FNHC FedNat Holding Company

Federated National Holding Company (the “Company”) (Nasdaq:FNHC) today reported results for the three and nine months ended September 30, 2017.

Q3 2017 highlights (as measured against the same three-month period last year, except where noted):

• Gross written premiums of $154.8 million
• Florida homeowners’ policies of approximately 280,000
• 54.2% increase in non-Florida homeowners’ policies to approximately 27,400
• 17.7% increase in total revenue to $95.9 million
• $310 million of estimated gross claims from Hurricane Irma, resulting in $21.4 million of claims, net of reinsurance
• $3.3 million of claims, net of recoveries including reinsurance, from Hurricane Harvey, including $0.5 million in Automobile.
• Net loss of $5.5 million or $0.42 per diluted share
• Book value per share, excluding noncontrolling interest, of $16.26, unchanged from December 31, 2016
• Repurchased 84,445 shares of common stock at an average price of $15.61, during the third quarter of 2017

Mr. Michael H. Braun, the Company’s Chief Executive Officer, with reference to the quarter’s results, said, “In a quarter in which weather damage to our insureds resulted in approximately $25 million of hurricane-related claims for the Company, pre-tax and net of reinsurance, our net loss of $5.5 million represents a strong result.  I am proud of the performance of our entire claims team, including our field and desk adjusters, agents and strategic partners, all of whom have come together to provide excellent service to the over 28,000 insureds who have filed hurricane-related claims with us so far.  Our robust reinsurance program, in which over eighty reinsurers participate, has demonstrated its strength.  Despite weathering the largest Category Five storm in the Atlantic Ocean in over a decade, which triggered hurricane warnings throughout the State of Florida, we utilized approximately 20% of our $1.5 billion per event reinsurance limit.  Our prepaid reinstatement features operated as intended, restoring our full $1.5 billion per event limit on a highly cost-effective basis, with $1.9 billion of total remaining limit available for multiple future events.  Our 2017 rate increase of 10.0%, which took effect on August 1st, will mitigate the impact of assignment of benefits (“AOB”) and improve our underwriting results in the coming quarters.”

Revenues

• Total revenues increased $14.4 million, or 17.7%, to $95.9 million for the three months ended September 30, 2017, compared with $81.5 million for the same three-month period last year.
• Gross written premiums decreased $6.3 million, or 3.9%, to $154.8 million in the quarter, compared with $161.1 million for the same three-month period last year.  The decrease was driven by Automobile, which decreased $14.3 million, partially offset by an increase in Homeowners of $7.9 million.  The Automobile decrease was due to management actions to reduce the size of our overall program.  During the quarter just ended, we had three active programs as compared to five active programs during the prior year quarter.  The Company’s Automobile written premiums in the third quarter came almost entirely from active programs.  While the remaining run-off program is expected to produce earned premiums for the next several quarters, the magnitude thereof is lessening quickly.  Homeowners’ non-Florida has continued its significant growth in 2017, specifically in Louisiana, Texas and South Carolina.  Homeowners’ Florida written premiums this quarter partially reflect the 10.0% rate increase that became effective August 1, 2017.
• Gross premiums earned increased $5.2 million, or 3.5%, to $152.8 million, driven primarily by 7.1% growth in Homeowners spanning all states, offset by management actions to decrease premiums in Automobile. 
• Ceded premiums decreased $4.1 million, or 5.2%, to $74.1 million in the quarter, compared with the same three-month period last year.  The decrease in ceded premiums earned was driven by lower ceded premiums from Automobile as a result of lower gross premiums discussed above.  Additionally, to a lesser extent, Homeowners ceded premiums decreased due to the expiration of the retrospectively-rated 10% and 30% Florida-only property quota share treaties, which ended on July 1, 2017 and 2016, respectively.  The effect of these expirations was partially offset by a new 10% Florida-only property quota share treaty, which became effective on July 1, 2017, and by a slight increase in the new 2017-2018 excess of loss reinsurance program, portions of which became effective on June 1, 2017 and July 1, 2017.  This slight increase in cost is from Monarch National Insurance Company’s reinsurance program, which reflects its premium growth in the past year.
• Together, the increase in gross earned premium and the decrease in ceded premiums drove net premiums earned of $78.7 million, a $9.3 million increase, or 13.3%, from the same three-month period last year, with Homeowners up 15.8%.
• Net realized investment gains were $6.1 million for the three months ended September 30, 2017, compared to $1.1 million in the prior year period.  This increase was driven by a decision to re-deploy approximately $30.6 million of equities into fixed-income securities during the quarter in order to reduce the Company’s exposure to the equity markets.

Expenses

• Losses and loss adjustment expenses (“LAE”) increased $26.9 million, or 58.6%, to $72.9 million for the three months ended September 30, 2017, compared with $46.0 million for the same three-month period last year.  Losses were impacted by claims, net of reinsurance, of $21.4 million related to Hurricane Irma across both of our insurance carriers.  The Company was also impacted by claims, net of reinsurance, of $5.5 million related to Hurricane Harvey in the Homeowners and Auto lines of businesses in Texas and Louisiana, $2.3 million of which is recoverable through a profit-share mechanism that is presented in commissions and other underwriting expenses.  The third quarter of 2016 included $4.0 million of losses related to Hurricane Hermine.  During the current quarter, we strengthened our 2017 net loss reserves by approximately $1.5 million in Homeowners in Florida, which increased our 2017 attritional loss ratio to 36.5%.  These impacts were offset by approximately $4.0 million of revenues in our managing general agent for catastrophe claims handling, which presents itself in the consolidated financial statements as lower net losses.  Approximately $2.5 million of the period over period increase stems from lower ceded losses in the third quarter of 2017 from the combination of the expiration of the retrospectively-rated 10% and 30% Florida-only property quota share treaties and the new 10% Florida-only property quota share treaty.  The remainder of the variance is primarily attributable to premium growth in the current quarter as compared to the third quarter of 2016.
• Commissions and other underwriting expenses decreased $0.7 million, or 2.1%, to $29.2 million for the three months ended September 30, 2017, compared with $29.9 million for the three months ended September 30, 2016.  Excluding the impact of Hurricane Harvey on the related profit-sharing provision, commissions and other underwriting expenses increased by $1.6 million over the prior year period due primarily to higher expense from the profit-sharing provision as a result of increased profitability in our homeowners’ Non-Florida business and incremental expenses in support of higher premiums.

Stock Repurchase Program

• During the third quarter of 2017, the Company repurchased 84,445 shares of common stock for $1.3 million at an average price of $15.61. 

Conference Call Information

The Company will hold an investor conference call at 9:00 AM (ET) Tuesday, November 7, 2017. The Company’s CEO, Michael Braun, its CFO, Ronald Jordan, and its CAO, Erick Fernandez will discuss the financial results and review the outlook for the Company. Messrs. Braun, Jordan and Fernandez invite interested parties to participate in the conference call.

Listeners interested in participating in the Q&A session may dial-in with the number below:(877) 303-6913

Conference ID: 96863798

A live webcast of the call will be available online via the “Conference Calls” section of the Company’s website at FedNat.com or interested parties can click on the following link:

http://www.fednat.com/investors/conference-calls/

Please call at least five minutes in advance to ensure that you are connected prior to the presentation.  A webcast replay of the conference call will be available shortly after the live webcast is completed and may be accessed via the Company’s website.

About the Company

The Company is authorized to underwrite, and/or place through our wholly owned subsidiaries, homeowners’ multi-peril, personal automobile, commercial general liability, federal flood, and various other lines of insurance in Florida and various other states.  The Company also serves as managing general agent for its joint venture, Monarch National Insurance Company. The Company markets and distributes its own and third-party insurers’ products and our other services through a network of independent agents. The Company also utilizes a select number of general agents for the same purpose.

The Company’s supplemental line of business information is designed to afford users greater transparency into our results.  The “Homeowners” line of business consists of our homeowners and fire property and casualty insurance business, which currently operates in Florida, Alabama, Texas, Louisiana and South Carolina. The “Automobile” line of business consists of our nonstandard personal automobile insurance business which currently operates in Georgia, Texas, Alabama, and Florida. The “Other” line of business primarily consists of our commercial general liability and federal flood businesses, along with corporate and investment operations.

Forward-Looking Statements /Safe Harbor Statements

Safe harbor statement under the Private Securities Litigation Reform Act of 1995:

Statements that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” or “will” or the negative thereof or other variations thereon and similar words or phrases or comparable terminology are intended to identify forward-looking statements.

Forward-looking statements might also include, but are not limited to, one or more of the following:

• Projections of revenues, income, earnings per share, dividends, capital structure or other financial items or measures;
• Descriptions of plans or objectives of management for future operations, insurance products/or services;
• Forecasts of future insurable events, economic performance, liquidity, need for funding and income; and
• Descriptions of assumptions or estimates underlying or relating to any of the foregoing.

The risks and uncertainties include, without limitation, risks and uncertainties related to estimates, assumptions and projections generally; the nature of the Company’s business; the adequacy of its reserves for losses and loss adjustment expense; claims experience; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail) and other catastrophic losses; reinsurance costs and the ability of reinsurers to indemnify the Company; raising additional capital and our compliance with minimum capital and surplus requirements; potential assessments that support property and casualty insurance pools and associations; the effectiveness of internal financial controls; the effectiveness of our underwriting, pricing and related loss limitation methods; changes in loss trends, including as a result of insureds’ assignment of benefits; court decisions and trends in litigation; our potential failure to pay claims accurately; ability to obtain regulatory approval applications for requested rate increases, or to underwrite in additional jurisdictions, and the timing thereof; the impact that the results of the Monarch joint venture may have on our results of operations; inflation and other changes in economic conditions (including changes in interest rates and financial markets); pricing competition and other initiatives by competitors; legislative and regulatory developments; the outcome of litigation pending against the Company, and any settlement thereof; dependence on investment income and the composition of the Company’s investment portfolio; insurance agents; ratings by industry services; the reliability and security of our information technology systems; reliance on key personnel; acts of war and terrorist activities; and other matters described from time to time by the Company in releases and publications, and in periodic reports and other documents filed with the United States Securities and Exchange Commission.

In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including claims and litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a contingency. Reported results may therefore appear to be volatile in certain accounting periods.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.  We do not undertake any obligation to update publicly or revise any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

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

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
			2017				2016				2017				2016
		(in thousands, except per share data)
Revenue:
	Gross premiums written	$	154,782			$	161,137			$	469,525			$	468,379
	Gross premiums earned		152,779				147,624				451,320				413,056
	Ceded premiums earned		(74,116	)			(78,219	)			(211,005	)			(228,609	)
	Net premiums earned		78,663				69,405				240,315				184,447
	Net investment income		2,603				2,164				7,481				6,398
	Net realized investment gains		6,101				1,126				8,644				2,060
	Direct written policy fees		3,651				4,318				13,222				13,445
	Other income		4,874				4,493				14,511				13,321
	Total revenue		95,892				81,506				284,173				219,671
Costs and expenses:
	Losses and loss adjustment expenses		72,935				45,973				181,657				126,216
	Commissions and other underwriting expenses		29,242				29,868				86,578				61,232
	General and administrative expenses		5,042				4,044				14,737				13,211
	Interest expense		81				81				247				259
	Total costs and expenses		107,300				79,966				283,219				200,918
(Loss) income before income taxes			(11,408	)			1,540				954				18,753
	Income taxes		(4,223	)			102				350				6,594
Net (loss) income			(7,185	)			1,438				604				12,159
	Net (loss) income attributable to noncontrolling interest		(1,674	)			44				(1,975	)			239
Net (loss) income attributable to Federated National Holding Company shareholders		$	(5,511	)		$	1,394			$	2,579			$	11,920
Net (loss) income per share:
	Basic	$	(0.42	)		$	0.10			$	0.20			$	0.86
	Diluted	$	(0.42	)		$	0.10			$	0.19			$	0.85
Number of shares used to calculate net income per share:
	Basic		13,135				13,780				13,211				13,807
	Diluted		13,135				13,943				13,302				13,999
Dividends declared per share of common stock		$	0.08			$	0.08			$	0.24			$	0.17

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIESSelected Operating Metrics(Unaudited)

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
		2017				2016				2017				2016
Gross premiums written:	(in thousands)
Homeowners/Fire Florida	$	126,211			$	123,789			$	373,875			$	367,809
Homeowners/Fire non-Florida		15,198				9,743				40,381				26,038
Personal automobile		7,176				21,523				37,089				56,208
Commercial general liability		2,546				3,171				8,768				10,493
Federal flood		3,651				2,911				9,412				7,831
Total gross premiums written	$	154,782			$	161,137			$	469,525			$	468,379
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
		2017				2016				2017				2016
Gross premiums earned:	(in thousands)
Homeowners/Fire Florida	$	121,771			$	116,852			$	359,147					$	336,037
Homeowners/Fire non-Florida		11,734				7,857				31,064						20,496
Personal automobile		13,525				17,163				43,932						39,579
Commercial general liability		3,005				3,406				9,339						10,327
Federal flood		2,744				2,346				7,838						6,617
Total gross premiums earned	$	152,779			$	147,624			$	451,320					$	413,056
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
		2017				2016				2017				2016
Net premiums earned:	(in thousands)
Homeowners/Fire	$	72,266			$	62,421			$	217,820			$	166,556
Personal automobile		3,547				3,754				13,640				8,100
Commercial general liability		2,850				3,230				8,855				9,791
Total net premiums earned	$	78,663			$	69,405			$	240,315			$	184,447
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
		2017				2016				2017				2016
Commissions and other underwriting expenses:	(in thousands)
Homeowners/Fire Florida	$	14,707			$	13,700			$	43,171			$	39,725
All other lines of business		8,455				9,196				25,189				22,218
Ceded commissions		(5,387	)			(5,156	)			(15,083	)			(32,944			)
Total commissions and other fees		17,775				17,740				53,277				28,999
Salaries and wages		3,958				3,609				11,361				10,418
Other underwriting expenses		7,509				8,519				21,940				21,815
Total commissions and other underwriting expenses:	$	29,242			$	29,868			$	86,578			$	61,232

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIESSelected Operating Metrics (continued)(Unaudited)

	Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Net Loss Ratio		92.7	%			66.2	%			75.6	%			68.4	%
Net Expense Ratio		43.6	%			48.9	%			42.2	%			40.4	%
Combined Ratio		136.3	%			115.1	%			117.8	%			108.8	%
Gross Loss Ratio		254.4	%			48.9	%			118.7	%			48.6	%
Gross Expense Ratio		26.0	%			26.5	%			25.8	%			26.0	%
Book value per share excluding noncontrolling interest	$	16.26			$	17.72			$	16.26			$	17.72

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)

			September 30,			December 31,
				2017			2016
ASSETS			(in thousands, except share and per share data)
Investments
	Debt securities, available-for-sale, at fair value		$	422,359		$	374,756
	Debt securities, held-to-maturity, at amortized cost			5,410			5,551
	Equity securities, available-for-sale, at fair value			15,575			29,375
		Total investments		443,344			409,682
Cash and cash equivalents				81,535			74,593
Prepaid reinsurance premiums				189,957			156,932
Premiums receivable, net of allowance				55,145			54,854
Reinsurance recoverable, net				338,015			48,530
Deferred acquisition costs				38,958			37,477
Income taxes receivable				20,707			13,871
Property and equipment, net				4,202			4,194
Other assets				9,607			11,509
TOTAL ASSETS			$	1,181,470		$	811,642
LIABILITIES
Loss and loss adjustment expense reserves			$	461,541		$	158,476
Unearned premiums				312,227			294,022
Reinsurance payable				126,479			79,154
Debt from consolidated variable interest entity				4,925			4,909
Deferred income taxes, net				8,769			1,433
Other liabilities				38,766			35,792
	Total liabilities			952,707			573,786
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value: 1,000,000 shares authorized				-			-
Common stock, $0.01 par value: 25,000,000 shares authorized; 13,053,281 and 13,473,120 shares issued and outstanding, respectively				130			134
Additional paid-in capital				139,161			136,779
Accumulated other comprehensive income				2,713			1,941
Retained earnings				70,265			80,275
	Total Federated National Holding Company shareholders’ equity			212,269			219,129
Noncontrolling interest				16,494			18,727
	Total shareholders' equity			228,763			237,856
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			$	1,181,470		$	811,642

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIESSUPPLEMENTAL INFORMATIONStatements of Operations and Operating Metrics by Line of Business(Unaudited)

	Three Months Ended September 30,
		2017													2016
	Homeowners			Automobile			Other			Consolidated				Homeowners			Automobile			Other			Consolidated
	(in thousands)
Revenue:
Gross premiums written	$	141,409		$	7,176		$	6,197		$	154,782			$	133,532		$	21,523		$	6,082		$	161,137
Gross premiums earned		133,505			13,525			5,749			152,779				124,709			17,163			5,752			147,624
Ceded premiums earned		(61,239	)		(9,978	)		(2,899	)		(74,116	)			(62,288	)		(13,409	)		(2,522	)		(78,219	)
Net premiums earned		72,266			3,547			2,850			78,663				62,421			3,754			3,230			69,405
Net investment income		—			—			2,603			2,603				—			—			2,164			2,164
Net realized investment gains		—			—			6,101			6,101				—			—			1,126			1,126
Direct written policy fees		2,306			1,206			139			3,651				2,190			1,977			151			4,318
Other income		3,432			495			947			4,874				2,765			1,318			410			4,493
Total revenue		78,004			5,248			12,640			95,892				67,376			7,049			7,081			81,506
Costs and expenses:
Losses and loss adjustment expenses		65,600			4,581			2,754			72,935				40,399			3,498			2,076			45,973
Commissions and other underwriting expenses		24,587			3,431			1,224			29,242				23,875			4,883			1,110			29,868
General and administrative expenses		3,915			150			977			5,042				3,033			150			861			4,044
Interest expense		81			—			—			81				81			—			—			81
Total costs and expenses		94,183			8,162			4,955			107,300				67,388			8,531			4,047			79,966
(Loss) income before income taxes		(16,179	)		(2,914	)		7,685			(11,408	)			(12	)		(1,482	)		3,034			1,540
Income taxes		(6,241	)		(1,124	)		3,142			(4,223	)			(4	)		(572	)		678			102
Net (loss) income		(9,938	)		(1,790	)		4,543			(7,185	)			(8	)		(910	)		2,356			1,438
Net (loss) income attributable to noncontrolling interest		(1,674	)		—			—			(1,674	)			44			—			—			44
Net (loss) income attributable to Federated National Holding Company shareholders	$	(8,264	)	$	(1,790	)	$	4,543		$	(5,511	)		$	(52	)	$	(910	)	$	2,356		$	1,394
Net loss ratio		90.8	%		129.2	%		96.6	%		92.7	%			64.7	%		93.2	%		64.3	%		66.2	%
Net expense ratio		39.4	%								43.6	%			43.1	%								48.9	%
Combined ratio		130.2	%								136.3	%			107.8	%								115.1	%

FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIESSUPPLEMENTAL INFORMATIONStatements of Operations and Operating Metrics by Line of Business(Unaudited)(Continued)

	Nine Months Ended September 30,
		2017													2016
	Homeowners			Automobile			Other			Consolidated				Homeowners			Automobile			Other			Consolidated
	(in thousands)
Revenue:
Gross premiums written	$	414,256		$	37,089		$	18,180		$	469,525			$	393,847		$	56,208		$	18,324		$	468,379
Gross premiums earned		390,211			43,932			17,177			451,320				356,533			39,579			16,944			413,056
Ceded premiums earned		(172,391	)		(30,292	)		(8,322	)		(211,005	)			(189,977	)		(31,479	)		(7,153	)		(228,609	)
Net premiums earned		217,820			13,640			8,855			240,315				166,556			8,100			9,791			184,447
Net investment income		-			-			7,481			7,481				-			-			6,398			6,398
Net realized investment gains		-			-			8,644			8,644				-			-			2,060			2,060
Direct written policy fees		6,935			5,828			459			13,222				6,478			6,477			490			13,445
Other income		8,917			2,982			2,612			14,511				6,673			4,838			1,810			13,321
Total revenue		233,672			22,450			28,051			284,173				179,707			19,415			20,549			219,671
Costs and expenses:
Losses and loss adjustment expenses		159,497			18,093			4,067			181,657				111,211			7,227			7,778			126,216
Commissions and other underwriting expenses		72,742			10,126			3,710			86,578				49,517			8,282			3,433			61,232
General and administrative expenses		11,288			500			2,949			14,737				10,127			450			2,634			13,211
Interest expense		247			-			-			247				259			-			-			259
Total costs and expenses		243,774			28,719			10,726			283,219				171,114			15,959			13,845			200,918
(Loss) income before income taxes		(10,102	)		(6,269	)		17,325			954				8,593			3,456			6,704			18,753
Income taxes		(3,896	)		(2,418	)		6,664			350				3,316			1,332			1,946			6,594
Net (loss) income		(6,206	)		(3,851	)		10,661			604				5,277			2,124			4,758			12,159
Net (loss)  income attributable to noncontrolling interest		(1,975	)		-			-			(1,975	)			239			-			-			239
Net (loss)  income attributable to Federated National Holding Company shareholders	$	(4,231	)	$	(3,851	)	$	10,661		$	2,579			$	5,038		$	2,124		$	4,758		$	11,920
Net loss ratio		73.2	%		132.6	%		45.9	%		75.6	%			66.8	%		89.2	%		79.4	%		68.4	%
Net expense ratio		38.6	%								42.2	%			35.8	%								40.4	%
Combined ratio		111.8	%								117.8	%			102.6	%								108.8	%