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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☑ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE
FISCAL YEAR
ENDED December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________TO
_______________________
Commission File number 000-25001
FedNat Holding Company
(Exact name of registrant as specified in its charter)
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Florida |
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65-0248866 |
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(State or Other Jurisdiction of Incorporation or
Organization) |
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(IRS Employer Identification Number) |
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14050 N.W. 14th Street, Suite 180, Sunrise, FL
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33323 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code:
800-293-2532
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Securities registered pursuant to Section 12(b) of the
Act: |
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Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01 per share |
FNHC |
NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No þ
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes þ
No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes þ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer," “accelerated filer,"
“smaller reporting company,” and "emerging growth company" in Rule
12b-2 of the Exchange Act:
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Large accelerated filer ☐ |
Accelerated filer ☑
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Non-accelerated filer ☐ |
Smaller reporting company ☐
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Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
The aggregate market value of the Registrant’s common stock held by
non-affiliates was $168,614,834 as of June 30, 2019, computed
on the basis of the closing sale price of the Registrant’s common
stock on June 28, 2019 (the last business day of the second fiscal
quarter).
As of March 1, 2020, the total number of common shares
outstanding of Registrant’s common stock
was 14,209,773.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Form 10-K will be
incorporated by reference from the Registrant's definitive proxy
statement or included in an amendment on Form 10-K/A that will be
filed not later than 120 days after the end of the fiscal year
ended December 31, 2019.
FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
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PART I |
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ITEM 1 |
BUSINESS |
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ITEM 1A |
RISK FACTORS |
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ITEM 1B |
UNRESOLVED STAFF COMMENTS |
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ITEM 2 |
PROPERTIES |
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ITEM 3 |
LEGAL PROCEEDINGS |
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ITEM 4 |
MINE SAFETY DISCLOSURES |
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PART II |
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ITEM 5 |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES |
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ITEM 6 |
SELECTED FINANCIAL DATA |
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ITEM 7 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
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ITEM 7A |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
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ITEM 8 |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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ITEM 9 |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
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ITEM 9A |
CONTROLS AND PROCEDURES |
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ITEM 9B |
OTHER INFORMATION |
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PART III |
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ITEM 10 |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
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ITEM 11 |
EXECUTIVE COMPENSATION |
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ITEM 12 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS |
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ITEM 13 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE |
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ITEM 14 |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
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PART IV |
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ITEM 15 |
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ITEM 16 |
FORM 10-K SUMMARY |
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PART I
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS AND NON-GAAP
MEASURES
This Annual Report on Form 10-K (“Annual Report”) contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act. These statements are therefore entitled to the
protection of the safe harbor provisions of these laws. These
statements may be identified by the use of forward-looking
terminology such as “anticipate,” “believe,” “budget,”
“contemplate,” “continue,” “could,” “envision,” “estimate,”
“expect,” “forecast,” “guidance,” “indicate,” “intend,” “may,”
“might,” “outlook,” “plan,” “possibly,” “potential,” “predict,”
“probably,” “pro-forma,” “project,” “seek,” “should,” “target,”
“will,” “would,” “will be,” “will continue” or the negative
thereof or other variations thereon or comparable
terminology. We have based these forward-looking statements on our
current expectations, assumptions, estimates and projections. While
we believe these expectations, assumptions, estimates and
projections are reasonable, such forward-looking statements are
only predictions and involve a number of risks and uncertainties,
many of which are beyond our control. These and other important
factors may cause our actual results, performance or achievements
to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking
statements. Management cautions that the forward-looking statements
contained in this Annual Report are not guarantees of future
performance, and we cannot assume that such statements will be
realized or the forward-looking events and circumstances will
occur. Factors that might cause such a difference include, without
limitation, the risks and uncertainties discussed under “Risk
Factors” in this Annual Report, and discussed from time to time in
our reports filed with the Securities and Exchange Commission
(“SEC”).
Given these risks and uncertainties, you are cautioned not to place
undue reliance on such forward-looking statements. The
forward-looking statements included or incorporated by reference
into this Annual Report are made only as of the date hereof. We do
not undertake and specifically decline any obligation to update any
such statements or to publicly announce the results of any
revisions to any such statements to reflect future events or
developments.
In addition to providing consolidated revenues and net income
(loss), in the Annual Report we also provide adjusted operating
revenues and adjusted operating income (loss) because we believe
these performance measures that are not United States of America
generally accepted accounting principles ("GAAP") 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.
Non-GAAP measures do not replace the most directly comparable GAAP
measures. Refer to Part II, Item 7, "Management’s Discussion and
Analysis of Financial Condition and Results of Operations" below
for a detailed reconciliation.
We exclude the after-tax (using our prevailing 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.
ITEM 1. BUSINESS
GENERAL
FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or
“our”) 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. We, through our wholly owned subsidiaries, are
authorized to underwrite, and/or place homeowners multi-peril
(“homeowners”), 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.
FedNat Insurance Company (“FNIC”), our largest wholly-owned
insurance subsidiary, is licensed as an admitted carrier to write
homeowners property and casualty insurance by the state insurance
departments in Florida, Louisiana, Texas, South Carolina, Alabama,
Georgia and Mississippi.
Maison Insurance Company ("MIC"), an insurance subsidiary that we
acquired on December 2, 2019 (see "Maison Acquisition" below for
more information), is licensed as an admitted carrier to write
homeowners property and casualty insurance as well as wind/hail
only exposures by the state insurance departments in Louisiana,
Texas and Florida.
Monarch National Insurance Company (“MNIC”), an insurance
subsidiary, is licensed to write homeowners property and casualty
insurance in Florida.
Through our wholly-owned subsidiary, FedNat Underwriters, Inc.
(“FNU”), we serve as managing general agent for FNIC and MNIC. MNIC
was founded in 2015 through a joint venture. On February 21, 2018,
FNIC acquired the non-controlling interests in MNIC’s indirect
parent company, Monarch Delaware Holdings LLC (“Monarch Delaware”)
from our joint venture partners (see “Monarch National Insurance
Company,” below, for more information). Maison Managers, Inc.
("MMI"), a wholly-owned subsidiary, serves as the managing general
agent for MIC. ClaimCor, LLC ("ClaimCor"), a wholly-owned
subsidiary, is a claims solutions company that processes Maison's
claims.
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|
|
Year Ended December 31, |
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|
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2019 |
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2018 |
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2017 |
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|
(In thousands) |
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|
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|
Gross Premiums Written |
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Homeowners: |
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|
|
|
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|
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Florida |
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$ |
451,856 |
|
|
$ |
458,652 |
|
|
$ |
482,039 |
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|
Louisiana |
|
45,043 |
|
|
36,063 |
|
|
31,312 |
|
|
Texas |
|
66,429 |
|
|
22,492 |
|
|
8,491 |
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South Carolina |
|
25,172 |
|
|
17,592 |
|
|
10,803 |
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Alabama |
|
5,841 |
|
|
4,890 |
|
|
4,110 |
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Total homeowners |
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594,341 |
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|
539,689 |
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|
536,755 |
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Personal automobile: |
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|
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|
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Texas |
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— |
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5,141 |
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|
19,324 |
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Georgia |
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(1) |
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|
3,078 |
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|
22,479 |
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Florida |
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— |
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|
384 |
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|
1,265 |
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Alabama |
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— |
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— |
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437 |
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Total personal automobile |
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(1) |
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8,603 |
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|
43,505 |
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|
|
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Commercial general liability |
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(145) |
|
|
5,384 |
|
|
11,048 |
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|
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Federal flood |
|
16,413 |
|
|
14,088 |
|
|
12,109 |
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|
Gross premiums written total |
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$ |
610,608 |
|
|
$ |
567,764 |
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|
$ |
603,417 |
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Acquisitions and Joint Ventures
Maison Acquisition
On December 2, 2019, the Company closed its acquisition from 1347
Property Insurance Holdings, Inc., a Delaware corporation (“PIH”),
of PIH’s insurance operations conducted through MIC, MMI and
ClaimCor (collectively, “Maison Companies”). The results of
operations of the Maison Companies are included herein only from
the acquisition date forward.
Refer to Note 3 of the notes to our Consolidated Financial
Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for additional
information regarding the acquisition.
Monarch National Insurance Company
In March 2015, we organized MNIC and obtained its certificate of
authority to write homeowners property and casualty insurance in
Florida from the Florida Office of Insurance Regulation (the
“Florida OIR”). We and Crosswinds Investor Monarch LP (“Crosswinds
Investor”), a wholly-owned subsidiary of Crosswinds Holdings Inc.
(“Crosswinds Holdings”), a private equity firm and asset manager,
each invested $14.0 million for a 42.4% membership interest (each
holding 50.0% of the voting interests in Monarch Delaware).
Transatlantic Reinsurance Company (“TransRe”), an international
property and casualty reinsurance company, invested $5.0 million
for a 15.2% non-voting membership interest in Monarch Delaware.
TransRe also provided a loan represented by a six-year promissory
note in the principal amount of $5.0 million bearing annual
interest of 6.0% payable by Monarch National Holding Company
(“Monarch Holding”), the direct parent of MNIC and wholly-owned
subsidiary of Monarch Delaware (together with MNIC and Monarch
Holding, the “Monarch Entities”).
On February 21, 2018, we purchased Crosswinds Investor’s 42.4%
Class A membership interest and 50.0% voting interest for $12.3
million, and TransRe’s 15.2% non-voting membership interest in
Monarch Delaware for $4.4 million. We also repaid the outstanding
principal balance and interest due on the $5.0
million promissory
note to TransRe. Following the closing, Monarch Delaware and
Monarch Holdings were merged into MNIC. With the completion of
these transactions, FNIC owns 100% of MNIC.
Material Distribution Relationships
We are a party to an insurance agency master agreement with
Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate
Insurance Company (“Allstate”), pursuant to which we have been
authorized by ISA to appoint Allstate agents to offer our
homeowners insurance products to consumers in Florida.
We are a party to a managing general underwriting agreement with
SageSure Insurance Managers, LLC (“SageSure”) in which they
underwrite our FNIC homeowners business outside of
Florida.
Executive Office
Our executive office is located at 14050 N.W. 14th Street, Suite
180, Sunrise, Florida 33323. Our telephone number is (800)
293-2532.
Available Information
Our internet web site is www.FedNat.com for policy holders, agents
and investors. Our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to such
reports are available, free of charge, through our website as soon
as reasonably practicable after we electronically file or furnish
such material to the SEC. The SEC maintains an internet site that
contains reports, proxy and information statements and other
information regarding our filings at www.sec.gov.
INSURANCE OPERATIONS AND RELATED SERVICES
Business Strategy
We expect that in 2020 we will advance our enterprise value
through:
•successfully
integrating the operations of the Maison Companies into those of
the Company in pursuit of geographic diversification as well as
operational and expense synergies;
•focusing
on our core operations, the Homeowners line of business, while
managing the remaining runoff of our non-core Automobile and
commercial general liability obligations;
•applying
rigorous underwriting standards even if that limits growth in our
Florida book of business, due to the challenging claims environment
as a result of increased litigation, and focusing our new business
efforts on our non-Florida book, which embodies a more favorable
underwriting environment;
•increasing
rates on our policies where warranted, based on claims experience
and the cost of catastrophe reinsurance, irrespective of
competitive pricing pressures within the markets where we
operate;
•focusing
on operational efficiencies in our homeowners operations to reduce
expenses in conjunction with our continued investment in, and use
of, technology;
•leveraging
MNIC by developing and implementing a plan to expand upon MNIC’s
pricing and product offerings in 2020 to increase market share in
the risk-adjusted portion of the Florida homeowners
market;
•enhancing
our property analytical metrics, such as an increased geographical
dispersion of risks, while managing our underwriting appetite,
whether new or renewal, to ensure a balanced book of
business;
•continued
growth in our existing non-Florida markets plus expansion of our
homeowners products into other southeastern states, with our recent
entrance into Mississippi;
•maintaining
our commitment to provide high quality customer service to our
agents and insureds;
•continued
strengthening of our marketing efforts by retaining key personnel
and implementing direct marketing technologies;
•offering
attractive incentives to our agents to place a high volume of
quality business with our companies;
•continuing
with our comprehensive catastrophe reinsurance programs to reduce
our exposure to risks; and
•additional
strategies that may include possible mergers, acquisitions and
joint ventures or dispositions of assets.
Overview of Insurance Lines of Business
Homeowners Property and Casualty Insurance
FNIC, MIC and MNIC underwrite homeowners insurance in Florida and
FNIC and MIC also underwrites homeowners insurance in Louisiana and
Texas, while FNIC also underwrites homeowners in South Carolina,
Alabama and Mississippi. Homeowners insurance generally protects an
owner of real and personal property against covered causes of loss
to that property. As of December 31, 2019, the total
homeowners policies in-force was 374,000, of which 241,000 were in
Florida and 133,000 were outside of Florida. As of
December 31, 2018, the total homeowners policies in-force was
291,000, of which 247,000 were in Florida and 44,000 were outside
of Florida.
Florida
Our homeowners insurance products provide maximum dwelling coverage
of approximately $3.9 million, with the aggregate maximum policy
limit being approximately $6.3 million. We currently offer dwelling
coverage “A” up to $4.0 million with an aggregate total insured
value of $6.5 million. We continually review and update these
limits. The approximate average premium on the policies currently
in-force is $1,940, as compared with $1,873 for 2018. The typical
deductible is either $2,500 or $1,000 for non-hurricane-related
claims and generally 2% of the coverage amount for the structure
for hurricane-related claims.
Premium rates charged to our homeowners insurance policyholders are
continually evaluated to assure that they meet the expectation that
they are actuarially sound and produce a reasonable level of profit
(neither excessive, inadequate or discriminatory). Premium rates in
Florida and other states are regulated and approved by the
respective states’ office of insurance regulation. We
continuously monitor and seek appropriate adjustment to our rates
in order to remain competitive and profitable.
The following are our recent approved rate actions that we have
taken across our three insurance subsidiaries:
•In
2019, FNIC applied for a reinsurance-related statewide average
increase of 2.8% for Florida homeowners multiple-peril insurance
policies only, which was approved by the Florida OIR, and became
effective for new polices on January 25, 2020 and is expected to
become effective for renewal policies on March 15,
2020.
•In
2018, FNIC applied for a statewide average rate increase of 4.6%
for Florida homeowners multiple-peril insurance policies, which was
approved by the Florida OIR, and became effective for new and
renewal policies on April 20, 2019.
•In
2019, FNIC applied for a statewide average rate increase of 3.6%
for Florida dwelling fire insurance policies, which was approved by
the Florida OIR, and became effective for new and renewal policies
on June 1, 2019. Also in 2019, FNIC applied for a
reinsurance-related statewide average rate increase of 5.1% for
Florida dwelling fire insurance policies, and became effective for
new policies on February 25, 2020 and is expected to become
effective for renewal policies on April 1, 2020.
•In
2019, MNIC applied for a statewide average rate increase of 14.9%
for Florida homeowners multiple-peril insurance policies, which was
approved by the Florida OIR, and became effective for renewal
policies on October 1, 2019.
Through MIC, we have assumed Florida policies through the state-run
insurer Citizens Property Insurance Corporation
("Citizens").
Non-Florida
Our FNIC non-Florida homeowners insurance products, produced
through our partnership with SageSure, provide maximum dwelling
coverage “A” up to $1.8 million, with the aggregate maximum policy
limit being approximately $3.5 million. The approximate
average premium on the policies currently in-force is $1,753, as
compared with $1,758 for 2018. The typical deductible
is either $2,500 or $1,000 for non-hurricane-related claims and
generally 2% of the coverage amount for the structure for
hurricane-related claims.
As part of our partnership with SageSure, we entered into a profit
share agreement, whereby we share 50% of net profits of this line
of business, as calculated per the terms of the agreement, subject
to certain limitations. The profit share cost is reflected in
commissions and underwriting expenses on our consolidated statement
of operations.
Our MIC non-Florida insurance products include homeowners
insurance, manufactured home insurance and dwelling fire insurance.
MIC writes both full peril property policies as well as wind/hail
only exposures.
The following are our recent approved rate actions that we have
taken across FNIC and MIC:
•In
2019, FNIC applied for a statewide average rate increase of 5.0%
for Texas homeowners multiple-peril insurance policies, which was
approved by the Texas Department of Insurance, and became effective
for new and renewal policies on October 1, 2019. Also in 2019, FNIC
applied for a statewide average rate increase of 4.0% for Louisiana
homeowners multiple-peril insurance policies, which was approved by
the Louisiana Department of Insurance ("LDI"), and became effective
for new and renewal policies on December 1, 2019.
•In
2019, MIC applied for a statewide average rate increase of 30.5%
for Texas homeowners multiple-peril insurance policies, which was
approved by the LDI, and became effective for new policies on June
1, 2019 and renewal policies on August 1, 2019.
Other Lines of Business
Flood:
FNIC writes flood insurance through the National Flood Insurance
Program (“NFIP”). We write the policy for the NFIP, which assumes
100% of the flood risk while we retain a commission for our
service. FNIC offers this line of business in Florida, Louisiana,
Texas, and Georgia. FNIC plans to file an admitted flood
endorsement as an alternative to the NFIP program. MIC writes flood
insurance through a partnership with Bintech who assumes 100% of
the risk, in Louisiana only.
MARKETING AND DISTRIBUTION
Our independent agents and general agents have the authority to
sell and bind insurance coverage in accordance with procedures
established by FNU and MMI. FNU and MMI generally accept all
coverage that falls within stated underwriting criteria. For
all policies issued, FNU and MMI also have the right, within a
period that varies by state between 60 days and 120 days from a
policy’s inception, to cancel any policy, upon an advanced notice
provided in accordance with statutory specific guidelines, even if
the risk falls within our underwriting criteria. We are focusing
our marketing efforts on continuing to expand our distribution
network while maintaining our commitment to long-term
relationships. We market our products and services throughout
Florida by establishing relationships with independent agents and
general agents, and in other states, through our partnership with
SageSure. There can be no assurance, however, that we will be able
to obtain the required regulatory approvals to offer additional
insurance products or expand into other states.
We believe that our integrated computer systems, which allow for
rapid automated premium quotation and policy issuance by our
agents, are key elements in providing quality service to both our
agents and insureds for our various lines of business.
LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
We are directly liable for loss and loss adjustment expense (“LAE”)
payments under the terms of the insurance policies that are
underwritten by our insurance companies. In many cases, there
may be a time lag between the occurrence and reporting of an
insured loss and our payment of that loss. As required by insurance
regulations and accounting rules, we reflect the liability for the
ultimate payment of all incurred losses and LAE by establishing a
liability for those unpaid losses and LAE for both reported and
unreported claims, which represent estimates of future amounts
needed to pay claims and related expenses.
When a claim involving a probable loss is reported, we establish a
liability for the estimated amount of our ultimate loss and LAE
payments. We based our estimate upon such factors as the type of
loss, jurisdiction of the occurrence, knowledge of the
circumstances surrounding the claim, severity of injury or damage,
potential for ultimate exposure, estimate of liability on the part
of the insured, past experience with similar claims and the
applicable policy provisions.
We also establish a liability on an aggregate basis to provide for
incurred but not reported (“IBNR”). The estimates of the
liability for loss and LAE reserves are subject to the effect of
trends in claims severity and frequency and are continually
reviewed. As part of this process, we review historical data and
consider various factors, including known and anticipated legal
developments, inflation and economic conditions. As experience
develops and other data becomes available, these estimates are
revised, as required, resulting in an increase or decrease of the
existing liability for loss and LAE reserves. Adjustments are
reflected in results of operations in the period in which they are
made and the liability may deviate substantially from prior
estimates.
Among our classes of insurance, the automobile and homeowners
liability and claims historically tend to have longer time lapses
between the occurrence of the event, the reporting of the claim and
the final settlement, than do automobile physical damage and
homeowners property claims. These liability claims often involve
parties filing suit and therefore may result in litigation. By
comparison, property damage claims tend to be reported in a
relatively shorter period of time and settled in a shorter time
frame with less occurrence of litigation.
REINSURANCE
Reinsurance is used to mitigate the insurance loss exposure related
to certain events such as natural and man-made catastrophes, manage
overall capital adequacy and protect capital resources. We reinsure
(cede) a portion of written premiums on an excess of loss or a
quota-share basis in order to limit our loss exposure. To the
extent that reinsuring companies are unable to meet their
obligations assumed under these reinsurance agreements, we remain
primarily liable to our policyholders.
Reinsurance markets include:
•Traditional
local and global reinsurance markets including those in the United
States (“U.S.”), Bermuda, London and Europe, accessed directly and
through reinsurance intermediaries;
•Capital
markets through insurance-linked securities and collateralized
reinsurance transactions, such as catastrophe bonds, sidecars and
similar vehicles; and
•Other
insurers that engage in both direct and assumed
reinsurance.
The form of reinsurance that we may choose from time to time will
generally depend on whether we are seeking:
•Proportional
reinsurance, whereby we cede a specified percentage of premium and
losses to reinsurers;
•Non-proportional
or excess of loss reinsurance, whereby we cede all or a specified
portion of losses in excess of a specified amount on a per risk,
per occurrence (including catastrophe reinsurance) or aggregate
basis; or
•Facultative
contracts that reinsure individual policies.
Significant Reinsurance Contracts
FNIC, MIC and MNIC operate primarily by underwriting and accepting
risks for their direct accounts on a gross basis and reinsuring a
portion of the exposure on either an individual risk or an
aggregate basis to the extent those exceed the desired retention
level. We continually evaluate the relative attractiveness of
different forms of reinsurance contracts and different markets that
may be used to achieve our risk and profitability objectives.
Our reinsurance contracts do not relieve FNIC, MIC, or MNIC from
their direct obligations to the insured.
While it is not always possible to reinsure every known and unknown
risk to our company, an effective reinsurance program substantially
mitigates our exposure to potentially significant losses.
There is a credit risk exposure with respect to ceded losses to the
extent that any reinsurer is unable or unwilling to meet the
obligations assumed under the reinsurance contracts. The
collectability of reinsurance is subject to the solvency of the
reinsurers, interpretation of contract language and other
factors. The availability and amount of ceded premiums and
losses associated with the acquisition of reinsurance will vary
year to year. Our reinsurance program is subject to approval
primarily by the Florida OIR and other regulators in states where
we do business, and subject to review by Demotech, Inc.
(“Demotech”). Demotech provides Financial Stability Ratings (“FSR”)
for property and casualty insurance companies throughout the United
States.
We are selective in choosing reinsurers and consider numerous
factors, the most important of which are the financial stability of
the reinsurer or capital specifically pledged to uphold the
contract, its history of responding to claims and its overall
reputation. In an effort to minimize our exposure to the insolvency
of a reinsurer, we evaluate the acceptability and review the
financial condition of the reinsurer at least annually with the
assistance of our reinsurance broker. As of December 31, 2019
and 2018, we had over 70 reinsurance companies on our program
which are required to have at least an “A-” or better rating
by A.M. Best Company (“A.M. Best”) or the agreement
would need to be fully collateralized.
Refer to Note 6 of the notes to our Consolidated Financial
Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for further information
regarding our reinsurance programs.
EMPLOYEES
As of December 31, 2019, we had 357 employees. We are not a
party to any collective bargaining agreement and we have not
experienced work stoppages or strikes as a result of labor
disputes. We consider relations with our employees to be
satisfactory.
COMPETITION
We operate in highly competitive markets and face competition from
national, regional and residual market insurance companies in the
homeowners and flood insurance markets. Our competitors include
companies that market their products through agents and companies
that sell insurance directly to their customers. Large national
captive writers may have certain competitive advantages over
independent agency writers, including increased name recognition,
increased loyalty of their customer base and reduced policy
acquisition costs. We compete based on underwriting criteria,
pricing, our distribution network and superior service to our
agents and insureds. Although our pricing is inevitably influenced,
to an extent, by that of our competitors, we believe that it is
generally not in our best interest to compete solely on
price.
In Florida, more than 40 companies compete with us in the
homeowners insurance market. Three of our larger competitors are
Citizens, Universal Property and Casualty Insurance Company and
Heritage Property and Casualty Insurance Company.
Significant competition also emerged because of fundamental changes
made to the property and casualty insurance business in Florida in
recent years which resulted in a multi-pronged approach to address
the cost of residential property insurance in Florida. First, the
law increased the capacity of reinsurance that stabilized the
reinsurance market to the benefit of the insurance companies
writing in Florida. Second, the law provided for rate relief to all
policyholders. The law also authorized the legislatively created
insurance company, Citizens, which is free of many of the
constraints on private carriers such as minimum surplus, financial
ratio requirements, income tax and reinsurance expense, to reduce
its premium rates and begin competing against private insurers in
the residential property insurance market and expanded the
authority of Citizens to write commercial insurance.
Adverse loss experience and increasing catastrophe reinsurance
costs in recent years could potentially disrupt smaller competitors
that lack adequate scale.
REGULATION
Overview
Our current insurance operations are subject to the laws and
regulations of Florida, Georgia, Louisiana, Texas, South Carolina,
Alabama and Mississippi. We are subject to employment regulations
of Florida and potentially to other states in which we may seek to
conduct business in the future. The regulations cover all aspects
of our business and are generally designed to protect the interests
of insurance policyholders, as opposed to the interests of
shareholders. Such regulations relate to authorized lines of
business, capital and surplus requirements, allowable rates and
forms, investment parameters, underwriting limitations,
transactions with affiliates, dividend limitations, changes in
control, market conduct, maximum amount allowable for premium
financing service charges and a variety of other financial and
non-financial components of our business. Our failure to comply
with certain provisions of applicable insurance laws and
regulations could have a material adverse effect on our business,
results of operations or financial condition. In addition, any
changes in such laws and regulations, including the adoption of
consumer initiatives regarding rates charged for coverage, could
materially and adversely affect our operations or our ability to
expand.
Most states’ laws restrict an insurer’s underwriting discretion,
such as the ability to terminate policies, terminate agents or
reject insurance coverage applications, and many state regulators
have the power to reduce, or to disallow, increases in premium
rates. In addition, state laws generally require that rate
schedules and other information be filed with the state’s insurance
regulatory authority, either directly or through a rating
organization with which the insurer is affiliated. The regulatory
authority may disapprove a rate filing if it finds that the rates
are inadequate, excessive or unfairly discriminatory. Rates, which
are not necessarily uniform for all insurers, vary by class of
business, hazard covered, and size of risk. Certain states,
including Florida, as discussed above, have adopted laws or are
considering proposed legislation which, among other things, limit
the ability of insurance companies to effect rate increases or to
cancel, reduce or non-renew insurance coverage with respect to
existing policies, particularly personal automobile
insurance.
Most states require licensure or regulatory approval prior to the
marketing of new insurance products. Typically, licensure review is
comprehensive and includes a review of a company’s business plan,
solvency, financial projections, reinsurance, character of its
officers and directors, rates, forms and other financial and
non-financial aspects of a company. The regulatory authorities may
prohibit entry into a new market by not granting a license or by
withholding approval.
All insurance companies must file quarterly and annual statements
with certain regulatory agencies and are subject to regular and
special examinations by those agencies. We may be the subject of
additional special examinations or analysis. These examinations or
analysis may result in one or more corrective orders being issued
by the Florida OIR or Louisiana Department of Insurance ("LDI").
The Florida OIR has completed its regularly scheduled statutory
examination of FNIC for the five years ended December 31, 2015, of
MNIC for the period of March 17, 2015 (inception) through December
31, 2015 and of MNIC for the year ended December 31, 2016. The LDI
has completed its regularly scheduled statutory examination of MIC
for the three years ended December 31, 2014. There were no material
findings by the Florida OIR or LDI in connection with these
examinations.
Various states routinely require deposits of assets for the
protection of policyholders either in those states or for all
policyholders. As of December 31, 2019, FNIC, MIC and
MNIC held investment securities with a fair value of
approximately $11.2 million, as deposits with the state of Florida,
Texas, Georgia, South Carolina, Alabama and
Mississippi.
On July 1, 2019, Florida legislation to address Assignments of
Benefits ("AOB") took effect. AOB is the assignment of benefits for
a claim where a service provider agrees to make a repair that may
be covered by an insurance policy in exchange for the
policyholder's right to sue the insurance carrier directly. AOB has
substantially increased over the last few years, leading to
material adverse losses, particularly from our Florida homeowners
insurance policies, due to inflated claims, attorney's fees and
costs. Provisions and limitations in the new legislation are
expected to reduce inflated claims as well as offset negative
claims trends. Since AOB reform was enacted, the Company has seen a
decrease in AOB-related lawsuits. Additionally, incremental adverse
non-AOB claim trends are currently offsetting any initial favorable
impact of the AOB legislation.
Insurance Holding Company Regulation
FNHC, as the parent holding company, is subject to laws governing
insurance holding companies in Florida where FNIC and MNIC are
domiciled or Louisiana where MIC is domiciled. Among other things,
these laws: (i) require us to file periodic information with the
Florida OIR, including information concerning our capital
structure, ownership, financial condition and general business
operations; (ii) regulate certain transactions between us and our
affiliates, including the amount of dividends and other
distributions, the terms of surplus notes and amounts that our
affiliates can charge the holding company for services such as
management fees or commissions; and (iii) restrict the ability of
any one person to acquire certain levels of our voting securities
without prior regulatory approval. Any purchaser of 10% or more of
the outstanding shares of our common stock will be presumed to have
acquired control of FNIC, MIC, or MNIC and is required to file an
application with the Florida OIR or LDI to obtain approval of such
acquisition.
Restrictions in Payments of Dividends by Domestic Insurance
Companies
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of
that part of its available and accumulated capital surplus funds
which is derived from realized net operating profits on its
business and net realized capital gains. A Florida domestic insurer
may not make dividend payments or distributions to shareholders
without prior approval of the Florida OIR if the dividend or
distribution would exceed the larger of (i) the lesser of (a) 10.0%
of its surplus or (b) net income, not including realized capital
gains, plus a two-year carryforward, (ii) 10.0% of surplus with
dividends payable constrained to unassigned funds minus 25.0% of
unrealized capital gains or (iii) the lesser of (a) 10.0% of
surplus or (b) net investment income plus a three-year carryforward
with dividends payable constrained to unassigned funds minus 25.0%
of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or
distribution without the prior written approval of the Florida OIR:
(i) if the dividend is equal to or less than the greater of: (a)
10.0% of the insurer’s surplus as regards policyholders derived
from realized net operating profits on its business and net
realized capital gains or (b) the insurer’s entire net operating
profits and realized net capital gains derived during the
immediately preceding calendar year; (ii) the insurer will have
policy holder surplus equal to or exceeding 115.0% of the minimum
required statutory surplus after the dividend or distribution;
(iii) the insurer files a notice of the dividend or distribution
with the Florida OIR at least ten business days prior to the
dividend payment or distribution; and (iv) the notice includes a
certification by an officer of the insurer attesting that, after
the payment of the dividend or distribution, the insurer will have
at least 115.0% of required statutory surplus as to policyholders.
Except as provided above, a Florida domiciled insurer may only pay
a dividend or make a distribution: (i) subject to prior approval by
the Florida OIR; or (ii) 30 days after the Florida OIR has received
notice of such dividend or distribution and has not disapproved it
within such time.
Under Louisiana law, a domestic insurer may not declare or pay any
dividend to its stockholders unless its capital is fully paid in
cash and is unimpaired and it has a surplus beyond its capital
stock and the initial minimum surplus required and all other
liabilities equal to fifteen percent of its capital stock, provided
that this restriction does not apply when an insurer's paid-in
capital and surplus exceeds the minimum required by Louisiana law
by one hundred percent or more. No extraordinary dividend or other
extraordinary distribution to its shareholders may be made until 30
days after the Louisiana Commissioner of Insurance has received
notice of the declaration thereof and has not within that period
disapproved the payment, or has approved the payment within the
thirty-day period. An extraordinary dividend or distribution
includes any dividend or distribution of cash or other property,
whose fair market value together with that of other dividends or
distributions made within the preceding twelve months exceeds the
lesser of (a) 10.0% percent of the insurer's surplus as regards
policyholders as of the 31st day of December next preceding; or (b)
the net income, not including realized capital gains, for the
twelve-month period ending the 31st day of December next preceding,
but shall not include pro rata distributions of any class of the
insurer's own securities. In determining whether a dividend or
distribution is extraordinary, an insurer may carry forward net
income from the previous two calendar years that has not already
been paid out as dividends. This carryforward shall be computed by
taking the net income from the second and third preceding calendar
years, not including realized capital gains, less dividends paid in
the second and immediate preceding calendar years. Notwithstanding
the foregoing, an insurer may declare an extraordinary dividend or
distribution which is conditional upon regulatory approval. and the
declaration shall confer no rights upon shareholders until either
the payment is approved or has not been disapproved within the 30
day period referred to above.
No dividends were paid by FNIC or MNIC in 2019, 2018 and 2017, and
none are anticipated in 2020. No dividends were paid by MIC since
the acquisition date, and none are anticipated in 2020. Although we
believe that amounts required to meet our financial and operating
obligations will be available from sources other than dividends
from our insurance subsidiaries, there can be no assurance in this
regard. Further, there can be no assurance that, if requested, the
Florida OIR or LDI will allow any dividends to be paid by FNIC, MIC
or MNIC to FNHC, the parent company, in the future. The maximum
dividends permitted by state law are not necessarily indicative of
an insurer’s actual ability to pay dividends or other distributions
to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on
surplus, which could affect an insurer’s competitive position, the
amount of premiums that can be written and the ability to pay
future dividends. Further, state insurance laws and regulations
require that the statutory surplus of an insurance company
following any dividend or distribution by it be reasonable in
relation to its outstanding liabilities and adequate for its
financial needs.
While the non-insurance company subsidiaries (FNU and any other
affiliate) are not subject directly to the dividend and other
distribution limitations, insurance holding company regulations
govern the amount that any affiliate within the holding company
structure may charge any of the insurance companies for services
(e.g., management fees and commissions).
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to address
the cyclical nature of the insurance industry, catastrophic events
and insurance capacity and pricing. These regulations include: (i)
the creation of “market assistance plans” under which insurers are
induced to provide certain coverages; (ii) restrictions on the
ability of insurers to rescind or otherwise cancel certain policies
in mid-term; (iii) advance notice requirements or limitations
imposed for certain policy non-renewals; and (iv) limitations upon
or decreases in rates permitted to be charged.
National Association of Insurance Commissioners Risk-Based Capital
Requirements
In order to enhance the regulation of insurer solvency, the
National Association of Insurance Commissioners (“NAIC”),
established risk-based capital (“RBC”) requirements for insurance
companies that are designed to assess capital adequacy and to raise
the level of protection that statutory surplus provides for policy
holders. These requirements measure four major areas of risk facing
property and casualty insurers: (i) underwriting risks, which
encompass the risk of adverse loss development and inadequate
pricing; (ii) declines in asset values arising from credit risk;
(iii) other business risks from investments; and (iv) catastrophe
risk. Insurers having less statutory surplus than required will be
subject to varying degrees of regulatory action, depending on the
level of capital inadequacy. The Florida OIR and LDI, which follows
these requirements, could require FNIC, MIC or MNIC to cease
operations in the event they fail to maintain the required
statutory capital.
Based upon the 2019 and 2018 statutory financial statements for
FNIC, MIC and MNIC, statutory surplus exceeded the regulatory
action levels established by the NAIC’s RBC
requirements.
Based on RBC requirements, the extent of regulatory intervention
and action increases as the ratio of an insurer’s statutory surplus
to its Authorized Control Level (“ACL”), as calculated under the
NAIC’s requirements, decreases. The first action level, the
Company Action Level, requires an insurer to submit a plan of
corrective actions to the insurance regulators if statutory surplus
falls below 200.0% of the ACL amount. The second action
level, the Regulatory Action Level, requires an insurer to submit a
plan containing corrective actions and permits the insurance
regulators to perform an examination or other analysis and issue a
corrective order if statutory surplus falls below 150.0% of the ACL
amount. The third action level, ACL, allows the regulators to
rehabilitate or liquidate an insurer in addition to the
aforementioned actions if statutory surplus falls below the ACL
amount. The fourth action level is the Mandatory Control Level,
which requires the regulators to rehabilitate or liquidate the
insurer if statutory surplus falls below 70.0% of the ACL amount.
FNIC’s ratio of statutory surplus to its ACL was 323.9% and 329.9%
as of December 31, 2019 and 2018, respectively. MNIC’s ratio
of statutory surplus to its ACL was 1,128.7% and 774.4% as of
December 31, 2019 and 2018, respectively. MIC's ratio of
statutory surplus to its ACL was 305.7% as of December 31,
2019.
Industry Ratings Services
Third-party rating agencies assess and rate the ability of insurers
to pay their claims. The insurance industry uses financial strength
ratings to assess the financial strength and quality of insurers.
Ratings are based upon criteria established by the rating agencies
and reflect evaluations of each insurer’s profitability, debt and
cash levels, customer base, adequacy and soundness of reinsurance,
quality and estimated market value of assets, adequacy of reserves
and management. Ratings are also based upon factors of concern to
agents, reinsurers and policyholders and are not directed toward
the protection of investors, such as purchasers of our common
stock.
As of December 31, 2019 and 2018, FNIC, MIC, and MNIC
are rated by Demotech as “A” (“Exceptional”), which is the
third of seven ratings, and defined as “Regardless of the severity
of a general economic downturn or deterioration in the insurance
cycle, insurers earning an FSR of “A” possess “Exceptional”
financial stability related to maintaining surplus as regards to
policyholders.” Demotech’s ratings are based upon factors of
concern to agents, reinsurers and policyholders and are not
primarily directed toward the protection of investors. Our Demotech
rating could be jeopardized by factors including adverse
development and various surplus related ratio
exceptions.
ITEM 1A. RISK FACTORS
We are subject to various risks in our business operations as
described below. The risks and uncertainties described below are
the known risk factors we consider material. Additional risks and
uncertainties not currently known, or currently deemed immaterial,
may also impair our business operations. Investors should carefully
consider these risks before making an investment
decision.
Risks Related to Our Business
Our financial condition could be adversely affected by the
occurrence of natural and man-made disasters.
We write insurance policies that cover homeowners for losses that
result from, among other things, catastrophes and sinkholes.
Catastrophic losses can be caused by natural events such as
hurricanes, tropical storms, tornadoes, wind, hail, fires,
explosions and other events. The incidence and severity of these
events are inherently unpredictable. Catastrophic losses can also
be caused by terrorist attacks, war, riots, political instability
and other man-made events. The extent of losses from a catastrophe
is a function of two factors: the total amount of the insurance
company’s exposure in the area affected by the event and the
severity of the event. Our homeowners policyholders are disbursed
throughout the southeast United States, although the majority of
our policyholders are located in Florida. Further, a substantial
portion of our Florida homeowners policyholders, are located in
southeastern Florida, and therefore are especially subject to
adverse weather conditions such as hurricanes and tropical
storms.
The occurrence of claims from catastrophic events can result in
substantial volatility in our results of operations or financial
condition for any fiscal quarter or years as seen in 2019, 2018 and
2017. An elevation in the values and concentrations of insured
property may increase the severity of the occurrence of claims in
the future. Although we attempt to manage our exposure to such
events through the use of underwriting controls and the purchase of
third-party reinsurance, catastrophic events are inherently
unpredictable and the actual nature of such events when they occur
could be more frequent or severe than contemplated in our pricing
and risk management expectations. As a result, the occurrence of
one or more catastrophic events could have a material adverse
effect on our results of operations or financial
condition.
Florida,
South Carolina and Texas, all states in which we write homeowners
policies, experienced several significant hurricanes in 2019, 2018
and 2017, which some weather analysts believe is consistent with a
period of greater hurricane activity. Exposure risk management
alternatives are carefully evaluated as they may increase operating
expenses and may not be successful in protecting long-term
profitability. If our loss experience is more adverse than is
contemplated by our loss reserves, the related increase in our loss
reserves may have a material adverse effect on our results of
operations in the period in which the increase occurs.
Our loss reserves are estimates and may be inadequate to cover our
actual liability for losses, causing our results of operations to
be adversely affected.
We maintain reserves to cover our estimated ultimate liabilities
for losses and LAE. These reserves are estimates based on
historical data and statistical projections of what we believe the
settlement and administration of claims will cost based on facts
and circumstances then known to us. Actual loss and LAE reserves,
however, may vary significantly from our estimates. Factors that
affect loss and LAE reserves include the estimates made on a
claim-by-claim basis known as “case reserves” coupled with bulk
estimates known as IBNR. Periodic estimates by management of the
ultimate costs required to settle all claim files are based on our
analysis of historical data and estimations of the impact of
numerous factors such as:
•per-claim
information;
•company
and industry historical loss experience, including the impact of
trends such as the AOB by insureds;
•legislative
enactments, judicial decisions, legal developments in the awarding
of damages, and changes in political attitudes; and
•trends
in general economic conditions, including the effects of
inflation.
Management revises its estimates based on the results of its
analysis. This process assumes that past experience, adjusted for
the effects of current developments and anticipated trends, is an
appropriate basis for estimating the ultimate settlement of all
claims. There is no precise method for subsequently evaluating the
impact of any specific factor on the adequacy of the reserves,
because the eventual redundancy or deficiency is affected by
multiple factors. Because of the uncertainties that surround
estimated loss reserves, we cannot be certain that our reserves
will be adequate to cover our actual losses. If our loss and LAE
reserves are less than actual losses and LAE, we will be required
to increase our reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified. Future
loss experience, substantially in excess of our loss and LAE
reserves, could substantially harm our results of operations and
financial condition.
Although we follow the industry practice of reinsuring a portion of
our risks, our costs of obtaining reinsurance fluctuates and we may
not be able to successfully alleviate risk through reinsurance
arrangements.
We have a reinsurance structure that is a combination of private
reinsurance and the FHCF. Our reinsurance structure is composed of
several reinsurance companies with varying levels of participation
providing coverage for losses and LAE at pre-established minimum
and maximum amounts. Losses incurred in connection with a
catastrophic event below the minimum and above the maximum are the
responsibility of FNIC, MIC and MNIC.
The availability and costs associated with the acquisition of
reinsurance varies year to year. We are not able to control these
fluctuations which may be significant and may limit our ability to
purchase adequate coverage. The recovery of increased reinsurance
costs through rate increases is not immediate and cannot be
presumed, as rate increases are subject to approval of the Florida
OIR or LDI. We may be unable to purchase reinsurance for the
liabilities we reinsure, and if we successfully purchase such
reinsurance, we may be unable to collect, which could adversely
affect our business, financial condition and results of
operations.
We face a risk of non-collectability of reinsurance, which could
materially and adversely affect our business, results of operations
and financial condition.
As is common practice within the insurance industry, we transfer a
portion of the risks insured under our policies to other companies
through the purchase of reinsurance. This reinsurance is maintained
to protect our insurance subsidiary against the severity of losses
on individual claims, unusually serious occurrences in which a
number of claims produce an aggregate extraordinary loss and other
catastrophic events. Although reinsurance does not discharge our
insurance subsidiary from its primary obligation to pay for losses
insured under the policies it issues, reinsurance does make the
assuming reinsurer liable to the insurance subsidiary for the
reinsured portion of the risk. A credit exposure exists with
respect to ceded losses to the extent that any reinsurer is unable
or unwilling to meet the obligations assumed under the reinsurance
contracts. The collectability of reinsurance is subject to the
solvency of the reinsurers, interpretation of contract language and
other factors. A reinsurer’s insolvency or inability to make
payments under the terms of a reinsurance contract could have a
material adverse effect on our business, results of operations and
financial condition.
Our reinsurance structure has significant risks, including the fact
that the FHCF or our other reinsurers may not have available
capital resources to pay their claims or that their ability to pay
their claims in a timely manner may be impaired. This could result
in significant financial, legal and operational challenges to our
company. Therefore, in the event of a catastrophic loss, we may
become dependent upon the FHCF’s and our other reinsurers’ ability
to pay their claims. With respect to the FHCF, we may, in turn, be
dependent upon the ability of the State Board of Administration of
Florida (“SBA”) to issue bonds in amounts that would be required to
meet its reinsurance obligations in the event of such a
catastrophic loss.
We may experience increased financial exposure from climate
change.
A body of scientific evidence indicates that climate change is
occurring. Climate change, to the extent that it affects weather
patterns, is likely to cause an increase in the frequency and/or
the severity of catastrophic events or severe weather conditions.
Our financial exposure from climate change is most notably
associated with losses in connection with the occurrence of
hurricanes striking Florida, Louisiana and Texas. We mitigate the
risk of financial exposure from climate change by restrictive
underwriting criteria, sensitivity to geographic concentrations,
and reinsurance.
Restrictive underwriting criteria can include, but are not limited
to, higher premiums and deductibles and more specifically excluded
policy risks such as fences and screened-in enclosures. New
technological advances in computer generated geographical mapping
afford us an enhanced perspective as to geographic concentrations
of policyholders and proximity to flood prone areas. Our amount of
maximum reinsurance coverage is determined by subjecting our
homeowners exposures to statistical forecasting models that are
designed to quantify a catastrophic event in terms of the frequency
of a storm occurring once in every “n” years. If the statistical
forecasting models fail to contemplate an emerging claim trend,
such as the assignment of insurance benefits in Florida, then there
is the risk we may not purchase adequate catastrophic wind
coverage. Our reinsurance coverage contemplates the effects
of a catastrophic event that occurs only once every 130 years. Our
amount of losses retained (our deductible) in connection with a
catastrophic event is determined by market capacity, pricing
conditions and surplus preservation. There can be no assurance that
our reinsurance coverage and other measures taken will be
sufficient to mitigate losses resulting from one or more
catastrophic events.
Our operations could be adversely affected by contagious terminally
severe health viruses.
We are exposed to the risk of natural or man-made events, such as a
pandemic or other health related events that could cause a large
number of deaths, injuries or business disruptions. Significant
influenza pandemics have occurred three times in the last century,
but the likelihood, timing or severity of a future pandemic cannot
be predicted. A localized or widespread event that directly affects
our
workplace or customers could cause a material adverse effect on our
results of operations in any period and, depending on their
severity, could also materially and adversely affect our ability to
effectively conduct business, including our ability to write new
business, and our financial condition. Also, such events could harm
the financial condition of our reinsurers and thereby increase the
probability of default on reinsurance recoveries. Limiting FedNat’s
exposure to the spread of infectious diseases, the Company has long
supported a work from home culture in response to business
continuity concerns by establishing and supporting the expansion of
the Company’s network infrastructure to include dedicated home
workstations for most employees.
We may face difficulties integrating the Maison Companies, which we
acquired in December 2019. Failure to effectively integrate their
operations could harm our growth or operating results.
On December 2, 2019, we completed the acquisition of the Maison
Companies from PIH. We face the substantial risks associated with
acquisitions of existing businesses. These risks include, but are
not limited to, the risk that we may not be able to effectively
integrate the operations, personnel, services or technologies of
the business acquired; the risks associated with determining
adequate loss reserves for the business acquired; the potential
disruption of our ongoing businesses; the diversion of management
attention because of the substantial management time and resources
required; the difficulty in developing or maintaining controls and
procedures; and the dilution of our existing shareholders resulting
from the issuance of shares of our common stock as part of the
acquisition consideration.
Completing the integration of the Maison Companies may require us
to use cash resources and incur contingent liabilities. We may also
be faced with material liabilities not disclosed to us as part of
our due diligence process. If we are not able to address these
liabilities and otherwise successfully integrate the acquired
business, we may not receive the intended benefits of this
acquisition. As a result, our ongoing business, financial condition
and results of operations could be materially adversely
affected.
If we are unable to grow because our capital must be used to pay
greater than anticipated claims, our financial results may
suffer.
Our ability to grow in the future will depend on our ability to
expand the types of insurance products we offer and the geographic
markets in which we do business, both balanced by the business
risks we choose to assume and cede. We believe that our company is
sufficiently capitalized to operate our business as it now exists
and as we currently plan to expand it. Our existing sources of
funds include issuance of debt securities, possible sales of our
investment securities, and our earnings from operations and
investments. Catastrophic events in our market areas, such as the
hurricanes experienced in Florida, South Carolina and Texas in
2019, 2018 and 2017, have resulted and may result in greater claims
losses than anticipated, which could require us to limit or halt
growth while we redeploy our capital to pay these unanticipated
claims.
The failure of any of the loss limitation methods we employ could
have a material adverse effect on our financial condition or our
results of operations.
Various provisions of our policies, such as limitations or
exclusions from coverage which have been negotiated to limit our
risks, may not be enforceable in the manner we intend. At the
present time, we employ a variety of exclusions to our policies
that limit exposure to known risks, including, but not limited to,
exclusions relating to certain named liabilities, types of vehicles
and specific artisan activities. In addition, the policies we issue
contain conditions requiring the prompt reporting of claims to us
and our right to decline coverage in the event of a violation of
that condition. While we believe our insurance product exclusions
and limitations reduce the loss exposure to us and help eliminate
known exposures to certain risks, it is possible that a court or
regulatory authority could nullify or void an exclusion or that
legislation could be enacted modifying or barring the use of such
endorsements and limitations in a way that would adversely affect
our loss experience, which could have a material adverse effect on
our financial condition or results of operations.
The failure of various risk mitigation strategies utilized could
have a material, adverse effect on our financial condition, results
of operations or reputation in the marketplace.
We utilize a number of tactics to mitigate risk exposure within our
insurance business, which include:
•Avoidance
to risks that do not conform to underwriting
standards;
•Risk
portfolio optimization;
•Transferring
portfolio risk to financially sound reinsurance
companies;
•Acquiring
adequate primary insurance to ensure continued operations;
and
•Promoting
an enterprise risk management culture.
If we fail to mitigate our risk exposure, the Company could
experience increased claims, losses from catastrophic events that
are not reinsured and a damage of our reputation that makes agents
and reinsurers reluctant to work with us.
Trends in claims and coverage issues have had, and may continue to
have, a material adverse impact on our business.
As industry practices and legal, judicial, social and other
conditions change, unexpected and unintended issues related to
claims and coverage emerge. These issues adversely affect our
business by either extending coverage beyond our underwriting
intent or by increasing the number or size of claims. In some
instances, these changes may not become apparent until sometime
after we have issued insurance policies that are affected by the
changes. As a result, the full extent of liability under our
insurance policies may not be known for many years after a policy
is issued.
An example of an existing trend, particularly in Florida homeowners
insurance, is the assignment of benefits for a claim where a
service provider agrees to make a repair that may be covered by an
insurance policy in exchange for the policyholder’s right to sue
the insurance carrier directly. The assignment of the insurance
benefits has substantially increased, and may continue to increase,
our exposure to inflated claims, attorney’s fees and costs.
Although legislative actions in the State of Florida to limit the
effect of AOB on insurance companies are being contemplated, there
can be no assurances that any such legislative actions will become
law or, if enacted, that such actions will have the effect of
limiting the impact on us of assignments of benefits by
insureds.
Our failure to comply with the covenants in our senior note
indenture, including as a result of events beyond our control,
could result in an event of default, which could materially and
adversely affect our financial condition and results of
operations.
The indenture for our senior notes requires us to maintain certain
financial ratios and to comply with various operational and other
covenants, including limitations on our ability to incur additional
debt without the approval of the existing noteholders. If there
were an event of default under the indenture that was not cured or
waived, the holders of the senior notes could cause all amounts
outstanding with respect to the senior notes to be due and payable
immediately. We cannot assure you that our assets or cash flow
would be sufficient to fully repay the senior notes, either upon
maturity or, if accelerated, upon an event of default, or that we
would be able to refinance or restructure the payments on the
senior notes. This would have a material adverse impact on our
liquidity, financial condition and results of
operations.
We may require additional capital in the future which may not be
available or only available on unfavorable terms.
Our future capital requirements depend on many factors, including
our ability to write new business successfully and to establish
premium rates and reserves at levels sufficient to cover losses. To
the extent that our capital may be insufficient to meet future
operating requirements and/or cover losses, we may need to raise
additional funds through financings or curtail our growth. Many
factors will affect the amount and timing of our capital needs,
including our growth and profitability, our claims experience, and
the availability of reinsurance, as well as possible acquisition
opportunities, market disruptions and other unforeseeable
developments.
If we were required to raise additional capital, equity or debt
financing may not be available at all or may be available only on
terms that are not favorable to us. In the case of equity
financings, dilution to our shareholders’ ownership could result,
and in any case such securities may have rights, preferences and
privileges that are senior to those of existing shareholders. If we
raise additional funds by incurring debt financing, the terms of
the debt may involve significant cash payment obligations as well
as covenants and specific financial ratios that may restrict our
ability to operate our business or pay dividends. If we cannot
obtain adequate capital on favorable terms or at all, our business,
financial condition or results of operations could be materially
adversely affected.
Our business is heavily regulated, and changes in regulation may
reduce our profitability and limit our growth.
We are subject to extensive regulation in the states in which we
conduct business. This regulation is generally designed to protect
the interests of policyholders, as opposed to shareholders and
other investors, and relates to authorization for lines of
business, capital and surplus requirements, investment limitations,
underwriting limitations, transactions with affiliates, dividend
limitations, changes in control, premium rates and a variety of
other financial and non-financial components of an insurance
company’s business. These regulatory requirements may adversely
affect or inhibit our ability to achieve some or all of our
business objectives. State regulatory authorities also conduct
periodic examinations into insurers’ business practices. These
reviews may reveal deficiencies in our insurance operations or
differences between our interpretations of regulatory requirements
and those of the regulators.
The NAIC and state insurance regulators are constantly reexamining
existing laws and regulations, generally focusing on modifications
to holding company regulations, interpretations of existing laws
and the development of new laws.
From time to time, some states in which we conduct business have
considered or enacted laws that may alter or increase state
authority to regulate insurance companies and insurance holding
companies. In other situations, states in which we conduct business
have considered or enacted laws that impact the competitive
environment and marketplace for property and casualty insurance. In
addition, in recent years the state insurance regulatory framework
has come under increased federal scrutiny. Changes in federal
legislation and administrative policies in several areas, including
changes in financial services regulation and federal taxation, can
significantly impact the insurance industry and us.
We cannot predict with certainty the effect any enacted, proposed
or future state or federal legislation or NAIC initiatives may have
on the conduct of our business. Furthermore, there can be no
assurance that the regulatory requirements applicable to our
business will not become more stringent in the future or result in
materially higher costs than current requirements. Changes in the
regulation of our business may reduce our profitability, limit our
growth or otherwise adversely affect our operations.
Our revenues and operating performance will fluctuate due to
statutorily approved assessments that support property and casualty
insurance pools and associations.
We operate in a regulatory environment where certain entities and
organizations have the authority to require us to participate in
assessments. Currently these entities and organizations include,
but are not limited to, the Florida Insurance Guaranty Association
(“FIGA”), Citizens, the FHCF, Texas Windstorm Insurance Association
(“TWIA”) and Louisiana Citizens Property Insurance
(“LCPI”).
Insurance companies currently pass these assessments on to holders
of insurance policies in the form of a policy surcharge, and
reflect the collection of these assessments as fully earned credits
to operations in the period collected. The collection of these
fees, however, may adversely affect our overall marketing strategy
due to the competitive landscape in Florida. As a result, the
impact of possible future assessments on our balance sheet, results
of operations or cash flow are indeterminable at this
time.
Our investment portfolio may suffer reduced returns, or losses,
which would significantly reduce our earnings.
Like other insurance companies, we depend on income from our
investment portfolio for a portion of our earnings. During the time
that normally elapses between the receipt of insurance premiums and
any payment of insurance claims, we invest the premiums received,
together with our other available capital, primarily in debt
securities and to a lesser extent in equity securities, in order to
generate investment income.
Our investment portfolio contains interest rate sensitive
instruments, such as bonds, which may be adversely affected by
changes in interest rates. A significant increase in interest rates
or decrease in credit worthiness could have a material adverse
effect on our financial condition or results of operations.
Declines in interest rates could have an adverse effect on our
investment income.
We are required to review our investment portfolio to evaluate and
assess known and inherent risks associated with each investment
type. We revise our evaluations and assessments as conditions
change and new information becomes available. This may result in
changes in an other-than-temporary impairment (“OTTI”) in our
consolidated statements of income. We base our assessment of
whether an OTTI has occurred on our case-by-case evaluation of the
underlying reasons for the decline in fair value. Because
historical trends may not be indicative of future impairments and
additional impairments may need to be recorded in the future, no
assurances can be provided
that we have accurately assessed whether any such impairment is
temporary or other-than-temporary or that we have accurately
recorded amounts for an OTTI in our financial
statements.
In addition, volatile and illiquid markets increase the likelihood
that investment securities may not behave in historically
predictable manners, resulting in fair value estimates that may be
overstated compared with actual amounts that could be realized upon
disposition or maturity of the security. The effects of market
volatility, declining economic conditions, such as a US or global
economic slowdown, whether due to coronavirus, or other factors,
could adversely impact the fair value or credit quality of
securities in our portfolio and may have unforeseen consequences on
the liquidity and financial stability of the issuers of securities
we hold. Such deteriorations in financial condition can occur
rapidly, leaving us unable to react to such a scenario in a prudent
manner consistent with our historical practices in dealing with
more orderly markets. This, in turn, could adversely and negatively
affect our results of operations, liquidity or financial
condition.
Our failure to pay claims accurately could adversely affect our
business, financial results and capital requirements.
We must accurately evaluate and pay claims that are made under our
policies. Many factors affect our ability to pay claims accurately,
including the training and experience of our claims
representatives, the culture of our claims organization and the
effectiveness of our management, our ability to develop or select
and implement appropriate procedures and systems to support our
claims functions and
other factors. Our failure to pay claims accurately could lead to
material litigation, undermine our reputation in the marketplace,
impair our image and negatively affect our financial
results.
In addition, if we are not able to handle an increasing number of
claims as a result of a catastrophic event, or if we do not train
new claims adjusting employees effectively or lose a significant
number of experienced claims adjusting employees, our claims
department’s ability to handle an increasing workload could be
adversely affected. In addition to potentially requiring that
growth be slowed in the affected markets, we could suffer decreased
quality of claims work, which in turn could lower our operating
margins.
Our insurance companies are subject to minimum capital and surplus
requirements, and our failure to meet these requirements could
subject us to regulatory action.
Our insurance companies are subject to RBC standards and other
minimum capital and surplus requirements imposed under applicable
state laws, including the laws of the State of Florida. The RBC
standards, based upon the Risk Based Capital Model Act adopted by
the NAIC, require our insurance companies to report their results
of RBC calculations to state departments of insurance and the NAIC.
These RBC standards provide for different levels of regulatory
attention depending upon the ratio of an insurance company’s total
adjusted capital, as calculated in accordance with NAIC guidelines,
to its ACL RBC.
If we fail to meet the applicable RBC or minimum statutory capital
requirements imposed by the laws of Florida or other states where
we do business, we would be required to raise additional capital
and we could be subject to further examination or corrective action
imposed by state regulators, including limitations on out writing
of additional business, additional state supervision, or
liquidation. Similarly, an increase in existing RBC requirements or
minimum statutory capital requirements, such as the catastrophic
risk component of RBC may require us to increase our statutory
capital levels.
Ratios calculated based on RBC tend to be a key criteria in the
assignment of ratings by insurance rating agencies.
Our revenues and operating performance may fluctuate with business
cycles in the property and casualty insurance
industry.
Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical
patterns characterized by periods of significant competition in
pricing and underwriting terms and conditions, which is known as a
“soft” insurance market, followed by periods of lessened
competition and increasing premium rates, which is known as a
“hard” insurance market. Although an individual insurance company’s
financial performance is dependent upon its own specific business
characteristics, the profitability of most property and casualty
insurance companies tends to follow this cyclical market pattern,
with profitability generally increasing in hard markets and
decreasing in soft markets. At present, on a consolidated
basis, we continue to file and obtain rate increases as the current
Florida property and casualty market continues to harden, but
remains competitive. Elsewhere in the United States, we are
experiencing a stable market, but increased competition.
We cannot predict how long these market conditions will persist.
Although we do not compete entirely on price or targeted market
share, negative market conditions may impair our ability to write
insurance at rates that we consider appropriate relative to the
risk assumed. If we cannot write insurance at appropriate rates,
our revenues and operating performance may be adversely
affected.
New homeowners insurance operations outside of Florida may not be
profitable.
Our insurance subsidiaries currently conduct business in a limited
number of states in addition to Florida, with concentrations of
business in South Carolina, Louisiana and Texas and to a lesser
extent in Alabama and Mississippi. Any single catastrophic
occurrence or other condition affecting losses in these states
could adversely affect the results of our operating results. We
plan to continue the expansion of admitted homeowners property and
casualty programs into other states as opportunities arise.
Expanding our operations to additional states present risks similar
to those we currently face with our existing operations, including
risks associated with the inability to market an adequately priced
policy, inadequate commission structures, and overpriced or
unavailable catastrophic reinsurance for wind events. Additionally,
we would become subject to the insurance regulators in each state
and the laws and regulations designed to regulate the insurance
products and operations of new and existing insurance companies
under their respective authority. As a result, there can be no
guarantees that state regulators will allow us to do business in
those states or, if we are approved to operate in a state, that our
operations will be profitable in that state.
If we determine to expand to additional states or to expand the
types of insurance products we offer, we may incur additional costs
and may not obtain the necessary regulatory approvals.
Although we exited the automobile and commercial general liability
lines of insurance, we may determine to expand our product
offerings in the future by underwriting additional insurance
products and programs, and marketing them through our distribution
network. Expansion of our product offerings will result in
increases in expenses due to additional costs incurred in actuarial
rate
justifications, software and personnel. Offering additional
insurance products may also require regulatory approval, further
increasing our costs. Before we can write insurance in a new state,
or sell a new insurance product in a state, we must obtain a
license or other approvals from the applicable state insurance
regulators. These state insurance regulators may request additional
information, add conditions to the license that we find
unacceptable, or deny our application. This would delay or prevent
us from operating in that state or offering that new product. There
can be no assurance that we would be successful bringing new
insurance products to our markets in a manner that is
profitable.
Our success depends on our ability to accurately price the risks we
underwrite.
The results of operations and the financial condition of our
insurance company depend on our ability to underwrite and set
premium rates accurately for a wide variety of risks. Rate adequacy
is necessary to generate sufficient premiums to pay losses, LAE and
underwriting expenses and to earn a profit. In order to price our
products accurately, we must collect and properly analyze a
substantial amount of data; develop, test and apply appropriate
rating formulas; closely monitor and timely recognize changes in
trends; and project both severity and frequency of losses with
reasonable accuracy. Our ability to undertake these efforts
successfully and price our products accurately is subject to a
number of risks and uncertainties, some of which are outside our
control, including:
•the
availability of sufficient reliable data and our ability to
properly analyze available data;
•the
uncertainties that inherently characterize estimates and
assumptions;
•our
selection and application of appropriate rating and pricing
techniques;
•changes
in legal standards, claim settlement practices, medical care
expenses and restoration costs;
•regulatory
restrictions, including, without limitation regulatory approval of
rates sought; and
•legislatively
imposed consumer initiatives.
Consequently, we could underprice risks, which would negatively
affect our profit margins, or we could overprice risks, which could
reduce our sales volume and competitiveness. In either event, the
profitability of our insurance company could be materially and
adversely affected.
Adverse ratings by insurance rating agencies may adversely impact
our ability to write new policies, renew desirable policies or
obtain adequate reinsurance, which could limit or halt our growth
and harm our business.
Third-party rating agencies assess and rate the ability of insurers
to pay their claims. The insurance industry uses financial strength
ratings to assess the financial strength and quality of insurers.
Ratings are based on criteria established by the rating agencies
and reflect evaluations of each insurer’s profitability, debt and
cash levels, customer base, adequacy and soundness of reinsurance,
quality and estimated market value of assets, adequacy of reserves,
capital and RBC ratios, and management. Ratings are also based upon
factors of concern to agents, reinsurers and policyholders and are
not directed toward the protection of investors, such as purchasers
of our common stock.
Our ability to compete successfully in states outside of Florida to
expand our business footprint may also be negatively affected by
our lack of an A.M. Best company rating of our financial strength.
Although our insurance subsidiaries have a Demotech rating of “A”
(Exceptional), which is generally accepted in Florida and certain
other states, a rating by A.M. Best is more widely accepted outside
of Florida and may cause customers and agents to prefer a policy
written by an A.M. Best-rated company over a policy written by us.
In addition, some mortgage companies outside of Florida may require
homeowners to obtain property insurance from an insurance company
with a minimum A.M. Best rating.
The withdrawal or downgrade of our ratings could limit or prevent
us from writing or renewing desirable insurance policies, from
competing with insurers who have higher ratings, from obtaining
adequate reinsurance, or from borrowing on a line of credit or
cause us to default on financial covenants contained in certain of
our debt financing agreements. The withdrawal or downgrade of
our ratings could have a material adverse effect on our results of
operations and financial position because our insurance products
might no longer be acceptable to the secondary marketplace and
mortgage lenders. Furthermore, a withdrawal or downgrade of our
ratings could prevent independent agents from selling and servicing
our insurance products or could increase the commissions we must
pay to these agents.
We rely on independent and general agents to write our insurance
policies, and if we are not able to attract and retain independent
and general agents, our revenues would be negatively
affected.
We currently market and distribute our products and services
through contractual relationships with a network of independent
agents and a select number of general agents. Our independent
agents are our primary source for our property and liability
insurance policies. Many of our competitors also rely on
independent agents. As a result, we must compete with other
insurers for independent agents’
business. Our competitors may offer a greater variety of insurance
products, lower premiums for insurance coverage, or higher
commissions to their agents. If our products, pricing and
commissions do not remain competitive, we may find it more
difficult to attract business from independent agents to sell our
products. A material reduction in the amount of our products that
independent agents sell or a material reduction in the number of
independent agents with whom we maintain a relationship could
negatively affect our results of operations and financial
condition.
We are a party to an insurance agency master agreement with ISA, an
affiliate of Allstate, pursuant to which we are authorized by ISA
to appoint Allstate agents to offer our homeowners insurance
products to consumers in Florida. Since that time, our homeowners
premiums and the percentage of homeowners premiums attributable to
Allstate agents has increased rapidly. During the years ended
December 31, 2019, 2018 and 2017, 23.2%, 23.8% and 23.8%,
respectively, of the homeowners premiums we underwrote were from
Allstate’s network of Florida agents, and this concentration may
continue to increase. An interruption or change in our relationship
with ISA could have a material adverse effect on the amount of
premiums we are able to write, as well as our results of
operations.
We are a party to a managing general underwriting agreement with
SageSure to facilitate growth in our FNIC homeowners business
outside of Florida. As a percentage of our total homeowners
premiums, 23.1%, 15.0% and 10.2%, for the years ended
December 31, 2019, 2018 and 2017, respectively, were
underwritten by SageSure. The profitability of the business we
obtain outside of Florida through this agreement will depend
substantially on the quality of underwriting performed by SageSure.
An interruption in SageSure’s services for us, or issues with the
quality of SageSure’s underwriting, could have a material adverse
effect on the profitability of the business obtained through this
relationship.
Certain of our agreements with agents provide that the renewal
rights for policies written under those agreements belong to the
agents, making it more difficult for us to maintain the policies
written and the premium income generated through these
relationships.
Our agreements with ISA and SageSure provide that ISA and SageSure,
respectively, own the expirations of the policies underwritten
under these agreements. This means that we do not have the right to
solicit renewals of these policies. As a result, we may be less
able to maintain the policies and the corresponding premium income
from renewals of policies written by us under these
agreements.
Cybersecurity breaches and other disruptions could compromise our
information and expose us to loss of data or liability, which would
cause our business and reputation to suffer.
In the ordinary course of our business, we store sensitive data,
including our proprietary business information and personally
identifiable information of our insureds and employees, on our
networks. The secure processing and maintenance of this information
is critical to our operations and business strategy. Despite our
security measures, our information technology and infrastructure
may be vulnerable to attacks by hackers or breached due to employee
error, malfeasance or other disruptions. Any such breach could
compromise our networks and the information stored there could be
accessed, publicly disclosed, or stolen. Any such access,
disclosure or loss of information could result in legal claims
against us, liability under laws that protect the privacy of
personal information, regulatory penalties, disruption to our
operations, and damage our reputation, which could materially
adversely affect our results of operations. Although we have
implemented security measures to protect our systems from viruses
and other intrusions by third parties, there can be no assurances
that these measures will be effective. To mitigate these costs, we
carry a cyber-liability insurance policy. Our insurance may not be
sufficient to protect against all financial and other loss.
Additionally, this policy will not cover us for security breaches,
data loss, or cyber-attacks experienced by our third-party business
partners who have access to our customer, agent, or employee
data.
Our business could be materially and adversely affected by a
security breach or other attack involving the systems of one or
more of our business partners or vendors.
We conduct significant business functions and computer operations
using the systems of third-party business partners and vendors, who
provide software, hosting, communication, and other computer
services to us. Our networks could be compromised by the errors or
actions of our vendors and other business partners with legitimate
access to our systems. If one of our vendors or other business
partners are the subject of a security breach or cyber-attack, such
breach or attack may result in improper or unauthorized access to
our systems, and the loss, theft or unauthorized publication of our
information or the confidential information of our customers,
agents or employees, notwithstanding our substantial efforts to
protect our systems and sensitive or confidential information. An
unauthorized disclosure or loss of policyholder or employee
information or other sensitive or confidential information,
including by cyber-attack or other security breach, could cause a
loss of data, give rise to remediation or other expenses, expose us
to liability under federal and state laws, and subject us to
litigation and investigations, which could have an adverse effect
on our business, cash flows, financial condition and results of
operations. While we expend significant resources on these
defensive measures, there can be no assurance that we will be
successful in preventing attacks or detecting and stopping them
once they have begun.
We rely on our information technology and telecommunications
systems, and the failure of these systems could disrupt our
operations.
Our business is highly dependent upon the successful and
uninterrupted functioning of our current information technology and
telecommunications systems. We rely on these systems to process new
and renewal business, provide customer service, make claims
payments and facilitate collections and cancellations, as well as
to perform actuarial and other analytical functions necessary for
pricing and product development. As a result, the failure of these
systems could interrupt our operations and adversely affect our
financial results.
Increased competition, competitive pressures, industry developments
and market conditions could affect the growth of our business and
adversely impact our financial results.
We operate in highly competitive markets and face competition from
national, regional and residual market insurance companies in the
homeowners markets, many of whom are larger, have greater financial
and other resources, have higher financial strength ratings and
offer more diversified insurance coverage. Our competitors include
companies that market their products through agents, as well as
companies that sell insurance directly to their customers. Large
national captive writers may have certain competitive advantages
over independent agency writers, including increased name
recognition, increased loyalty of their customer base and reduced
policy acquisition costs. We may be forced to reduce our premiums
or increase our commissions significantly to compete, which could
make us less profitable and have a material adverse effect on our
business, results of operations and financial condition. If we do
not meet the prices offered by our competitors, we may lose
business in the short term, which could also result in a material
adverse effect on our business, results of operations and financial
condition.
Our executive management team is critical to the strategic
direction of our company. If there were an unplanned loss of
service by any of our officers our business could be
harmed.
We depend, and will continue to depend, on the services of our
executive management team, which includes Michael H. Braun, Chief
Executive Officer and President, and others. Our success also will
depend in part upon our ability to attract and retain qualified
executive officers, experienced underwriting talent and other
skilled employees who are knowledgeable about our business. If we
were to lose the services of one or more members of our executive
management team, our business could be adversely affected. Although
we have employment agreements with certain of our executive
officers, any unplanned loss of service could substantially harm
our business.
If we are unable to maintain effective internal controls over
financial reporting, investors may lose confidence in the accuracy
and completeness of our financial reports and the market price of
our common stock may be negatively affected.
As a public company, we are required to maintain internal controls
over financial reporting and to report any material weaknesses in
such internal controls. Section 404 of the Sarbanes-Oxley Act of
2002 requires that we evaluate and determine the effectiveness of
our internal controls over financial reporting and provide a
management report on the internal controls over financial
reporting. If we have a material weakness in our internal controls
over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially
misstated.
If in the future we identify material weaknesses in our internal
controls over financial reporting, are unable to comply with the
requirements of Section 404 in a timely manner or are unable to
assert that our internal controls over financial reporting are
effective, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our
common stock could be negatively affected. We could also become
subject to investigations by the SEC, Nasdaq or other regulatory
authorities, which could require additional financial and
management resources to address.
Our reliance on insurance scoring in pricing and underwriting
certain of our insurance policies may be limited by changes in
applicable law, regulation or policies of regulatory authorities,
which could cause our pricing and underwriting to be less
effective.
We rely on insurance scoring, which combines credit scores and
claims history of persons applying for insurance policies with us,
in pricing and underwriting these policies. We believe that the use
of this information, together with other relevant information
provided to us in the application process, is important to our
ability to effectively price our insurance products and determine
the risks we are willing to underwrite. We also believe that we use
this information in accordance with applicable law, regulations and
policies. From time to time, however, the use of this information
has come under review by insurance and other regulators. If the use
of this information is limited or prohibited, our pricing and
underwriting of our insurance policies may be less effective, with
the result that our results of operations may be adversely
affected.
Risks Related to an Investment in Our Shares
Our stock price in recent years has been volatile and is likely to
continue to be volatile. As a result, the market price of our
common stock may drop below the price you pay, and you may not be
able to resell your shares at a profit.
The market price of our common stock has experienced, and may
continue to experience, significant volatility from time to time.
Such volatility may be affected by various factors and events, such
as:
•our
operating results, including a shortfall in operating revenue or
net income from that expected by securities analysts and
investors;
•recognition
of large unanticipated accounting charges, such as related to a
loss reserve enhancement;
•changes
in securities analysts’ estimates of our financial performance or
the financial performance of our competitors or companies in our
industry generally;
•Failure
to successfully integrate the operations of the Maison Companies
into those of the Company;
•Demotech
downgrade;
•the
announcement of a material event or anticipated event involving us
or our industry or the markets in which we operate;
•the
issuance of a significant number of shares; and
•the
other risk factors described in this Annual Report, the
accompanying notes and the documents incorporated by reference
herein.
In recent years, the U.S. stock market has experienced extreme
price and volume fluctuations, which have sometimes affected the
market price of the securities issued by a particular company in a
manner unrelated to the operational performance of the Company.
This type of market effect could impact our common stock price as
well. The volatility of our common stock means that the price of
our common stock may have declined substantially at such time as
you may look to sell your shares of our common stock. If our share
price decreases, the value of your investment could
decline.
We have authorized but unissued preferred stock, which could affect
rights of holders of common stock.
Our articles of incorporation authorize the issuance of preferred
stock with designations, rights and preferences determined from
time to time by our board of directors. Accordingly, our board of
directors is empowered, without shareholder approval, to issue
preferred stock with dividends, liquidation, conversion, voting or
other rights that could adversely affect the voting power or other
rights of the holders of common stock. In addition, the preferred
stock could be issued as a method of discouraging a takeover
attempt. Although we do not intend to issue any preferred stock at
this time, we may do so in the future.
As a holding company, we depend on the earnings of our subsidiaries
and their ability to pay management fees and dividends to the
holding company as the primary source of our income.
We are an insurance holding company whose primary assets are our
subsidiaries. Our operations, and our ability to pay dividends or
service our debt, are limited by the earnings of our subsidiaries
and their payment of their earnings to us in the form of management
fees, commissions, dividends, loans, advances or the reimbursement
of expenses. These payments can be made only when our subsidiaries
have adequate earnings. In addition, dividend payments made to us
by our insurance subsidiaries are restricted by Florida law
governing the insurance industry. Generally, Florida law limits the
dividends payable by insurance companies under complicated formulas
based on the subsidiaries’ available capital and
earnings.
Payment of dividends in the future will depend upon our earnings
and financial position and such other factors, as our board of
directors deems relevant.
Future sales of our common stock by our existing shareholders in
the public market, or the possibility or perception of such future
sales, or sales of additional shares of common stock by us, could
depress our stock price.
Investors currently known to be the beneficial owners of more than
5.0% of our common stock hold approximately 45% of our outstanding
shares. This includes PIH, which received 1,773,102 shares in the
closing of our acquisition of the Maison Companies. The resale of
PIH's shares has been registered, but is subject to certain
limitations under our standstill agreement with PIH. Sales of a
substantial number of shares of our common stock in the public
market or otherwise by our existing shareholders, or the
possibility or perception that such sales could occur, could
depress the market price of our common stock and impair our ability
to raise capital through the sale of additional equity securities.
In addition, we may issue additional shares of our common stock
from time to time in the future in amounts that may be significant.
The sale of substantial amounts of our common stock by us, or the
perception that these
sales may occur, could adversely impact our stock price. Refer to
Note 3 of the notes to our Consolidated Financial Statements set
forth in Part II, Item 8. Financial Statements and Supplementary
Data of this Annual Report for information regarding our
acquisition of the Maison Companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive office is located at 14050 N.W. 14th Street, Suite
180, Sunrise, Florida 33323 in a 64,727 square foot office
facility. Our lease for this office space is scheduled to expire in
October 2028.
We also lease office space located at 7861 Woodland Center
Boulevard, Tampa, Florida 33614 in a 5,880 square foot office
facility, which serves as the principal office space for our
subsidiary, Maison. Our lease for this office space is scheduled to
expire in January 2025.
Refer to Note 10 of the notes to our Consolidated Financial
Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for further information
regarding our leases.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting our business, we become
involved in various legal actions and claims. Litigation is
subject to many uncertainties and we may be unable to accurately
predict the outcome of such matters, some of which could be decided
unfavorably to us. Management does not believe the ultimate
outcome of any pending matters of this nature would be
material.
Regarding the matter involving the Co-Existence Agreement effective
as of August 30, 2013 with Federated Mutual Insurance Company
("Mutual") and the related arbitration, the Company and Mutual have
exchanged releases and all remaining pending proceedings have been
resolved by an agreed order entered by the U.S. District Court for
the Northern District of Illinois on November 22,
2019.
Refer to Note 10 of the notes to our Consolidated Financial
Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for further information
regarding our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is listed for trading on the NASDAQ Global Market
under the symbol “FNHC.”
HOLDERS
As of March 1, 2020, there were 102 holders of record of our
common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table summarizes our equity compensation plans as of
December 31, 2019. All equity compensation plans were approved
by our shareholders. We have not granted any options, warrants or
rights to our shareholders outside of these equity compensation
plans.
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Equity Compensation Plan Information |
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Number of securities |
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remaining available for |
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Number of securities to |
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Weighted-average |
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future issuance under |
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be issued upon exercise of |
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exercise price of |
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equity compensation plans |
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outstanding options, |
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outstanding options, |
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(excluding securities |
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warrants and rights |
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warrants and rights |
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reflected in column (a)) |
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Plan category |
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(a) |
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(b) |
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(c) |
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Equity compensation plans approved by shareholders |
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38,850 |
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3.80 |
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689,890 |
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Refer to Note 11 of the notes to our Consolidated Financial
Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for additional
information regarding our equity compensation.
STOCK PERFORMANCE GRAPH
The following graph shows the cumulative total shareholder return
on our common stock over the last five fiscal years as compared
with the total returns of the NASDAQ Composite Index and the SNL
Property & Casualty Insurance Index. In accordance with SEC
rules, this graph includes indices that we believe are comparable
and appropriate.
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Period Ending |
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12/31/2014 |
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12/31/2015 |
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12/31/2016 |
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12/31/2017 |
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12/31/2018 |
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12/31/2019 |
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Index |
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FedNat Holding Company |
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100.00 |
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123.08 |
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78.81 |
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71.24 |
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87.13 |
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74.37 |
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NASDAQ Composite |
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100.00 |
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106.96 |
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116.45 |
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150.96 |
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146.67 |
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200.49 |
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SNL Insurance P&C |
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100.00 |
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103.44 |
|
|
122.08 |
|
|
139.58 |
|
|
134.19 |
|
|
157.47 |
|
Returns are based on the change in year-end to year-end price. The
graph assumes $100 was invested on December 31, 2014 in our
common stock, the NASDAQ Composite Index and the SNL Property &
Casualty Insurance Index and that all dividends were reinvested.
Past performance is not necessarily an indicator of future
results.
Our filings with the SEC may incorporate information by reference,
including this Annual Report. Unless we specifically state
otherwise, the information under this heading “Stock Performance
Graph” shall not be deemed to be “soliciting materials” and shall
not be deemed to be “filed” with the SEC or incorporated by
reference into any of our filings under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934.
RECENT SALES OF UNREGISTERED SECURITIES
On December 2, 2019, we issued 1,773,102 shares of common stock to
PIH as part of the consideration we paid for the Maison Companies.
These shares were issued pursuant to the exemption from
registration set forth in Section 4(a)(2) of the Securities Act of
1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read
in conjunction with the consolidated financial statements and notes
thereto and Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth elsewhere in this
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
2017 |
|
2016 |
|
2015 |
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
$ |
363,652 |
|
|
$ |
355,257 |
|
|
$ |
333,481 |
|
|
$ |
261,369 |
|
|
$ |
213,020 |
|
|
Net investment income |
15,901 |
|
|
12,460 |
|
|
10,254 |
|
|
9,063 |
|
|
7,226 |
|
|
Net realized and unrealized investment gains (losses) |
7,084 |
|
|
(4,144) |
|
|
8,548 |
|
|
3,045 |
|
|
3,616 |
|
|
Direct written policy fees |
10,200 |
|
|
13,366 |
|
|
17,173 |
|
|
16,619 |
|
|
9,740 |
|
|
Other income |
18,124 |
|
|
19,154 |
|
|
22,206 |
|
|
17,429 |
|
|
9,869 |
|
|
Total revenues |
414,961 |
|
|
396,093 |
|
|
391,662 |
|
|
307,525 |
|
|
243,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
273,080 |
|
|
228,416 |
|
|
247,557 |
|
|
197,810 |
|
|
112,710 |
|
|
Commissions and other underwriting expenses |
107,189 |
|
|
121,109 |
|
|
114,867 |
|
|
90,378 |
|
|
52,862 |
|
|
General and administrative expenses |
23,203 |
|
|
22,183 |
|
|
19,963 |
|
|
17,186 |
|
|
14,698 |
|
|
Interest expense |
10,776 |
|
|
4,177 |
|
|
348 |
|
|
348 |
|
|
256 |
|
|
Total costs and expenses |
414,248 |
|
|
375,885 |
|
|
382,735 |
|
|
305,722 |
|
|
180,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
713 |
|
|
20,208 |
|
|
8,927 |
|
|
1,803 |
|
|
62,945 |
|
|
Income tax expense (benefit) |
(298) |
|
|
5,498 |
|
|
3,585 |
|
|
542 |
|
|
24,089 |
|
|
Net income (loss) |
1,011 |
|
|
14,710 |
|
|
5,342 |
|
|
1,261 |
|
|
38,856 |
|
|
Net income (loss) attributable to non-controlling
interest |
— |
|
|
(218) |
|
|
(2,647) |
|
|
246 |
|
|
(445) |
|
|
Net income (loss) attributable to FedNat Holding Company
shareholders
|
$ |
1,011 |
|
|
$ |
14,928 |
|
|
$ |
7,989 |
|
|
$ |
1,015 |
|
|
$ |
39,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to FedNat Holding Company
shareholders
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.08 |
|
|
$ |
1.17 |
|
|
$ |
0.61 |
|
|
$ |
0.07 |
|
|
$ |
2.86 |
|
|
Diluted |
0.08 |
|
|
1.16 |
|
|
0.60 |
|
|
0.07 |
|
|
2.81 |
|
|
Dividends |
0.33 |
|
|
0.24 |
|
|
0.32 |
|
|
0.27 |
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
2017 |
|
2016 |
|
2015 |
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
Cash and invested assets |
$ |
684,002 |
|
|
$ |
515,948 |
|
|
$ |
530,249 |
|
|
$ |
484,275 |
|
|
$ |
437,369 |
|
|
Total assets |
1,179,016 |
|
|
925,371 |
|
|
904,873 |
|
|
815,390 |
|
|
701,373 |
|
|
Loss and loss adjustment expense reserves |
324,362 |
|
|
296,230 |
|
|
230,515 |
|
|
158,110 |
|
|
97,706 |
|
|
Total liabilities |
930,323 |
|
|
710,112 |
|
|
677,414 |
|
|
580,925 |
|
|
455,216 |
|
|
Total shareholders' equity |
248,693 |
|
|
215,259 |
|
|
227,459 |
|
|
234,465 |
|
|
246,157 |
|
|
Book value per share, excluding non-controlling
interest |
17.25 |
|
|
16.84 |
|
|
16.29 |
|
|
16.01 |
|
|
16.52 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Results Overview
—
Year Ended
December 31, 2019
Compared to Year Ended
December 31, 2018
The following table sets forth results of operations for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2019 |
|
% Change |
|
2018 |
|
|
(Dollars in thousands) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Gross premiums written |
$ |
610,608 |
|
|
7.5 |
% |
|
$ |
567,764 |
|
|
Gross premiums earned |
582,334 |
|
|
0.4 |
% |
|
580,020 |
|
|
Ceded premiums |
(218,682) |
|
|
(2.7) |
% |
|
(224,763) |
|
|
Net premiums earned |
363,652 |
|
|
2.4 |
% |
|
355,257 |
|
|
Net investment income |
15,901 |
|
|
27.6 |
% |
|
12,460 |
|
|
Net realized and unrealized investment gains (losses) |
7,084 |
|
|
(270.9) |
% |
|
(4,144) |
|
|
Direct written policy fees |
10,200 |
|
|
(23.7) |
% |
|
13,366 |
|
|
Other income |
18,124 |
|
|
(5.4) |
% |
|
19,154 |
|
|
Total revenues |
414,961 |
|
|
4.8 |
% |
|
396,093 |
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
Losses and loss adjustment expenses |
273,080 |
|
|
19.6 |
% |
|
228,416 |
|
|
Commissions and other underwriting expenses |
107,189 |
|
|
(11.5) |
% |
|
121,109 |
|
|
General and administrative expenses |
23,203 |
|
|
4.6 |
% |
|
22,183 |
|
|
Interest expense |
10,776 |
|
|
158.0 |
% |
|
4,177 |
|
|
Total costs and expenses |
414,248 |
|
|
10.2 |
% |
|
375,885 |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
713 |
|
|
(96.5) |
% |
|
20,208 |
|
|
Income tax expense (benefit) |
(298) |
|
|
(105.4) |
% |
|
5,498 |
|
|
Net income (loss) |
1,011 |
|
|
(93.1) |
% |
|
14,710 |
|
|
Net income (loss) attributable to non-controlling
interest |
— |
|
|
(100.0) |
% |
|
(218) |
|
|
Net income (loss) attributable to FNHC shareholders |
$ |
1,011 |
|
|
(93.2) |
% |
|
$ |
14,928 |
|
|
|
|
|
|
|
|
|
Ratios to net premiums earned: |
|
|
|
|
|
|
Net loss ratio |
75.1 |
% |
|
|
|
64.3 |
% |
|
Net expense ratio |
35.9 |
% |
|
|
|
40.3 |
% |
|
Combined ratio |
111.0 |
% |
|
|
|
104.6 |
% |
(1)Net
loss ratio is calculated as losses and loss adjustment expenses
divided by net premiums earned.
(2)Net
expense ratio is calculated as all operating expenses less interest
expense divided by net premiums earned.
(3)Combined
ratio is calculated as the sum of losses and loss adjustment
expenses and all operating expenses less interest expense divided
by net premiums earned.
The following table sets forth a reconciliation of GAAP to non-GAAP
measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
Homeowners |
|
Automobile |
|
Other |
|
Consolidated |
|
Homeowners |
|
Automobile |
|
Other |
|
Consolidated |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
387,300 |
|
|
$ |
28 |
|
|
$ |
27,633 |
|
|
$ |
414,961 |
|
|
$ |
364,752 |
|
|
$ |
10,128 |
|
|
$ |
21,213 |
|
|
$ |
396,093 |
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses)
|
|
— |
|
|
|
— |
|
|
|
7,084 |
|
|
|
7,084 |
|
|
|
— |
|
|
|
— |
|
|
|
(4,144) |
|
|
|
(4,144) |
|
|
Adjusted operating revenues |
|
$ |
387,300 |
|
|
|
$ |
28 |
|
|
|
$ |
20,549 |
|
|
|
$ |
407,877 |
|
|
|
$ |
364,752 |
|
|
|
$ |
10,128 |
|
|
|
$ |
25,357 |
|
|
|
$ |
400,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,665 |
|
|
|
$ |
(4,040) |
|
|
|
$ |
(614) |
|
|
|
$ |
1,011 |
|
|
|
$ |
22,175 |
|
|
|
$ |
(5,648) |
|
|
|
$ |
(1,599) |
|
|
|
$ |
14,928 |
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses)
|
|
— |
|
|
|
— |
|
|
|
5,347 |
|
|
|
5,347 |
|
|
|
— |
|
|
|
— |
|
|
|
(3,094) |
|
|
|
(3,094) |
|
|
Acquisition and other costs |
|
(237) |
|
|
|
(5) |
|
|
|
(1,025) |
|
|
|
(1,267) |
|
|
|
(1,488) |
|
|
|
(70) |
|
|
|
(410) |
|
|
|
(1,968) |
|
|
Acquisition of identifiable intangibles |
|
(10) |
|
|
|
— |
|
|
|
— |
|
|
|
(10) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Gain (loss) on early extinguishment of debt
|
|
— |
|
|
|
— |
|
|
|
(2,698) |
|
|
|
(2,698) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Adjusted operating income (loss) |
|
$ |
5,912 |
|
|
|
$ |
(4,035) |
|
|
|
$ |
(2,238) |
|
|
|
$ |
(361) |
|
|
|
$ |
23,663 |
|
|
|
$ |
(5,578) |
|
|
|
$ |
1,905 |
|
|
|
$ |
19,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax rate assumed for reconciling items above
|
|
24.522 |
% |
|
|
24.522 |
% |
|
|
24.522 |
% |
|
|
24.522 |
% |
|
|
25.345 |
% |
|
|
25.345 |
% |
|
|
25.345 |
% |
|
|
25.345 |
% |
The following table summarizes our results of operations by line of
business for the periods presented. Although we conduct our
operations under a single reportable segment, we have provided line
of business information as we believe it is useful to our
shareholders and the investing public. “Homeowners” line of
business consists of our homeowners and fire property and casualty
insurance business. “Automobile” line of business consists of our
nonstandard personal automobile insurance business. “Other” line of
business primarily consists of our commercial general liability and
federal flood businesses, along with corporate and investment
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
Homeowners |
|
Automobile |
|
Other |
|
Consolidated |
|
Homeowners |
|
Automobile |
|
Other |
|
Consolidated |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
594,341 |
|
|
$ |
(1) |
|
|
$ |
16,268 |
|
|
$ |
610,608 |
|
|
$ |
539,689 |
|
|
$ |
8,603 |
|
|
$ |
19,472 |
|
|
$ |
567,764 |
|
|
Gross premiums earned |
|
565,566 |
|
|
26 |
|
|
16,742 |
|
|
582,334 |
|
|
539,692 |
|
|
18,402 |
|
|
21,926 |
|
|
580,020 |
|
|
Ceded premiums |
|
(203,383) |
|
|
(20) |
|
|
(15,279) |
|
|
(218,682) |
|
|
(197,445) |
|
|
(13,744) |
|
|
(13,574) |
|
|
(224,763) |
|
|
Net premiums earned |
|
362,183 |
|
|
6 |
|
|
1,463 |
|
|
363,652 |
|
|
342,247 |
|
|
4,658 |
|
|
8,352 |
|
|
355,257 |
|
|
Net investment income |
|
— |
|
|
— |
|
|
15,901 |
|
|
15,901 |
|
|
— |
|
|
— |
|
|
12,460 |
|
|
12,460 |
|
|
Net realized and unrealized investment gains (losses)
|
|
— |
|
|
— |
|
|
7,084 |
|
|
7,084 |
|
|
— |
|
|
— |
|
|
(4,144) |
|
|
(4,144) |
|
|
Direct written policy fees |
|
9,915 |
|
|
3 |
|
|
282 |
|
|
10,200 |
|
|
8,484 |
|
|
4,322 |
|
|
560 |
|
|
13,366 |
|
|
Other income |
|
15,202 |
|
|
19 |
|
|
2,903 |
|
|
18,124 |
|
|
14,021 |
|
|
1,148 |
|
|
3,985 |
|
|
19,154 |
|
|
Total revenues |
|
387,300 |
|
|
28 |
|
|
27,633 |
|
|
414,961 |
|
|
364,752 |
|
|
10,128 |
|
|
21,213 |
|
|
396,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
257,297 |
|
|
5,128 |
|
|
10,655 |
|
|
273,080 |
|
|
206,062 |
|
|
11,617 |
|
|
10,737 |
|
|
228,416 |
|
|
Commissions and other underwriting expenses
|
|
104,071 |
|
|
51 |
|
|
3,067 |
|
|
107,189 |
|
|
111,103 |
|
|
5,751 |
|
|
4,255 |
|
|
121,109 |
|
|
General and administrative expenses |
|
18,818 |
|
|
200 |
|
|
4,185 |
|
|
23,203 |
|
|
18,079 |
|
|
325 |
|
|
3,779 |
|
|
22,183 |
|
|
Interest expense |
|
— |
|
|
— |
|
|
10,776 |
|
|
10,776 |
|
|
100 |
|
|
— |
|
|
4,077 |
|
|
4,177 |
|
|
Total costs and expenses |
|
380,186 |
|
|
5,379 |
|
|
28,683 |
|
|
414,248 |
|
|
335,344 |
|
|
17,693 |
|
|
22,848 |
|
|
375,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
7,114 |
|
|
(5,351) |
|
|
(1,050) |
|
|
713 |
|
|
29,408 |
|
|
(7,565) |
|
|
(1,635) |
|
|
20,208 |
|
|
Income tax expense (benefit) |
|
1,449 |
|
|
(1,311) |
|
|
(436) |
|
|
(298) |
|
|
7,451 |
|
|
(1,917) |
|
|
(36) |
|
|
5,498 |
|
|
Net income (loss) |
|
5,665 |
|
|
(4,040) |
|
|
(614) |
|
|
1,011 |
|
|
21,957 |
|
|
(5,648) |
|
|
(1,599) |
|
|
14,710 |
|
|
Net income (loss) attributable to non-controlling
interest
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(218) |
|
|
— |
|
|
— |
|
|
(218) |
|
|
Net income (loss) attributable to FNHC shareholders
|
|
$ |
5,665 |
|
|
$ |
(4,040) |
|
|
$ |
(614) |
|
|
$ |
1,011 |
|
|
$ |
22,175 |
|
|
$ |
(5,648) |
|
|
$ |
(1,599) |
|
|
$ |
14,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to net premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
71.0 |
% |
|
NCM |
|
|
NCM |
|
|
75.1 |
% |
|
60.2 |
% |
|
249.4 |
% |
|
128.6 |
% |
|
64.3 |
% |
|
Net expense ratio |
|
34.0 |
% |
|
|
|
|
|
35.9 |
% |
|
37.8 |
% |
|
|
|
|
|
40.3 |
% |
|
Combined ratio |
|
105.0 |
% |
|
|
|
|
|
111.0 |
% |
|
98.0 |
% |
|
|
|
|
|
104.6 |
% |
Revenue
Total revenue increased $18.9 million, or 4.8%, to $415.0 million
for the year ended December 31, 2019, as compared to $396.1
million for the year ended December 31, 2018. The increase was
primarily driven by higher net premiums growth from Homeowners and
higher net investment gains offset by lower net premiums earned in
Automobile and commercial general liability, all of which are
discussed below.
Gross Premiums Written
The following table sets forth the gross premiums written for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
|
|
|
(In thousands) |
|
|
|
Gross premiums written: |
|
|
|
|
|
Homeowners Florida |
|
$ |
451,856 |
|
|
$ |
458,652 |
|
|
Homeowners non-Florida |
|
142,485 |
|
|
81,037 |
|
|
Automobile |
|
(1) |
|
|
8,603 |
|
|
Commercial general liability |
|
(145) |
|
|
5,384 |
|
|
Federal flood |
|
16,413 |
|
|
14,088 |
|
|
Total gross premiums written |
|
$ |
610,608 |
|
|
$ |
567,764 |
|
Gross premiums written increased $42.8 million, or 7.5%, to $610.6
million for the year ended December 31, 2019, as compared to
$567.8 million for the year ended December 31, 2018. Gross
premiums written increased primarily due to the growth in
homeowners non-Florida, including $6.6 million from Maison,
partially offset by the decline in the non-core lines we are
exiting, Automobile and commercial general liability, as well as a
decline in homeowners Florida. Our homeowners non-Florida business
continues to show exceptional growth year over year, especially in
the state of Texas, and now with Maison's book of business, will
allow us to leverage our infrastructure and diversify insurance
risk. Overall, Homeowners grew 10.1%.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
|
|
|
(In thousands) |
|
|
|
Gross premiums earned: |
|
|
|
|
|
Homeowners Florida |
|
$ |
452,730 |
|
|
$ |
473,121 |
|
|
Homeowners non-Florida |
|
112,836 |
|
|
66,571 |
|
|
Automobile |
|
26 |
|
|
18,402 |
|
|
Commercial general liability |
|
1,669 |
|
|
8,794 |
|
|
Federal flood |
|
15,073 |
|
|
13,132 |
|
|
Total gross premiums earned |
|
$ |
582,334 |
|
|
$ |
580,020 |
|
Gross premiums earned increased $2.3 million, or 0.4%, to $582.3
million for the year ended December 31, 2019, as compared to
$580.0 million for the year ended December 31, 2018. Gross
premiums earned increased primarily due to a 4.8% increase in
earned premiums in Homeowners, which includes $7.9 million from
Maison, partially offset by our decision to exit the Automobile and
commercial general liability lines.
Ceded Premiums Earned
Ceded premiums earned decreased $6.1 million, or 2.7%, to $218.7
million for the year ended December 31, 2019, as compared to
$224.8 million for the year ended December 31, 2018. The
decrease was primarily driven by lower ceded premiums in Automobile
as we have exited that line of business, partially offset by higher
excess of loss reinsurance spend in Homeowners.
Net Investment Income
Net investment income increased $3.4 million, or 27.6%, to $15.9
million for the year ended December 31, 2019, as compared to
$12.5 million for the year ended December 31, 2018. The
increase was due to fixed income portfolio growth and the
improvement in the yield as a result of rising interest rates
during 2018 and from portfolio repositioning.
Net Realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) increased
$11.2 million, to $7.1 million for the year ended December 31,
2019, as compared to $(4.1) million for the year ended
December 31, 2018. We recognized $4.1 million and $(1.2)
million in unrealized investment gains (losses) for equity
securities during these respective periods. Our current year net
realized gains and prior year net realized losses 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. Our prior year net realized losses
also resulted from our decision to liquidate certain bond
positions, including positions related to tax-free municipal
securities during the first quarter of 2018.
Direct Written Policy Fees
Direct written policy fees decreased by $3.2 million, or 23.7%, to
$10.2 million for the year ended December 31, 2019, as
compared to $13.4 million for the year ended December 31,
2018. The decrease in direct written policy fees is correlated to
our decision to exit the Automobile line, as discussed
earlier.
Other Income
Other income decreased $1.1 million, or 5.4%, to $18.1 million for
the year ended December 31, 2019, as compared to $19.2 million
for the year ended December 31, 2018. Other income included
the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
2019 |
|
% Change |
|
2018 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
Commission income |
|
$ |
2,904 |
|
|
(37.5) |
% |
|
$ |
4,649 |
|
|
Brokerage |
|
13,577 |
|
|
10.3 |
% |
|
12,305 |
|
|
Financing and other revenue |
|
1,643 |
|
|
(25.3) |
% |
|
2,200 |
|
|
Total other income |
|
$ |
18,124 |
|
|
(5.4) |
% |
|
$ |
19,154 |
|
The decrease in other income was driven by lower commission income
and financing revenue, partially offset by higher brokerage
revenue. The year over year decreases in commission income were
driven by lower Automobile fee income from the reduction in
premiums earned and, to a lesser extent, lower fee income from
other areas of the business. The brokerage revenue increase is the
result of higher excess of loss reinsurance spend from the
reinsurance programs in place during 2019 as compared to
2018.
Expenses
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") increased $44.7
million, or 19.6%, to $273.1 million for the year ended
December 31, 2019, as compared to $228.4 million for the year
ended December 31, 2018. Homeowners losses increased $51.2
million during the year ended December 31, 2019 as compared to the
year ended December 31, 2018, slightly offset by $6.5 million of
decreases in Automobile and commercial general liability as we exit
these lines, across the same period.
The net loss ratio increased 10.8 percentage points, to 75.1% in
2019, as compared to 64.3% in 2018. The higher ratio was primarily
the result of $52.7 million of net losses from 2019 severe weather
events in Florida and other states (of which $26.5 million relates
to
non-Florida losses and is subject to a 50% profit-sharing
agreement, as discussed earlier), as compared to $31.5 million from
2018 severe weather events. Additionally, we incurred approximately
$10 million of additional losses in 2019 as compared to 2018 as a
result of higher gross premiums earned. We, also, strengthened
current accident year reserves in 2019, primarily in Florida in
response to higher severity trends from AOB and the overall
litigation environment in Florida. Lastly, in 2019, we had
approximately $12.8 million of adverse prior year reserve
development, in our non-core lines, as we exit these
lines.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other
underwriting expenses for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
|
|
|
(In thousands) |
|
|
|
Commissions and other underwriting expenses: |
|
|
|
|
|
Homeowners Florida |
|
$ |
52,962 |
|
|
$ |
56,693 |
|
|
All others |
|
25,491 |
|
|
19,948 |
|
|
Ceding commissions |
|
(12,128) |
|
|
(12,743) |
|
|
Total commissions |
|
66,325 |
|
|
63,898 |
|
|
|
|
|
|
|
|
Automobile |
|
3 |
|
|
4,322 |
|
|
Homeowners non-Florida |
|
3,365 |
|
|
2,147 |
|
|
Total fees |
|
3,368 |
|
|
6,469 |
|
|
|
|
|
|
|
|
Salaries and wages |
|
12,114 |
|
|
14,279 |
|
|
Other underwriting expenses |
|
25,382 |
|
|
36,463 |
|
|
Total commissions and other underwriting expenses |
|
$ |
107,189 |
|
|
$ |
121,109 |
|
Commissions and other underwriting expenses decreased $13.9
million, or 11.5%, to $107.2 million for the year ended
December 31, 2019, as compared to $121.1 million for the year
ended December 31, 2018. The decrease is the result of lower
profit share costs recorded within the other underwriting expenses
account. As noted above, we have a 50% profit share agreement with
our managing general underwriter on FNIC's non-Florida business,
whereby we split 50% of the profits. Accordingly, in 2019,
non-Florida incurred higher losses from severe weather events (as
previously discussed in the Losses and Loss Adjustment Expenses
section), resulting in a $13.3 million reduction.
Additionally, the lower Automobile fees and lower homeowners
Florida commissions are driven by the corresponding change in
premiums earned across periods. The decline in salaries and wages
is due in part to our continued focus on operational efficiencies.
These items are partially offset by an increase in homeowners
non-Florida commissions and fees as a result of higher premiums
earned across periods.
The net expense ratio decreased 4.4 percentage points to 35.9% in
2019, as compared to 40.3% in 2018. The decrease in the ratio is
attributable to the lower non-Florida profit share expense and
other expense reductions. Refer to the discussion above for more
information.
General and Administrative Expenses
General and administrative expenses increased $1.0 million, or
4.6%, to $23.2 million for the year ended December 31, 2019,
as compared to $22.2 million for the year ended December 31,
2018. The increase was primarily the result of higher professional
fees, including deal costs and due diligence costs relating to the
acquisition of the Maison Companies, as previously
discussed.
Interest Expense
Interest expense increased $6.6 million to $10.8 million for the
year ended December 31, 2019, as compared to $4.2 million for
the year ended December 31, 2018. The increase in interest
expense is the result of $3.6 million of prepayment fees, including
the write-off of remaining debt issuance costs, and an increase in
the outstanding debt as a result of our first quarter 2019
borrowing. Refer to Note 3 and 8 of the notes to our Consolidated
Financial Statements included herein, for information regarding new
debt issued and debt retirement that occurred in March
2019.
Income Taxes
Income tax expense (benefit) decreased $5.8 million, or 105.4%, to
$(0.3) million for the year ended December 31, 2019, as
compared to $5.5 million for the year ended December 31, 2018.
The decrease in income tax expense is the result of lower income
during 2019, compared to 2018. Additionally, in 2019, we recognized
a benefit of $0.4 million relating to an election to carry back
capital losses and a benefit of $0.2 million relating to a
reduction in the uncertain tax position reserve. Lastly, the State
of Florida announced a reduction in its state income tax rate
effective from January 1, 2019, as discussed earlier.
Operating Results Overview
—
Year Ended December 31, 2018 Compared to Year Ended
December 31, 2017
The following table sets forth selected results of operations for
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
2018 |
|
% Change |
|
2017 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
567,764 |
|
|
(5.9) |
% |
|
$ |
603,417 |
|
|
Gross premiums earned |
|
580,020 |
|
|
(3.8) |
% |
|
603,193 |
|
|
Ceded premiums |
|
(224,763) |
|
|
(16.7) |
% |
|
(269,712) |
|
|
Net premiums earned |
|
355,257 |
|
|
6.5 |
% |
|
333,481 |
|
|
Net investment income |
|
12,460 |
|
|
21.5 |
% |
|
10,254 |
|
|
Net realized and unrealized investment gains (losses) |
|
(4,144) |
|
|
(148.5) |
% |
|
8,548 |
|
|
Direct written policy fees |
|
13,366 |
|
|
(22.2) |
% |
|
17,173 |
|
|
Other income |
|
19,154 |
|
|
(13.7) |
% |
|
22,206 |
|
|
Total revenues |
|
396,093 |
|
|
1.1 |
% |
|
391,662 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
228,416 |
|
|
(7.7) |
|