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FedNat Holding Company Reports First Quarter of 2019 Results

SUNRISE, Florida, May 07, 2019 (GLOBE NEWSWIRE) -- FedNat Holding Company (the “Company”) (FNHC) today reported results for the three months ended March 31, 2019.

Q1 2019 highlights (as measured against the same three-month period last year, except where noted):

  • Net loss of $3.9 million or $0.30 per diluted share.

  • Adjusted operating loss of $2.4 million or $0.19 per diluted share.

  • $18.7 million of claims, net of recoveries, from a single hailstorm.

  • Gross written premiums of $132.2 million.

  • 8.1% increase in net premiums earned to $88.8 million, including 13.4% increase in Homeowners.

  • Quarter-end Florida homeowners in-force policies of approximately 244,000.

  • 56.1% increase in non-Florida homeowners in-force policies to approximately 52,000.

  • Book value per share increased 0.8% to $16.98 as compared to $16.84 as of December 31, 2018, despite $1.09 per share loss on a single hail storm.

"FedNat continued to make excellent progress on its strategies to drive profitable growth in the first quarter. While that progress was masked by the impact of a large hail storm that impacted Brevard County in Florida, I’m nonetheless very pleased with the continued fundamental improvement in our core homeowners business performance,” said Michael H. Braun, the Company’s Chief Executive Officer. “Highlights in the quarter included more than five percentage points of improvement in our net expense ratio, strong growth in our non-Florida homeowners book, and of course, the February announcement of our pending acquisition of the Maison businesses, which will further strengthen and diversify our Company when we complete the transaction, which is anticipated to be during the second quarter. We are also greatly encouraged by Florida’s recent passage of legislation to regulate Assignment of Benefit rules, a move that is a huge win for all policyholders within the state of Florida, regardless of who they insure their homes with, and will significantly enhance our industry’s ability to serve Florida homeowners affordably and more effectively. Collectively these developments, along with our ongoing focus on performance improvement, position FedNat for attractive opportunity to drive profitable growth for our shareholders in the quarters to come.”

Consolidated

  • Net loss of $3.9 million or $0.30 per diluted share during the first quarter of 2019, as compared to net income of $7.5 million or $0.58 per diluted share during the first quarter of 2018.

  • Adjusted operating loss of $2.4 million or $0.19 per diluted share during the first quarter of 2019, as compared to adjusted operating income of $8.5 million or $0.65 per diluted share during the first quarter of 2018.

  • Comparing to December 31, 2018, book value per share increased $0.14 to $16.98 at March 31, 2019. The increase was predominantly driven by unrealized gains on our fixed-income portfolio of $0.54 per share, partially offset by net loss of $0.30 per share, as noted above, and a dividend of $0.08 per share.

Revenues

  • Total revenue increased $8.1 million or 8.7%, to $101.2 million for the three months ended March 31, 2019, compared with $93.1 million for the three months ended March 31, 2018. The increase was primarily driven by higher Homeowners net premiums earned as a result of decreased reinsurance spend and higher recognized gains on our investments, partially offset by planned reductions in net premiums earned from Automobile and commercial general liability for the three months ended March 31, 2019, as compared to the same period in 2018.

  • Due to rigorous focus on profitability and managing our underwriting exposure, gross premiums written decreased $2.2 million, or 1.6%, to $132.2 million in the quarter, compared with $134.4 million for the same three-month period last year. The decrease in premiums written is the result of declining premiums in the non-core businesses we are exiting, Automobile and commercial general liability, as well as a decline in homeowners Florida, partially offset by homeowners non-Florida business, which continues to show exceptional growth year over year, especially in the state of Texas. Overall, Homeowners gross premiums written grew 5.3%.

  • Gross premiums earned decreased $8.0 million, or 5.5%, to $138.4 million for the three months ended March 31, 2019, as compared to $146.4 million for the three months ended March 31, 2018. The results are a reflection of our decision to exit the Automobile and commercial general liability lines and were partially offset by a 1.0% increase in earned premiums in Homeowners.

  • Ceded premiums decreased $14.7 million, or 22.9%, to $49.6 million in the quarter, compared to $64.3 million the same three-month period last year. The decrease was primarily driven by lower excess of loss reinsurance spend in Homeowners and lower ceded premiums in Automobile as a result of decreases in premiums earned during the period.

  • Other income decreased $1.5 million, or 27.1%, to $4.0 million in the quarter, compared with $5.5 million in the same three-month period last year, due to lower commission and brokerage revenue. Commission income decreased as a result of lower Automobile fee income driven by the reduction in premiums earned and, to a lesser extent, lower fee income from other areas of the business. The brokerage revenue decrease is the result of lower excess of loss reinsurance spend from the reinsurance program that became effective July 1, 2018.

Expenses

  • Losses and loss adjustment expenses (“LAE”) increased $20.7 million, or 45.1%, to $66.8 million for the three months ended March 31, 2019, compared with $46.1 million for the same three-month period last year. The net loss ratio increased 19.2 percentage points, to 75.3% in the current quarter, as compared to 56.1% in the first quarter of 2018. The higher ratio was the result of $19.0 million of weather-related net losses in the quarter, which included $18.7 million of net losses from the March 2019 hail storm.

  • The net expense ratio decreased 5.3 percentage points to 38.9% in the first quarter of 2019, as compared to 44.2% in the first quarter of 2018. The decrease in the ratio is primarily related to the lower reinsurance spend during the quarter driving higher net premiums earned. Commissions and other underwriting expenses decreased $2.0 million, or 6.6%, to $28.2 million for the three months ended March 31, 2019, compared with $30.2 million for the three months ended March 31, 2018. The decrease is made up of lower policy fee expense due to lower gross premiums earned in Automobile and lower salaries and wages from the impact of our headcount reduction initiatives.

  • Interest expense increased $4.0 million to $5.1 million for the three months ended March 31, 2019, compared with $1.1 million in the prior year period. The increase in interest expense is the result of $3.6 million prepayment fees, including the write-off of remaining debt issuance costs, related to our previously announced repayment of $45 million of Senior Notes issued in December 2017 during the quarter.

Line of Business Results

  • Homeowners net loss for the current quarter was $1.4 million, which included $18.7 million of pre-tax net losses related to a single hail storm, as mentioned above. Excluding this storm, Homeowners net income would have been $12.5 million with a combined ratio of 87.5%. Additionally, net premiums earned increased $10.4 million or 13.4% in the first quarter of 2019 as compared to the first quarter of 2018.

  • Automobile's net loss for the first quarter of 2019 was $0.7 million, which includes $0.6 million of pre-tax adverse development, as compared to breakeven results in the first quarter of 2018.

  • Other’s net loss was $1.8 million in the first quarter of 2019, as compared to net income of $0.6 million in the first quarter of 2018. Other's adjusted operating income (loss) was $(0.3) million and $1.4 million for these same period, with the decline primarily due to adverse prior year development in our commercial general liability book of business and higher interest expense, partially offset by $0.8 million higher pre-tax net investment income this quarter as compared to prior year quarter.

Non-GAAP Performance Measures

Non United States generally accepted accounting principles ("GAAP") measures do not replace the most directly comparable GAAP measures and we have included a detailed reconciliation thereof on page 11.

We exclude the after-tax (using our statutory income tax rate) effects of the following items from GAAP net income (loss) to arrive at adjusted operating income (loss):

  • Net realized and unrealized gains (losses), including, but not limited to, gains (losses) associated with investments and early extinguishment of debt;

  • Acquisition, integration and other costs and the amortization of specifically identifiable intangibles (other than value of business acquired);

  • Impairment of intangibles;

  • Income (loss) from initial adoption of new regulations and accounting guidance; and

  • Income (loss) from discontinued operations.

We also exclude the pre-tax effect of the first bullet above from GAAP revenues to arrive at adjusted operating revenues.

Management believes these non-GAAP performance measures allow for a better understanding of the underlying trend in our business, as the excluded items are not necessarily indicative of our operating fundamentals or performance.

Similarly, we exclude accumulated other comprehensive income (loss) ("AOCI") from book value per share to arrive at book value per share, excluding AOCI.

Conference Call Information

The Company will hold an investor conference call at 9:00 AM (ET) Wednesday, May 8, 2019. The Company’s CEO, Michael Braun and its CFO, Ronald Jordan will discuss the financial results and review the outlook for the Company. Messrs. Braun and Jordan invite interested parties to participate in the conference call.

Listeners interested in participating in the Q&A session may access the conference call as follows:

Toll-Free Dial-in: (877) 303-6913

Conference ID: 9374219

A live webcast of the call will be available online via the “Conference Calls” section of the Company’s website at FedNat.com or interested parties can click on the following link:

http://www.fednat.com/investors/conference-calls/

Please call at least five minutes in advance to ensure that you are connected prior to the presentation. A webcast replay of the conference call will be available shortly after the live webcast is completed and may be accessed via the Company’s website.

About the Company

The Company is an insurance holding company that controls substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual relationships with independent agents and general agents. The Company, through our wholly owned subsidiaries, are authorized to underwrite, and/or place homeowners multi-peril, federal flood and other lines of insurance in Florida and other states. We market, distribute and service our own and third-party insurers’ products and other services through a network of independent and general agents.

The Company’s supplemental line of business information is designed to afford users greater transparency into our results. The “Homeowners” line of business consists of our homeowners and fire property and casualty insurance business, which currently operates in Florida, Alabama, Texas, Louisiana and South Carolina. The “Automobile” line of business consists of our nonstandard personal automobile insurance business which currently operates in Georgia, Texas, Alabama, and Florida. The “Other” line of business primarily consists of our commercial general liability and federal flood businesses, along with corporate and investment operations.

Forward-Looking Statements

Certain statements made by FedNat Holding Company or on its behalf may contain “forward-looking statements” within the Private Securities Litigation Reform Act of 1995.

Statements that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” or “will” or the negative or other variations thereof, and similar words or phrases or comparable terminology, are intended to identify forward-looking statements.

Forward-looking statements might also include, but are not limited to, one or more of the following:

  • Projections of revenues, income, earnings per share, dividends, capital structure or other financial items or measures;

  • Descriptions of plans or objectives of management for future operations, insurance products or services;

  • Forecasts of future insurable events, economic performance, liquidity, need for funding and income; and

  • Descriptions of assumptions or estimates underlying or relating to any of the foregoing.

The risks and uncertainties include, without limitation, risks and uncertainties related to estimates, assumptions and projections generally; the nature of the Company’s business and its ability to integrate the operations to be acquired; the adequacy of its reserves for losses and loss adjustment expense; claims experience; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail) and other catastrophic losses; reinsurance costs and the ability of reinsurers to indemnify the Company; raising additional capital and our compliance with minimum capital and surplus requirements; potential assessments that support property and casualty insurance pools and associations; the effectiveness of internal financial controls; the effectiveness of our underwriting, pricing and related loss limitation methods; changes in loss trends, including as a result of insureds’ assignment of benefits; court decisions and trends in litigation; our potential failure to pay claims accurately; ability to obtain regulatory approval applications for requested rate increases, or to underwrite in additional jurisdictions, and the timing thereof; the impact that the results of our subsidiaries’ operations may have on our results of operations; inflation and other changes in economic conditions (including changes in interest rates and financial markets); pricing competition and other initiatives by competitors; legislative and regulatory developments; the outcome of litigation pending against the Company, and any settlement thereof; dependence on investment income and the composition of the Company’s investment portfolio; insurance agents; ratings by industry services; the reliability and security of our information technology systems; reliance on key personnel; acts of war and terrorist activities; and other matters described from time to time by the Company in releases and publications, and in periodic reports and other documents filed with the United States Securities and Exchange Commission.

In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including claims and litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a contingency. Reported results may therefore appear to be volatile in certain accounting periods.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company does not undertake any obligation to update publicly or revise any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Contacts

Michael H. Braun, CEO (954) 308-1322,
Ronald Jordan, CFO (954) 308-1363,
or Erick A. Fernandez (954) 308-1341



FEDNAT HOLDING COMPANY AND SUBSIDIARIES

Selected Financial Highlights

(Dollars in thousands, except per share data)

(Unaudited)

As of or For the

Three Months Ended

2019

2018

% Change

Net Income (Loss) Attributable to Common Shareholders

Net income (loss):

Homeowners

$

(1,423

)

$

6,941

(120.5

)%

Automobile

(679

)

(41

)

1,556.1

%

Other

(1,763

)

563

(413.1

)%

Consolidated

$

(3,865

)

$

7,463

(151.8

)%

Adjusted operating income (loss):

Homeowners

$

(1,387

)

$

7,117

(119.5

)%

Automobile

(679

)

(20

)

3,295.0

%

Other

(328

)

1,367

(124.0

)%

Consolidated

$

(2,394

)

$

8,464

(128.3

)%

Per Common Share

Net income (loss) - diluted

$

(0.30

)

$

0.58

(152.4

)%

Adjusted operating income (loss) - diluted

(0.19

)

0.65

(128.6

)%

Dividends declared

0.08

0.08

%

Book value

16.98

16.36

3.8

%

Book value, excluding AOCI

16.73

16.66

0.4

%

Return to Shareholders

Repurchases of common stock

$

$

5,000

(100.0

)%

Dividends declared

1,041

1,043

(0.2

)%

$

1,041

$

6,043

(82.8

)%

Revenue

Total revenues

$

101,197

$

93,077

8.7

%

Adjusted operating revenues

98,896

94,129

5.1

%

Gross premiums written

132,233

134,395

(1.6

)%

Gross premiums earned

138,367

146,442

(5.5

)%

Net premiums earned

88,784

82,109

8.1

%

Ratios to Net Premiums Earned

Net loss ratio

75.3

%

56.1

%

Net expense ratio

38.9

%

44.2

%

Combined ratio

114.2

%

100.3

%

In-Force Homeowners Policies

Florida

244,228

265,184

(7.9

)%

Non-Florida

52,297

33,492

56.1

%

296,525

298,676

(0.7

)%





FEDNAT HOLDING COMPANY AND SUBSIDIARIES

Consolidated Statement of Operations

(In thousands, except per share data)

(Unaudited)

Three Months Ended

March 31,

2019

2018

Revenues:

Net premiums earned

$

88,784

$

82,109

Net investment income

3,710

2,943

Net realized and unrealized investment gains (losses)

2,301

(1,052

)

Direct written policy fees

2,391

3,576

Other income

4,011

5,501

Total revenues

101,197

93,077

Costs and expenses:

Losses and loss adjustment expenses

66,839

46,071

Commissions and other underwriting expenses

28,234

30,221

General and administrative expenses

6,311

6,085

Interest expense

5,051

1,084

Total costs and expenses

106,435

83,461

Income (loss) before income taxes

(5,238

)

9,616

Income tax expense (benefit)

(1,373

)

2,371

Net income (loss)

(3,865

)

7,245

Net income (loss) attributable to non-controlling interest

(218

)

Net income (loss) attributable to FedNat Holding Company shareholders

$

(3,865

)

$

7,463

Net Income (Loss) Per Common Share

Basic

$

(0.30

)

$

0.58

Diluted

$

(0.30

)

$

0.58

Weighted Average Number of Shares of Common Stock Outstanding

Basic

12,795

12,850

Diluted

12,795

12,945

Dividends Declared Per Common Share

$

0.08

$

0.08




FEDNAT HOLDING COMPANY AND SUBSIDIARIES

Selected Operating Metrics

(Unaudited)

Three Months Ended

March 31,

2019

2018

(In thousands)

Gross premiums written:

Homeowners Florida

$

103,963

$

108,371

Homeowners non-Florida

25,320

14,444

Automobile

(1

)

6,347

Commercial general liability

(53

)

2,514

Federal flood

3,004

2,719

Total gross premiums written

$

132,233

$

134,395


Three Months Ended

March 31,

2019

2018

(In thousands)

Gross premiums earned:

Homeowners Florida

$

112,672

$

118,824

Homeowners non-Florida

21,170

13,639

Automobile

22

8,328

Commercial general liability

1,036

2,629

Federal flood

3,467

3,022

Total gross premiums earned

$

138,367

$

146,442


Three Months Ended

March 31,

2019

2018

(In thousands)

Net premiums earned:

Homeowners

$

87,811

$

77,405

Automobile

5

2,211

Commercial general liability

968

2,493

Total net premiums earned

$

88,784

$

82,109




FEDNAT HOLDING COMPANY AND SUBSIDIARIES

Selected Operating Metrics (continued)

(Unaudited)

Three Months Ended

March 31,

2019

2018

(In thousands)

Commissions and other underwriting expenses:

Homeowners Florida

$

13,222

$

14,363

All others

5,267

4,800

Ceding commissions

(2,784

)

(3,715

)

Total commissions

15,705

15,448

Automobile

3

1,467

Homeowners non-Florida

676

186

Total fees

679

1,653

Salaries and wages

3,322

3,766

Other underwriting expenses

8,528

9,354

Total commissions and other underwriting expenses

$

28,234

$

30,221


Three Months Ended

March 31,

2019

2018

Net loss ratio

75.3

%

56.1

%

Net expense ratio

38.9

%

44.2

%

Combined ratio

114.2

%

100.3

%

Gross loss ratio

211.4

%

123.5

%

Gross expense ratio

27.0

%

27.3

%




FEDNAT HOLDING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheet

(Unaudited)

March 31,

December 31,

2019

2018

ASSETS

(In thousands)

Investments:

Debt securities, available-for-sale, at fair value

$

443,458

$

428,641

Debt securities, held-to-maturity, at amortized cost

4,552

5,126

Equity securities, at fair value

20,824

17,758

Total investments

468,834

451,525

Cash and cash equivalents

100,589

64,423

Prepaid reinsurance premiums

69,858

108,577

Premiums receivable, net of allowance

22,684

29,791

Reinsurance recoverable, net

301,922

211,424

Deferred acquisition costs, net

40,232

39,436

Income taxes, net

4,027

5,220

Other assets

27,441

14,975

Total assets

$

1,035,587

$

925,371

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

Loss and loss adjustment expense reserves

$

374,124

$

296,230

Unearned premiums

275,860

281,992

Reinsurance payable

31,399

63,599

Long-term debt, net of deferred financing costs

98,401

44,404

Deferred revenue

4,567

4,585

Other liabilities

33,320

19,302

Total liabilities

817,671

710,112

Shareholders' Equity

Preferred stock, $0.01 par value: 1,000,000 shares authorized

Common stock, $0.01 par value: 25,000,000 shares authorized; 12,836,401 and 12,784,444 shares issued and outstanding, respectively

128

128

Additional paid-in capital

141,803

141,128

Accumulated other comprehensive income (loss)

3,138

(3,750

)

Retained earnings

72,847

77,753

Total shareholders’ equity attributable to FedNat Holding Company shareholders

217,916

215,259

Non-controlling interest

Total shareholders’ equity

217,916

215,259

Total liabilities and shareholders' equity

$

1,035,587

$

925,371






FEDNAT HOLDING COMPANY AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION

Statements of Operations and Operating Metrics by Line of Business

(Unaudited)

Three Months Ended March 31,

2019

2018

Homeowners

Automobile

Other

Consolidated

Homeowners

Automobile

Other

Consolidated

(Dollars in thousands)

Revenues:

Gross premiums written

$

129,283

$

(1

)

$

2,951

$

132,233

$

122,815

$

6,347

$

5,233

$

134,395

Gross premiums earned

133,842

22

4,503

138,367

132,463

8,328

5,651

146,442

Ceded premiums

(46,031

)

(17

)

(3,535

)

(49,583

)

(55,058

)

(6,117

)

(3,158

)

(64,333

)

Net premiums earned

87,811

5

968

88,784

77,405

2,211

2,493

82,109

Net investment income

3,710

3,710

2,943

2,943

Net realized and unrealized investment gains (losses)

2,301

2,301

(1,052

)

(1,052

)

Direct written policy fees

2,298

3

90

2,391

1,923

1,467

186

3,576

Other income

3,542

12

457

4,011

3,977

488

1,036

5,501

Total revenues

93,651

20

7,526

101,197

83,305

4,166

5,606

93,077

Costs and expenses:

Losses and loss adjustment expenses

63,330

844

2,665

66,839

41,955

2,236

1,880

46,071

Commissions and other underwriting expenses

27,367

35

832

28,234

27,356

1,860

1,005

30,221

General and administrative expenses

4,860

50

1,401

6,311

4,889

125

1,071

6,085

Interest expense

5,051

5,051

100

984

1,084

Total costs and expenses

95,557

929

9,949

106,435

74,300

4,221

4,940

83,461

Income (loss) before income taxes

(1,906

)

(909

)

(2,423

)

(5,238

)

9,005

(55

)

666

9,616

Income tax expense (benefit)

(483

)

(230

)

(660

)

(1,373

)

2,282

(14

)

103

2,371

Net income (loss)

(1,423

)

(679

)

(1,763

)

(3,865

)

6,723

(41

)

563

7,245

Net income (loss) attributable to non-controlling interest

(218

)

(218

)

Net income (loss) attributable to FNHC shareholders

$

(1,423

)

$

(679

)

$

(1,763

)

$

(3,865

)

$

6,941

$

(41

)

$

563

$

7,463

Ratios to net premiums earned:

Net loss ratio

72.1

%

NCM

275.3

%

75.3

%

54.2

%

101.1

%

75.4

%

56.1

%

Net expense ratio

36.7

%

38.9

%

41.7

%

44.2

%

Combined ratio

108.8

%

114.2

%

95.9

%

100.3

%






FEDNAT HOLDING COMPANY AND SUBSIDIARIES

GAAP to Non-GAAP Reconciliations

(Dollars in thousands)

(Unaudited)

As of or For the Three Months Ended March 31,

2019

2018

Homeowners

Automobile

Other

Consolidated

Homeowners

Automobile

Other

Consolidated

Revenue

Total revenues

$

93,651

$

20

$

7,526

$

101,197

$

83,305

$

4,166

$

5,606

$

93,077

Less:

Net realized and unrealized investment gains (losses)

2,301

2,301

(1,052

)

(1,052

)

Adjusted operating revenues

$

93,651

$

20

$

5,225

$

98,896

$

83,305

$

4,166

$

6,658

$

94,129

Net Income (Loss)

Net income (loss)

$

(1,423

)

$

(679

)

$

(1,763

)

$

(3,865

)

$

6,941

$

(41

)

$

563

$

7,463

Less:

Net realized and unrealized investment gains (losses)

1,718

1,718

(785

)

(785

)

Acquisition and other costs

(36

)

(484

)

(520

)

(176

)

(21

)

(19

)

(216

)

Gain (loss) on early extinguishment of debt

(2,669

)

(2,669

)

Adjusted operating income (loss)

$

(1,387

)

$

(679

)

$

(328

)

$

(2,394

)

$

7,117

$

(20

)

$

1,367

$

8,464

Income tax rate assumed for reconciling items above

25.35

%

25.35

%

25.35

%

25.35

%

25.35

%

25.35

%

25.35

%

25.35

%

Per Common Share

Book value

$

16.98

$

16.36

Less:

AOCI

0.24

(0.30

)

Book value, excluding AOCI

$

16.73

$

16.66