GlobeNewswire Inc | Aug 5, 2020 04:02PM EDT

August 05, 2020

SUNRISE, Fla., Aug. 05, 2020 (GLOBE NEWSWIRE) -- FedNat Holding Company (the Company) (Nasdaq: FNHC) today reported results for the three and six months ended June30, 2020.

Q2 2020 highlights (as measured against the same three-month period last year, except where noted):

-- Net loss of $21.5 million or $1.57 per diluted share as compared to net income of $7.1 million or $0.55 per diluted share. -- Adjusted operating loss of $28.1 million or $2.05 per diluted share as compared to adjusted operating income of $5.7 million or $0.44 per diluted share. -- $48.3 million of claims, net of recoveries, pre-tax, from fourteen Property Claims Services ("PCS") weather events, impacting Florida, Texas and Louisiana, including Tropical Storm Cristobal and a Florida panhandle wildfire, as previously communicated. -- Strengthened reserves for prior accident years by $7.5 million, pre-tax, related primarily to the 2019 accident year in the Florida homeowners line of business, as previously communicated. -- 21.4% increase in gross written premiums to $205.4 million, including $28.1 million from Maison. -- Net premiums earned increased 20.8% or $19.2 million, to $111.5 million, including $14.9 million from Maison. -- Combined ratio of 147.9%, up 46.4 points, including 43.3 points of net catastrophe losses and 6.7 points of prior year development and 6.7 points of prior year development in the period. -- Quarter-end Florida homeowners in-force policies decreased 4.2% to approximately 230,000, reflecting continued execution of our strategy to limit our exposure in this market until rates more accurately reflect increased costs of claims and reinsurance. -- 148.3% increase in non-Florida homeowners in-force policies to approximately 149,000, in-line with our diversification strategy. -- Book value per share decreased $1.07, or 6.2%, to $16.18 as compared to $17.25 as of December31, 2019, due primarily to a net loss of $1.38 per share and dividends declared of $0.18 per share, partially offset by unrealized gains on our fixed-income portfolio of $0.30 and repurchases of stock of $0.27 per share. -- Repurchased 276,652 shares of common stock, at a discount to book value per share, at a total cost of $3.3 million during the second quarter of 2020.

Our second quarter results were impacted by a high number of severe weather events in Florida, and across the Southeast, including fourteen industry events, which included Tropical Storm Cristobal, said Mr. Michael H. Braun, FedNat s Chief Executive Officer. The claims environment in the Florida homeowners market continues to be challenging, and as a result we decided to proactively strengthen our property reserves for the 2019 accident year. We are also taking action to mitigate the difficult claims environment by continuing to raise rates and restrict new business in Florida until our rates more accurately reflect our increased cost of doing business primarily as a result of claims severity and reinsurance costs. The profitability of our non-Florida homeowners business, excluding the impact of these recent severe weather events, continues to meet our expectations and we remain focused on our long-term growth strategy of expanding profitably in more attractive coastal homeowners markets outside of Florida. Mr. Braun continued, FedNats balance sheet and capital structure remain solid, which will enable us to continue providing best in class service to our policyholder and agents while maintaining our commitment to returning capital to our shareholders through our dividend and opportunistic share repurchases, based on the needs of our company and the market price of our shares. We commend the dedication and hard work of our employees, who remain focused on ensuring FedNats commitment to providing the highest quality service to our policyholders and trusted agents, especially during these challenging times where 95% of our staff is working remote.

Revenues

-- Total revenue increased $28.7 million or 27.3%, to $134.0 million for the three months ended June30, 2020, compared with $105.3 million for the three months ended June30, 2019. The increase was driven by net premiums growth, including the effect of the acquisition of Maison and net investment gains, all of which are discussed below. -- Gross premiums written increased $36.2 million, or 21.4%, to $205.4 million in the quarter compared with $169.2 million for the same three-month period last year. Gross premiums written increased due to organic non-Florida growth, and $28.1 million from Maison, 83% of which was non-Florida. Our organic non-Florida business continues to show exceptional growth year over year, especially in the state of Texas, which has allowed us to leverage our infrastructure and diversify insurance risk. Overall, Homeowners grew 21.6%. -- Gross premiums earned increased $38.7 million, or 27.4%, to $179.9 million for the three months ended June30, 2020, as compared to $141.2 million for the three months ended June30, 2019. The higher gross premiums earned was primarily driven by continued non-Florida growth, including $19.7 million from the acquisition of Maison. -- Ceded premiums increased $19.5 million, or 39.9%, to $68.4 million in the quarter, compared to $48.9 million the same three-month period last year. The increase was driven by higher excess of loss reinsurance spend primarily related to increased property exposures in our non-Florida business, including from the Maison acquisition. -- Net investment income decreased $1.0 million, or 21.6%, to $3.3 million during the three months ended June30, 2020, as compared to $4.3 million during the three months ended June30, 2019. The decrease was due primarily to the lower interest rate environment in 2020 and elevated second quarter 2019 income earned on debt proceeds that had not yet been deployed on the Maison acquisition, partially offset by fixed income portfolio growth in 2020 from the Maison acquisition. -- Net realized and unrealized investment gains (losses) increased $8.4 million, to $10.4 millionfor the three months ended June30, 2020, compared to $2.0 million in the prior year period. We recognized $3.3 million and $1.2 million in unrealized investment gains (losses) for equity securities during these respective periods. Our current and prior year net realized gains are primarily associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice each and every quarter. Furthermore, to mitigate the potential COVID-19 related adverse impact on the financial stability of the issuers of securities we hold, certain positions were liquidated during 2020. -- Direct written policy fees increased $1.2 million, or 49.5%, to $3.6 million for the three months ended June 30, 2020, as compared to $2.4 million during the three months ended June30, 2019. The increase is primarily driven by the fees associated with Maisons premiums and, to a lesser extent, organic non-Florida growth. -- Other income increased $0.8 million, or 19.3%, to $5.2 million in the quarter, compared with $4.4 million in the same three-month period last year. The increase in other income was primarily driven by higher brokerage revenue. The brokerage revenue increase is the result of higher excess of loss reinsurance spend from the reinsurance programs in place during the second quarter of 2020 as compared to the second quarter of 2019.

Expenses

-- Losses and loss adjustment expenses (LAE) increased $64.6 million, or 98.8%, to $129.9 million for the three months ended June30, 2020, compared with $65.3 million for the same three-month period last year. The net loss ratio increased 45.7 percentage points, to 116.5% in the current quarter, as compared to 70.8% in the second quarter of 2019.The higher loss ratio was primarily the result of higher weather-related net losses when comparing the periods, as the second quarter of 2020 included $59.2 million, net of reinsurance (of which, $22.0 million were from FedNat Insurance Company's ("FNIC") non-Florida losses which are subject to a 50% profit-sharing agreement) and strengthening reserves for prior accident years by $7.5 million related primarily to 2019 accident year in the Florida homeowners line of business. The second quarter 2020 catastrophe losses were fourteen PCS weather events, impacting Florida, Texas and Louisiana, including Tropical Storm Cristobal and a Florida panhandle wildfire. See the Companys Form 8-K filed with the SEC on July 17, 2020 for a breakout of catastrophe losses by state. Additionally, higher volume of policies in force drove approximately $12.0 million of higher losses as compared to 2019. These items were partially offset by weather-related losses in the corresponding period in 2019, which included twelve catastrophe events totaling $17.0 million in losses and LAE. -- The net expense ratio increased 0.7% percentage points to 31.4% in the second quarter of 2020, as compared to 30.7% in the second quarter of 2019. -- Commissions and other underwriting expenses increased $6.7 million, or 29.7%, to $29.3 million for the three months ended June30, 2020, compared with $22.6 million for the three months ended June30, 2019. The increase was primarily driven by higher non-Florida acquisition related cost as a result of premium growth. This was partially offset by a higher benefit in the current quarter from the 50% profit-sharing agreement, as FNIC's non-Florida business experienced higher weather losses in the current quarter than the second quarter of 2019. -- Income taxes (benefits) decreased $13.9 million, to a benefit of $(11.3) million for the three months ended June 30, 2020, compared to a tax expense of $2.6 million for the three months ended June 30, 2019. The decrease in income tax expense is predominantly the result of the pre-tax loss during the current quarter as compared to income during the second quarter of 2019. Additionally, the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020, is allowing us to carry back net operating loss to prior years when federal income taxes were at 35%, which increased our effective tax rate during the current quarter.

Stock Repurchase Program

-- During the second quarter of 2020, the Company repurchased 276,652 shares of common stock for $3.3 million at an average price per share of $11.75.

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 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) Thursday, August 6, 2020. 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: 3668319

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

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 presents users with data related to different aspects of our business to afford users greater transparency into our results. Homeowners Florida consists of data related to our homeowners and fire property and casualty insurance business, which currently operates in Florida. Homeowners non-Florida consists of data related to our homeowners and fire property and casualty insurance business, which currently operates in Alabama, Louisiana, South Carolina, Texas and Mississippi. Non-core consists of financial information related to nonstandard personal automobile insurance business which operated in Florida, Georgia, Texas and Alabama and our commercial general liability insurance business.

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 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 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 Six Months Ended 2020 2019 % Change 2020 2019 % ChangeNet Income(Loss)Attributable to CommonShareholdersNet income $ (21,479 ) $ 7,110 (402.1 ) % $ (19,346 ) $ 3,245 (696.2 ) %(loss)Adjustedoperating (28,122 ) 5,666 (596.3 ) % (23,802 ) 3,272 (827.4 ) %income(loss) Per Common ShareNet income(loss) - $ (1.57 ) $ 0.55 (383.8 ) % $ (1.38 ) $ 0.25 (649.1 ) %dilutedAdjustedoperatingincome (2.05 ) 0.44 (566.3 ) % (1.70 ) 0.25 (770.0 ) %(loss) -dilutedDividends 0.09 0.08 12.5 % 0.18 0.16 12.5 %declaredBook value 16.18 17.96 (9.9 ) % 16.18 17.96 (9.9 ) %Book value,excluding 15.13 17.24 (12.3 ) % 15.13 17.24 (12.3 ) %AOCI Return to ShareholdersRepurchasesof common $ 3,250 $ ? NCM $ 10,000 $ ? NCMstockDividends 1,258 1,046 20.3 % 2,560 2,087 22.7 %declared $ 4,508 $ 1,046 331.0 % $ 12,560 $ 2,087 501.8 % Revenue Total $ 134,019 $ 105,301 27.3 % $ 249,718 $ 206,498 20.9 %revenuesAdjustedoperating 123,636 103,346 19.6 % 242,160 202,242 19.7 %revenuesGrosspremiums 205,378 169,170 21.4 % 378,340 301,403 25.5 %writtenGrosspremiums 179,896 141,220 27.4 % 355,470 279,587 27.1 %earnedNet premiums 111,478 92,306 20.8 % 217,388 181,090 20.0 %earned Ratios toNet Premiums EarnedNet loss 116.5 % 70.8 % 91.5 % 73.0 % ratioNet expense 31.4 % 30.7 % 35.6 % 34.7 % ratioCombined 147.9 % 101.5 % 127.1 % 107.7 % ratio In-ForceHomeowners PoliciesFlorida 230,000 240,000 (4.2 ) % 230,000 240,000 (4.2 ) %Non-Florida 149,000 60,000 148.3 % 149,000 60,000 148.3 % 379,000 300,000 26.3 % 379,000 300,000 26.3 %

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

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019Revenues: Net premiums $ 111,478 $ 92,306 $ 217,388 $ 181,090 earnedNet investment 3,341 4,259 7,233 7,969 incomeNet realizedand unrealized 10,383 1,955 7,558 4,256 investmentgains (losses)Direct written 3,593 2,403 7,059 4,794 policy feesOther income 5,224 4,378 10,480 8,389 Total revenues 134,019 105,301 249,718 206,498 Costs and expenses:Losses andloss 129,916 65,340 198,846 132,179 adjustmentexpensesCommissionsand other 29,270 22,562 65,625 50,796 underwritingexpensesGeneral andadministrative 5,663 5,779 11,908 12,090 expensesInterest 1,915 1,915 3,830 6,966 expenseTotal costs 166,764 95,596 280,209 202,031 and expenses Income (loss)before income (32,745 ) 9,705 (30,491 ) 4,467 taxesIncome taxexpense (11,266 ) 2,595 (11,145 ) 1,222 (benefit)Net income $ (21,479 ) $ 7,110 $ (19,346 ) $ 3,245 (loss) Net Income(Loss) Per Common ShareBasic $ (1.57 ) $ 0.55 $ (1.38 ) $ 0.25 Diluted (1.57 ) 0.55 (1.38 ) 0.25 WeightedAverage Numberof Shares of Common StockOutstandingBasic 13,714 12,844 13,981 12,820 Diluted 13,714 12,883 13,981 12,876 DividendsDeclared Per $ 0.09 $ 0.08 $ 0.18 $ 0.16 Common Share

FEDNAT HOLDING COMPANY AND SUBSIDIARIESSelected Operating Metrics(Unaudited)

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (In thousands)Grosspremiums written:Homeowners $ 122,151 $ 128,016 $ 233,698 $ 231,979 FloridaHomeowners 77,508 36,212 135,450 61,532 non-FloridaFederal 5,647 4,991 9,307 7,995 floodNon-core 72 (49 ) (115 ) (103 ) Total grosspremiums $ 205,378 $ 169,170 $ 378,340 $ 301,403 written

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (In thousands)Grosspremiums earned:Homeowners $ 115,791 $ 112,747 $ 231,891 $ 225,419 FloridaHomeowners 59,787 24,327 115,312 45,497 non-FloridaFederal 4,246 3,642 8,382 7,109 floodNon-core 72 504 (115 ) 1,562 Total grosspremiums $ 179,896 $ 141,220 $ 355,470 $ 279,587 earned

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (In thousands)Net premiums earned:Homeowners $ 68,247 $ 71,394 $ 136,301 $ 141,882 FloridaHomeowners 43,159 20,480 81,202 37,803 non-FloridaNon-core 72 432 (115 ) 1,405 Total netpremiums $ 111,478 $ 92,306 $ 217,388 $ 181,090 earned

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

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (In thousands)Commissionsand other underwritingexpenses:Homeowners $ 13,618 $ 13,401 $ 27,445 $ 26,623 FloridaAll others 12,834 5,920 24,452 11,187 Ceding (3,161 ) (2,906 ) (6,060 ) (5,690 )commissionsTotal 23,291 16,415 45,837 32,120 commissions Fees 1,222 759 2,336 1,438 Salaries and 3,119 3,072 6,717 6,394 wagesOtherunderwriting 1,638 2,316 10,735 10,844 expensesTotalcommissionsand other $ 29,270 $ 22,562 $ 65,625 $ 50,796 underwritingexpenses

Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net loss ratio 116.5 % 70.8 % 91.5 % 73.0 %Net expense ratio 31.4 % 30.7 % 35.6 % 34.7 %Combined ratio 147.9 % 101.5 % 127.1 % 107.7 %Gross loss ratio 97.9 % 60.8 % 105.4 % 135.3 %Gross expense ratio 21.2 % 22.1 % 23.5 % 24.5 %

FEDNAT HOLDING COMPANY AND SUBSIDIARIESConsolidated Balance Sheet(Unaudited)

June 30, December 31, 2020 2019ASSETS (In thousands)Investments: Debt securities, available-for-sale, at fair $ 555,961 $ 526,265 valueDebt securities, held-to-maturity, at amortized ? 4,337 costEquity securities, at fair value 18,040 20,039 Total investments 574,001 550,641 Cash and cash equivalents 163,910 133,361 Prepaid reinsurance premiums 81,564 145,659 Premiums receivable, net of allowance 49,632 41,422 Reinsurance recoverable, net 228,709 209,615 Deferred acquisition costs and value of 63,022 56,136 business acquired, netCurrent and deferred income taxes, net 11,408 2,552 Goodwill 10,997 10,997 Other assets 31,543 28,633 Total assets $ 1,214,786 $ 1,179,016 LIABILITIES AND SHAREHOLDERS? EQUITY Liabilities Loss and loss adjustment expense reserves $ 387,723 $ 324,362 Unearned premiums 383,739 360,870 Reinsurance payable 67,876 102,467 Long-term debt, net of deferred financing costs 98,603 98,522 Deferred revenue 6,984 6,856 Other liabilities 48,181 37,246 Total liabilities 993,106 930,323 Shareholders' Equity Preferred stock, $0.01 par value: 1,000,000 ? ? shares authorizedCommon stock, $0.01 par value: 25,000,000shares authorized; 13,703,175 and 14,414,821 137 144 shares issued and outstanding, respectivelyAdditional paid-in capital 168,485 167,677 Accumulated other comprehensive income (loss) 14,390 10,281 Retained earnings 38,668 70,591 Total shareholders? equity 221,680 248,693 Total liabilities and shareholders' equity $ 1,214,786 $ 1,179,016

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

As of or For the Three Months Ended Six Months Ended 2020 2019 2020 2019Revenue Total revenues $ 134,019 $ 105,301 $ 249,718 $ 206,498 Less: Net realizedand unrealized 10,383 1,955 7,558 4,256 investmentgains (losses)Adjustedoperating $ 123,636 $ 103,346 $ 242,160 $ 202,242 revenues Net Income (Loss)Net income $ (21,479 ) $ 7,110 $ (19,346 ) $ 3,245 (loss)Less: Net realizedand unrealized 6,659 1,460 4,527 3,178 investmentgains (losses)Acquisition and 1 (16 ) (26 ) (536 ) other costsAmortization ofidentifiable (17 ) ? (45 ) ? intangiblesGain (loss) onearly ? ? ? (2,669 ) extinguishmentof debtAdjustedoperating $ (28,122 ) $ 5,666 $ (23,802 ) $ 3,272 income (loss) Income tax rateassumed for 35.74 % 25.35 % 40.10 % 25.35 %reconcilingitems above Per Common ShareBook value $ 16.18 $ 17.96 $ 16.18 $ 17.96 Less: AOCI 1.05 0.72 1.05 0.72 Book value, $ 15.13 $ 17.24 $ 15.13 $ 17.24 excluding AOCI