21st Century Holding Company Q4 2009 Earnings Call Transcript

Mar.23.10 | About: Federated National (FNHC)

21st Century Holding Company (TCHC) Q4 2009 Earnings Call Transcript March 23, 2010 4:30 PM ET

Executives

Michael Braun – President and CEO

Peter Prygelski – Treasurer and CFO

Analysts

William Myers – Miller Asset Management

Doug Eden [ph]

Charles Virgil [ph]

Operator

Good afternoon and welcome to the 21st Century Holding Company's 2009 year-end financial results conference call. My name is Rebecca and I will be your operator today. Please note that today's call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

Statements in this conference call or in the documents incorporated by reference that are not historical fact are forward-looking statements. Forward-looking statements 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 foregoing, words such as may, will, expect, believe, anticipate, intend, could, would, estimate, or continue, or the negative other variations thereof, or comparable terminology are intended to identify forward-looking statements.

The risks and uncertainties include, but are not limited to, the risks and uncertainties described in this conference call or press release issued today and other filings made by the company with the SEC from the time to time. Furthermore, the consolidated financial statements of 21st Century Holding Company for the year ended December 31st, 2009, have been prepared in accordance with Generally Accepted Accounting Principles for annul financial information and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X.

21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise.

Now, at this time, I would like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of 21st Century Holding Company. Please go ahead, sir.

Michael Braun

Thank you. I just wanted go ahead and welcome everyone to our call. We appreciate you dialing in today. We'll start with just a brief overview and then open it up to some questions.

Basically, we had issued two separate press releases today, one containing the announcement that we are going to be acquiring HomeWise Insurance Company, which is news that we are very excited about. HomeWise is located in Tampa and they really offer – they really offer a great opportunity for our company in terms of diversifying our risk.

We – we've been traditionally a South Florida company and HomeWise really has a book of business that goes into other parts of the state that really will help us diversify from a reinsurance perspective. Reinsurance is our number one expense being a property writer in the state of Florida.

They also have business that they write in Louisiana, which is very – once again, it's good to more diversification, the better in that regard. They have a well managed team there and we look forward to that. We – it's – Dale Hammond and his team, I think they look forward to working with us and I know we sure look forward to working with them.

The other information that we put out today was our 2009 results. 2009 was a very challenging year and I think we've touched on that in the past that the biggest challenges that we had in 2009 were the – an increase in reinsurance expense that really hit the second half of the year. It materially affected us in the third and fourth quarter. And also the credits associated with wind mitigation.

Once again, as I've said in the past that that's a program that was very well intended to encourage people to go ahead and fortify their houses so they would be less resistant to damage in the event of a storm, but it's a big amount of premium that – in terms of credits that we have given that has impacted us. That's about 24% right now at year-end of our premium has been given back in the form of credits.

So in 2009, we also had a rate increase of approximately 19% on a voluntary book of business and that made a big improvement towards getting us back towards profitability, also improved underwriting.

But the wind mitigation credits, that's something that once again that hit us really hard being in the year-end and it took away the ability for the company to generate the capital to surplus in the insurance company. That has resulted in something that we put in the press release as well that we just received correspondence from Demotech that they are concerned about the capital level within Federated and we are looking at that and actively looking for a solution to that issue.

The – I don't think that's – that letter is unique to us within the state. A lot of carriers have experienced difficulty with surplus this year. It's a challenge, but I think that we've got some resources available that will help with that challenge.

That's just a brief overview, but we'll go ahead and turn it over to questions. And operator, if you can open it up?

Question-and-Answer Session

Operator

(Operator Instructions) And we'll pause for just a moment. We'll go to William Myers with Miller Asset Management.

William Myers – Miller Asset Management

Hi, guys. Thank you for taking my questions. This is my first time on your call. You have $142 million listed on your balance sheet as total cash and investments. So I am wondering why the $10 million increase in capitalization for subsidiary, I believe it is, why that – would that be any problem at all? Is that – does that – if you shift the money to the subsidiary, does it still appear on your balance sheet? Thanks.

Michael Braun

Well, basically, the subsidiary is what has statutory surplus and that's what is referring to within Federated. Federated has approximately $21 million at year-end as statutory surplus. So the Demotech, that's what they are referring to. Cash and cash equivalents, things like that include a lot of different things. It does include surplus, but it also includes both Federated, American Vehicle which is the other insurance company and the Holding Company. So that would include prepaid premiums, case reserve, things like that, IBNR. So there is a lot of different things that go into that.

William Myers – Miller Asset Management

Okay. Well then, I guess I'm trying to get a better idea of what the cash and investments represent. How much– is there some way of giving me an idea how much of that is available for purposes other than reserves for losses? Is there any way you can break that down for us to just have a little bit better idea than what you just said?

Peter Prygelski

I mean – this is Pete Prygelski. Basically, we – if you are talking about free cash, which to me means cash outside of the two insurance subsidiaries –

William Myers – Miller Asset Management

Okay.

Peter Prygelski

You are looking at about $10 million in free cash outside the subsidiaries – outside the two insurance companies.

William Myers – Miller Asset Management

Okay. If that – okay, if that's the level of detail you can give, that at least is helpful. And I think that's all for me. Thank you very much.

Michael Braun

Thank you for calling in.

Operator

And our next question will come from Doug Eden [ph], a private investor.

Doug Eden

Yes, good afternoon. Can you hear me okay?

Michael Braun

Yes. Hi, Doug. Thanks for calling in.

Doug Eden

Hi, sure. I have a couple of questions. One is related to the first question that the other caller just mentioned. So it seems like free unencumbered cash you have is about $10 million. So is that – when you say you are exploring options, is this going to be internally funded within 21st Century Holdings or are you looking to raise external capital to meet Demotech's?

Michael Braun

There is a lot of different things that we are looking at. I mean, really we don't want to leave any – not looking at any option that might be available to us. So there is that possibility, but clearly we've got some capital – we have capital inside the company that we could use for it.

Doug Eden

Okay, okay. So not an – it's an issue, but not a concern?

Michael Braun

Well, it's something that has been given to us and we are exploring the best way to respond to that.

Doug Eden

Okay. Secondly, after you all rejected the merger overture, I think it was in the fall of this past year by the other company, Home Choice – Homeowners Choice, the announcement that you all released mentioned that there was going to be a share buyback. And I wanted to know in the first quarter of 2010, has there been any shares purchased and how the Demotech additional capital needs letter may impact share buybacks in the future, as well as the dividend.

Peter Prygelski

Well, I'll answer that, Doug. This is Pete again. We initiated a buyback around October 29th of 2009. We bought back pretty much every day that the market was open from 10/29 through December 2nd. We bought back a total of 67,000 shares; we spent about $285,000 of the $4 million that was authorized.

At that point, on – in December, we aggressively started pursuing strategic acquisitions. We looked at several of them, we wound up with HomeWise. At that point, we suspended the buyback, not cancelled it because – again, this – even the HomeWise acquisition has to go through due diligence and regulatory approval.

So we suspended the buyback in hopes that we are going to use a majority of our free cash to fund this acquisition. After the acquisition is funded, we'll then, as we do monthly and quarterly at Board meetings, look at the best use for our capital, whether that's continuing the buyback with money left over after we make this purchase, increasing the dividend or – we'll go through all the scenarios. But right now, for the long term – long-term accretiveness to our shareholders, we feel this potential transaction with HomeWise is going to be extremely beneficial and accretive to our shareholders this year, as well as the out years.

Doug Eden

Okay, that's helpful. Thank you. So – and in the announcement that you just released, it mentioned $100 million was of revenues – additional revenues. Is that just from the HomeWise acquisition on a run rate basis?

Michael Braun

Yes, that's correct. The HomeWise, there is two different insurance companies in their organization and HomeWise has approximately $40 million, but also we mentioned that there is what's called renewal rights where we would be – have the ability to write a substantial amount of business from their other carrier business that works well for our company, models well. So it aggregated approximately $100 million. There is a lot of variables that can move there in terms of how it shapes out with the insurer and the agent and things like that. But we feel that's a pretty sound number.

Doug Eden

Okay. So as it relates to that, we – for 2010, year end – or the full year 2010, what would be your expected gross written premiums with the combined entities, as well as operating earnings?

Michael Braun

Well, there is going to be some seasonality in terms of converting a lot of that business over. Yes, I don't know that we've got a hard number that we are releasing.

Peter Prygelski

We don't – we – I don't know if you've been on the call before, Doug. We don't really release the earnings number, but we are projecting $100 million in annualized premium from the HomeWise purchase and our premiums should remain pretty flat. So we are looking at $180 million in gross written.

Doug Eden

So yours would remain flat even with the 19% rate increase in assuming the more of the Citizens' policies?

Michael Braun

There will be some more – there will be some more in that regard. But yes, I mean, there is not going to be substantial growth with Federated.

Doug Eden

Okay, thank you. And one final question. Just in terms of using the free capital, with the shares trading for awhile now at approximately 50% of book value, wouldn't it make sense to continue buying back shares as opposed to making acquisitions of companies that the ROE is going to be, I would imagine, significantly less than the tremendous discount to book?

Michael Braun

Well, there is –

Doug Eden

Don't – in other words, don't you get a huge investment by buying back shares at this discount?

Michael Braun

There is a full analysis that we do and that we will continue to do in reference to this acquisition.

Peter Prygelski

Yes.

Michael Braun

We are looking at "We have capital, what's the most effective way to use it between the different entities."

Peter Prygelski

Yes. And Doug, just to clarify, we continue to look at this. And I'm not – we haven't released – specifically, we haven't released the terms of the deal with HomeWise because we are going through due diligence.

So what we did was – that's why I said it – I wanted to make clear that we haven't cancelled it, that we are just suspending it, so we can assess the best use of the cash. And I'm not saying that we are not going to resume it and I'm not saying that we are not going to use some of the cash to fund this deal, some of the cash for a buyback. So the deal – the buyback is just suspended as we get through this due diligence, which we expect to take about 30 to 45 days.

Doug Eden

Okay.

Peter Prygelski

So "stay tuned" is the message. I don't want you to think that we are just saying, "Well, the stock is at half of book value, why aren’t you guys buying it back"? I mean, that – it's on our radar.

Doug Eden

Okay. With the $30 million-something approximately of revenues from HomeWise, how many policies does that equate to? Is that 30,000-something policies?

Michael Braun

Yes, ballpark and it really varies. We are going to do further – there is different types of policies in terms of condos and things like that. Each – those are individual units versus single-family houses, but also in different parts of the state, the premium is higher, traditionally South Florida.

Doug Eden

Of course. So in terms of before HomeWise, what percentage of your business – what percentage do you pay out in reinsurance costs? You said it was a high percentage because (inaudible)?

Michael Braun

It's significant, it's over 50%. Traditionally, we've been in the mid-to-upper 40s. It went – is in the 60's this year, basically because of the suppression of premium associated with the mitigation credits, but also because the reinsurance costs went up. We are confident that we can – with the acquisition of HomeWise, their distribution is better and we are confident that our reinsurance, as a percentage of premium, is going to be much more manageable.

Doug Eden

Okay. Yes, that makes sense. So we – their – your percentage was in the 50s of your $80 million, but when you add their $100 million at a lower percent, your weighted average reinsurance cost, you are saying, will go down something more manageable where you can make a profit?

Michael Braun

It significantly benefits us from a reinsurance perspective in that regard, yes. In terms of our percentage of premium spent on reinsurance, we are – it's going to be much more favorable.

Doug Eden

Okay. Thank you.

Michael Braun

And once again, this is subject to the whole due diligence process and that the customary regulatory approval from the state of Florida, both of which we anticipate – our – the cat cycle, the reinsurance season starts June 1 and our goal is to have this – we'll want to complete it before that because that's where we start out our new reinsurance contract.

Doug Eden

Right. And so – and the DOI will approve this subject to your maintaining the A rating, the A Demotech rating, correct?

Michael Braun

They don't rely on Demotech. The state – the Department of Insurance has their own criteria and we'll have to present them with the – all the information that we have and they'll do their due diligence as well and they will make their decision if they approve this amount.

Doug Eden

Okay, very good. So it sounds there is a lot of exciting things. Good luck for you for this New Year.

Michael Braun

Yes, thank you very much.

Operator

Next question will come from Charles Virgil [ph], also a private investor.

Charles Virgil

Hi, there. I wish you could explain a little bit further on your strategic plan and growth initiatives, like how they performed by line in 2009 and what your expectations for 2010.

Michael Braun

Yes.

Charles Virgil

In other words just, is the condo line increasing or –

Michael Braun

Yes.

Charles Virgil

And the marine line?

Michael Braun

Yes, the inland marine is a smaller line. It's not – it's not – that’s not, by any stretch – the condo line is the commercial habitational, which we started I believe it's October and we've been averaging, I would say, roughly $200,000 to $250,000 a month in premium. That's coming along nice and really the – once again, the big thing with that is the way it models into our existing book of business.

There is – I would say for not only for homeowners within the state of Florida, but for condo, there is far more demand than there is supply. We could be writing a lot more business without a doubt. But what we are trying to do is be prudent with that and write it correctly. I have no doubt that we could be writing $1 million a month on that line – that – but we are not.

The other thing that we have is American Vehicle, which we – that's in multiple states as well. That – that's exposed a lot to – it's the general liability/artisan program that we continue to – we had a – in 2009 that we had the agreement with an A rated carrier where they were able to help us expand into some new markets. That's going to take time, but that once again helps diversify us outside of Florida.

Charles Virgil

Okay. Thank you very much.

Michael Braun

Thank you.

Peter Prygelski

Thank you.

Operator

(Operator Instructions) Your next question will come from Kevin Wagner [ph], private investor.

Kevin Wagner

I believe my question was answered by responses to Mr. Eden's questions.

Michael Braun

Thank you for calling in.

Kevin Wagner

Yes, thank you.

Operator

And seeing no further questions in the queue, at this time, I would like to turn the conference back over to management for any additional or closing remarks.

Michael Braun

Well, we just want to thank everyone for dialing in and those that had the questions as well, we appreciate that. Obviously, it's a challenging market that we operate in, but we feel that we are sticking with the fundamentals and very excited about the future. I think that our business – our normal business is absolutely moving in the right direction that we have and I think that we look – we are very excited about the acquisition with HomeWise and hope to have that closed as quick as possible.

So thank you very much, everyone.

Operator

And ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!