GlobeNewswire Inc | Nov 8, 2021 04:01PM EST

November 08, 2021

SUNRISE, Fla., Nov. 08, 2021 (GLOBE NEWSWIRE) -- FedNat Holding Company (the Company or "FedNat") (Nasdaq: FNHC) today reported results for the three and nine months ended September30, 2021. The Company also announced its intent to refocus its operations on the Florida homeowners market and to exit non-Florida markets.

Refocus on Florida Homeowners Market

FedNat announced its intent to refocus operations on the Florida market, which has been the Companys historical focus since its founding in 1992. In conjunction with this decision, FedNat has elected to commence an orderly runoff of the insurance operations of Maison Insurance Company (Maison). Maison will be filing appropriate documentation with its insurance regulators in Louisiana, Florida and Texas concerning a withdrawal plan. Subject to the regulatory review, Maison expects to begin non-renewing its Louisiana policies on their anniversary dates beginning in January 2022 and its Texas policies beginning in February 2022. The nonrenewal of Maisons Florida policies is expected to begin in June 2022.

FedNat Insurance Companys (FNIC) non-Florida book has been written through SageSure, a longstanding partner that is a third-party managing general underwriter, that owns the renewal rights to these policies. After careful coordination and collaboration with SageSure, FedNat expects that in December 2021 SageSure will begin making offers of coverage to FNIC policyholders to renew most policies onto alternative insurance carrier partners of SageSure in Texas and Louisiana that are not affiliated with the Company. FNIC policies in South Carolina, Alabama and Mississippi that were written through SageSure will continue to be renewed by FNIC until such time as SageSures carrier partners obtain the necessary licensing in those states, possibly in the second quarter of 2022. The transition of policies to other carriers is subject to applicable insurance laws and regulations.

Michael H. Braun, FedNats Chief Executive Officer, said, The geographic expansion strategy that FedNat launched in 2013 to write homeowners insurance in coastal markets outside of Florida, and then accelerated in 2019, was well-intended given the challenges we were facing in the Florida homeowners market at that time. The acquisition of Maison, and to a lesser extent, the expansion of FNICs non-Florida book, ended up being significantly challenged due to the unprecedented number of catastrophe weather events that affected Texas and Louisiana over the past 15 months, coupled with the hardening reinsurance market that began in mid-2019, after our announcement of the acquisition. The impact of these significant catastrophe weather events has put a strain on FedNats capital position and further action is now appropriate. We are therefore exiting the non-Florida markets and refocusing on the improving Florida homeowners market, where there has been some legislative reform, and more importantly, we have taken rate of approximately 70% in FNIC and approximately 50% in Monarch National Insurance Company ("MNIC") over the past four years. As a result, we believe now is the right time to focus on writing policies in Florida, where FedNat continues to have significant market share, strong underwriting and claims handling capabilities, and strong agent relationships.

The Company infused $20 million of capital into FNIC effective as of September 30, 2021 to support its book of business. In accordance with the orderly runoff strategy, the Company elected to make no such infusion into Maison for the third quarter. The Company has approximately $40 million of non-insurance company liquidity heading into the fourth quarter of 2021.

Mr. Braun continued, "FedNat has communicated with Demotech about our intent to refocus our operations on the Florida market and appreciates the constructive analysis and dialogue maintained through a challenging period of time. Demotech has informed FedNat that it is withdrawing its rating from Maison, which we believe is appropriate at this time, while the ratings of FNIC and MNIC are independent of such action."

Mr. Braun continued, The process of running off the Maison book and transferring the SageSure policies is expected to take approximately 18 months to complete, resulting in a financially stronger company with approximately $450 million of anticipated in-force premium exclusively in Florida. We expect the benefits of this transition to begin to materialize immediately in the form of lower capital requirements and lower exposure to catastrophe weather losses. We will of course continue to provide quality service to all of our policyholders throughout the runoff period."

The Companys Form 10-Q for the period ended September 30, 2021 will contain further detail with respect to this announcement.

Third Quarter 2021 Results

Q3 2021 highlights (as measured against the same three-month period last year, except where noted):

-- Net loss of $24.8 million or $(1.42) per diluted share as compared to net loss of $20.7 million or $(1.51) per diluted share. -- Adjusted operating loss of $26.0 million or $(1.49) per diluted share as compared to adjusted operating loss of $21.5 million or $(1.57) per diluted share. -- Loss before income taxes decreased 26.1% to $24.8 million as compared to $33.5 million. -- $20.0 million or $1.15 per diluted share of claims, net of reinsurance recoveries and fee income, driven by Hurricane Ida, as well as other severe weather events, primarily impacting Louisiana, Florida and Texas. -- $157.0 million of gross written premiums, compared to $180.2 million, reflecting exposure management initiatives. -- Combined ratio of 165.4%, including 37.7 points of net catastrophe losses in the period. -- Gross loss ratio for current quarter attritional losses of 34.0% and gross expense ratio of 25.9%, as compared to 38.3% and 20.6%, respectively, in the third quarter of 2020. -- Florida homeowners in-force policies decreased 22.6% to approximately 168,000, while Florida gross premiums written decreased 13.9%, reflecting continued execution of our strategy to increase revenue per policy and limit the size of our book of business until rates more accurately reflect increased costs of claims and reinsurance. -- Non-insurance company liquidity of approximately $60 million at September30, 2021, which then decreased to $40 million as a result of a surplus infusion into FedNat Insurance Company ("FNIC") related to third quarter results. No infusion was made to Maison Insurance Company, as stated above. -- Book value per share of $4.08 as of September30, 2021.

Commenting on FedNats third quarter results, Mr. Braun said, "Our results were significantly impacted by catastrophe weather events that primarily impacted Louisiana and Texas. At the same time, the profitability of our Florida homeowners business continued to improve as a result of ongoing rate increases and underwriting actions we have taken to reduce our policy count and insured exposure. Over the past five years, our exposure management efforts have reduced our Florida book by over a third from 272,000 policies-in-force in 2017 to 168,000 at the end of the third quarter of 2021, yet our in-force premiums remained fairly stable at approximately $430 million due to multiple rounds of rate increases. The benefits of these underwriting actions and rate increases are clearly evident in our Florida homeowners attritional loss ratio, which declined to 39% in the third quarter of 2021 as compared to 44% a year ago.

Revenues

-- Total revenue decreased $30.6 million or 31.4%, to $66.7 million for the three months ended September30, 2021, compared with $97.3 million for the three months ended September30, 2020. The decrease was driven primarily by increases in ceded premiums from incremental quota-share agreements and lower gross premiums earned, which are discussed in further detail below. -- Gross premiums written decreased $23.2 million, or 12.8%, to $157.0 million in the quarter compared with $180.2 million for the same three-month period last year, which was driven by a reduction in our policies-in-force and exposure across all states, as a result of our rigorous exposure management in response to the challenging litigation environment, partially offset by rate actions taken across our insurance subsidiaries. -- Gross premiums earned decreased $5.1 million, or 2.8%, to $178.4 million for the three months ended September30, 2021, as compared to $183.5 million for the three months ended September30, 2020. -- Ceded premiums increased $24.4 million, or 24.5%, to $124.4 million in the quarter, compared to $100.0 million the same three-month period last year. The increase was driven by approximately $26 million of higher quota-share ceded premiums: $20 million related to new and incremental treaties for FNIC's Florida book of business and $6 million related to the quota-share treaty for FNIC's non-Florida book of business cession percentage increasing to 80% from 50% during the fourth quarter of 2020. The increase to ceded premium earned associated with the aforementioned quota-share treaties is largely offset by corresponding reductions in loss and LAE, and commission and other underwriting expenses when comparing the periods.

Expenses

-- Losses and loss adjustment expenses (LAE) decreased $39.4 million, or 39.8%, to $59.6 million for the three months ended September30, 2021, compared with $99.0 million for the same three-month period last year driven by higher ceded losses under quota-share reinsurance treaties and lower net catastrophe losses. The net loss ratio decreased 7.9 percentage points, to 110.6% in the current quarter, as compared to 118.5% in the third quarter of 2020, driven primarily by lower net catastrophe losses. The current quarter included approximately $20.3 million of catastrophe losses, net of reinsurance and claims handling fee income, driven by Hurricane Ida as well as other severe weather events, which together impacted Louisiana, Florida and Texas. By comparison, the third quarter of 2020 catastrophe net losses were $38.3 million, net of reinsurance, which included Hurricanes Laura and Sally as well as other severe weather events. Additionally, higher ceded losses through our quota-share treaties and lower attritional losses in FNIC's Florida book of business drove lower current accident year losses, excluding catastrophes, compared to the prior year. -- Our gross expense ratio was 25.9% during the three months ended September30, 2021, as compared to 20.6% during the three months ended September30, 2020. The net expense ratio increased 19.0% percentage points to 54.8% in the third quarter of 2021, as compared to 35.8% in the third quarter of 2020 due primarily to higher ceded reinsurance premiums in 2021, as discussed earlier. -- Commissions and other underwriting expenses decreased $1.0 million, or 4.0%, to $23.6 million for the three months ended September30, 2021, compared with $24.6 million for the three months ended September30, 2020. -- Pre-tax losses decreased $8.7 million, or 26.1%, to $24.8 million for the three months ended September30, 2021, compared with $33.5 million for the three months ended September30, 2020. -- In the current quarter, we did not record a tax benefit on our pre-tax losses due to the ongoing valuation allowance against our net deferred tax assets for net operating loss carryforwards, which was established in the second quarter of 2021. We currently expect that these net deferred tax assets will be realizable; however, recognition of these amounts may not occur until the Company reports taxable income.

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 detailed reconciliations thereof on page 10.

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 investment gains (losses); -- Gains (losses) associated with early extinguishment of debt; -- Merger and acquisition, integration and other strategic 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) Tuesday, November 9, 2021. The Companys 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: 2329424

A live webcast of the call will be available online via the Conference Calls section of the Companys 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 Companys website.

About the Company

FedNat Holding Company is a regional 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 its wholly owned subsidiaries FedNat Insurance Company, Maison Insurance Company and Monarch National Insurance Company, is focused on providing homeowners insurance in Florida, Texas, Louisiana, Alabama, South Carolina and Mississippi. More information is available at https://www.fednat.com/investor-relations/.

Forward-Looking Statements

Safe harbor statement under 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 Companys business; 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 catastrophe losses; reinsurance costs and the ability of reinsurers to indemnify the Company; raising additional capital and our compliance with minimum capital and surplus requirements; the impact of the refocus of our operations on Florida; 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 consistent with our contractual obligations; 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 Companys 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. We do 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,Bernard Kilkelly, Investor Relations (954) 308-1409,or investorrelations@fednat.com

FEDNAT HOLDING COMPANY AND SUBSIDIARIESSelected Financial Highlights(Dollars in thousands, except per share data)(Unaudited)

As of or For the Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % ChangeNet Income(Loss)Attributable to CommonShareholdersNet income $ (24,781 ) $ (20,745 ) 19.5 % $ (94,531 ) $ (40,091 ) 135.8 %(loss)Adjustedoperating (26,007 ) (21,501 ) 21.0 % (95,916 ) (45,303 ) 111.7 %income(loss) Per Common ShareNet income )(loss) - $ (1.42 ) $ (1.51 ) (6.1 % $ (5.76 ) $ (2.89 ) 99.5 %dilutedAdjustedoperating )income (1.49 ) (1.57 ) (5.0 % (5.84 ) (3.26 ) 79.1 %(loss) -dilutedDividends ? 0.09 (100.0 ) ? 0.27 (100.0 )declared % %Book value 4.08 14.69 (72.2 ) 4.08 14.69 (72.2 ) % %Book value, ) )excluding 3.94 13.54 (70.9 % 3.94 13.54 (70.9 %AOCI Return to ShareholdersRepurchases )of common $ ? $ ? NCM $ ? $ 10,000 (100.0 %stockDividends ? 1,259 (100.0 ) ? 3,819 (100.0 )declared % % $ ? $ 1,259 (100.0 ) $ ? $ 13,819 (100.0 ) % % Revenue Total $ 66,724 $ 97,316 (31.4 ) $ 178,510 $ 347,034 (48.6 )revenues % %Adjusted ) )operating 65,451 95,992 (31.8 % 176,986 338,152 (47.7 %revenuesGross ) )premiums 157,003 180,152 (12.8 % 527,495 558,492 (5.6 %writtenGross ) )premiums 178,368 183,518 (2.8 % 535,848 538,988 (0.6 %earnedNet premiums 53,929 83,546 (35.4 ) 129,155 300,934 (57.1 )earned % % Ratios toNet Premiums EarnedNet loss 110.6 % 118.5 % 143.3 % 99.0 % ratioNet expense 54.8 % 35.8 % 61.8 % 35.7 % ratioCombined 165.4 % 154.3 % 205.1 % 134.7 % ratio In-ForceHomeowners PoliciesFlorida 168,000 217,000 (22.6 ) 168,000 217,000 (22.6 ) % %Non-Florida 133,000 152,000 (12.5 ) 133,000 152,000 (12.5 ) % % 301,000 369,000 (18.4 ) 301,000 369,000 (18.4 ) % %

FEDNAT HOLDING COMPANY AND SUBSIDIARIESConsolidated Statement of Operations(In thousands, except per share data)(Unaudited)

Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020Revenues: Net premiums earned $ 53,929 $ 83,546 $ 129,155 $ 300,934 Net investment income 1,685 2,404 5,092 9,637 Net realized andunrealized gains 1,273 1,324 10,949 8,882 (losses)Direct written policy 3,179 3,603 9,730 10,662 feesOther income 6,658 6,439 23,584 16,919 Total revenues 66,724 97,316 178,510 347,034 Costs and expenses: Losses and loss 59,644 99,016 185,090 297,862 adjustment expensesCommissions and other 23,591 24,580 61,977 90,205 underwriting expensesGeneral and 5,974 5,333 17,854 17,241 administrative expensesInterest expense 2,296 1,915 6,451 5,745 Total costs and 91,505 130,844 271,372 411,053 expenses Income (loss) before (24,781 ) (33,528 ) (92,862 ) (64,019 )income taxesIncome tax expense ? (12,783 ) 1,669 (23,928 )(benefit)Net income (loss) $ (24,781 ) $ (20,745 ) $ (94,531 ) $ (40,091 ) Net Income (Loss) Per Common ShareBasic $ (1.42 ) $ (1.51 ) $ (5.76 ) $ (2.89 )Diluted (1.42 ) (1.51 ) (5.76 ) (2.89 ) Weighted Average Numberof Shares of Common Stock OutstandingBasic 17,445 13,708 16,417 13,890 Diluted 17,445 13,708 16,417 13,890 Dividends Declared Per $ ? $ 0.09 $ ? $ 0.27 Common Share

FEDNAT HOLDING COMPANY AND SUBSIDIARIESSelected Operating Metrics(Unaudited)

Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (In thousands)Gross premiums written:Homeowners Florida $ 91,370 $ 106,101 $ 320,613 $ 339,799 Homeowners 59,660 68,447 190,148 203,897 non-FloridaFederal flood 5,993 5,660 16,874 14,967 Non-core (20 ) (56 ) (140 ) (171 )Total gross premiums $ 157,003 $ 180,152 $ 527,495 $ 558,492 written

Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (In thousands)Gross premiums earned:Homeowners Florida $ 108,193 $ 115,346 $ 326,956 $ 347,237 Homeowners 65,017 63,759 194,160 179,071 non-FloridaFederal flood 5,178 4,469 14,872 12,851 Non-core (20 ) (56 ) (140 ) (171 )Total gross premiums $ 178,368 $ 183,518 $ 535,848 $ 538,988 earned

Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (In thousands)Net premiums earned:Homeowners Florida $ 34,308 $ 54,326 $ 79,867 $ 190,627 Homeowners 19,641 29,276 49,428 110,478 non-FloridaNon-core (20 ) (56 ) (140 ) (171 )Total net premiums $ 53,929 $ 83,546 $ 129,155 $ 300,934 earned

FEDNAT HOLDING COMPANY AND SUBSIDIARIESSelected Operating Metrics (continued)(Unaudited)

Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (In thousands)Commissions andother underwriting expenses:Homeowners Florida $ 12,539 $ 13,736 $ 36,963 $ 41,181 All others 13,108 13,337 36,318 37,789 Ceding commissions (16,546 ) (7,909 ) (55,991 ) (13,969 )Total commissions 9,101 19,164 17,290 65,001 Fees 1,271 1,358 3,839 3,694 Salaries and wages 3,124 3,351 9,759 10,068 Other underwriting 10,095 707 31,089 11,442 expensesTotal commissionsand other $ 23,591 $ 24,580 $ 61,977 $ 90,205 underwritingexpenses

Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net loss ratio 110.6 % 118.5 % 143.3 % 99.0 %Net expense ratio 54.8 % 35.8 % 61.8 % 35.7 %Combined ratio 165.4 % 154.3 % 205.1 % 134.7 %Gross loss ratio 371.4 % 213.0 % 211.4 % 142.0 %Gross expense ratio 25.9 % 20.6 % 25.3 % 22.5 %

FEDNAT HOLDING COMPANY AND SUBSIDIARIESConsolidated Balance Sheet(Unaudited)

September 30, December 31, 2021 2020ASSETS (In thousands)Investments: Debt securities, available-for-sale, at fair $ 349,299 $ 488,210 valueEquity securities, at fair value 5,965 3,157 Total investments 355,264 491,367 Cash and cash equivalents 166,860 102,367 Prepaid reinsurance premiums 320,929 278,272 Premiums receivable, net of allowance 50,018 50,803 Reinsurance recoverable, net 959,263 413,026 Deferred acquisition costs, net 18,977 25,405 Current and deferred income taxes, net 29,776 35,035 Other assets 37,686 32,262 Total assets $ 1,938,773 $ 1,428,537 LIABILITIES AND SHAREHOLDERS? EQUITY Liabilities Loss and loss adjustment expense reserves $ 1,037,537 $ 540,367 Unearned premiums 358,435 366,789 Reinsurance payable and funds withheld 306,679 202,827 liabilitiesLong-term debt, net of deferred financing costs 118,776 98,683 Deferred revenue 6,211 7,187 Other liabilities 39,912 54,524 Total liabilities 1,867,550 1,270,377 Shareholders' Equity Preferred stock, $0.01 par value: 1,000,000 ? ? shares authorizedCommon stock, $0.01 par value: 50,000,000shares authorized; 17,446,930 and 13,717,908 174 137 shares issued and outstanding, respectivelyAdditional paid-in capital 185,799 169,298 Accumulated other comprehensive income (loss) 2,442 11,386 Retained earnings (deficit) (117,192 ) (22,661 )Total shareholders? equity 71,223 158,160 Total liabilities and shareholders' equity $ 1,938,773 $ 1,428,537

FEDNAT HOLDING COMPANY AND SUBSIDIARIESGAAP to Non-GAAP Reconciliations(Dollars in thousands)(Unaudited)

As of or For the Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020Revenue Total revenues $ 66,724 $ 97,316 $ 178,510 $ 347,034 Less: Net realized andunrealized investment 1,273 1,324 1,524 8,882 gains (losses)Adjusted operating $ 65,451 $ 95,992 $ 176,986 $ 338,152 revenues Net Income (Loss) Net income (loss) $ (24,781 ) $ (20,745 ) $ (94,531 ) $ (40,091 )Less: Net realized andunrealized investment 1,273 793 1,524 5,320 gains (losses)Acquisition and (9 ) (15 ) (26 ) (41 )strategic costsAmortization of (38 ) (22 ) (113 ) (67 )identifiable intangiblesAdjusted operating $ (26,007 ) $ (21,501 ) $ (95,916 ) $ (45,303 )income (loss) Income tax rate assumedfor reconciling items ? % 40.10 % ? % 40.10 %above Per Common Share Book value $ 4.08 $ 14.69 $ 4.08 $ 14.69 Less: AOCI 0.14 1.15 0.14 1.15 Book value, excluding $ 3.94 $ 13.54 $ 3.94 $ 13.54 AOCI