GlobeNewswire Inc | Nov 4, 2020 04:01PM EST

November 04, 2020

SUNRISE, Fla., Nov. 04, 2020 (GLOBE NEWSWIRE) -- FedNat Holding Company (the Company) (Nasdaq: FNHC) today reported results for the three and nine months ended September30, 2020.

Q3 2020 highlights (as measured against the same three-month period last year, except where noted):

-- Net loss of $20.7 million or $1.51 per diluted share as compared to net income of $4.7 million or $0.36 per diluted share. -- Adjusted operating loss of $21.5 million or $1.57 per diluted share as compared to adjusted operating income of $4.3 million or $0.33 per diluted share. -- $44.9 million of claims, net of recoveries, pre-tax, from catastrophe losses including Hurricanes Laura and Sally as well as other severe weather events, which together impacted Florida, Louisiana and other states, as previously communicated. -- 13.2% increase in gross written premiums to $180.2 million, including $28.3 million from Maison. -- Combined ratio of 154.3%, up 48.8 percentage points, including 45.8 points of net catastrophe losses in the period. -- Quarter-end Florida homeowners in-force policies decreased 8.4% to approximately 217,000, reflecting continued execution of our strategy to limit our exposure in this market until rates more accurately reflect increased costs of claims and reinsurance. -- 94.9% increase in non-Florida homeowners in-force policies to approximately 152,000, in-line with our diversification strategy. -- Non-insurance company liquidity of $63 million at September30, 2020. -- Book value per share decreased $2.56, or 14.8%, to $14.69 as compared to $17.25 as of December31, 2019, due primarily to a net loss of $2.89 per share and dividends declared of $0.27 per share, each for the nine months ended September 30, 2020, partially offset by unrealized gains on our fixed-income portfolio of $0.40 and repurchases of stock of $0.27 per share.

"FedNat's results in the third quarter were impacted by an elevated number of severe weather events during this year's hurricane season," said Mr. Michael H. Braun, FedNats Chief Executive Officer. Our strong reinsurance program and additional reinsurance purchases during the quarter enabled us to maintain over $140 million of capital in our insurance companies as of September 30, 2020 with liquidity over $60 million at the holding company.

Mr. Braun continued, We remain committed to proactively managing our capital while focusing for the remainder of 2020 and throughout 2021 on continuing to implement increased rates in our homeowners business in Florida and non-Florida markets. We are also restricting business and shrinking our book in Florida as appropriate until our rates meet our profitability targets. Based on rate increases we have already implemented in 2020 and anticipated rate increases in the balance of 2020 and in 2021, we expect to generate over $65 million in incremental additional premium in 2021 as compared to 2020.

Revenues

-- Total revenue decreased $2.2 million or 2.2%, to $97.3 million for the three months ended September30, 2020, compared with $99.5 million for the three months ended September30, 2019. The slight decrease was driven by lower net premiums earned as increases in ceded premiums outpaced the growth in gross premiums earned. Additionally, lower net investment income was offset by higher policy fees and higher brokerage income, all of which are discussed in further detail below. -- Gross premiums written increased $21.1 million, or 13.2%, to $180.2 million in the quarter compared with $159.1 million for the same three-month period last year. Gross premiums written increased by $7.0 million from FNIC's non-Florida business and $28.3 million from Maison, which was partially offset by a $15.1 million decrease in FNIC's Florida business, as we reduce our exposures in this market. -- Gross premiums earned increased $38.0 million, or 26.1%, to $183.5 million for the three months ended September30, 2020, as compared to $145.5 million for the three months ended September30, 2019. The higher gross premiums earned was primarily driven by continued non-Florida growth, including $19.9 million from Maison's non-Florida business. -- Ceded premiums increased $41.8 million, or 71.9%, to $100.0 million in the quarter, compared to $58.2 million the same three-month period last year. The increase was driven by approximately $26 million higher excess of loss reinsurance spend, as property exposures increased, including from the Maison acquisition, this year as compared to last year. Additionally, there was approximately $15 million of additional ceded premiums related to the 50% quota-share treaty for FNIC's non-Florida book of business that became effective July 1, 2020. -- Net investment income decreased $1.7 million, or 40.9%, to $2.4 million during the three months ended September30, 2020, as compared to $4.1 million during the three months ended September30, 2019. The decrease was due primarily to the lower interest rate environment in 2020 and elevated third 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. -- Direct written policy fees increased $1.1 million, or 43.3%, to $3.6 million for the three months ended September 30, 2020, as compared to $2.5 million during the three months ended September30, 2019. The increase is primarily driven by the policy fees generated from Maisons policies in-force and higher fees as a result of FNIC's non-Florida premium growth. -- Other income increased $1.7 million, or 36.2%, to $6.4 million in the quarter, compared with $4.7 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 third quarter of 2020 as compared to the third quarter of 2019.

Expenses

-- Losses and loss adjustment expenses (LAE) increased $36.9 million, or 59.4%, to $99.0 million for the three months ended September30, 2020, compared with $62.1 million for the same three-month period last year. The net loss ratio increased 47.4 percentage points, to 118.5% in the current quarter, as compared to 71.1% in the third quarter of 2019. The higher ratio was the result of two main factors: higher ceded premiums, as discussed earlier, which reduces net earned premium, the denominator of the net loss ratio calculation, as well as higher catastrophe net losses as compared to the prior year period. 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, which together impacted Florida, Louisiana and other states. The $38.3 million represents $44.9 million of initial net losses, as previously disclosed, less $6.6 million of benefit from our claims handling services. By comparison, the third quarter of 2019 catastrophe net losses were $11.0 million, net of reinsurance, which primarily included impacts from Hurricane Dorian, Hurricane Barry and other severe weather events. Additionally, higher volume of policies in force drove approximately $6 million of higher net losses as compared to 2019. The remaining variance was driven by higher loss pick for FNIC's Florida book of business, as a result of adverse loss experience, as compared to 2019. -- The net expense ratio increased 1.4% percentage points to 35.8% in the third quarter of 2020, as compared to 34.4% in the third quarter of 2019. The third quarter of 2020 net expense ratio was further increased by lower net premiums earned reducing the denominator of the net expense ratio calculation. -- Commissions and other underwriting expenses decreased $0.3 million, or 1.1%, to $24.6 million for the three months ended September30, 2020, compared with $24.9 million for the three months ended September30, 2019. The decrease was primarily driven by a higher ceding commissions driven in part by the new 50% quota share in FNIC's non-Florida book of business and lower other underwriting expenses. When comparing these periods, this decrease was partially offset by higher non-Florida acquisition related costs as a result of premium growth. -- Income taxes (benefits) decreased $13.5 million, to $(12.8) million for the three months ended September30, 2020, compared to $0.7 million for the three months ended September30, 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 third 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.

Subsequent Events

Today, the Company also announced:

-- The declaration of the Companys regular quarterly dividend of $0.09 per share, payable on December 1, 2020 to shareholders of record at the close of business on November 16, 2020. -- The formation of a Strategic Review Committee of the Board of Directors to oversee a review of strategic alternatives and the retention of Piper Sandler & Co. as the committees financial advisor. -- It has experienced impacts from Hurricanes Delta and Zeta, both of which made landfall in the state of Louisiana during the month of October. We expect each storm to exceed our single-event aggregate reinsurance program retention. Our preliminary estimate is that we will incur approximately $27 million (pre-tax) of catastrophe losses, net of all recoveries, including reinsurance, on a combined basis for these storms.

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 5:00 PM (ET) Wednesday, November 4, 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: 5182801

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 Nine Months Ended September 30, September 30, 2020 2019 % Change 2020 2019 % ChangeNet Income(Loss)Attributable to CommonShareholdersNet income $ (20,745 ) $ 4,659 (545.3 ) % $ (40,091 ) $ 7,904 (607.2 ) %(loss)Adjustedoperating (21,501 ) 4,292 (601.0 ) % (45,303 ) 7,564 (698.9 ) %income(loss) Per Common ShareNet income(loss) - $ (1.51 ) $ 0.36 (518.9 ) % $ (2.89 ) $ 0.61 (570.3 ) %dilutedAdjustedoperatingincome (1.57 ) 0.33 (571.3 ) % (3.26 ) 0.59 (655.4 ) %(loss) -dilutedDividends 0.09 0.08 12.5 % 0.27 0.24 12.5 %declaredBook value 14.69 18.45 (20.4 ) % 14.69 18.45 (20.4 ) %Book value,excluding 13.54 17.54 (22.8 ) % 13.54 17.54 (22.8 ) %AOCI Return to ShareholdersRepurchasesof common $ ? $ ? NCM $ 10,000 $ ? NCMstockDividends 1,259 1,046 20.4 % 3,819 3,133 21.9 %declared $ 1,259 $ 1,046 20.4 % $ 13,819 $ 3,133 341.1 % Revenue Total $ 97,316 $ 99,476 (2.2 ) % $ 347,034 $ 305,974 13.4 %revenuesAdjustedoperating 95,992 98,682 (2.7 ) % 338,152 300,924 12.4 %revenuesGrosspremiums 180,152 159,131 13.2 % 558,492 460,534 21.3 %writtenGrosspremiums 183,518 145,546 26.1 % 538,988 425,133 26.8 %earnedNet premiums 83,546 87,374 (4.4 ) % 300,934 268,464 12.1 %earned Ratios toNet Premiums EarnedNet loss 118.5 % 71.1 % 99.0 % 72.4 % ratioNet expense 35.8 % 34.4 % 35.7 % 34.6 % ratioCombined 154.3 % 105.5 % 134.7 % 107.0 % ratio In-ForceHomeowners PoliciesFlorida 217,000 237,000 (8.4 ) % 217,000 237,000 (8.4 ) %Non-Florida 152,000 78,000 94.9 % 152,000 78,000 94.9 % 369,000 315,000 17.1 % 369,000 315,000 17.1 %

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, 2020 2019 2020 2019Revenues: Net premiums $ 83,546 $ 87,374 $ 300,934 $ 268,464 earnedNet investment 2,404 4,068 9,637 12,037 incomeNet realized andunrealized 1,324 794 8,882 5,050 investment gains(losses)Direct written 3,603 2,514 10,662 7,308 policy feesOther income 6,439 4,726 16,919 13,115 Total revenues 97,316 99,476 347,034 305,974 Costs and expenses:Losses and lossadjustment 99,016 62,105 297,862 194,284 expensesCommissions andother 24,580 24,854 90,205 75,650 underwritingexpensesGeneral andadministrative 5,333 5,246 17,241 17,336 expensesInterest expense 1,915 1,894 5,745 8,860 Total costs and 130,844 94,099 411,053 296,130 expenses Income (loss)before income (33,528 ) 5,377 (64,019 ) 9,844 taxesIncome taxexpense (12,783 ) 718 (23,928 ) 1,940 (benefit)Net income $ (20,745 ) $ 4,659 $ (40,091 ) $ 7,904 (loss) Net Income(Loss) Per Common ShareBasic $ (1.51 ) $ 0.36 $ (2.89 ) $ 0.62 Diluted (1.51 ) 0.36 (2.89 ) 0.61 Weighted AverageNumber of Shares of Common StockOutstandingBasic 13,708 12,854 13,890 12,831 Diluted 13,708 12,897 13,890 12,880 DividendsDeclared Per $ 0.09 $ 0.08 $ 0.27 $ 0.24 Common Share

FEDNAT HOLDING COMPANY AND SUBSIDIARIESSelected Operating Metrics(Unaudited)

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands)Gross premiums written:Homeowners Florida $ 106,101 $ 115,341 $ 339,799 $ 347,320 Homeowners 68,447 38,790 203,897 100,322 non-FloridaFederal flood 5,660 5,019 14,967 13,014 Non-core (56 ) (19 ) (171 ) (122 )Total gross premiums $ 180,152 $ 159,131 $ 558,492 $ 460,534 written

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands)Gross premiums earned:Homeowners Florida $ 115,346 $ 113,062 $ 347,237 $ 338,481 Homeowners 63,759 28,431 179,071 73,928 non-FloridaFederal flood 4,469 3,896 12,851 11,005 Non-core (56 ) 157 (171 ) 1,719 Total gross premiums $ 183,518 $ 145,546 $ 538,988 $ 425,133 earned

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands)Net premiums earned: Homeowners Florida $ 54,326 $ 65,975 $ 190,627 $ 207,857 Homeowners 29,276 21,311 110,478 59,114 non-FloridaNon-core (56 ) 88 (171 ) 1,493 Total net premiums $ 83,546 $ 87,374 $ 300,934 $ 268,464 earned

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

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands)Commissions andother underwriting expenses:Homeowners Florida $ 13,736 $ 13,187 $ 41,181 $ 39,810 All others 13,337 6,610 37,789 17,796 Ceding commissions (7,909 ) (3,203 ) (13,969 ) (8,893 )Total commissions 19,164 16,594 65,001 48,713 Fees 1,358 902 3,694 2,340 Salaries and wages 3,351 2,696 10,068 9,090 Other underwriting 707 4,662 11,442 15,507 expensesTotal commissionsand other $ 24,580 $ 24,854 $ 90,205 $ 75,650 underwritingexpenses

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net loss ratio 118.5 % 71.1 % 99.0 % 72.4 %Net expense ratio 35.8 % 34.4 % 35.7 % 34.6 %Combined ratio 154.3 % 105.5 % 134.7 % 107.0 %Gross loss ratio 213.0 % 113.1 % 142.0 % 127.7 %Gross expense ratio 20.6 % 22.9 % 22.5 % 24.0 %

FEDNAT HOLDING COMPANY AND SUBSIDIARIESConsolidated Balance Sheet(Unaudited)

September 30, December 31, 2020 2019ASSETS (In thousands)Investments: Debt securities, available-for-sale, at fair $ 540,443 $ 526,265 valueDebt securities, held-to-maturity, at amortized ? 4,337 costEquity securities, at fair value 13,108 20,039 Total investments 553,551 550,641 Cash and cash equivalents 49,286 133,361 Prepaid reinsurance premiums 286,128 145,659 Premiums receivable, net of allowance 52,753 41,422 Reinsurance recoverable, net 452,194 209,615 Deferred acquisition costs and value of 51,157 56,136 business acquired, netCurrent and deferred income taxes, net 24,099 2,552 Goodwill 10,997 10,997 Other assets 34,643 28,633 Total assets $ 1,514,808 $ 1,179,016 LIABILITIES AND SHAREHOLDERS? EQUITY Liabilities Loss and loss adjustment expense reserves $ 553,980 $ 324,362 Unearned premiums 380,374 360,870 Reinsurance payable and funds withheld 230,987 102,467 liabilitiesLong-term debt, net of deferred financing costs 98,643 98,522 Deferred revenue 6,795 6,856 Other liabilities 42,553 37,246 Total liabilities 1,313,332 930,323 Shareholders' Equity Preferred stock, $0.01 par value: 1,000,000 ? ? shares authorizedCommon stock, $0.01 par value: 25,000,000shares authorized; 13,717,525 and 14,414,821 137 144 shares issued and outstanding, respectivelyAdditional paid-in capital 168,912 167,677 Accumulated other comprehensive income (loss) 15,763 10,281 Retained earnings 16,664 70,591 Total shareholders? equity 201,476 248,693 Total liabilities and shareholders' equity $ 1,514,808 $ 1,179,016

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, 2020 2019 2020 2019Revenue Total revenues $ 97,316 $ 99,476 $ 347,034 $ 305,974 Less: Net realized andunrealized investment 1,324 794 8,882 5,050 gains (losses)Adjusted operating $ 95,992 $ 98,682 $ 338,152 $ 300,924 revenues Net Income (Loss) Net income (loss) $ (20,745 ) $ 4,659 $ (40,091 ) $ 7,904 Less: Net realized andunrealized investment 793 634 5,320 3,812 gains (losses)Acquisition and other (15 ) (238 ) (41 ) (774 )costsAmortization of (22 ) ? (67 ) ? identifiable intangiblesGain (loss) on early ? (29 ) ? (2,698 )extinguishment of debtAdjusted operating income $ (21,501 ) $ 4,292 $ (45,303 ) $ 7,564 (loss) Income tax rate assumedfor reconciling items 40.10 % 18.26 % 40.10 % 24.52 %above Per Common Share Book value $ 14.69 $ 18.45 $ 14.69 $ 18.45 Less: AOCI 1.15 0.91 1.15 0.91 Book value, excluding $ 13.54 $ 17.54 $ 13.54 $ 17.54 AOCI