U.S. Markets closed

Edited Transcript of FNHC earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 Fednat Holding Co Earnings Call

Lauderdale Lakes Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Fednat Holding Co earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Erick Anthony Fernandez

FedNat Holding Company - CAO & Treasurer

* Michael Herbert Braun

FedNat Holding Company - President, CEO & Director

* Ronald Arthur Jordan

FedNat Holding Company - CFO

================================================================================

Conference Call Participants

================================================================================

* Charles Gregory Peters

Raymond James & Associates, Inc., Research Division - Equity Analyst

* Christopher Campbell

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Douglas Scott Ruth

Lenox Financial Services, Inc. - President

* Ronald David Bobman

Capital Returns Management, LLC - President

* Bernard Joseph Kilkelly

Darrow Associates Inc. - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to FedNat Holding Company's Third Quarter 2019 Financial Results Conference Call. My name is Victor, and I'll be your conference operator this morning. (Operator Instructions) 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 FedNat's website at www.fednat.com.

Now I'd like to turn the call over to Bernie Kilkelly for FedNat Investor Relations. Bernie?

--------------------------------------------------------------------------------

Bernard Joseph Kilkelly, Darrow Associates Inc. - MD [2]

--------------------------------------------------------------------------------

Thank you. Good morning, and welcome again to FedNat's Third Quarter 2019 Financial Results 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 definitions can be found on Page 4 of our earnings release, and reconciliations from the GAAP measures to the non-GAAP measures begin on Page 13.

Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, believe, contemplate, could, envision, estimate, expect, guidance, indicate, intend, may, might, plan, potential, predict, probably, project, seek, should, target or will 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 Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances or otherwise.

Now I'll turn the call over to Mike Braun, FedNat's CEO.

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you. Good morning, and welcome to our third quarter 2019 conference call. Ron Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer, are here with me this morning.

I'm going to give an overview of the quarter, then Ron will provide a deeper dive into the financial results, and then we will have time for questions.

FedNat had solid performance in the third quarter and made significant progress on our strategies to position the company for future growth and shareholder value.

Book value per share rose to $18.45 at September 30, which represents an increase of 10% year-to-date. Earnings per share were $0.36 compared to $0.62 in the prior year's quarter, primarily due to the impact of $7 million of pretax catastrophe losses in the quarter.

Our third quarter net income was also impacted by higher reinsurance costs, which Ron will detail in his remarks.

The performance of our core homeowners business was solid with profitable growth, and we continue to make progress in winding down our noncore auto and CGL business, including a 39% reduction in open auto claims compared to this year's second quarter. Our exit from these businesses will enable us to improve FedNat's overall profitability as we focus solely on our core homeowners insurance business.

While higher reinsurance costs impacted the quarter, a portion of the increased costs was driven by recent growth in our core homeowners book of business, primarily in Texas, along with the stabilization of our book in Florida as our product offerings have become more competitive in the marketplace.

This bodes well for the future due to a larger go-forward earnings engine we have in place even before factoring in the addition of the Maison acquisition.

Turning to Maison. The acquisition continues to be on track to close in early December, with all necessary regulatory approvals in place. We are excited about the strategic and financial benefits this transaction will bring to FedNat.

As I've said in the past, Maison is a perfect fit for FedNat as the book increases our market share in Texas and Louisiana, 2 states that have attractive potential for profitable growth. The acquisition of Maison accelerates our strategy to profitably grow our non-Florida homeowners book.

We expect Maison to be accretive to earnings per share based on $3 million in operating synergies and $7 million in savings from our combined 2019-2020 reinsurance program, which is already reflected in the combined reinsurance tower that took effect on July 1.

In the third quarter, gross written premiums increased 14.5%, driven by 75% growth in our non-Florida book of business. It is also worth noting that FNIC's Florida gross written premiums grew in Q3 '19 as compared to Q3 '18, representing the first instance of year-over-year quarterly growth in our Florida book in over 2 years, driven by rate increases.

Net premiums earned were $87.4 million, an 11% decrease from the prior year's quarter. This was primarily due to the impact of the higher catastrophe reinsurance ceded premiums in the quarter, which as a result of our new reinsurance coverage that started in July are also a byproduct of our growing book of business.

Our $11 million of gross catastrophe losses in the quarter included $8 million from our non-Florida property book, which is subject to a 50% profit-share agreement with SageSure, our independent managing general underwriter for our non-Florida business. The catastrophe losses arose primarily from Hurricane Dorian, Hurricane Barry and Tropical Storm Imelda, which impacted South Carolina, Florida and Louisiana and Texas.

I'm proud to say that FedNat's dedicated staff once again provided quality service to our policyholders and our trusted agents in their time of need, which is our #1 priority.

We remain encouraged by the reputation this level of service affords FedNat as we continue to be a destination for our 2,500 plus industry-leading partner agents.

In the Florida market, Assignment of Benefits reform went into effect in July. As you know, AOB has been a major disruptive force in the Florida homeowners market and was one of the main reasons for increases in attritional losses over the past several years.

We have been ahead of the curve, offsetting higher Florida claim costs with rate increases, which compounded at a rate of 21% over the past 3 years. We believe the new legislation is a big win for Florida homeowners and should eventually lead to reduced premiums for policyholders as well as lower cost to us, the insurers, and our reinsurance partners.

It is still early days, but we're already seeing early benefits of this reform, including a declining of AOB-related lawsuits. We look forward to providing an update in future quarters as the full picture of the impact of AOB reform comes into focus.

This improved operating environment in our core market paired with our proactive approach to rate increases positions us to profitably grow our Florida book of business and capture a greater share of the fragmented $9 billion plus homeowners market.

Additionally, as we bring Maison into the fold, we have more opportunity to expand our presence in the large middle-market segment of the Florida homeowners market where we are currently underway.

In our non-Florida business, we are continuing to profitably grow our homeowners book in Texas, Louisiana, Alabama and South Carolina. We believe we have a long runway for continued growth in these states, particularly upon the completion of the Maison acquisition.

In the third quarter, non-Florida gross premiums grew to $28.4 million, a 58% year-over-year increase. This growth was led by strong growth in Texas, our biggest book of business outside of Florida, which almost tripled gross premiums earned in and around the Houston area and other coastal regions.

While not quite yet part of the FedNat family, it is also worth mentioning that multiple rate increases are taking hold at Maison. Maison's underwriting results improve every day as a result of these rate increases that were and are still being implemented upon the renewal of each policy and includes a 40% statewide increase in the state of Texas.

FedNat's improved operating efficiency resulting from the initiatives we implemented in 2018 that produced $6 million in annual savings and our exit of noncore lines is contributing to improvement in our gross expense ratio, which Ron will discuss in more detail.

Our capital structure remains strong with ample capital and flexibility. Following the close of the Maison acquisition, we anticipate that we will be able to use some of the capital to resume our share repurchase program, which we believe is a strong opportunity to deliver value and capital to our shareholders in addition to our quarterly cash dividends.

To that end, and in tandem with our earnings announcement, we announced that our Board approved a 12.5% increase in the company's quarterly cash dividend to $0.09. FedNat values its shareholders, and management stands with the Board in seeing value in returning to -- capital to shareholders.

Before I turn the call over to Ron, I want to highlight important government's -- corporate government enhancements that we originally put in place. At our Annual Shareholders Meeting on October 17, 2 additional independent directors were elected to the Board. This expands the total number of directors to 9, with 8 independent directors. We are thrilled to have Dave Michelson and Dave Patterson on our Board. Both bring deep insurance industry experience and backgrounds as C-suite leaders.

Additionally, in recent years, we've strengthened our shareholders' rights by amending our corporate government documents to eliminate super majority voting requirements and reduced the percentage of shares outstanding needed to call a special meeting.

We're pleased to report that these efforts have been recognized by the leading proxy adviser, ISS, which recently gave FedNat its top governance score.

Now I'll turn the call over to Ron to go over the numbers.

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [4]

--------------------------------------------------------------------------------

Thanks, Mike, and good morning, everyone. We were pleased with the performance of our core homeowners business in the third quarter, with improvement in underlying pricing and combined ratio trends. At the same time, our results continued to be impacted by catastrophe losses from severe weather events in 2019.

As Mike discussed, third quarter pretax income was reduced by $7 million due to cat losses as compared to $4 million pretax impact in last year's third quarter. On a year-to-date basis, the comparable figures are pretax impacts from weather-related events of $35 million in 2019 as compared to $5.4 million in 2018.

Our third quarter results were also impacted by higher reinsurance costs, which I'll comment on in a moment.

Net income in the quarter was $4.7 million or $0.36 per share. Adjusted operating income was $4.3 million or $0.33 per share. The primary non-GAAP adjustment this quarter was the exclusion of roughly $800,000 of pretax investment gains.

Mike has already covered the details of our 3Q cat losses. So I will share some remarks on the other notable impact in the quarter, the higher reinsurance costs, which shows up as an increase in ceded premiums in our income statement. The increase was driven by 2 factors: first, the fact that our Florida quota share treaty was set at 10% in 3Q '19 as compared to 2% in 3Q '18; and second, the true-up of the loss exposure characteristics of our homeowners book of business from projected information as of last March to actual information as of September 30.

This true-up occurs each year in the normal course of our catastrophe coverages, both with respect to the Florida hurricane cat fund as well as in terms of our private reinsurance spend and spans our total book of business across all the states we operate in.

As you know, we have been laser-focused on the profitability of our in-force book, especially Florida, which is reflected, first, through our industry-leading rate increases, including 4.6% Florida increase that took effect in April of this year; and second, through our rigorous exposure management.

These factors have driven a steady and deliberate decrease in the size of our Florida book over the past couple of years. As a result, the catastrophe program true-ups in recent years have tended to be small and in a favorable direction.

However, as already mentioned, FedNat Insurance Company's Florida book grew in the third quarter, with 3Q '19 gross written premiums up 2% from 3Q '18. This was driven by rate increases, an increase in our renewal retention percentage and an uptick in new business production with improved retention and new business dynamics emerging over the course of the third quarter.

Contributing to this inflection point back to growth in our Florida book has been an increase in the price competitiveness of our product offerings as a result of sizable rate increases brought to market by numerous carriers in the middle part of 2019.

As a result of these positive trends, our in-force book of business and the underlying loss exposures are larger at September 30 than the earlier projection that drove the $165 million treaty year cost estimate previously disclosed.

The '19/'20 treaty year cost now stands at $179 million, an increase of $14 million over the course of the full treaty year. As a point of comparison, the '18/'19 treaty year cost was approximately $149 million. For clarity, the figures I'm citing here pertain to our 2 existing carriers and do not include Maison.

Without going into proprietary specifics on the related offsets, the net impact over the full treaty year is expected to be approximately $15 million pretax or $11 million after tax.

In terms of our third quarter earnings, catastrophe reinsurance costs increased to $8.1 million as compared to the third quarter of 2018 and $8.8 million as compared to the second quarter of 2019.

The after-tax impact on the quarter of these higher reinsurance costs was approximately $3.2 million or $0.25 per diluted share. The increase in ceded premiums resulting from the September 30 exposure adjustments specifically accounted for just under half of the overall impact or $0.11 per share.

However, going forward, our profitability will benefit from our well-pruned Florida book of business returning to growth mode. Note that the combination of a growing book, the September 30 point in time adjustment and the accounting convention that spreads the annualized cost of the cat treaty evenly over 4 quarters results in the third quarter bearing a somewhat oversized portion of the annual treaty cost relative to the actual level of gross earned premiums in the quarter.

To put a finer point on it, consider new business written at the very end of the quarter. Despite the fact that the quarter includes essentially no gross earned premium on such policies, it bears 25% of the annual cost of catastrophe coverage for those policies.

This punitive dynamic is unique to the third quarter and will not recur over the remainder of the treaty year. Also worth noting is the fact that the increased ceded premiums have on net loss expense and combined ratios. The additional $8.1 million of ceded cat premium in the quarter reduced net earned premiums by over 8% from what they would have been absent the increase. As a result, the combined ratio, and each component thereof are elevated by 8% on a relative basis, subject to related numerator impacts. This added 6 points to our net loss ratio and 0.8 points to the net expense ratio in the third quarter.

While a statement of the obvious, it's important to note that the denominator impact portion of the increase in these metrics is strictly a function of lower net earned premiums and is not indicative of an increase in losses or expenses.

Now let's turn to the gross expense ratio. This is an important measure of our expense efficiency, and compared to the net expense ratio has the advantage of excluding noise associated with fluctuations in ceded premiums. This ratio improved by 270 basis points to 22.9% in the third quarter from 25.6% in the prior year quarter.

Excluding the impact that non-Florida cat losses had on the SageSure profit share expense in each period, that improvement is still a healthy 140 basis points, demonstrating the benefits of the staff reductions and technology initiatives we implemented in 2018, which resulted in $6 million of annualized savings and the efficiencies of the increasing scale of our homeowners business.

Now let's look at our lines of business starting with our core business, homeowners, which made $3.4 million in the quarter, with cat losses representing $5.3 million of after-tax headwind in this line of business.

Gross written premiums grew $17.6 million or 13% compared to the third quarter of 2018. In our non-Florida business, gross written premiums increased $16.7 million or 76% as our brand continues to gain increased recognition and broader distribution in these growing markets.

Importantly, FNIC's gross written premiums in Florida increased by $2.2 million or 2%, which was the first time we've had quarter-over-quarter growth in our Florida book in over 2 years, as Mike mentioned.

We believe this inflection point back to growth reflects the hardening of the market in Florida as competitors are increasing rates such that FedNat's rates, which embody over 21% of compounded increases over the past 3 years, have become more competitive. An important point that I want to clarify is that we remain laser-focused on our underwriting profitability and did not loosen our underwriting standards to capture this additional market share.

Our homeowners combined ratio was 102.3% in the third quarter compared to 93.6% in the third quarter last year due to the higher cat losses and higher ceded premiums that we have already discussed.

Together, these 2 drivers added almost 15 points to the combined ratio, which would have otherwise come in at around 87.5%, 2.5 points lower than 3Q '18 homeowners combined ratio of 90%, excluding 4 points of cat impact in that quarter, demonstrating the positive trajectory our core business is on in terms of pricing and efficiencies of scale.

Turning to our noncore operations. The main takeaway is that headwinds from these discontinued lines continue to diminish. Auto is purely in claims runoff mode, and CGL is now there as well with policies in-force having reached 0 as of September 30, 2019, an important milestone in the exit.

Open claim count in auto declined by 39% during the quarter to less than 300 claims, and we recorded $600,000 of reserve development in the quarter compared to almost $1 million in the third quarter a year ago, contributing to a $771,000 improvement in adjusted operating earnings in the quarter compared to 3Q '18.

Commercial general liability is included in our other line of business. CGL gross earned premiums were $157,000 in the third quarter compared with $2.1 million in the third quarter last year. We recorded $300,000 of CGL reserve strengthening in the quarter as compared to $900,000 in the third quarter of 2018.

Overall, our other line of business generated $1.3 million of adjusted operating income, an improvement of $1.3 million compared to last year's third quarter, which came in at breakeven. This was driven by net investment income of $4.1 million, which increased $930,000 over last year's third quarter as a result of growth in our investment portfolio and improved fixed-income yields, along with a lower effective tax rate in the quarter.

Investment gains, which we excluded from our non-GAAP measures, were $794,000 in the third quarter compared to $1.8 million in last year's third quarter.

Turning to our capital structure. We continue to be in a strong position as shown by book value per share rising to $18.45 as of September 30. This represents an increase of 10% year-to-date, aided by unrealized gains in our bond portfolio.

As you know, we strengthened our balance sheet and raised long-term capital earlier this year in conjunction with the announcement of the Maison transaction. We currently have over $115 million of liquidity among our HoldCo and non-regulated subsidiaries, which includes $41 million of funds that will be used to close the Maison acquisition in December. The roughly $75 million of liquidity that will remain after closing on Maison puts us in a strong position to execute on our existing share buyback program, which has $10 million remaining in the authorization from December of 2018. We look forward to having the opportunity to reenter the repurchases market as an effective way to return capital to shareholders.

Our fixed income portfolio remains short term, with an average duration of just under 4.0 and a high-quality composite S&P rating of A-, with a total carrying value of $472 million.

We ended the third quarter with $121 million in cash and cash equivalents, which, of course, includes the undeployed Maison funding.

To wrap up, we are confident that our core homeowners business is growing stronger and stronger. We have an increased opportunity for profitable growth in Florida to complement our strong and steady non-Florida growth as a result of the increased competitiveness of our product offerings and because of AOB reform.

The upcoming closing of the Maison acquisition will further expand our footprint outside of Florida and as proprietary non-Florida distribution. We are making substantial progress in winding down our noncore businesses and expect minimal impact on earnings from these runoff lines in 2020.

We are well positioned to scale our business and capitalize on efficiencies from our initiatives to reduce staff and increase our use of technology.

With that, I'll turn the call back over to Mike.

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [5]

--------------------------------------------------------------------------------

All right. Thank you, Ron. Operator, with that, we'll go ahead and open up for questions, if you could open the queue.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question will come from the line of Greg Peters from Raymond James.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

I wanted to just circle back and sort of unpack the comments around your reinsurance costs in the third quarter. And for the increased costs, it seems like you're suggesting that wherever our ceded premium estimate was before that we're going to have an incremental $3 million or $3.5 million of additional costs because of this true-up estimate on a go-forward basis for the next 3 quarters. Is that an accurate read? Or would you -- how else would you recommend I look at that?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. That's an accurate read with respect to the September 30 adjustment on the ceded premiums line. As I alluded to, there are a couple of offsets that bring the net pretax impact of that down. That has to do with the fact that a portion of that growth in exposures relates to our non-Florida business. So there is a SageSure profit share impact on that. And then of course, as you know, we earn brokerage income from our internal catastrophe brokers or reinsurance broker firm. So as our spend goes up, the brokerage income goes up. So the -- as I mentioned in my remarks, the combination of those 2 impacts roughly halve the impact -- the gross impact on the ceded premiums.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

So just carrying forward the discussion because of one reason that you cited for the increased cost was that the business is growing again. If your market position continues to become more favorable because of the rating actions of your competitors, would that suggest there's going to be another reset in the fourth quarter or in the first quarter? Or is this reset that you just did or true-up, I should call it, is that carried forward through the end of the treaty year?

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [5]

--------------------------------------------------------------------------------

That's a great question, Greg, and the answer is the latter. This is the one and only true-up point during the treaty year for the private portion of our spend, which of course, is the lion's share of our $179 million spend. It's a 9/30 true-up that happens halfway through the wind season and that is the only exposure adjustment all the way through the June 30 end of the treaty year. So no, there is no potential for further adjustments up or down related to the private portion of our spend.

With respect to the FHCF portion of the program, the state is in the process right now, I'm sure, of compiling and getting ready to send out adjustments. Those -- our best estimate, including those -- the input of our reinsurance brokers, inside and outside brokers has already been reflected in the adjustment that we recorded at 9/30. We'll get the actual notice from the state sometime in the next few weeks here. We would expect that to be very modest.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

But there could be another adjustment from that when you get the notice, is that right?

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [7]

--------------------------------------------------------------------------------

Yes. And just the FHCF portion, again, we'd expect that to be 0. I mean we've updated our best estimate in these 9/30 numbers. There's a lot of dynamics there, though, because it does -- it is impacted by every other carrier in the state, what did the size of their books do, what did their election percentages do, right. So it's a -- there's a lot of moving parts on the FHC (sic) [FHCF] item.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [8]

--------------------------------------------------------------------------------

Got it. I'm sure there's a lot of questions about this. Can I pivot to just reserves? And some of your peers reported a claim surge leading up to the effective date of AOB reform. And I'm wondering if you could provide an update on your perspective of if that happened within your book? And how those reserves have held up through the end of the third quarter?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [9]

--------------------------------------------------------------------------------

Yes, Greg, this is Mike. I'll give you a little commentary and then Ron can go deeper on the math. But as you stated, AOB reform occurred at the end of Q2, July 1. We absolutely saw a spike in Q2 activity. Since then, AOB reform has taken place. And the AOB, I think it's been extremely effective. We've seen less AOB contracts come in, and to clarify, some have come in, and they were not executed correctly. Therefore, they were not valid. But also in terms of less suits, as it relates to AOB, those have really dropped significantly. Now it's still early days, but let me clarify, there's ways to get suits more than just AOB. And those avenues include public adjusters as well as insureds -- the route of the insured contacting the attorney directly.

So there are 3 legs to that table. Where the rampant abuse and the rapid growth occurred over the last 4 years was really more central to AOB. So that I think has really been muted quite a bit. The other avenues are still open. The plaintiff's bar is very strong in the state of Florida as well as the public adjuster's. But I think the AOB was a big challenge that with this reform's a real win for all policyholders across the whole state.

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [10]

--------------------------------------------------------------------------------

Yes. Just the only thing that I would add is, I think a year ago on this call, from my perspective, was the first time that we really talked about seasonality that happens in the normal course of our quarterly operations. And I guess I just want to make sure everyone remembers that the third quarter is typically our worst quarter of the year in terms of seasonality in our losses.

So we -- our frequency does go up in the summer months. We get more fires, more lightning, those sorts of claims. So I think -- I don't know that there's anything terribly atypical about our third quarter this year.

--------------------------------------------------------------------------------

Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

Okay. The last question I'll ask is more of a longer-term strategy question, and it deals with reinsurance costs. The tone of the reinsurance market seems to be definitely changed and focused on more rates. And it feels like you had to adjust your reinsurance program this year. But if I had to read the tea leaves, I would think that your reinsurance costs are going to go up again next year. And I'm just curious how, from a strategy's perspective, you're positioning the company to limit any sort of headwind you may face in the form of higher reinsurance costs next year?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [12]

--------------------------------------------------------------------------------

Yes, Greg, good point. The reinsurers in terms of Florida, obviously, this year, there's been no losses. But obviously, over the last 3, 4 years, there's been multiple events, primarily Michael and Irma. And they really took it on the chin. With us, we had about $1.2 billion of gross losses of weather over the last 3, 4 years and about $100 million net. So that's about $1.1 billion that they felt. We think that rates have moved significantly this prior renewal. But based on historical pricing, what the reinsurers are saying is that pricing is still low. So don't know that answer, Greg, where pricing is going next year. But I'll tell you, we've got a robust panel, 75 reinsurers on the program.

And I'll tell you, we lost about 10 of them at the renewal, and we actually added new markets at the renewal of about 10. And we had some that really had a big, big increase in appetite and some that had a big decrease in appetite, some that moved within the program. But I'll tell you, Greg, that we're under the assumption that the pricing that occurred last year is sticking, and there's pressure on that. We'll find a lot more -- find out a lot more over the next 6 months, but we're going to be prudent with our underwriting to make sure that we are prepared for it.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

And our next question will come from the line of Christopher Campbell from KBW.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

--------------------------------------------------------------------------------

I guess a few numbers questions just to start off. I mean did you guys have any gross loss development on Michael or Irma in the quarter?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [15]

--------------------------------------------------------------------------------

Yes, Chris, yes, we did. $40 million for Irma, $50 million for Michael.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [16]

--------------------------------------------------------------------------------

Okay. And that's incremental from your latest disclosed loss specs?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [17]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. Great. And then a question kind of on capital management. I know you guys are kind of locked out from buybacks until Maison closes. But I guess just going forward, as that deal probably closes early December, I guess just how much excess capital do you have? And what is your thought on the quarterly pace of buybacks once you come out of the prohibition period?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [19]

--------------------------------------------------------------------------------

Well, so you've got 2 questions there, Chris. I mean you asked about Irma and Michael, and those continue to move as you well had -- well know and you've documented the industry's movement.

So I'll tell you, in terms of Irma, it's unfortunate, 2 years out, we still get about 50 first notices of loss per week. So that's a bit frustrating. It's really kind of difficult to get our hands on some of that, why those continue to come in at such a late date. Statutorily, they do have 3 years to report a claim. And Irma really did impact a significant amount of the state from a geographic perspective.

In terms of Michael, those were massive claims. I think you know, we're very big in the Panhandle. I believe we're a top 3 writer in the Panhandle with nearly 10% market share, and it's complete devastation. And what we're seeing is a year after the event, a lot of those folks are still out of their home, and quite honestly, I think it's going to be a long time for that area to rebuild. So there's -- in terms of Irma, most of those claims have been closed, about 97%. In terms of Michael, we're at about 85%. And a lot of those are just -- continue to evolve as more information becomes available, including what's called ALE, additional living expense, where these folks are out of the house. And also, as people have to rebuild, when they rebuild, they have to pull permits and you have something called law and ordinance. So those are 2 tough situations.

Switching to your second question about capital management. We have a lot of capital in the holding company. Based on yesterday's close at $14.26 and our updated book value here at $18.45, that's 77% of book. That's extremely -- it's a low number. It's extremely accretive for us if we can buy back shares at that price.

Our intention is to close on the Maison deal in early December. We're excited for that to happen. And the intention is to be back in the market to be buying back shares, and I think that's an easy decision, buying back the stock at 77%. I can't speak for the entire Board. We'll be deciding on the math here shortly in terms of when we'll be back in the market, but it would be after the -- after we close on the acquisition and how much. But I think that Ron can go much deeper into the numbers. We've got a lot of capital in the holding company, a lot of nonstatutory capital that's available after the acquisition. And at this price at 77% of book, it's very compelling. I'm curious to see where that price goes. And obviously, if it goes up, it's still compelling, but this is very compelling for us.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [20]

--------------------------------------------------------------------------------

Got it. So I guess just, I mean, okay, so like how much excess capital is there?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [21]

--------------------------------------------------------------------------------

Well, we have $10 million authorized from the Board from last December, and that's all dry powder. So I would anticipate that the Board will review that again this December. But I think $10 million is an easy number. We're not putting a number out there, specifically, what we'll be buying back. But the $10 million is authorized, and we'll be asking the Board for that approval again, which I would anticipate we'll be getting here. And we'll announce that as soon as we decide what we have.

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [22]

--------------------------------------------------------------------------------

And we've talked in the past, Chris, about some rules of thumb that we have in terms of liquidity that we like to view as a threshold kind of minimum liquidity in the HoldCo and the like.

So as I mentioned, we'll have $75 million of liquidity after closing on Maison. And there's definitely room to exhaust that full $10 million authorization and more in the coming months.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [23]

--------------------------------------------------------------------------------

Okay. Great. That's helpful. And then I think one of your peers had talked about like corporate tax rates declining in Florida. I mean should we be modeling any impact from that?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [24]

--------------------------------------------------------------------------------

Yes, there is a change in the state of Florida tax rate. It's retroactive to January 1. It's a 1% benefit. So that -- there is an impact -- a benefit of that reflected in our third quarter, and it will go forward. Erick, do you know -- is there further specifics we know on that 1% rollback and how long that's in place and...

--------------------------------------------------------------------------------

Erick Anthony Fernandez, FedNat Holding Company - CAO & Treasurer [25]

--------------------------------------------------------------------------------

Yes, it'll be more than just this year, I think it's a couple years that'll be in effect until they'll reset it.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [26]

--------------------------------------------------------------------------------

Okay. Got it. And so I've got a 26% in my model. So should we be taking that down to 25%, is the way to think about that? Or...

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [27]

--------------------------------------------------------------------------------

Yes, do factor in the fact that -- well, do factor in that there is a federal tax deduction on the state taxes you pay. So the state goes down, then your federal deduction goes down. So it's not quite the full 1% benefit on the effective tax rate.

--------------------------------------------------------------------------------

Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [28]

--------------------------------------------------------------------------------

Okay. Got it. And then just I want to understand, I know you -- Rod, you provided great color on just kind of the impact of the reinsurance costs. And I really just want to focus on the core loss ratio piece of that, because I think Mike was saying that you started to see like a benefit from the declining lawsuits. And then obviously, you're getting a little bit of a -- you're getting little bit of a headwind from the higher reinsurance costs. So the core loss ratio was up, I think 980 bps year-over-year. So is there a way we can decompose that into how much was from the reinsurance cost, how much was attritional and then how much was the benefit from AOB reform?

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [29]

--------------------------------------------------------------------------------

Yes. So Mike's comments are with respect to what I would call the underlying data, right, and claims activity. To be clear, we have not booked, in terms of our accounting and our recorded reserves, we have not booked a nickel of benefit from AOB. I want to be -- make sure everyone understands that. That needs time to prove itself out through the loss triangles and that will take some period of time. To the extent that the positive things we're seeing continue to factor through, whether that's in reduced frequency, which is perhaps less likely, but rather through lower severity, which we think is more likely as that continues to play through, yes, in the future, we expect AOB reform will benefit our reserves and our recorded results.

In terms of getting back to your core question, I think the key thing to zero in on, perhaps is on the gross side. And our gross loss pick in our Florida book is 39.5%, 40%, okay. So that is our pick right now, let's call it 40%. If AOB benefit comes through in the future, then that will help bring that back down. Future rate increases should bring that back down, but that's how I would think about our Florida book.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Doug Ruth from Lenox Financial.

--------------------------------------------------------------------------------

Douglas Scott Ruth, Lenox Financial Services, Inc. - President [31]

--------------------------------------------------------------------------------

Mike, now that you're more optimistic about what's happening in Florida, what will you do on the sales front?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [32]

--------------------------------------------------------------------------------

Yes, Doug. Well, what we're seeing is that our underwriting discipline hasn't changed. What we're looking at in terms of the marketplace, we continue to have the same lens and the same appetite. But clearly, in Q3, we absolutely saw a change where the competition has caught up to our prices. I think we've been a leader in the pricing of AOB over the last 3 to 4 years. Some people have been reluctant to take that rate and/or have been more aggressive in the underwriting side.

We would like to grow Florida, Doug. However, we're going to keep the same discipline to it. I think the runway is long. I think people have to take more rates in the market to fully reflect AOB. And let me clarify with what we've seen on AOB reform, that we've taken pre-AOB reform about 21 points in rate. I don't think the market as a whole has been as aggressive. So therefore, I think there's some disconnect still. So we'll be as aggressive as we can in the marketplace to keep our product competitive and to write the business that we believe we can in a manner that's sustainable to our capital.

--------------------------------------------------------------------------------

Douglas Scott Ruth, Lenox Financial Services, Inc. - President [33]

--------------------------------------------------------------------------------

And what about -- will some of that come from the -- from your Monarch label?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [34]

--------------------------------------------------------------------------------

Yes. Monarch has been relaunched as of July. We've had some tweaks on it effective in October. And we're seeing some promising trends in that. However, it's very small, and that's not going to have a material impact on our business in Florida. Our Florida book's approximately $440 million for FNIC. MNIC is roughly $10 million. So I really don't see a lot of movement in MNIC here in calendar year 2019. And gradually, you'll see some trends in 2020 with that. But we're being very prudent with that. That's open to a very select population of agents at this point. And as we continue to see results, we'll tweak it and then bring it out more aggressively at the appropriate time.

--------------------------------------------------------------------------------

Douglas Scott Ruth, Lenox Financial Services, Inc. - President [35]

--------------------------------------------------------------------------------

And how do you explain the success that you're having in the Houston area?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [36]

--------------------------------------------------------------------------------

Well, I think we've got a big appetite for policies in Texas. We see there's an opportunity there. And with that opportunity, we've been writing there for a number of years. And it's similar to -- the similar risk profile that we experience in these other coastal states, these other Gulf states, really, Florida, Texas, Louisiana are very similar in that nature. But we also believe that the product that we have is competitive out there within the marketplace. Clearly, there are some synergies with our reinsurance program being a Florida writer that we can bring that reinsurance coverage with us to these other states.

--------------------------------------------------------------------------------

Douglas Scott Ruth, Lenox Financial Services, Inc. - President [37]

--------------------------------------------------------------------------------

Okay. And my last question has to do with the Maison is, what are our biggest concerns for getting the acquisition to close in early December?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [38]

--------------------------------------------------------------------------------

Well, we're excited about it, Doug. We think it's a great opportunity to improve our distribution non-Florida, and obviously, Florida's had challenges in years past. So we're excited for it. We're working towards that. I hope to see that closing in early December. We'd like to be back in the marketplace as well from a buyback perspective.

But from an operational perspective, I think that Doug's got a solid business over there, Doug Raucy, as well as his underwriter, Dean Stroud. And we're happy to move forward on that front to go ahead and get that acquisition behind us. So that should be in early December. And you said that's your last question. I'm surprised you haven't brought up the dividend because I know that's been an important topic for you.

--------------------------------------------------------------------------------

Douglas Scott Ruth, Lenox Financial Services, Inc. - President [39]

--------------------------------------------------------------------------------

I want to thank everybody at FedNat for increasing that dividend, and that was a nice early Thanksgiving/holiday gift. So thank you for that.

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [40]

--------------------------------------------------------------------------------

Yes. No, absolutely, Doug. And you've been consistent with your messaging on that. And once again, we think there's opportunities to once again recognize our shareholders with the value both in the buyback but also the dividend. So we're happy to have that out there for the benefit of all of our shareholders.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

And our next question will be from the line of Ron Bobman from Capital Returns.

--------------------------------------------------------------------------------

Ronald David Bobman, Capital Returns Management, LLC - President [42]

--------------------------------------------------------------------------------

I had a question about the homeowners rates in Florida. I was wondering, in light of reinsurance cost increases that we've incurred, are you working on or planning on a Florida rate increase?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [43]

--------------------------------------------------------------------------------

Yes, Ron. Yes, we are actually working on our rate filing as we speak. We're not ready to make that public. But I think that you'll see a rate filing in the fourth quarter from us to reflect the reinsurance costs that we've experienced at midyear.

--------------------------------------------------------------------------------

Ronald David Bobman, Capital Returns Management, LLC - President [44]

--------------------------------------------------------------------------------

Okay. And just sort of jumping around. Do you have a claim count number for the GL (sic) [CGL] book?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [45]

--------------------------------------------------------------------------------

Open claims on CGL?

--------------------------------------------------------------------------------

Ronald David Bobman, Capital Returns Management, LLC - President [46]

--------------------------------------------------------------------------------

Exactly.

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [47]

--------------------------------------------------------------------------------

Yes, Ron, I apologize, we don't have that -- I don't have that figure handy in the room here, but I feel fine getting back with you or putting that in a future public document.

--------------------------------------------------------------------------------

Ronald David Bobman, Capital Returns Management, LLC - President [48]

--------------------------------------------------------------------------------

Great. I'd be interested in the claim counts for both of the runoff books as well as the reserves case versus IBNR that remain outstanding for each of those books separately. And do you foresee any loss activity in the fourth quarter from the Texas weather that I think happened early, I think it was mostly Dallas-centric, but as it relates to the FedNat book, do you see that weather having any noteworthy impact?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [49]

--------------------------------------------------------------------------------

Yes. So good question on that. Obviously, Dallas had a big F3 go through there. We're currently not in Dallas with our existing book of business. But our practice is really on a go-forward basis is to go ahead and when we have meaningful weather to preannounce it at quarter end. But from a book perspective, our book -- our current book is down in Houston.

--------------------------------------------------------------------------------

Ronald David Bobman, Capital Returns Management, LLC - President [50]

--------------------------------------------------------------------------------

Okay. All right. And my last question, I'm -- a lot of talk about Florida -- growth in Florida, somewhat attributable to rate action amongst competitors on a relative basis making FedNat, in effect, more competitive. What I don't understand sort of all that commentary about Florida growth, while at the same time, Florida PIF -- homeowners PIF has actually gone down from June 30 to 9/30, a little bit down. So I don't understand why there's so much discussion about Florida growth, homeowners, when in fact PIF went down?

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [51]

--------------------------------------------------------------------------------

Yes, it's total premium, where we've seen the premium decrease over the last 3, 4 years somewhat in a small manner, but you're correct, the PIF has decreased significantly quarter after quarter after quarter, and that's what we had baked into our projections for Q3. The PIF count stabilized more than we anticipated in Q3. And we're still seeing that as we speak today. We're seeing the desire for new business to come in to pick up. So we're continuing to monitor that. It's been a bit frustrating because once again, we've heard our competitiveness by being on the front end of taking rate in the market. But what we're seeing now is the market catching up to the moves that we've made.

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [52]

--------------------------------------------------------------------------------

Yes. Just to get back to you on your auto question around claims, as of 9/30, our open claim count is 264 and then our total reserves growth is $4 million.

--------------------------------------------------------------------------------

Ronald David Bobman, Capital Returns Management, LLC - President [53]

--------------------------------------------------------------------------------

Could you split that of -- the $4 million between IBNR and case?

--------------------------------------------------------------------------------

Ronald Arthur Jordan, FedNat Holding Company - CFO [54]

--------------------------------------------------------------------------------

I apologize, I only have the combined number, case and IBNR.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

And I'm not showing any further questions at this time. I'd now like to turn the call back over to Mike Braun for any closing remarks.

--------------------------------------------------------------------------------

Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [56]

--------------------------------------------------------------------------------

All right. Thank you. In summary, we are pleased with the progress we made in the third quarter to position FedNat for profitable growth in the fourth quarter and heading into 2020.

The Maison acquisition will be a major contributor to our long-term roadmap, accelerating our presence in markets where we believe we can utilize our underwriting ability to profitably grow market share as well as offering earnings accretion.

Lastly, the cost reductions measures we've implemented over the past year have given us a lean and efficient operating structure to profitably scale our business.

FedNat has set up a continued improved performance in 2020, and we are excited about the future for the company and our shareholders.

So with that, thank you very much. And if there's follow-up questions, feel free to reach out to us. Have a great day.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

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