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Edited Transcript of FNHC earnings conference call or presentation 6-May-20 3:00pm GMT

Q1 2020 Fednat Holding Co Earnings Call

Lauderdale Lakes Jun 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Fednat Holding Co earnings conference call or presentation Wednesday, May 6, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Herbert Braun

FedNat Holding Company - President, CEO & Director

* Ronald Arthur Jordan

FedNat Holding Company - CFO

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Conference Call Participants

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* Charles Gregory Peters

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

* Douglas Scott Ruth

Lenox Financial Services, Inc. - President

* Matthew John Carletti

JMP Securities LLC, Research Division - MD and Senior Analyst

* Bernard Joseph Kilkelly

Darrow Associates Inc. - MD

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Presentation

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Operator [1]

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Good morning, and welcome to FedNat Holding Company's First Quarter 2020 Conference Call. My name is Cindy, 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 Mr. Bernie Kilkelly, FedNat Investor Relations. Sir, go ahead.

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

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Great. Thank you. Good morning, and welcome again to FedNat's First Quarter 2020 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 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.

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

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Good morning, and welcome to our first quarter 2020 conference call. Ron Jordan, our Chief Financial Officer; and Erick Fernandez, our Chief Accounting Officer, are on the call with me this morning.

I am 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.

Before we discuss our first quarter results, we wanted to acknowledge the unprecedented challenges that many people are currently experiencing throughout our country and specifically in the many communities in which we operate, from both a health and an economic perspective. Our hearts go out to everyone touched by the COVID-19 pandemic, and FedNat is grateful to all those serving our communities from the many doctors and nurses to those that keep our essential services and products available, such as truck drivers and supermarket workers. We remain committed to all our stakeholders’ wellbeing, especially our staff, policyholders and partner agents during this crisis. Thank you to all.

We are pleased with FedNat's improved performance in the first quarter, which was driven primarily by strong growth and increased profitability in our non-Florida homeowners business. We continue to return value to shareholders through dividends and share repurchases, while maintaining a strong balance sheet and capital position. We are especially proud of these results because our team has demonstrated resilience and incredible dedication to our policyholders in these unprecedented times.

FedNat places the highest priority on the health and safety of our staff, so we put in place our business contingency plans to enable working remotely back in March. Our staff has risen to the occasion, as they do, in response to all emergency situations we deal within our business, providing the highest quality service to our policyholders and our partner agents. The vast majority of our staff is working remote and can continue to do so indefinitely, though we will continue to monitor and make any changes to that based on the recommendations and guidelines provided by the states and local governments where we operate.

As we stated in yesterday's release, we do not expect the COVID-19 pandemic to directly impact our underwriting results. As with any event that has such a widespread economic effect, there could be tangential impacts to FedNat. We will closely monitor the states and communities we operate in, focusing on the housing and rental markets to track and adjust to the long-term effects that develop.

Looking now at our first quarter results. Our non-Florida expansion has proven to be profitable opportunity that we expected. Homeowners premiums from non-Florida markets more than doubled from last year's first quarter by every measure with gross earned premiums up 180%. Our non-Florida business represented 32% of total gross earned premiums compared to approximately 15% last year. We achieved strong organic growth as we expanded our market presence in Texas, South Carolina, Louisiana and Alabama through our managing general agent SageSure. In addition to organic growth, Maison contributed over $23.5 million in gross earned premiums in its first full quarter since the acquisition last December.

Most importantly, all of this growth added to profitability with net income in our non-Florida homeowners business rising sharply from last year's first quarter, excluding cat losses. We continue to be proactive in our Florida homeowners business to improve profitability in the challenging market environment. We are taking rate increases, including the expedited reinsurance rate increase of 2.8% that went into effect in March. The 7.4% Florida rate filing we previously announced has received a contingent verbal approval with full approval believed to be in the final stages and continues to be on track for June 15 effective date.

We are following rigorous underwriting practices in Florida for both new policies and renewals. FedNat's Florida policy count is down approximately 5%, while its gross written premium is flat, indicating stronger pricing in this book of business. We plan to continue to limit our appetite in Florida until late this year when we expect that our approved regulatory rates will more accurately reflect our increased cost of doing business, primarily related to increased litigation costs and reinsurance expenses.

While this operating environment remains challenging, we're continuing to see the favorable AOB trends that we mentioned on our last call. As an update, since AOB reform was enacted on July 1, 2019, we've only had 17 AOB lawsuits on claims with post reform date of loss. This compares to 104 AOB lawsuits over the comparable time frame last year. While we continue to see a high-volume of claims, we're encouraged by this 84% reduction in the number of AOB claims going to suit. We believe this will surely be a net positive in reducing AOB claims severity going forward.

Our loss ratio in our Florida homeowners business continues to be impacted by the challenging market condition we discussed in our fourth quarter conference call. We continue to feel pressure from the powerful plaintiffs bar in Florida that continues to bring litigation against insurers through different avenues. However, we believe our conservative approach to underwriting in this market compared with our industry-leading rate increases are the necessary actions to mitigate this pressure and focus on expansion in other more profitable markets at this time. We are currently working to finalize our reinsurance program for the 2020-2021 program year, and are pleased with the level of participation and the quality of our reinsurance partners. While we expect reinsurance pricing to increase, we remain proactive in our actions to ensure profitability through timely rate increases in Florida and non-Florida markets to offset these increased costs.

FedNat's balance sheet and capital position remains strong. And as Ron will discuss in more detail, our investment portfolio performance was solid despite tremendous market volatility. This strength enabled us to be aggressive in our share repurchase program in the first quarter repurchasing 524,000 shares at an aggregate cost of approximately $6.8 million in the period. Subsequent to quarter end, we purchased an additional 277,000 shares at an aggregate cost of approximately $3.2 million. This $10 million of repurchases, in addition to $3.9 million of shares we repurchased in December, means that we have repurchased a total of 1,038,000 shares, representing well over 7% of shares outstanding since the close of the Maison acquisition on December 2, 2019. In March, our Board of Directors authorized an additional $10 million authorization to our share repurchase program. And today, we have the entire incremental authorization at our disposal for the balance of 2020. Our Board will continue to make decisions on repurchases based on the capital needs of the company as well as market conditions, but we continue to view repurchases below book value as an attractive use of our capital.

Looking ahead, we are taking the unprecedented time very seriously. We believe we have limited exposure to the effects of COVID-19, but will continue to monitor the economic impact very closely. We believe our staff and network of agents will continue to enable us to rise to the needs of our policyholders and generate value for our shareholders.

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

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

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Thanks, Mike, and good morning, everyone. As Mike mentioned, we're operating in unprecedented times. So we're extremely proud of our team and their contributions to our first quarter performance. We are generating strong profitable growth in our non-Florida book, proactively taking rate in Florida and beyond as we hold steady amidst challenging market conditions, prudently managing our conservative investment portfolio and returning value to shareholders through dividends and buybacks while maintaining our solid capital position.

Before we jump into first quarter financial results, I want to point out a slight change in our reporting that you may have noticed in our earnings release. Going forward, we are eliminating line of business presentation in our quarterly financial statements. As you know, we are currently in runoff mode in our auto and CGL lines. Given the absence of underwriting activity, we believe it is the appropriate time to eliminate the presentation of full P&L statements for these lines here at the start of 2020. We will continue to provide updates for these former lines of business as necessary, disclosing any loss reserve activity, for example, if it occurs.

Our go-forward operations and results are truly driven by our homeowners business, and this external reporting change further demonstrates this fact. We look forward to continuing to communicate our planned profitable growth in our Florida and non-Florida books as transparency with our shareholders is a priority for management.

Looking now at first quarter results. As previously disclosed in our pre-released 8-K about 3 weeks ago, our pretax net income was reduced by $8.7 million of catastrophe losses, net of all recoveries, including reinsurance. This impact was predominantly the result of 2 storms though we had a total of 5 PCS severe weather events that impacted Florida, Texas and Louisiana. These storms added approximately 10 points to our loss ratio and 8 points to our combined ratio in the quarter, and reduced our earnings by $6.6 million or $0.46 per share. Consequently, net income in the first quarter was $2.1 million or $0.15 per share. This compares to a net loss in last year's first quarter of $3.9 million or $0.30 per share, which included the impact of $19 million of pretax catastrophe losses.

Adjusted operating income in this year's first quarter was $4.3 million or $0.30 per share compared with adjusted operating loss of $2.4 million or $0.19 per share last year.

The primary onetime adjustment between net income and operating income in this year's first quarter was the impact of mark-to-market adjustments in our equity portfolio, which I'll address later. As Mike mentioned, we achieved strong premium growth in the first quarter. Mike highlighted key gross earned premium metrics, so I'll focus on written premium instead.

Gross written premiums grew 31% year-over-year to approximately $173 million with non-Florida gross written premiums up 129%. We continued to diligently restrict underwriting in our Florida book, particularly in FNIC, where gross written premium was flat despite the rate increases that continue to earn in. This underscores the increased contribution of our non-Florida book. Maison's first full quarter added approximately $17.6 million of gross premiums written, with 95% of it coming from Louisiana and Texas. But we were especially pleased with our strong organic growth of more than 62% as we expanded our market presence outside of Florida. Overall, gross written premiums in our non-Florida markets more than doubled, growing to $58 million from $25 million in 2019.

We are especially pleased about the fact that this growth was profitable growth, with our net income contribution from non-Florida markets rising sharply excluding cats. Consistent with our past mantra, we continue to focus on our bottom line profitability more so than top line growth.

Continuing with the topic of revenues, Mike addressed our Florida rate increases in his remarks. These rate increases will be further bolstered by increases in our non-Florida markets. In Texas, a 5% rate increase went into effect on April 1, and we are continuing to earn-out the Texas and Louisiana increases from last fall, including the 31% rate increase from August at Maison.

Our overall rate increases are on track to generate over $25 million of incremental premium in the balance of 2020. And we continue to estimate that once fully earned out in the third quarter of 2021, these increases will contribute over $50 million of incremental annual premium as compared to 2019.

Turning to our noncore operations. We are pleased to report that the impact of these lines diminished substantially in the first quarter. Auto continues to runoff and had no earnings impact in the quarter whatsoever. Our CGL business also in runoff experienced prior year development of just under $1 million net, driven by a further uptick in frequency and severity, particularly on late reported claims from old accident years.

Now let's turn to our capital structure and investment portfolio. Our balance sheet and capital position remains strong despite significant market volatility. We ended the quarter with cash and cash equivalents of $123 million, with liquidity of over $75 million in our HoldCo and non-regulated subsidiaries as of March 31. Book value per share was essentially flat versus year-end at $17.15, despite over $8.6 million of pretax unrealized losses on our investment portfolio in the quarter. This impact was largely offset by our net income in the period and the beneficial impact of the $6.8 million of buybacks we executed in the quarter.

With that mention of investment losses, I'll now turn briefly to our investment portfolio. The last 45 to 60 days have certainly been eventful in the capital markets, and portfolio management took center stage for several weeks there from mid-March to early April. I'm pleased to report that the $8.6 million of unrealized losses in the first quarter that I mentioned a moment ago, which consisted of $3.3 million loss on equity securities and a $5.3 million unrealized loss on bonds, has since swung to a year-to-date gain of $3.5 million, representing approximately $12 million of value recovery since April 1.

Our bond portfolio has swung to a year-to-date gain of approximately $5.4 million while the loss on our equity position has shrunk to $1.9 million. We believe this resilience is a direct reflection of our disciplined investment approach and the investment-grade portfolio we've built. We have said this before, our portfolio is designed to preserve capital, maintain liquidity and minimize risk across a range of economic scenarios.

These primary objectives remain our focus, and we have the discipline to not compromise these priorities for the sake of a few more basis points of yield. The past 2 months have perhaps been the strongest litmus test yet for our thesis, and we are pleased with our outcome. We continue to closely monitor the markets and are applying a stringent risk appetite to our portfolio and capital allocation considerations as we know there are more challenging times to come in the capital markets. With that said, the strength of our balance sheet has enabled us to be aggressive in share repurchases, and Mike gave a comprehensive update on our share repurchase activity for Q1 and subsequent. We remain committed to responsibly returning value to shareholders and view share repurchases as an attractive use of capital.

In closing, we believe we have the right strategy in place to generate improved financial performance in 2020. We remain focused on mitigating challenges in our Florida market through proactively taking rates and profitably expanding our presence in non-Florida markets where we are seeing favorable results.

We will continue to prudently manage our investment portfolio and believe we are well positioned to return capital to shareholders while driving strong results.

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

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

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Yes. Thank you, Ron. That's great. Operator, Cindy, if you can go ahead and open it up to questions, that would be great.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from Greg Peters from Raymond James.

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

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I'm going to ask 3 questions. One on reinsurance, one on commission expense and one on capital. So Mike, I know you commented -- you gave us some color in your opening comments on reinsurance. Can you give us some more perspective on how things are going to change for you for this upcoming storm season, whether it's retentions or top limit, et cetera?

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

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Yes, Greg. Great question. Reinsurance is a very hot topic. And over the last 2 years, there's been pressure on reinsurance pricing for a couple of reasons; number one, there's been a lot of cat events, a lot of activity; number two, some of the capacity in the retro markets has gone away; and number three, other macro situations. So last year, we did have a big rate increase, and I think that was appropriate last year, and we were able to pass that through in our rate filing to the policyholders, but obviously there is a lag. As we do the renewal right now, we're well underway. We've got a majority of our cat program in place, we're finishing it out in the coming days or the coming weeks, we have ample time. We have a full panel, 75-plus reinsurers. And it's -- the renewal is going well. But let's be clear, there's pressure on pricing. And I think what you're seeing is the pricing that dipped 2 years ago in 2018 was not sustainable for our reinsurance partners, and we respect that, and we appreciate that. And we want a trading relationship that's profitable for both parties. So there's pressure on them. The pricing is just ticking up. But I think it's extremely manageable with what we face. And to remind everybody, approximately 32% of our premium does go to reinsurance spend. So if, in fact, that went up 10%, you can do the math and understand that we would probably file about a 3.2% rate increase. There would be some other costs associated with that, so perhaps it's 4%, 5%. And obviously, if rates were to go up more than 10%, you would multiply the math out appropriately. So we have a healthy relationship with our partners. We've paid out $1.5 billion in cat claims over the last 3, 4 years. These folks need to have a return on their investment in their trading relationship. So the renewal is going smooth.

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

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Okay. Then switching gears to commission expense. I know you called out the higher expense ratio because of non-Florida acquisition. Can -- going forward because your non-Florida business is growing, is it fair to assume that the expense ratio is going to be up on a year-over-year basis for the remainder of the year? Or can you give us some added color?

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

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Yes. I think it depends on a lot of factors, Greg, because, yes, our FNIC, non-Florida book with -- through SageSure is growing strongly. But we also have Maison, which is our organic distribution model and has a lower expense structure in non-Florida than SageSure does. The other factor, of course, associated with that -- those higher non-Florida acquisition costs, flip side is, we also, of course, have a lower loss ratio, and that's on that business. And that's why we tend to focus more on the combined ratio as we look at the FNIC non-Florida book.

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

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On that point, when the profit share from SageSure flows through or lack thereof flows through your income statement, does that come through commission expense or is it coming through another line?

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

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Yes, it's coming through commission expense. The way to think about it is, imagine if we had a quota share treaty in place, right, we would be seeding premiums, losses, commissions, et cetera. That's the case in our Florida book with our 10% Swiss Re quota share. With respect to SageSure, the economics are such that we're seeding 50% of premiums, losses, commissions, everything. But the financial statement presentation is that the net of all that profit is showing up in the commission expense line. And just as a point of reference, in the current quarter, that added, I think, 4 points to the expense ratio on our SageSure book relative to the gross earned on that block.

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

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Got it. The final question, I know you gave some comments and color around this. But when I think about where on a go-forward basis with the increase in the total gross written premium, how -- and net, what should I think about in terms of the range of acceptable ratios considering your rating in terms of, say, premiums to surplus, whether it's net or gross, especially in the context of the fact that you're using excess capital to -- for dividends and share repurchase.

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

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Greg, good question. And roughly speaking, there's, I would say, roughly 3.5:1 gross over stat. But those numbers are influenced by many things. So I can tell you the way we manage our insurance capital, the capital within our insurance companies, obviously, RBC is a big component of it. And in addition to that, we want to make sure we have adequate capital at the holding company. So our desire with our capital is to grow our business, and that's the intent. But where our stock is trading, it's awfully accretive to go ahead and pick up these shares at such a discount to book. But we think we've got adequate capital in the insurance companies as well as the HoldCo.

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Operator [10]

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Your next question comes from Mark -- Matt Carletti from JMP.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [11]

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Just one question. I was hoping you could help me with the deeper dive on Texas and just some of the metrics there. So I mean I caught the comments both in the prepared remarks and in the press release about growth is going really well there. And I'm hoping you can help us tie that together with some of the comments you made right around the time of acquiring Maison and talking about how some of that Texas business was underpriced. I mean there's too much cat exposure, and you're pushing a lot of rate increase, particularly in the Dallas area. And so could you help us through kind of -- of that growth that's coming through, maybe what is rate? What is PIF? What has happened to cat exposure in Dallas? Just kind of help us separate the pieces to understand while there's good growth kind of -- do those 2 statements still line up with each other?

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

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Yes, Matt, great question. So since the -- we closed on Maison, we're happy with the brand. Prior to Maison, our exposure in Texas was through SageSure. They're a fantastic partner. They have avoided Dallas because they're not happy with the pricing. So they've been much more coastal, primarily Houston up into San Antonio. So there's multiple rate increases that are working through those -- that book, that FedNat's booked with our MGU, which is SageSure. And those are small, I believe we have 2 rate increases of around 5% each. And that book continues to perform well, and it continues to grow.

In terms of Maison, there's 3 different books there; there's the Louisiana book, which we're happy with, and there's not much rate action there. We've taken that rate back really in 2019, some of that is fully earned in, some of it continues to earn in; Maison in Florida is way underweight. We're going to be putting that through our distribution, probably more in 2021. And that brings to the point that you're asking, which is Texas Maison. They were a bit overweight in my opinion in Dallas. That rate increase is over -- approximately 60%. The policies that are actually renewing are approximately 45%. So what we're finding is that PIF is being cut in half rapidly, continues to be so each and every day, yet the premium remains relatively stable. So we're committed to those markets, including Dallas, where we can get paid for the risk. So I don't think you're going to see much growth with Maison as we recalibrate some of the programs that they have, the rates, the rules, the forms, we integrated into our operations, which is going well. I really don't think you're going to see much growth in 2020. But I think Maison has a great opportunity to grow in 2021 in these 3 states that they operate.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [13]

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Okay. Great. So just to kind of put those together, would I be right in saying that -- of the strong growth in Texas, the bulk of it is coastal in nature via SageSure and that really what happened at Maison is more, I think, you said kind of holding serve through a lot of rate increase, and we'd see PIFs and therefore cat exposure in places like Dallas declining?

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [14]

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Absolutely, spot on. Dallas is going to become much less meaningful for us unless we can get paid as we feel appropriate. SageSure is much more the first 100, 200 miles from the coast, which is much more consistent with our strategy elsewhere. We find that our cat spend actually is more efficient because that's more similar to the exposures that we write in our other states, including Louisiana, Alabama, Mississippi, Florida, all the way up to South Carolina. So spot on.

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Operator [15]

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(Operator Instructions) And your next question comes from Doug Ruth from Lenox Financial Services.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [16]

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Could you give us some additional commentary about what's happening in Florida?

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

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Yes, Doug. In terms of Florida, it's an interesting marketplace, and it has been for a number of years. It's approximately $10 billion market. And I would say the Florida domestic carriers represent about 65% to 70%. But I would say that it's hardening very quickly because some of those that are too aggressive in pricing are having to deal with the implications and the ramifications of that. In terms of us specifically, we're bullish on Florida at the right time. So our policy count is down significantly within Florida from a high 3, 4 years ago of 285,000 policies, we're at about 230,000 policies now. And I will say by the year-end of 2020, it will be lower. It might be in the 200,000 to 220,000 range. So our premiums should stay relatively flat in Florida at about $440 million. However, our policy count and our TIV, which is our total insured value, will be down significantly.

And the reason for that is, we're not being paid the correct rate. There's continued pressure on the attritional losses. We have a 7.4% rate filing that was filed in January. We have verbal notification that, that is going well. We anticipate written approval shortly and expect to deploy that in June. After that, we will be having a rate filing that will go in to recover any reinsurance pricing that does happen at midyear.

And of course, there'll be a lag as it earns out, but I believe that we'll have that rate increase, whatever it may be. Let's just say theoretically, it might be 5, 6 points, the actuaries have their work to do yet. And then that hopefully will be in line for October. So as we get onto the other side of hurricane season, I think our book will be more adequately priced. But I think additional rate may be needed. So we do have another rate filing planned for the fall. And that math, we don't have yet. We're continuing to evaluate our attritional losses. We're continuing to evaluate litigation, the benefits of AOB reform. So I would not anticipate growth from us until perhaps Q4, but more likely as we get to year-end into the beginning of 2021, perhaps January of 2021. And I think there's a great opportunity to grow if we so desire. I believe with those rate increases and with the pressures felt not just by us but by many, I think that those prices that I just spoke of, those increases will remain competitive. We are absolutely a partner to our agents. They want to place that business with us. So we're just going to wait until the correct time to write that business.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [18]

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Is the Florida book profitable at this level now?

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

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That's a tough answer because basically, the way we look at it is on a go-forward basis. So when you look backwards, with the rate increase with the data, it would need to satisfy the state with the 95% combined approximately 7.4%. So once that gets in, with that data in a flat world, that would tell you that it should be profitable as those policies earn out. With increased cat costs, that -- it's like a staircase, it's another step that we have to take. So we'll be incurring that expense before the premium will be in. So there is a bit of a lag, and that's why I say we're continuing to restrict new business and contract that book until the rates are correct.

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Ronald Arthur Jordan, FedNat Holding Company - CFO [20]

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Just to jump in on that one. This is Ron. Yes, absolutely. Here in the first quarter, despite the weather that came through, both our Florida and non-Florida books produced positive earnings.

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Douglas Scott Ruth, Lenox Financial Services, Inc. - President [21]

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All right. That's helpful. Look, the other thing would be is the stock is under the radar. It would really help if the management team and the Board of Directors would be able to consider buying some stock with their own money, it would -- it would get additional people to recognize what's going on. You folks are -- we've been patient, and we've been -- let you do what you think is right, but it would show us that you really believe in the business plan, if you were to buy some stock with your own money. I would like to encourage you to consider doing that.

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Michael Herbert Braun, FedNat Holding Company - President, CEO & Director [22]

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Yes. Doug, well said, and you've represented that in the past. And once again, I'll share that with the Board. But we do believe in what we're doing. It's been a bit of a challenge in the last 3, 4 years, where the challenge has been one after another within Florida. And it's hard to believe it, but we've already taken rates up 25% incrementally over the last 3, 4 years. And here, I am saying, we may need another 15% to 20%. So there is a challenge. We're happy with our plan in Florida. We feel we've done the right thing by pivoting our growth outside of Florida. We think the economics make sense, and we look for that opportunity to grow inside Florida as well.

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Operator [23]

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There are no further questions at this time. I would like to turn the conference back over to Mr. Mike Braun, FedNat's Chief Executive Officer.

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

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Thank you all for participating on today's call. Before we close, I want to once again thank and showcase our FedNat community, our staff, partner agents, policyholders and beyond. Our team has risen to the occasion, delivering best-in-class solutions to our customers and exhibiting resilience and flexibility in the process. This collaborative ecosystem well positions us to continue to drive improved financial results for the balance of 2020 and our strong partner agent network and increased brand recognition fuels that performance.

Our first quarter results and the successful execution to date of our non-Florida expansion strategy demonstrates this. FedNat continues to maintain a strong balance sheet and capital position, which will further enable us to build value and return capital to shareholders. As we navigate through this time, we will remain committed to excellent service, stringent underwriting and organically growing our presence in our more profitable markets.

So with that, thank you very much. Ron and I are always available if there are any follow-up questions. And hopefully, all stay well and healthy during the pandemic. And we remain committed to serving our policyholders and all of our stakeholders, our shareholders who are very important to us. So thank you.

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Operator [25]

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