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Federated National Holding Company Reports Fourth Quarter and Full Year 2017 Results

SUNRISE, Fla., March 13, 2018 (GLOBE NEWSWIRE) -- Federated National Holding Company (the “Company”) (Nasdaq:FNHC) today reported results for the three and twelve months ended December 31, 2017.

Q4 2017 highlights (as measured against the same three-month period last year, except where noted):

  • Net income of $6.3 million or $0.48 per diluted share.
  • Homeowners net premiums earned of $80.4 million, up 18.6%.
  • Gross written premiums of $133.9 million.
  • Florida homeowners policies of approximately 272,000.
  • 49.9% increase in non-Florida homeowners’ policies to approximately 30,600.
  • 13.1% increase in total revenue to $101.8 million.
  • $1.5 million of claims, net of recoveries including reinsurance, from Hurricane Nate and other severe weather events during the fourth quarter of 2017.
  • Book value per share, excluding noncontrolling interest, of $16.29, as compared to $16.01 as of December 31, 2016.
  • Repurchased 75,667 shares of common stock at an average price of $16.11, during the fourth quarter of 2017.

Mr. Michael H. Braun, the Company’s Chief Executive Officer, with reference to the quarter’s results, said, “Our fourth quarter financial results represent a solid end to the year, which was impacted from weather-related events and challenges in our non-core business model. Excluding realized gains, fourth quarter revenue grew by 10% and 14%, respectively, compared with the third quarter and prior-year fourth quarter, driven by 13% and 21% increases in our core Homeowners business line over those respective periods. Net income comparisons with the third quarter and prior-year fourth quarter are strong, given hurricane activity that occurred in each period, with Homeowners results up over $15 million in each case. We’ve entered 2018 in a strong position in our core operations, with enhanced strategic focus on our Homeowners business. We recently completed the acquisition of the minority interests in Monarch, and previously announced our exit from our non-core Automobile operations. We have also decided to exit from our commercial general liability lines, a non-core business that represents less than 2% of our gross written premium. We believe we have a unique opportunity in 2018 and beyond to build on our strong presence in the Florida market, expand selectively in other coastal states, and invest in initiatives to drive further improvements in underwriting profitability and operational efficiency.”

Revenues

  • Total revenues increased $11.8 million, or 13.1%, to $101.8 million for the three months ended December 31, 2017, compared with $89.9 million for the same three-month period last year.

  • Gross written premiums decreased $3.2 million, or 2.3%, to $133.9 million in the quarter, compared with $137.1 million for the same three-month period last year. The decrease was driven by Automobile, which decreased $6.9 million, partially offset by an increase in Homeowners of $3.6 million. The Automobile decrease was due to management actions to reduce the size of our overall program consistent with our previously disclosed plans to exit the Automobile line of business. As of December 31, 2017, the Company has only 2 remaining Automobile programs that will generate premiums earned in 2018. Homeowners’ non-Florida has continued its significant growth in 2017, specifically in Louisiana, Texas and South Carolina.

  • Gross premiums earned decreased $0.5 million, or 0.3 %, to $151.9 million. The results include $7.5 million of Homeowners growth spanning several states offset by an $8.0 million decrease in Automobile as a result of management actions to reduce premiums written in this line of business.

  • Ceded premiums decreased $11.1 million, or 14.7%, to $64.4 million in the quarter, compared with the same three-month period last year. The decrease in ceded premiums earned was driven by lower ceded premiums from Automobile as a result of lower gross premiums discussed above. Additionally, Homeowners ceded premiums decreased due to the expiration of the retrospectively-rated 10% and 30% Florida-only property quota share treaties, which ended on July 1, 2017 and 2016, respectively. The effect of these expirations was partially offset by a new 10% Florida-only property quota share treaty, which became effective on July 1, 2017.

  • Other income increased $2.9 million, or 58.1%, to $8.0 million in the quarter, compared with the same three-month period last year. The increase was driven by $1.8 million of partnership income from Southeast Catastrophe Consulting Company, our 33% owned investee, as well as $1.3 million of additional brokerage income generated from the reinstatement of an XOL layer as a result of Hurricane Irma losses.

Expenses

  • Losses and loss adjustment expenses (“LAE”) decreased $12.7 million, or 17.8%, to $ 58.9 million for the three months ended December 31, 2017, compared with $71.6 million for the same three-month period last year. Lower ceded losses from the combination of the retrospectively-rated 10% and 30% Florida-only property quota share treaties and the new 10% Florida-only property quota share treaty drove losses higher in the fourth quarter of 2017 by approximately $8.5 million. Additionally, during the quarter, we strengthened net loss reserves by approximately $4.7 million of additional losses above the attritional rates across our lines of business. The Company was also impacted by claims, net of reinsurance, of $1.5 million related to Hurricane Nate and other severe weather events in the Homeowners line of business. Lastly, during the quarter, we recognized $1.6 million of income for catastrophe claims handling, which represents a reduction to net losses. These impacts were offset by fourth quarter 2016 activity which included approximately $21.4 million of losses, net of reinsurance, related to the impact of Hurricane Matthew and approximately $4.0 million of additional losses above the attritional rates across our lines of business.
  • Commissions and other underwriting expenses decreased $0.3 million, or 1.1%, to $27.9 million for the three months ended December 31, 2017, compared with $28.3 million for the three months ended December 31, 2017.

2017 vs. 2016 Full Year Results

  • The Company reported $8.0 million, or $0.60 per diluted share, of net income for 2017 as compared to net income of $1.0 million, or $0.07 per diluted share, for 2016. Full year earnings in our Homeowners business were $3.2 million in 2017, as compared to a loss of $3.5 million in 2016. See the Company’s 2017 Form 10-K, which is being filed contemporaneously with this press release, for further analysis of full year results.

Stock Repurchase Program

  • During the fourth quarter of 2017, the Company repurchased approximately 76,000 shares of common stock for $1.2 million at an average price of $16.11.
  • During the full year 2017, the Company repurchased approximately 654,000 shares of common stock for $10.6 million at an average price of $16.23.
  • During the first quarter of 2018 thus far, the Company repurchased approximately 280,000 shares of common stock for $4.3 million at an average price of $15.40.

Revisions to Previously Disclosed Financial Information

  • As further explained in Note 1 to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017, management identified certain errors in the previously issued consolidated financial statements for fiscal years 2016 and 2015, as well as the first three quarters of fiscal year 2017. The corrections primarily relate to the up-front recognition of direct written policy fees across all our lines of business and fee income generated through the Company's personal automobile business, the over-amortization of deferred acquisition costs and the accounting for certain limits in our automobile reinsurance agreements, related to ceded premiums and other items. The Company has concluded that the errors are not material to any of the Company's previously-issued financial statements. Accordingly, the Company has concluded that an amendment of previously-filed periodic reports is not required.

Conference Call Information

The Company will hold an investor conference call at 9:00 AM (ET) Wednesday, March 14, 2018. 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: 8988958

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, through our wholly owned subsidiaries, is authorized to underwrite, and/or place homeowners multi-peril, personal automobile, commercial general liability, 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 /Safe Harbor 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 Company’s 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 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. 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.

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended December 31, Year Ended December 31,
2017 2016 2017 2016
As Adjusted As Adjusted
(in thousands, except per share data)
Revenue:
Gross premiums written$ 133,892 $ 137,106 $ 603,417 $ 605,485
Gross premiums earned 151,873 152,366 603,193 565,423
Ceded premiums earned (64,370) (75,444) (269,712) (304,054)
Net premiums earned 87,503 76,922 333,481 261,369
Net investment income 2,773 2,665 10,254 9,063
Net realized investment gains (96) 985 8,548 3,045
Direct written policy fees 3,556 4,328 17,173 16,619
Other income 8,016 5,071 22,206 17,429
Total revenue 101,752 89,971 391,662 307,525
Costs and expenses:
Losses and loss adjustment expenses 58,874 71,594 247,557 197,810
Commissions and other underwriting expenses 27,984 28,290 114,867 90,378
General and administrative expenses 5,226 3,975 19,963 17,186
Interest expense 101 89 348 348
Total costs and expenses 92,185 103,948 382,735 305,722
Income (loss) before income taxes 9,567 (13,977) 8,927 1,803
Income taxes 3,943 (5,191) 3,585 542
Net Income (loss) 5,624 (8,786) 5,342 1,261
Net (loss) income attributable to noncontrolling interest (672) 7 (2,647) 246
Net income (loss) attributable to Federated National Holding Company shareholders$ 6,296 $ (8,793) $ 7,989 $ 1 ,015
Net income (loss) per share:
Basic$ 0.48 $ (0.65) $ 0.61 $ 0.07
Diluted$ 0.48 $ (0.65) $ 0.60 $ 0.07
Number of shares used to calculate net income per share:
Basic 13,131 13,611 13,170 13,758
Diluted 13,197 13,611 13,250 13,922
Dividends declared per share of common stock$ 0.08 $ 0.08 $ 0.32 $ 0.27


FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Selected Operating Metrics
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
2017 2016 2017 2016
Gross premiums written:(in thousands)
Homeowners Florida$ 108,106 $ 109,680 $ 482,038 $ 477,489
Homeowners non-Florida 14,393 9,210 54,717 35,248
Personal automobile 6,416 13,271 43,505 69,479
Commercial general liability 2,280 2,763 11,048 13,256
Federal flood 2,697 2,182 12,109 10,013
Total gross premiums written$ 133,892 $ 137,106 $ 603,417 $ 605,485
Three Months Ended Year Ended
December 31, December 31,
2017 2016 2017 2016
Gross premiums earned:(in thousands)
Homeowners Florida$ 122,188 $ 119,216 $ 481,541 $ 455,252
Homeowners non-Florida 13,125 8,604 43,983 29,101
Personal automobile 10,747 18,733 54,679 58,312
Commercial general liability 2,877 3,350 12,216 13,675
Federal flood 2,936 2,463 10,774 9,083
Total gross premiums earned$ 151,873 $ 152,366 $ 603,193 $ 565,423
Three Months Ended Year Ended
December 31, December 31,
2017 2016 2017 2016
As Adjusted As Adjusted
Net premiums earned:(in thousands)
Homeowners$ 80,435 $ 67,825 $ 298,255 $ 234,381
Personal automobile 4,339 5,921 23,642 14,021
Commercial general liability 2,729 3,176 11,584 12,967
Total net premiums earned$ 87,503 $ 76,922 $ 333,481 $ 261,369
Three Months Ended Year Ended
December 31, December 31,
2017 2016 2017 2016
As Adjusted As Adjusted
Commissions and other underwriting expenses: (in thousands)
Homeowners$ 18,092 $ 16,874 $ 69,124 $ 62,378
All other lines of business 3,207 6,194 20,132 21,712
Ceding commissions (4,688) (5,451) (19,199) (36,445)
Total commissions and other fees 16,611 17,617 70,057 47,645
Salaries and wages 3,160 3,330 14,521 13,748
Other underwriting expenses 8,213 7,343 30,289 28,985
Total commissions and other underwriting expenses$ 27,984 $ 28,290 $ 114,867 $ 90,378

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Selected Operating Metrics (continued)
(Unaudited)
Three Months Ended December 31, Year Ended December 31,
2017 2016 2017 2016
As Adjusted As Adjusted
Net loss ratio 67.3% 93.1% 74.2% 75.7%
Net expense ratio 38.0% 41.9% 40.4% 41.2%
Combined ratio 105.3% 135.0% 114.6% 116.9%
Gross loss ratio 77.4% 79.6% 108.3% 57.0%
Gross expense ratio 25.0% 24.8% 25.5% 25.5%
Book value per share excluding noncontrolling interest$ 16.29 $ 16.01 $ 16.29 $ 16.01


FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
December 31, December 31,
2017 2016
As Adjusted
ASSETS(in thousands, except share and per share data)
Investments
Debt securities, available-for-sale, at fair value$ 423,238 $ 374,756
Debt securities, held-to-maturity, at amortized cost 5,349 5,551
Equity securities, available-for-sale, at fair value 15,434 29,375
Total investments 444,021 409,682
Cash and cash equivalents 86,228 74,593
Prepaid reinsurance premiums 135,492 156,932
Premiums receivable, net of allowance 46,393 54,854
Reinsurance recoverable, net 124,601 47,863
Deferred acquisition costs 40,893 41,892
Income taxes receivable 9,510 13,871
Deferred tax assets, net 307 -
Property and equipment, net 4,025 4,194
Other assets 13,403 11,509
TOTAL ASSETS$ 904,873 $ 815,390
LIABILITIES
Loss and loss adjustment expense reserves$ 230,515 $ 158,110
Unearned premiums 294,423 294,022
Reinsurance payable 71,944 79,154
Long –term debt, net of deferred financing cost of $749 and $91, respectively 49,251 4,909
Deferred revenue 6,222 6,834
Deferred tax liabilities, net - 253
Other liabilities 25,059 37,643
Total liabilities$ 677,414 $ 580,925
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value: 1,000,000 shares authorized - -
Common stock, $0.01 par value: 25,000,000 shares authorized; 12,988,247 and 13,473,120 shares issued and outstanding, respectively$ 130 $ 134
Additional paid-in capital 139,728 136,779
Accumulated other comprehensive income 1,770 1,941
Retained earnings 70,009 76,884
Total Federated National Holding Company shareholders’ equity 211,637 215,738
Noncontrolling interest 15,822 18,727
Total shareholders' equity 227,459 234,465
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$ 904,873 $ 815,390


FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Statements of Operations and Operating Metrics by Line of Business
(Unaudited)
Three Months Ended December 31,
2017 2016 - As Adjusted
HomeownersAutomobileOtherConsolidated HomeownersAutomobileOtherConsolidated
(in thousands)
Revenue:
Gross premiums written$ 122,499 $ 6,416 $ 4,977 $ 133,892 $ 118,890 $ 13,271 $ 4,945 $ 137,106
Gross premiums earned 135,313 10,747 5,813 151,873 127,820 18,733 5,813 152,366
Ceded premiums earned (54,878) (6,408) (3,084) (64,370) (59,995) (12,812) (2,637) (75,444)
Net premiums earned 80,435 4,339 2,729 87,503 67,825 5,921 3,176 76,922
Net investment income 2,773 2,773 2,665 2,665
Net realized investment (losses) gains (96) (96) 985 985
Direct written policy fees 2,214 1,194 148 3,556 2,065 2,101 162 4,328
Other income 4,957 616 2,443 8,016 2,452 1,604 1,015 5,071
Total revenue 87,606 6,149 7,997 101,752 72,342 9,626 8,003 89,971
Costs and expenses:
Losses and loss adjustment expenses 47,345 7,633 3,896 58,874 58,709 7,658 5,227 71,594
Commissions and other underwriting expenses 25,038 1,885 1,061 27,984 23,301 3,774 1,215 28,290
General and administrative expenses 4,115 150 961 5,226 2,952 150 873 3,975
Interest expense 101 101 89 89
Total costs and expenses 76,599 9,668 5,918 92,185 85,051 11,582 7,315 103,948
Income (loss) before income taxes 11,007 (3,519) 2,079 9,567 (12,709) (1,956) 688 (13,977)
Income taxes 4,246 (1,358) 1,055 3,943 (4,901) (754)
464 (5,191)
Net income (loss) 6,761 (2,161) 1,024 5,624 (7,808) (1,202) 224 (8,786)
Net (loss) income attributable to noncontrolling interest (672) (672) 7 7
Net income (loss) attributable to Federated National Holding Company shareholders$ 7,433 $ (2,161) $ 1,024 $ 6,296 $ (7,815) $ (1,202) $ 224 $ (8,793)
Net loss ratio 58.9% 175.9% 142.8% 67.3% 86.6% 129.3% 164.6% 93.1%
Net expense ratio 36.2% 38.0% 38.7% 41.9%
Combined ratio 95.1% 105.3% 125.3% 135.0%


FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Statements of Operations and Operating Metrics by Line of Business
(Unaudited)
(Continued)
Year Ended December 31,
2017 2016 - As Adjusted
HomeownersAutomobileOtherConsolidated HomeownersAutomobileOtherConsolidated
(in thousands)
Revenue:
Gross premiums written$ 536,755 $ 43,505 $ 23,157 $ 603,417 $ 512,737 $ 69,479 $ 23,269 $ 605,485
Gross premiums earned 525,524 54,679 22,990 603,193 484,353 58,312 22,758 565,423
Ceded premiums earned (227,269) (31,037) (11,406) (269,712) (249,972) (44,291) (9,791) (304,054)
Net premiums earned 298,255 23,642 11,584 333,481 234,381 14,021 12,967 261,369
Net investment income - - 10,254 10,254 - - 9,063 9,063
Net realized investment gains - - 8,548 8,548 - - 3,045 3,045
Direct written policy fees 8,715 7,846 612 17,173 7,844 8,171 604 16,619
Other income 13,662 3,277 5,267 22,206 9,106 5,479 2,844 17,429
Total revenue 320,632 34,765 36,265 391,662 251,331 27,671 28,523 307,525
Costs and expenses:
Losses and loss adjustment expenses 206,842 32,752 7,963 247,557 169,920 14,885 13,005 197,810
Commissions and other underwriting expenses 97,111 12,976 4,780 114,867 73,215 12,471 4,692 90,378
General and administrative expenses 15,403 650 3,910 19,963 13,079 600 3,507 17,186
Interest expense 348 - - 348 348 - - 348
Total costs and expenses 319,704 46,378 16,653 382,735 256,562 27,956 21,204 305,722
Income (loss) before income taxes 928 (11,613) 19,612 8,927 (5,231) (285) 7,319 1,803
Income taxes 360 (4,481) 7,706 3,585 (2,015) (111) 2,668 542
Net income (loss) 568 (7,132) 11,906 5,342 (3,216) (174) 4,651 1,261
Net (loss) income attributable to noncontrolling interest (2,647) - - (2,647) 246 - - 246
Net income (loss) attributable to Federated National Holding Company shareholders$ 3,215 $ (7,132) $ 11,906 $ 7,989 $ (3,462) $ (174) $ 4,651 $ 1,015
Net loss ratio 69.4% 138.5% 68.7% 74.2% 72.5% 106.2% 100.3% 75.7%
Net expense ratio 37.7% 40.4% 36.8% 41.2%
Combined ratio 107.1% 114.6% 109.3% 116.9%

CONTACT: Michael H. Braun, CEO (954) 308-1322, Ronald Jordan, CFO (954) 308-1363, or Erick A. Fernandez, CAO (954) 308-1341 Federated National Holding Company

Source:Federated National Holding Company