EX-99.1 2 ex99_1.htm EXHIBIT 99.1

Exhibit 99.1
 
 Federated National(Nasdaq: FNHC)  22ND ANNUAL CFANY INSURANCE industry conference  March 19, 2018 
 

 SAFE HARBOR STATEMENT  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.  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 potential failure to meet 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; 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.  2 
 

 FNHC corporate profile  Overview:Leader in coastal Florida homeowners marketHigh quality book of business with proven underwriting excellenceStrong, large partner agent network and brand recognitionExperienced leadership team Key Metrics:Cash and Investments: $530.2M Book Value Per Common Share: $16.29, excluding non-controlling interestAgency Partnerships: 2,500+Gross Written Premiums for Q417: $133.9M Florida OIR Market Share*: 5.1%Demotech Financial Stability Rating: A   3  Federated National Insurance Company (FNIC) is predominantly a homeowners’ insurer in Florida with controlled expansion in AL, LA, SC and TX.  * Market data as of September 30, 2017 (Source: Florida OIR) 
 

 Long-term track record of book value growth  4   * Impacted by Hurricane Matthew** Impacted by Hurricane IrmaSource: Company Filings and SNL FinancialNote: Based on GAAP financial information 
 

 Top five position in attractive Florida market  Favorable track record of GWP  Significant opportunity to expand market share and diversify book  Recent refocus on homeowners market  Industry experience and market savvy executive team  Investment Considerations  5 
 

 GROWING Florida MARKET SHARE  6  OIR = Office of Insurance Regulation% Market share per OIR for Q1 and Q2-17 unavailable as of 8/17/2017. 
 

 Source: Florida OIR  Florida Homeowners Market overview  Nation’s third largest statePopulation growing by 1,000 every day$9.2 billion HO insurance marketHighly fragmented market with national players comprising less than 20%, none with higher market share than Federated NationalFederated National’s focus is on high quality, well-mitigated homes (build after 1994) – we have ~20% of homes in this class statewideWith Citizens down to ~450k policies, from 1.5mm in 2011, the days of depopulation growth are over with most companies now looking to grow through geographic expansion and new products  Large, fragmented market dominated by “specialists”, with limited presence of national P&C carriers  7  Rank  Insurer   2017 Q3 FL HO DWP ($ mm)  FL HO Mkt Share (%)  1  Universal Insurance  907  9.9  2  Citizens Property Ins  772  8.5   3  Federated National  465  5.1   4  Heritage Insurance  439  4.8   5  Security First Insurance  375  4.1   6  Homeowner’s Choice Insurance  340  3.7   7  First Protective Insurance  296  3.2   8  United Property & Casualty  296  3.2   9  American Integrity  283  3.1  10  St. John’s Insurance  256  2.8   11  People’s Trust Insurance  245  2.7   12  Florida Peninsula  244  2.7   13  United Services Auto  243  2.7   14  Tower Hill Prime  226  2.7   15  Federal Insurance  161  2.5   16  AIG Property  154  1.8  17  ASI Preferred  147  1.7   18  Safepoint Insurance  140  1.6   19  Olympus Insurance  134  1.5   20  Tower Hill Signature  127  1.5  21  USAA Casualty  116  1.4   22  Tower Hill Preferred  104  1.3   23  Gulfstream P&C Insurance  102  1.1  24  Auto Club Insurance  90  1.1   25  Progressive Property  98  1.1     Others  2,354  25.8      Total  $9,122(1)  100.0  
 

 Distribution network & strategy  All policies are generated on a voluntary basisPartnership with 2,500+ partner agentsOne of a few selected Florida homeowners’ insurance companies appointed to write voluntary business through Allstate & GEICO Florida partner agentsFocus on higher value, better mitigated propertiesEmphasize properties which typically have more advanced wind / hurricane mitigation features and lower All Other Peril (non-catastrophe) losses, all of which mitigate expected lossesUnderwrite every risk to maintain our quality book of businessTrust-based modelFNIC has achieved its growth by winning the business at the point of sale, not on price, but because our partner insurance agents trust us with their clients based on past experience  8  Federated National is a partner of choice in the upper segment of the Florida homeowners market.  
 

 DISCIPLINED Underwriting Approach  Focus on higher value properties with an emphasis on more advanced wind / hurricane mitigation features and lower All Other Peril (non-catastrophe) lossesUtilize a front-end Generalized Linear Model (“GLM”) to calculate each risk’s associated expenses, CAT and non-CAT exposure, cost of capital and risk concentration in order to determine a pass/fail position on all new business quoting Manual reviews of every bound risk to ensure accuracy of informationRegulatory approved use of our GLM-based analytics to provide a layer of pre-binding portfolio optimization management Rates on every policy a function of FNIC’s historical loss experience, concentration of risk, expenses and current market conditions All risks are subject to an annual review to ensure low performing risks are not offered a renewal Business written by MNIC utilizes a similar disciplined approach as its policies are also underwritten by FedNat Underwriters (“FNU”), the Company’s wholly owned MGA  Federated National’s meticulous underwriting approach allows the Company to manage its current exposures while profitably underwriting new risks.   Underwriting Process Overview  9 
 

 Quality FLORIDA Homeowners’ Portfolio  10  1-in-100 Year Probable Maximum Loss /In-Force Premium (“PML Premium”)  Note: Probable Maximum Loss modeled using average of RMS and AIR combined and assuming LT, NoSS and NoLA  FNIC Total Insured Value and Policies In-Force  Gross written premiums flat due to rate increases 
 

 The Assignment of Benefits (“AOB”) Challenge  Florida HO specialist results have come under pressure from increased storm activity and the AOB crisis Incurred loss ratios for FL homeowners increased by more than 5 points in 2016, primarily driven by the adverse AOB trends*AOB unlikely to see legislative solution near-term but significant rate increases are being approved by the OIRCombined with the 2 storms in 2016 and attritional loss pressure, the FL HO industry reported an aggregate combined ratio of 107% in 2016 vs. 90% in 2015 2016 upward trend has leveled off with higher frequency and lower severity  Federated National’s AOB Strategy  PricingAchieved aggregate 16+% compounded homeowners rate increase over 2016-17 to combat AOB impact; expect additional future increasesProactive management, training and engagementImplemented processes, employee training and rate increases to manage AOB claimsContact policyholders to educate them on claims reporting to FNHC upon occurrenceAnalyze expected costs and works directly with AOB contractors and preferred FNHC vendors to arrive at a fair payment or else invokes the policy’s appraisal clauseReducing litigation and mitigation expense riskCompany aggressively pushes Alternative Dispute Resolution practices to avoid or reduce AOB related litigation expensesFNHC instituted FL OIR approved policy language changes that restrict emergency mitigation expenses  SUCCESSFULLY Mitigating AOB HEADWIND  AOB has been a significant drag on FL HO providers, but Federated National’s multi-pronged strategy has positioned the company for improved underwriting profitability.  11  * Source: Dowling & Partners  
 

 2017-2018 REINSURANCE STRUCTURE  Program Highlights  12  Federated National has full indemnity reinsurance with highly rated reinsurers, and has maintained a business relationship with many of them for numerous years  ~$2.2 billion of aggregate coverage with maximum single event coverage of approximately $1.5 billion   Per occurrence pretax retention of $18 million   80+ reinsurance partners, all of which are rated “A-” or higher by A.M. Best or fully collateralized  
 

 Robust claims capabilities and tenured staff  40+ field adjusters covering the state of Florida as well as Louisiana 80+ onsite (desk) adjustersClaims management team of over 40 Directors, Managers, Supervisors and Team LeadsIn-house Litigation Management Team, which includes 3 in-house attorneys, supported by 15-person staffClaims personnel average 10+ years experience and are fully licensed Many on our team have tenure dating to storms of 2004 and 2005Training and knowledge is promoted and enhanced through on- and off-site education  24/7 new claims reporting capacity with immediate emergency response available when warrantedLong-standing relationships with water remediation companies, emergency services providers and loss causation analysts that provide rapid mitigation of damages and exceptional customer service  Owns 1/3 of Southeast Catastrophe Consulting Company, an independent catastrophe claims adjusterDedicated catastrophe adjusters available to FNIC & MNICAll data and systems functionality are integrated and backed-up through a remote cloud-based computing system  In-House Claims Adjusters  Strategic Alliance with Catastrophe Adjuster  Efficient Claims Response  13 
 

 Re-focusing on FNHC’s core strengths  Maintain market share in high end Florida market  Expand into larger, second tier pricing market through newly acquired full control of Monarch ($4.6B market opportunity)  Selectively expand in adjacent coastal markets  Continued investment in our people and processes to improve underwriting and claims performance through technology  2018 & Beyond: Building FOUNDATION FOR LONG-TERM VALUE CREATION  14 
 

 KEY Recent Events chart our future path  Harvey & Irma update$24.7 million pre-tax loss retained, net of reinsurance and other recoveriesCompany retention offset by claims adjusting fees and other related income resulting in $10 million net after-tax impactQ4 HO revenue grew 21% and earnings of $7.4 million, marking our strongest performance in 8 quartersFL rate increases taking effect, offsetting AOB and driving expected improvement in underwriting performance beginning in 2018Exiting unprofitable non-core businessesAuto – Minimal headwind beginning 2018Commercial GL – Small business proved a distraction to our HO focusCombined reduction in GWP of ~$75M annualizedCompleted purchase of Monarch venture from partners, paving path to FL book diversification strategy  15  Near-term focus on driving improved underwriting performance, while setting the stage longer-term profitable growth in HO 
 

 Diversifying Florida book – regional penetration  16  Federated National Insurance Company – Florida Market for Homeowners                                                                                                                                                        Panhandle11.6%  North FL5.6%  Tampa/St. Pete13.5%  Central FL14.6%  Treasure Coast8.1%  SW FL21.9%  Tri-County24.7%  Total Florida Policies in Force for Homeowners/Fire as of December 31, 2017 263,695   Statewide offering of HO3, HO6, HO4 and DP-3 FormsRisk Management through utilization of both analytics and geographic exposure managementDistribute through independent retail partner agents and national carrier affinitiesManaged catastrophe exposure by ceding risk through reinsurance treaties 
 

 Monarch National Insurance Overview  Established in 2015 as joint venture with Crosswinds and TransReStrategy: Leverage Federated National’s partner agent network to gain access to risk-adjusted class of FL HO marketClosed acquisition in February for $16.7 million in cash and retired $5 million noteImproved capital-efficiency with Monarch National stacked under Federated National  Ownership Benefits  Full control in executing on the Monarch opportunityProvides second prong to FL diversification strategy, expanding access to 50% of the FL HO market of which we are underweight Strengthens our partner agent relationships by expanding our appetite to risk-adjusted marketContinuing to enhance our underwriting process by deploying sophisticated scoring and leveraging our strong reinsurance partnerships to manage risk  Diversifying Florida book – monarch  17  Full Ownership of Monarch creates strategic flexibility and a path to diversification and growth 
 

 MIDDLE MARKET Opportunity  18  High-end SegmentHigh Quality Well Mitigated Risk  Middle Market SegmentRisk Adjusted Houses  Low-end SegmentPoorly/Un-Mitigated Risk  HO Insurance Market Segments  Federated National Current Share of Market Segment  Our Focus  Underweight  Not our Focus    Vast middle-market growth opportunity  ~50% of total HO Insurance Market 
 

 Coastal state diversification  19  Federated National Insurance Company In-Force Policy Counts – Regionally    Limited to Gulf and Atlantic coastal states offering Property & Casualty policiesFocus on hurricane zones 1 and 2 where consumer need is the greatestLeveraging best practices developed over our 2 plus decades of experience in FloridaDistributed through general partner agents and national carrier affinities        Florida89.6%    Texas1.8%    Louisiana5.6%    Alabama1.0%    South Carolina2.0%  Based on homeowners/fire lines of business 
 

 Why we are well positioned To Succeed  20  Strong mindshare, partner agent network in Florida supports diversified regional penetration  Ownership of Monarch gives us control in tailoring product for new Florida insurance classes  Continued expansion as we take our model to neighboring states  Multiple opportunities to leverage technology to improve performance  Deep domain expertise across the FNHC organization 
 

 Experienced MANAGEMENT TEAM  An experienced management team that has extensive tenure in the homeowners’ insurance market in Florida  Michael BraunChief Executive Officer & President  Appointed Chief Executive Officer in July 2008Elected to Board in 2005  Ronald JordanChief Financial Officer  Worked for multiple Fortune 200 insurance and Big 4 25+ years of Accounting, Finance, Risk & Governance  21  Tracy WigganVice President of Human Resources  20 + years experience in human resources  Anthony PreteVice President of Strategy  15+ years of industry experience  Stephen YoungVice President of Operations  20+ years of industry experience  C. Brian TurnauVice President of Claims  18+ years of industry experience  Neil NovellasVice President of Internal Audit  20+ years of auditing experience  Christopher ClouseVice President of Personal Lines Underwriting  25+ years of industry experience  Larry HufschmidVice President of Information Technology  28+ years of industry experience and 38 years of IT experience  Gordon JenningsVice President of Risk Management  23+ years of industry experience  Erick FernandezChief Accounting Officer  15+ years of Accounting and Finance  Scott FestVice President of Reinsurance  20+ years of Reinsurance experience 
 

 Financial Overview  22 
 

 Premiums  23  Note: Breakouts for Homeowners and Automobile are provided from 1Q16 forwardNote: Excludes CGL 
 

 Revenue and Expenses  24  *Unwinding of Florida homeowners’ 30% quota share reinsurance treaty. 
 

 4Q17 Results by line of business  25    HO  Other  Consolidated  Total Revenue  $87,606  $14,146  $101,752  Costs and expenses:        Losses and loss adjustment expenses  47,345  11,529  58,874  All other expenses  29,254  4,057  33,311  Total costs and expenses  76,599  15,586  92,185  Income before income taxes  11,007  (1,440)  9,567  Income taxes  4,246  (303)  3,943  Net income  6,761  (1,137)  5,624  Net loss attributable to noncontrolling interest  (672)  –  (672)  Net income attributable to FNHC shareholders  $ 7,433  $ (1,137)  $ 6,296  Note: Homeowners is presented on an underwriting results basis, i.e. all net investment income and net realized investment gains are presented in consolidated results onlyNote: Non-strategic lines are included in consolidated 
 

 Net income bridge  26  Q4-17 net income per average diluted share was 48¢ and annualized ROE was 12.1%, excluding realized investment gains. Q4-17 losses and LAE included $1.5, pre-tax, from severe weather events. 
 

 Losses and lae  27  Beginning Q4-15, we have experienced increased loss and LAE costs associated with claims in our Florida homeowners book of business due to Assignment of Benefits (“AOB”) AOB has resulted in a rate increase effective August 2016, with an additional 10% Florida statewide-average increase taking effect August 2017   * Impacted by Hurricane Matthew** Impacted by Hurricane Irma(1) Includes the impact of severe weather events (Hurricane Matthew, Tornados, Tropical Storm Colin, Hurricane Hermine, and Hurricane Irma) 
 

 BALANCE SHEET STRENGTH  28  “Our commitment to protecting our policyholders and our shareholders”  (1) 2016 Statutory surplus includes $25M surplus infusion(2) FNHC Shareholders’ Equity excludes non-controlling interest  Conservative Capital Structure  Reinsurance Strategy  Low risk investment portfolio 
 

 Federated National Investment Portfolio Composition* as of December 31, 2017(in millions)  Investment Portfolio Holdings  29  Designed to preserve capital, maximize after-tax investment income, maintain liquidity and minimize riskUtilize outside investment managers for the fixed income and equity portfoliosAs of 12/31/2017, 100% of the Company’s fixed income portfolio was rated investment gradeAverage duration: 3.962 yearsComposite rating: A- (S&P)YTM: 2.58%Book yield: 2.53%Historical total returns on cash and investments as of 12/31/20171 Year: 4.00%2 Years: 2.97%  *excludes Monarch National 
 

 Investment opportunity  30  UnderwritingPerformance  Strategy And Philosophy  Investment Returns  Shareholders’ Returns  Maintain competitive advantage on higher value propertiesExpand in middle market growth opportunityPrioritize value of bookFocus on sustainable profitabilityEmploy sophisticated pricing and actuarial tools  Re-focus on our core: quality property bookMaintain regional growth strategy that includes expanding in Non-FL statesContinue efficient and effective use of reinsurance programsFocus on long-term profitable growth  Preserve capitalMaximize after-tax investment incomeUtilize investment managers for fixed income and equity portfolioMaintain liquidity  Executed on authorized program for common stock repurchasesCommitted to maintaining DividendsEffective use of controls and management oversight of expendituresAchieve book value growth 
 

 Thank you!  31