want to recognize the dedication of FedNet's team who continue to provide exceptional service to our policyholders and partner agents, particularly in their times of need. The hard work of our team has enabled FedNet to maintain our high quality for 30 years. We look forward to continuing to meet the highest standards of customer service as we refocus on our historical home market in Florida. So with that, everyone have a great day, and if there's follow-up questions, feel free to reach out. Thank you.