|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of or For the Three Months Ended March 31, |
| | 2019 | | 2018 |
| | Homeowners | | Automobile | | Other | | Consolidated | | Homeowners | | Automobile | | Other | | Consolidated |
| | | | | | | | (Dollars in thousands) | | | | | | |
Revenue | | | | | | | | | | | | | | | | |
Total revenues | | $ | 93,651 |
| | $ | 20 |
| | $ | 7,526 |
| | $ | 101,197 |
| | $ | 83,305 |
| | $ | 4,166 |
| | $ | 5,606 |
| | $ | 93,077 |
|
Less: | | | | | | | | | | | | | | | | |
Net realized and unrealized investment gains (losses) | | — |
| | — |
| | 2,301 |
| | 2,301 |
| | — |
| | — |
| | (1,052 | ) | | (1,052 | ) |
Adjusted operating revenues | | $ | 93,651 |
| | $ | 20 |
| | $ | 5,225 |
| | $ | 98,896 |
| | $ | 83,305 |
| | $ | 4,166 |
| | $ | 6,658 |
| | $ | 94,129 |
|
| | | | | | | | | | | | | | | | |
Net Income (Loss) | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (1,423 | ) | | $ | (679 | ) | | $ | (1,763 | ) | | $ | (3,865 | ) | | $ | 6,941 |
| | $ | (41 | ) | | $ | 563 |
| | $ | 7,463 |
|
Less: | | | | | | | | | | | | | | | | |
Net realized and unrealized investment gains (losses) | | — |
| | — |
| | 1,718 |
| | 1,718 |
| | — |
| | — |
| | (785 | ) | | (785 | ) |
Acquisition and other costs | | (36 | ) | | — |
| | (484 | ) | | (520 | ) | | (176 | ) | | (21 | ) | | (19 | ) | | (216 | ) |
Gain (loss) on early extinguishment of debt | | — |
| | — |
| | (2,669 | ) | | (2,669 | ) | | — |
| | — |
| | — |
| | — |
|
Adjusted operating income (loss) | | $ | (1,387 | ) | | $ | (679 | ) | | $ | (328 | ) | | $ | (2,394 | ) | | $ | 7,117 |
| | $ | (20 | ) | | $ | 1,367 |
| | $ | 8,464 |
|
| | | | | | | | | | | | | | | | |
Income tax rate assumed for reconciling items above | | 25.35 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % |
The table below summarizes our unaudited 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. Certain percentages are not considered meaningful ("NCM").
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | | | | | | | | | | | |
| 2019 | | | | | | | | 2018 | | | | | | |
| Homeowners | | Automobile | | Other | | Consolidated | | Homeowners | | Automobile | | Other | | Consolidated |
| (Dollars in thousands) | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | |
Gross premiums written | $ | 154,131 | | | $ | — | | | $ | 5,000 | | | $ | 159,131 | | | $ | 136,503 | | | $ | (3,041) | | | $ | 5,560 | | | $ | 139,022 | |
Gross premiums earned | 141,493 | | | — | | | 4,053 | | | 145,546 | | | 136,587 | | | 2,766 | | | 5,554 | | | 144,907 | |
Ceded premiums | (54,207) | | | — | | | (3,965) | | | (58,172) | | | (40,782) | | | (2,091) | | | (3,541) | | | (46,414) | |
Net premiums earned | 87,286 | | | — | | | 88 | | | 87,374 | | | 95,805 | | | 675 | | | 2,013 | | | 98,493 | |
Net investment income | — | | | — | | | 4,068 | | | 4,068 | | | — | | | — | | | 3,137 | | | 3,137 | |
Net realized and unrealized investment gains (losses) | — | | | — | | | 794 | | | 794 | | | — | | | — | | | 1,760 | | | 1,760 | |
Direct written policy fees | 2,453 | | | — | | | 61 | | | 2,514 | | | 2,198 | | | 1,466 | | | 132 | | | 3,796 | |
Other income | 3,996 | | | 4 | | | 726 | | | 4,726 | | | 2,613 | | | 191 | | | 842 | | | 3,646 | |
Total revenues | 93,735 | | | 4 | | | 5,737 | | | 99,476 | | | 100,616 | | | 2,332 | | | 7,884 | | | 110,832 | |
| | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | 60,708 | | | 742 | | | 655 | | | 62,105 | | | 56,856 | | | 2,609 | | | 2,992 | | | 62,457 | |
Commissions and other underwriting expenses | 24,109 | | | — | | | 745 | | | 24,854 | | | 28,647 | | | 1,545 | | | 1,181 | | | 31,373 | |
General and administrative expenses | 4,484 | | | 50 | | | 712 | | | 5,246 | | | 4,187 | | | 75 | | | 738 | | | 5,000 | |
Interest expense | — | | | — | | | 1,894 | | | 1,894 | | | — | | | — | | | 1,032 | | | 1,032 | |
Total costs and expenses | 89,301 | | | 792 | | | 4,006 | | | 94,099 | | | 89,690 | | | 4,229 | | | 5,943 | | | 99,862 | |
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | 4,434 | | | (788) | | | 1,731 | | | 5,377 | | | 10,926 | | | (1,897) | | | 1,941 | | | 10,970 | |
Income tax expense (benefit) | 1,036 | | | (175) | | | (143) | | | 718 | | | 2,768 | | | (481) | | | 733 | | | 3,020 | |
Net income (loss) | $ | 3,398 | | | $ | (613) | | | $ | 1,874 | | | $ | 4,659 | | | $ | 8,158 | | | $ | (1,416) | | | $ | 1,208 | | | $ | 7,950 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Ratios to net premiums earned: | | | | | | | | | | | | | | | |
Net loss ratio | 69.6 | % | | NCM | | | 744.3 | % | | 71.1 | % | | 59.3 | % | | 386.5 | % | | 148.6 | % | | 63.4 | % |
Net expense ratio | 32.7 | % | | | | | | 34.4 | % | | 34.3 | % | | | | | | 36.9 | % |
Combined ratio | 102.3 | % | | | | | | 105.5 | % | | 93.6 | % | | | | | | 100.3 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| Homeowners | | Automobile | | Other | | Consolidated | | Homeowners | | Automobile | | Other | | Consolidated |
| (Dollars in thousands) |
Revenues: | | | | | | | | | | | | | | | |
Gross premiums written | $ | 129,283 |
| | $ | (1 | ) | | $ | 2,951 |
| | $ | 132,233 |
| | $ | 122,815 |
| | $ | 6,347 |
| | $ | 5,233 |
| | $ | 134,395 |
|
Gross premiums earned | 133,842 |
| | 22 |
| | 4,503 |
| | 138,367 |
| | 132,463 |
| | 8,328 |
| | 5,651 |
| | 146,442 |
|
Ceded premiums | (46,031 | ) | | (17 | ) | | (3,535 | ) | | (49,583 | ) | | (55,058 | ) | | (6,117 | ) | | (3,158 | ) | | (64,333 | ) |
Net premiums earned | 87,811 |
| | 5 |
| | 968 |
| | 88,784 |
| | 77,405 |
| | 2,211 |
| | 2,493 |
| | 82,109 |
|
Net investment income | — |
| | — |
| | 3,710 |
| | 3,710 |
| | — |
| | — |
| | 2,943 |
| | 2,943 |
|
Net realized and unrealized investment gains (losses) | — |
| | — |
| | 2,301 |
| | 2,301 |
| | — |
| | — |
| | (1,052 | ) | | (1,052 | ) |
Direct written policy fees | 2,298 |
| | 3 |
| | 90 |
| | 2,391 |
| | 1,923 |
| | 1,467 |
| | 186 |
| | 3,576 |
|
Other income | 3,542 |
| | 12 |
| | 457 |
| | 4,011 |
| | 3,977 |
| | 488 |
| | 1,036 |
| | 5,501 |
|
Total revenues | 93,651 |
| | 20 |
| | 7,526 |
| | 101,197 |
| | 83,305 |
| | 4,166 |
| | 5,606 |
| | 93,077 |
|
| | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | 63,330 |
| | 844 |
| | 2,665 |
| | 66,839 |
| | 41,955 |
| | 2,236 |
| | 1,880 |
| | 46,071 |
|
Commissions and other underwriting expenses | 27,367 |
| | 35 |
| | 832 |
| | 28,234 |
| | 27,356 |
| | 1,860 |
| | 1,005 |
| | 30,221 |
|
General and administrative expenses | 4,860 |
| | 50 |
| | 1,401 |
| | 6,311 |
| | 4,889 |
| | 125 |
| | 1,071 |
| | 6,085 |
|
Interest expense | — |
| | — |
| | 5,051 |
| | 5,051 |
| | 100 |
| | — |
| | 984 |
| | 1,084 |
|
Total costs and expenses | 95,557 |
| | 929 |
| | 9,949 |
| | 106,435 |
| | 74,300 |
| | 4,221 |
| | 4,940 |
| | 83,461 |
|
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | (1,906 | ) | | (909 | ) | | (2,423 | ) | | (5,238 | ) | | 9,005 |
| | (55 | ) | | 666 |
| | 9,616 |
|
Income tax expense (benefit) | (483 | ) | | (230 | ) | | (660 | ) | | (1,373 | ) | | 2,282 |
| | (14 | ) | | 103 |
| | 2,371 |
|
Net income (loss) | (1,423 | ) | | (679 | ) | | (1,763 | ) | | (3,865 | ) | | 6,723 |
| | (41 | ) | | 563 |
| | 7,245 |
|
Net income (loss) attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | (218 | ) | | — |
| | — |
| | (218 | ) |
Net income (loss) attributable to FNHC shareholders | $ | (1,423 | ) | | $ | (679 | ) | | $ | (1,763 | ) | | $ | (3,865 | ) | | $ | 6,941 |
| | $ | (41 | ) | | $ | 563 |
| | $ | 7,463 |
|
| | | | | | | | | | | | | | | |
Ratios to net premiums earned: | | | | | | | | | | | | | | | |
Net loss ratio | 72.1 | % | | NCM |
| | 275.3 | % | | 75.3 | % | | 54.2 | % | | 101.1 | % | | 75.4 | % | | 56.1 | % |
Net expense ratio | 36.7 | % | | | | | | 38.9 | % | | 41.7 | % | | | | | | 44.2 | % |
Combined ratio | 108.8 | % | | | | | | 114.2 | % | | 95.9 | % | | | | | | 100.3 | % |
Revenue
Total revenue increased $8.1decreased $11.3 million or 8.7%10.2%, to $101.2$99.5 million for the three months ended March 31,September 30, 2019, compared with $93.1$110.8 million for the three months ended March 31,September 30, 2018. The increasedecrease was primarily driven by higher Homeowners netceded premiums earned as a result of decreaseddue to increased reinsurance spend, a decline in Automobile direct written policy fees and higher recognizedlower investment gains, on our investments, partially offset by the planned reductionsincreases in netgross premiums earned, from Automobilenet investment income and commercial general liability,other income, all of which isare discussed below.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods presented:
| | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | |
| | 2019 | | 2018 |
| | (In thousands) | | |
Gross premiums written: | | | | |
Homeowners Florida | | $ | 115,341 | | | $ | 114,441 | |
Homeowners non-Florida | | 38,790 | | | 22,062 | |
Automobile | | — | | | (3,041) | |
Commercial general liability | | (19) | | | 1,435 | |
Federal flood | | 5,019 | | | 4,125 | |
Total gross premiums written | | $ | 159,131 | | | $ | 139,022 | |
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
| | (In thousands) |
Gross premiums written: | | | | |
Homeowners Florida | | $ | 103,963 |
| | $ | 108,371 |
|
Homeowners non-Florida | | 25,320 |
| | 14,444 |
|
Automobile | | (1 | ) | | 6,347 |
|
Commercial general liability | | (53 | ) | | 2,514 |
|
Federal flood | | 3,004 |
| | 2,719 |
|
Total gross premiums written | | $ | 132,233 |
| | $ | 134,395 |
|
Gross premiums written decreased $2.2increased $20.1 million, or 1.6%14.5%, to $132.2$159.1 million in the quarter, compared with $134.4$139.0 million for the same three-month period last year. Gross premiums written increased due to the growth in homeowners non-Florida and Florida. Our homeowners non-Florida business continues to show exceptional growth year over year, especially in the state of Texas, which has allowed us to leverage our infrastructure and diversify insurance risk. Our homeowners Florida FNIC premiums grew $2.2 million or 2% this quarter as compared to last year, which represents the first quarter showing premium growth since the third quarter of 2017. Overall, Homeowners grew 12.9%.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods presented:
| | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | |
| | 2019 | | 2018 |
| | (In thousands) | | |
Gross premiums earned: | | | | |
Homeowners Florida | | $ | 113,062 | | | $ | 118,603 | |
Homeowners non-Florida | | 28,431 | | | 17,984 | |
Automobile | | — | | | 2,766 | |
Commercial general liability | | 157 | | | 2,122 | |
Federal flood | | 3,896 | | | 3,432 | |
Total gross premiums earned | | $ | 145,546 | | | $ | 144,907 | |
Gross premiums earned increased $0.6 million, or 0.4%, to $145.5 million for the three months ended September 30, 2019, as compared to $144.9 million for the three months ended September 30, 2018. The higher gross earned premiums was driven by a 3.6% increase in earned premiums in Homeowners, partially offset by the results of our decision to exit the Automobile and commercial general liability lines.
Ceded Premiums Earned
Ceded premiums increased $11.8 million, or 25.3%, to $58.2 million in the quarter, compared to $46.4 million the same three-month period last year. The increase was driven by $8.1 million higher excess of loss reinsurance spend in Homeowners, as the new program became effective July 1, 2019 at a higher rate on-line than the program in the previous year and $6.1 million from the homeowners Florida quota share being set at 10% in the third quarter of 2019 as compared to 2% in the prior year period. These items were offset by $2.1 million lower ceded premiums in Automobile as we have exited that line of business.
Net Investment Income
Net investment income increased $1.0 million, or 29.7%, to $4.1 million during the three months ended September 30, 2019, as compared to $3.1 million during the three months ended September 30, 2018. The increase was due to fixed income portfolio growth, partly due to the net proceeds of the offering (refer to Notes 3 and 8 to the Consolidated Financial Statements included herein, for additional information) and the improvement in the yield as a result of rising interest rates during 2018 as well as from portfolio repositioning.
Net realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) decreased $1.0 million, to $0.8 million for the three months ended September 30, 2019, compared to $1.8 million in the prior year period. We recognized $(0.6) million and $1.6 million in unrealized investment gains (losses) for equity securities during these respective periods. Our current and prior year net realized gains are associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions in the normal course of managing the portfolio.
Direct Written Policy Fees
Direct written policy fees decreased by $1.3 million, or 33.8%, to $2.5 million for the three months ended September 30, 2019, compared with $3.8 million in the same period in 2018. The decrease in direct written policy fees is correlated to lower number of policies in-force in Automobile and commercial general liability due to our decision to exit these lines, as discussed earlier, offset by higher fees from homeowners non-Florida as we continue to grow.
Other Income
Other income included the following for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | | | |
| | 2019 | | % Change | | 2018 |
| | (In thousands) | | | | |
Other income: | | | | | | |
Commission income | | $ | 726 | | | (15.2) | % | | $ | 856 | |
Brokerage | | 3,582 | | | 63.6 | % | | 2,190 | |
Financing and other revenue | | 418 | | | (30.3) | % | | 600 | |
Total other income | | $ | 4,726 | | | 29.6 | % | | $ | 3,646 | |
The increase in other income was primarily driven by higher brokerage revenue, partially offset by lower financing and commission income. The brokerage revenue increase is the result of higher excess of loss reinsurance spend from the reinsurance programs in place during the third quarter of 2019 as compared to the third quarter of 2018. The year over year decreases in financing and commission income were driven by lower Automobile fee income from our exit of this line of business.
Expenses
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses (“LAE”) decreased $0.4 million, or 0.6%, to $62.1 million for the three months ended September 30, 2019, compared with $62.5 million for the same three-month period last year. The net loss ratio increased 7.7 percentage points, to 71.1% in the current quarter, as compared to 63.4% in the third quarter of 2018. The higher ratio was primarily the result of the increase in reinsurance spend, which reduces the net earned premium denominator of the loss ratio calculation. The third quarter of 2019 included $11.0 million of losses, related to catastrophe losses from Hurricane Dorian, Hurricane Barry and Tropical Storm Imelda ($8.0 million of these losses relate to non-Florida, which is subject to a 50% profit-sharing agreement, as discussed earlier), compared to the prior year quarter which included $6.1 million of catastrophe losses arising from Hurricane Florence and Tropical Storm Gordon. The remaining variance is driven by lower losses in the quarter in Automobile and commercial general liability lines as we exit those lines and higher ceded losses from homeowners Florida quota share in the quarter due to the higher percentage (as discussed earlier), partially offset by increased losses related to higher gross premiums earned in Homeowners.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other underwriting expenses for the periods presented:
| | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | |
| | 2019 | | 2018 |
| | (In thousands) | | |
Commissions and other underwriting expenses: | | | | |
Homeowners Florida | | $ | 13,187 | | | $ | 14,258 | |
All others | | 6,610 | | | 4,866 | |
Ceding commissions | | (3,203) | | | (689) | |
Total commissions | | 16,594 | | | 18,435 | |
| | | | |
Automobile | | — | | | 1,466 | |
Homeowners non-Florida | | 902 | | | 571 | |
Total fees | | 902 | | | 2,037 | |
| | | | |
Salaries and wages | | 2,696 | | | 3,147 | |
Other underwriting expenses | | 4,662 | | | 7,754 | |
Total commissions and other underwriting expenses | | $ | 24,854 | | | $ | 31,373 | |
Commissions and other underwriting expenses decreased $6.5 million, or 20.8%, to $24.9 million for the three months ended September 30, 2019, compared with $31.4 million for the three months ended September 30, 2018. The decrease was driven by higher ceding commissions from homeowners Florida quota share in the quarter due to the higher percentage (as discussed earlier), lower Automobile fees due to reduced premiums earned, and a reduction in other underwriting expenses as there was a benefit in the non-Florida profit share calculation this quarter as a direct result of $8.0 million of non-Florida weather-related losses (as previously discussed in the Losses and Loss Adjustment Expenses section), resulting in a $4.0 million reduction. These decreases were partially offset by higher homeowners acquisition related costs as a result of premium growth across periods.
The net expense ratio decreased 2.5 percentage points to 34.4% in the third quarter of 2019, as compared to 36.9% in the third quarter of 2018. Refer to the discussion above for more information.
General and Administrative Expenses
General and administrative expenses increased $0.2 million by 4.9% to $5.2 million for the three months ended September 30, 2019 compared to $5 million in the third quarter of 2018. The increase was the result of higher professional fees and other costs as compared to the prior year.
Interest Expense
Interest expense increased $0.9 million to $1.9 million for the three months ended September 30, 2019, compared with $1.0 million in the prior year period due to an increase in the outstanding debt. 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 taxes (benefits) decreased $2.3 million, to $0.7 million for the three months ended September 30, 2019, compared to $3.0 million for the three months ended September 30, 2018. The decrease in income tax expense is predominantly the result of lower income during the current quarter as compared to the third quarter of 2018. Additionally, in the quarter, 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 from 5.5% to 4.5%, effective January 1, 2019, which represented a benefit in the quarter. This new tax rate will be in place until at least December 31, 2021.
Operating Results Overview - Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018
The following overview does not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our shareholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations herein and in our 2018 Form 10-K.
The following table sets forth results of operations for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
| | September 30, | | | | |
| | 2019 | | % Change | | 2018 |
| | (Dollars in thousands) | | | | |
Revenues: | | | | | | |
Gross premiums written | | $ | 460,534 | | | 4.6 | % | | $ | 440,151 | |
Gross premiums earned | | 425,133 | | | (3.0) | % | | 438,239 | |
Ceded premiums | | (156,669) | | | (10.0) | % | | (174,080) | |
Net premiums earned | | 268,464 | | | 1.6 | % | | 264,159 | |
Net investment income | | 12,037 | | | 32.9 | % | | 9,058 | |
Net realized and unrealized investment gains (losses) | | 5,050 | | | 451.3 | % | | 916 | |
Direct written policy fees | | 7,308 | | | (31.6) | % | | 10,685 | |
Other income | | 13,115 | | | (11.6) | % | | 14,833 | |
Total revenues | | 305,974 | | | 2.1 | % | | 299,651 | |
| | | | | | |
Costs and expenses: | | | | | | |
Losses and loss adjustment expenses | | 194,284 | | | 24.5 | % | | 156,098 | |
Commissions and other underwriting expenses | | 75,650 | | | (17.3) | % | | 91,467 | |
General and administrative expenses | | 17,336 | | | 6.1 | % | | 16,345 | |
Interest expense | | 8,860 | | | 182.3 | % | | 3,139 | |
Total costs and expenses | | 296,130 | | | 10.9 | % | | 267,049 | |
| | | | | | |
Income (loss) before income taxes | | 9,844 | | | (69.8) | % | | 32,602 | |
Income tax expense (benefit) | | 1,940 | | | (77.4) | % | | 8,587 | |
Net income (loss) | | 7,904 | | | (67.1) | % | | 24,015 | |
Net income (loss) attributable to non-controlling interest | | — | | | (100.0) | % | | (218) | |
Net income (loss) attributable to FNHC shareholders | | $ | 7,904 | | | (67.4) | % | | $ | 24,233 | |
| | | | | | |
Ratios to net premiums earned: | | | | | | |
Net loss ratio | | 72.4 | % | | | | 59.1 | % |
Net expense ratio | | 34.6 | % | | | | 40.8 | % |
Combined ratio | | 107.0 | % | | | | 99.9 | % |
(1)Net loss ratio is calculated as losses and LAE 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 LAE 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of or For the Nine Months Ended September 30, | | | | | | | | | | | | | | |
| | 2019 | | | | | | | | 2018 | | | | | | |
| | Homeowners | | Automobile | | Other | | Consolidated | | Homeowners | | Automobile | | Other | | Consolidated |
| | | | | | | | (Dollars in thousands) | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | |
Total revenues | | $ | 284,685 | | | $ | 27 | | | $ | 21,262 | | | $ | 305,974 | | | $ | 269,395 | | | $ | 9,839 | | | $ | 20,417 | | | $ | 299,651 | |
Less: | | | | | | | | | | | | | | | | |
Net realized and unrealized investment gains (losses) | | — | | | — | | | 5,050 | | | 5,050 | | | — | | | — | | | 916 | | | 916 | |
Adjusted operating revenues | | $ | 284,685 | | | $ | 27 | | | $ | 16,212 | | | $ | 300,924 | | | $ | 269,395 | | | $ | 9,839 | | | $ | 19,501 | | | $ | 298,735 | |
| | | | | | | | | | | | | | | | |
Net Income (Loss) | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,981 | | | $ | (2,241) | | | $ | 2,164 | | | $ | 7,904 | | | $ | 23,529 | | | $ | (1,668) | | | $ | 2,372 | | | $ | 24,233 | |
Less: | | | | | | | | | | | | | | | | |
Net realized and unrealized investment gains (losses) | | — | | | — | | | 3,812 | | | 3,812 | | | — | | | — | | | 684 | | | 684 | |
Acquisition and other costs | | (237) | | | (5) | | | (532) | | | (774) | | | (1,183) | | | (69) | | | (126) | | | (1,378) | |
Gain (loss) on early extinguishment of debt | | — | | | — | | | (2,698) | | | (2,698) | | | — | | | — | | | — | | | — | |
Adjusted operating income (loss) | | $ | 8,218 | | | $ | (2,236) | | | $ | 1,582 | | | $ | 7,564 | | | $ | 24,712 | | | $ | (1,599) | | | $ | 1,814 | | | $ | 24,927 | |
| | | | | | | | | | | | | | | | |
Income tax rate assumed for reconciling items above | | 24.52 | % | | 24.52 | % | | 24.52 | % | | 24.52 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % | | 25.35 | % |
The following table summarizes our unaudited results of operations by line of business for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | | | | | | | | | |
| 2019 | | | | | | | | 2018 | | | | | | |
| Homeowners | | Automobile | | Other | | Consolidated | | Homeowners | | Automobile | | Other | | Consolidated |
| (Dollars in thousands) | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | |
Gross premiums written | $ | 447,642 | | | $ | (1) | | | $ | 12,893 | | | $ | 460,534 | | | $ | 414,914 | | | $ | 8,628 | | | $ | 16,609 | | | $ | 440,151 | |
Gross premiums earned | 412,409 | | | 26 | | | 12,698 | | | 425,133 | | | 403,579 | | | 17,876 | | | 16,784 | | | 438,239 | |
Ceded premiums | (145,438) | | | (20) | | | (11,211) | | | (156,669) | | | (150,722) | | | (13,350) | | | (10,008) | | | (174,080) | |
Net premiums earned | 266,971 | | | 6 | | | 1,487 | | | 268,464 | | | 252,857 | | | 4,526 | | | 6,776 | | | 264,159 | |
Net investment income | — | | | — | | | 12,037 | | | 12,037 | | | — | | | — | | | 9,058 | | | 9,058 | |
Net realized and unrealized investment gains (losses) | — | | | — | | | 5,050 | | | 5,050 | | | — | | | — | | | 916 | | | 916 | |
Direct written policy fees | 7,082 | | | 3 | | | 223 | | | 7,308 | | | 5,978 | | | 4,229 | | | 478 | | | 10,685 | |
Other income | 10,632 | | | 18 | | | 2,465 | | | 13,115 | | | 10,560 | | | 1,084 | | | 3,189 | | | 14,833 | |
Total revenues | 284,685 | | | 27 | | | 21,262 | | | 305,974 | | | 269,395 | | | 9,839 | | | 20,417 | | | 299,651 | |
| | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | 186,520 | | | 2,794 | | | 4,970 | | | 194,284 | | | 141,428 | | | 6,777 | | | 7,893 | | | 156,098 | |
Commissions and other underwriting expenses | 73,272 | | | 51 | | | 2,327 | | | 75,650 | | | 83,284 | | | 5,021 | | | 3,162 | | | 91,467 | |
General and administrative expenses | 14,320 | | | 150 | | | 2,866 | | | 17,336 | | | 13,361 | | | 275 | | | 2,709 | | | 16,345 | |
Interest expense | — | | | — | | | 8,860 | | | 8,860 | | | 100 | | | — | | | 3,039 | | | 3,139 | |
Total costs and expenses | 274,112 | | | 2,995 | | | 19,023 | | | 296,130 | | | 238,173 | | | 12,073 | | | 16,803 | | | 267,049 | |
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | 10,573 | | | (2,968) | | | 2,239 | | | 9,844 | | | 31,222 | | | (2,234) | | | 3,614 | | | 32,602 | |
Income tax expense (benefit) | 2,592 | | | (727) | | | 75 | | | 1,940 | | | 7,911 | | | (566) | | | 1,242 | | | 8,587 | |
Net income (loss) | 7,981 | | | (2,241) | | | 2,164 | | | 7,904 | | | 23,311 | | | (1,668) | | | 2,372 | | | 24,015 | |
Net income (loss) attributable to non-controlling interest | — | | | — | | | — | | | — | | | (218) | | | — | | | — | | | (218) | |
Net income (loss) attributable to FNHC shareholders | $ | 7,981 | | | $ | (2,241) | | | $ | 2,164 | | | $ | 7,904 | | | $ | 23,529 | | | $ | (1,668) | | | $ | 2,372 | | | $ | 24,233 | |
| | | | | | | | | | | | | | | |
Ratios to net premiums earned: | | | | | | | | | | | | | | | |
Net loss ratio | 69.9 | % | | NCM | | | NCM | | | 72.4 | % | | 55.9 | % | | 149.7 | % | | 116.5 | % | | 59.1 | % |
Net expense ratio | 32.8 | % | | | | | | 34.6 | % | | 38.3 | % | | | | | | 40.8 | % |
Combined ratio | 102.7 | % | | | | | | 107.0 | % | | 94.2 | % | | | | | | 99.9 | % |
Revenue
Total revenue increased $6.3 million, or 2.1%, to $306.0 million for the nine months ended September 30, 2019, compared with $299.7 million for the nine months ended September 30, 2018. The increase was primarily driven by higher net premiums from Homeowners due to gross premiums growth and lower reinsurance spend offset by lower revenue from Automobile as we exit the business, all of which are discussed below.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods presented:
| | | | | | | | | | | | | | |
| | Nine Months Ended | | |
| | September 30, | | |
| | 2019 | | 2018 |
| | (In thousands) | | |
Gross premiums written: | | | | |
Homeowners Florida | | $ | 347,320 | | | $ | 355,818 | |
Homeowners non-Florida | | 100,322 | | | 59,096 | |
Automobile | | (1) | | | 8,628 | |
Commercial general liability | | (121) | | | 5,519 | |
Federal flood | | 13,014 | | | 11,090 | |
Total gross premiums written | | $ | 460,534 | | | $ | 440,151 | |
Gross written premiums increased $20.3 million, or 4.6%, to $460.5 million for the nine months ended September 30, 2019, compared with $440.2 million for the nine months ended September 30, 2018. Gross premiums written increased primarily due to the growth in homeowners non-Florida, partially offset by the decline in the non-core businesses we are exiting, Automobile and commercial general liability, as well as a decline in homeowners Florida, partially offset by the growth in homeowners non-Florida.Florida. Our homeowners non-Florida business continues to show exceptional growth year over year, especially in the state of Texas, which is allowing us to leverage our infrastructure and diversify insurance risk. Overall, Homeowners grew 5.3%7.9%.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods presented:
| | | | | | | | | | | | | | |
| | Nine Months Ended | | |
| | September 30, | | |
| | 2019 | | 2018 |
| | (In thousands) | | |
Gross premiums earned: | | | | |
Homeowners Florida | | $ | 338,481 | | | $ | 356,507 | |
Homeowners non-Florida | | 73,928 | | | 47,072 | |
Automobile | | 26 | | | 17,876 | |
Commercial general liability | | 1,693 | | | 7,144 | |
Federal flood | | 11,005 | | | 9,640 | |
Total gross premiums earned | | $ | 425,133 | | | $ | 438,239 | |
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
| | (In thousands) |
Gross premiums earned: | | | | |
Homeowners Florida | | $ | 112,672 |
| | $ | 118,824 |
|
Homeowners non-Florida | | 21,170 |
| | 13,639 |
|
Automobile | | 22 |
| | 8,328 |
|
Commercial general liability | | 1,036 |
| | 2,629 |
|
Federal flood | | 3,467 |
| | 3,022 |
|
Total gross premiums earned | | $ | 138,367 |
| | $ | 146,442 |
|
Gross premiums earned decreased $8.0$13.1 million, or 5.5%3.0%, to $138.4$425.1 million for the threenine months ended March 31,September 30, 2019, as compared to $146.4$438.2 million for the threenine months ended March 31,September 30, 2018. The results are a reflection of our decision to exit the Automobile and commercial general liability lines, and were partially offset by a 1.0%2.2% increase in earned premiums in Homeowners.
Ceded Premiums Earned
Ceded premiums decreased $14.7$17.4 million, or 22.9%10.0%, to $49.6$156.7 million infor the quarter,nine months ended September 30, 2019, compared to $64.3$174.1 million for the same three-month period last year.nine months ended September 30, 2018. The decrease was primarily driven by lower excess of loss reinsurance spend in Homeowners and lower ceded premiums in Automobile as a resultwe have exited that line of decreases in premiums earned during the period.business.
Net Investment Income
Net investment income increased $0.8$2.9 million, or 26.1%32.9%, to $3.7$12.0 million during the threenine months ended March 31,September 30, 2019, as compared to $2.9$9.1 million during the threenine months ended March 31,September 30, 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 during the first quarter of 2018, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable municipal and corporate fixed income securities with higher coupon rates.repositioning.
Net realizedRealized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) increased $3.4 million, to $2.3were $5.1 million for the threenine months ended March 31,September 30, 2019, compared to $(1.1)$0.9 million in the prior year period. We recognized $2.3$3.0 million and $0.1$2.6 million in unrealized investment gains for equity securities during these respective periods. Our current year net realized gains and prior year net realized losses wereare primarily associated with our portfolio managers, under our control, moving out of positions due to theboth 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.securities during the first quarter of 2018.
Direct Written Policy Fees
Direct written policy fees decreased by $1.2$3.4 million, or 33.1%31.6%, to $2.4$7.3 million for the threenine months ended March 31,September 30, 2019, compared with $3.6$10.7 million induring the same period innine months ended September 30, 2018. The decrease in direct written policy fees is correlated to lower number of policies in-force in Automobile due to our decision to exit this line, as discussed earlier.
Other Income
Other income included the following for the periods presented:
|
| | | | | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | % Change | | 2018 |
| | (In thousands) |
Other income: | | | | | | |
Commission income | | $ | 458 |
| | (67.5 | )% | | $ | 1,409 |
|
Brokerage | | 3,134 |
| | (11.5 | )% | | 3,542 |
|
Financing and other revenue | | 419 |
| | (23.8 | )% | | 550 |
|
Total other income | | $ | 4,011 |
| | (27.1 | )% | | $ | 5,501 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
| | September 30, | | | | |
| | 2019 | | % Change | | 2018 |
| | (In thousands) | | | | |
Other income: | | | | | | |
Commission income | | $ | 2,466 | | | (35.6) | % | | $ | 3,827 | |
Brokerage | | 9,408 | | | 1.4 | % | | 9,274 | |
Financing and other revenue | | 1,241 | | | (28.3) | % | | 1,732 | |
Total other income | | $ | 13,115 | | | (11.6) | % | | $ | 14,833 | |
The declinedecrease 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 decrease is the result of lower excess of loss reinsurance spend from the reinsurance program, which became effective July 1, 2018.
Expenses
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses (“LAE”)LAE increased $20.7$38.2 million, or 45.1%24.5%, to $66.8$194.3 million for the threenine months ended March 31,September 30, 2019, compared with $46.1$156.1 million for the same three-month period last year. Homeowners losses increased $45.0 million during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, slightly offset by $6.0 million of decreases in Automobile and commercial general liability as we exit these lines, across the same period.
The net loss ratio increased 19.213.3 percentage points, to 75.3%72.4% in the current quarter,first nine months of 2019, as compared to 56.1%59.1% in the first quarternine months of 2018. The higher ratio was primarily the result of $19.0$46.7 million of weather-relatedlosses, net in 2019 from severe weather events in Florida and other states ($23.5 million of the 2019 losses relates to non-Florida, which is subject to a 50% profit-sharing agreement, as discussed earlier). Severe weather in 2018 amounted to $7.8 million. The remaining variance is the quarter, which included $18.7 millionresult of higher losses from the Marchhigher gross premiums in 2019 hail storm that passed through parts of Florida, including Brevard County.as compared to 2018.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other underwriting expenses for the periods presented:
| | | | Three Months Ended | | Nine Months Ended | |
| | March 31, | | September 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) | | (In thousands) | |
Commissions and other underwriting expenses: | | | | | Commissions and other underwriting expenses: | |
Homeowners Florida | | $ | 13,222 |
| | $ | 14,363 |
| Homeowners Florida | | $ | 39,810 | | | $ | 42,796 | |
All others | | 5,267 |
| | 4,800 |
| All others | | 17,796 | | | 14,488 | |
Ceding commissions | | (2,784 | ) | | (3,715 | ) | Ceding commissions | | (8,893) | | | (8,777) | |
Total commissions | | 15,705 |
| | 15,448 |
| |
Total commissions and other fees | | Total commissions and other fees | | 48,713 | | | 48,507 | |
| | | | | | | | |
Automobile | | 3 |
| | 1,467 |
| Automobile | | 3 | | | 4,229 | |
Homeowners non-Florida | | 676 |
| | 186 |
| Homeowners non-Florida | | 2,337 | | | 1,354 | |
Total fees | | 679 |
| | 1,653 |
| Total fees | | 2,340 | | | 5,583 | |
| | | | | | | | |
Salaries and wages | | 3,322 |
| | 3,766 |
| Salaries and wages | | 9,090 | | | 11,282 | |
Other underwriting expenses | | 8,528 |
| | 9,354 |
| Other underwriting expenses | | 15,507 | | | 26,095 | |
Total commissions and other underwriting expenses | | $ | 28,234 |
| | $ | 30,221 |
| Total commissions and other underwriting expenses | | $ | 75,650 | | | $ | 91,467 | |
Commissions and other underwriting expenses decreased $2.0$15.8 million, or 6.6%17.3%, to $28.2$75.7 million for the threenine months ended March 31,September 30, 2019, compared with $30.2$91.5 million for the threenine months ended March 31,September 30, 2018. The decrease is the result of a significant reduction in other underwriting expenses as there was a benefit in the non-Florida profit share calculation in the nine months as a direct result of $23.5 million of non-Florida weather related losses (as previously discussed in the Losses and Loss Adjustment Expenses section), resulting in a $11.8 million reduction.
Additionally, the lower Automobile fees and lower homeowners Florida commissions fromare driven by the corresponding change in premiums earned across periods. Additionally, lower other underwriting expenses was the result of a reductionThe decline in general operating costs,salaries and wages is due in part to our continued focus on operational efficiencies. These items are partially offset by higheran increase in homeowners non-Florida commissions and fees from increasedas a result of higher premiums earned.earned across periods.
The net expense ratio decreased 5.36.2 percentage points to 38.9%34.6% in the first quarternine months of 2019, as compared to 44.2%40.8% in the first quarternine months of 2018. The decrease in the ratio is primarily relatedattributable to the lower non-Florida profit share expense and other expense reductions as well as the lower reinsurance spend during the quarternine months driving higher net premiums earned. Refer to the discussion above for more information.
General and Administrative Expenses
General and administrative expenses increased $0.2$1.0 million, by 3.7%or 6.1%, to $6.3$17.3 million for the threenine months ended March 31,September 30, 2019, compared to $6.1with $16.3 million in the first quarter of 2018.prior year period. The slight increase was primarily the result of $0.6 million inhigher professional fees, including due diligence and other costs relatedrelating to the previously announced purchasepending acquisition of the Maison Companies, partially offset by the lower payroll and professional fees as compared to the prior year.previously discussed earlier.
Interest Expense
Interest expense increased $4.0$5.8 million to $5.1$8.9 million for the threenine months ended March 31,September 30, 2019, compared with $1.1$3.1 million in the prior year period primarily due to the result of $3.6 million of prepayment fees, including the write-off of remaining debt issuance costs, related toand an increase in the outstanding debt as a result of our repayment of the $45 million of Senior Notes issued in December 2017, during the quarter.first quarter 2019 borrowing. Refer to Note 13 and 78 of the notes to our Consolidated Financial Statements included herein, for additional information regarding thenew debt issued and debt retirement and new debt issued.that occurred in March 2019.
Income Taxes
Income taxes (benefits) decreased $3.8$6.7 million, to $(1.4)$1.9 million for the threenine months ended March 31,September 30, 2019, compared to $2.4with a tax expense of $8.6 million for the threenine months ended March 31,September 30, 2018. The decrease in income tax expense is the result of lower taxable income during the current quarter asnine months ended September 30, 2019, compared to the first quartercorresponding period in 2018. Additionally, in 2019, we recognized a benefit of 2018.$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.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of funds are gross written premiums, investment income, commission income and fee income. Our primary uses of funds are the payment of claims, catastrophe and other reinsurance premiums and operating expenses. As of March 31,September 30, 2019, the Company held $468.8$491.5 million in investments. Cash and cash equivalents increased $36.2$57.0 million, to $100.6$121.4 million as of March 31,September 30, 2019, compared with $64.4 million as of December 31, 2018, as discussed below, primarily due to the net proceeds of theour March 2019 debt offering, after redemption of our legacy $45 million principal amount. Total shareholders’ equity increased $2.6$22.1 million, to $217.9$237.4 million as of March 31,September 30, 2019, compared with $215.3 million as of December 31, 2018 due primarily to unrealized gains on our bond appreciation recognized during the first quarter of 2019, partially offset byportfolio and net loss.income.
Historically, we have met our liquidity requirements primarily through cash generated from operations. On March 5, 2019, the Company closed on an offering of $100 million of Senior Unsecured Notes due 2029, which bear interest at the annual rate of 7.5%. The net proceeds of the offering were in part used to redeem all $45 million of the Company's Senior Unsecured Fixed Rate Notes due 2022 and the Company's Senior Notes due 2027. Additionally, the remaining cash from the offering will be used to purchase the Maison Companies and for and other general corporate purposes, including potential repurchases of shares of our common stock and managing the capital needs of our subsidiaries. Refer to Notes 13 and 78 to the notes to the Consolidated Financial Statements included herein, for additional information regarding the 2029 Notes as well as the pending acquisition of the Maison Companies.
Among other things, the 2029 Notes contain customary covenants that limit the Company's ability to enter into certain operational and financial transactions, including, but not limited to incurring additional debt above certain thresholds. The Company's actual debt to capital ratio as of March 31,September 30, 2019 was approximately 31%29%.
Statutory Capital and Surplus of Our Insurance Subsidiaries
As described more fully in Part I, Item 1. Business, Regulation of our 2018 Form 10-K, for discussion of the Company’s insurance operations are subject to the laws and regulations of the states in which we operate. The Florida OIR and theirits regulatory counterparts in other states utilize the National Association of Insurance Commissions (“NAIC”) risk-based capital (“RBC”) requirements, and the resulting RBC ratio, as a key metric in the exercise of their regulatory oversight. The RBC ratio is a measure of the sufficiency of an insurer’s statutory capital and surplus. In addition, the RBC ratio is used by insurance industry ratings services in the determination of the financial strength ratings (i.e., claims paying ability) they assign to insurance companies. As of September 30, 2019 and December 31, 2018, FNIC’s statutory surplus was $150.9 million and $161.7 million, and as of March 31, 2019, our statutory capital of FNIC was $154.7 million.respectively.
Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its 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 and MNIC's ratios of statutory surplus to its ACL waswere 329.9% and 774.4%, respectively, as of December 31, 2018.
Cash Flows Discussion
We believe that existing cash and investment balances, when combined with anticipated cash flows and the proceeds of our debt offering as described above, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future. We believe the combined balances will be sufficient to meet our ongoing operating requirements and anticipated cash needs, and satisfy the covenants in our senior notes. Future growth strategies may require additional external financing and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that any such financing would not negatively impact our results of operations. We expect to continue declaring and paying dividends at comparable levels, subject to our future liquidity needs and reserve requirements.
Subject to our compliance with capital requirements as described above, we may consider various opportunities to deploy our capital, including repurchases of our common stock if such repurchases represent a more favorable use of available capital.
Operating Activities
Net cash used inprovided by operating activities decreased to $6.8$26.4 million in the threenine months ended March 31,September 30, 2019 compared to net cash provided of $12.4$28.3 million in the same period in 2018. This decrease reflects higher expenses paid, including those related to losses and loss adjustment expenses, and lowerpartially offset by higher net premiums collected, in the first threenine months of 2019 as compared to the corresponding period in 2018.
Investing Activities
Net cash used in investing activities of $6.5$16.7 million in the threenine months ended March 31,September 30, 2019 reflected purchases of debt and equity investment securities of $64.9$175.1 million, partly offset by sales, maturities and redemptions of our debt and equity investment securities of $59.0$160.0 million. Net cash used in investing activities of $15.3$15.2 million in the threenine months ended March 31,September 30, 2018 reflected purchases of debt and equity investment securities of $143.9$262.5 million, partly offset by sales, maturities and redemptions of our debt and equity investment securities of $128.7$248.3 million.
Financing Activities
Net cash provided by financing activities for the threenine months ended March 31,September 30, 2019 of $49.4$47.3 million primarily reflects issuance of long-term debt, net of issuance costs, of $98.5$98.4 million, partly offset by payment of long-term debt of $48.0 million. Net cash used in financing activities of $27.8$29.9 million for the threenine months ended March 31,September 30, 2018 primarily reflects the purchase of non-controlling interest of $16.7 million, payment of long-term debt of $5.0 million, and repurchase of our common stock of $5.0$5.1 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and thereby materially adversely affect future liability requirements.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may materially differ from those estimates.
We believe our most critical accounting estimates inherent in the preparation of our financial statements are: (i) fair value measurements of our investments; (ii) accounting for investments; (iii) premium and unearned premium calculation; (iv) reinsurance contracts; (v)
the recoverability of deferred acquisition costs; (vi) reserve for loss and losses adjustment expenses; and (vii) income taxes. The accounting estimates require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.
There have been no significant changes to our critical accounting estimates during the threenine months ended March 31,September 30, 2019. Refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” included in our 2018 Form 10-K for a more complete description of our critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity and minimizing risk. Our current investment policy limits investment in non-investment-grade debt securities (including high-yield bonds), and limits total investments in preferred stock, common stock and mortgage notes receivable. We also comply with applicable laws and regulations that further restrict the type, quality and concentration of our investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages.
Our investment policy is established by the Board of Directors' Investment Committee and is reviewed on a regular basis. Pursuant to this investment policy, as of March 31,September 30, 2019, approximately 96%97% of investments were in debt securities and cash and cash equivalents, which are considered to be either held-until-maturity or available-for-sale, based upon our estimates of required liquidity. Approximately 99% of the debt securities are considered available-for-sale and are marked to market. We may in the future consider additional debt securities to be held-to-maturity securities, which are carried at amortized cost. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.
There have been no material changes to the Company’s exposures to market risks since December 31, 2018. Please refer to the 2018 Form 10-K for a complete discussion of the Company’s exposures to market risks.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, due to the control matter discussed below in “Changes in Internal Control over Financial Reporting”, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31,September 30, 2019.
Notwithstanding the identified material weakness, we believe the consolidated financial statements included in this Form 10-Q fairly represent in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented.
Changes in Internal Control over Financial Reporting
ThereRecently, as part of a substantially completed investigation, the Company identified a control deficiency resulting primarily from inadequate managerial review by a subset of our claims team around processing of follow-on payments on closed claims of less than $30 thousand. In the course of investigating this matter, we identified fifteen inappropriate payments totaling approximately $0.3 million, which occurred between June and October 2019. As a result of our substantially completed investigation, we concluded that no other inappropriate payments occurred. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. While this deficiency did not result in a material misstatement of the Company’s financial statements, the Company’s management, with the oversight of the Audit Committee of our Board of Directors, concluded that this deficiency rises to the level of a material weakness, as it had the potential to allow for a material dollar amount of inappropriate claim payments to be made without being detected.
To remediate the material weakness, we are strengthening the level and scope of managerial review of claim payment controls related primarily to follow-on payments on closed claims of less than $30 thousand as well as enhancing compensating controls around access and authority limits. Additionally, we are improving the segregation of responsibilities across the claim payment process, which will add additional layers of management review. The material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by the end of fiscal year 2019.
Except as noted above, there were no changes in our internal control over financial reporting that occurred during the three months ended March 31,September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness
Our management and our audit committee do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control gaps and instances of fraud have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 910 to our Consolidated Financial Statements set forth in Part I, “Financial Statements” for information about legal proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s 2018 Form 10-K. Please refer to that section for disclosures regarding what we believe are the most significant risks and uncertainties related to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities. The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended September 30, 2019 by or on behalf of FNHC:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(c) | Issuer Purchases
| | | | | Total Number of Equity Securities. The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended March 31, 2019 by or on behalf of FNHC. All purchases were made in the open market in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act. | | Approximate Dollar |
|
| | | | | | | | | | | | | | |
| | | | | | Total Number of | | Approximate Dollar |
| | Total Number | | Average | | Shares Purchased | | Value of Shares That |
| | of Shares | | Price Paid | | as Part of Publicly | | May Yet Be Purchased |
| | Repurchased | | Per Share | | Announced Plans | | Under the Plans (1) |
January 2019 | | — |
| | $ | — |
| | — |
| | $ | 10,000,000 |
|
February 2019 | | — |
| | — |
| | — |
| | 10,000,000 |
|
March 2019 | | — |
| | — |
| | — |
| | 10,000,000 |
|
| | Total Number | | Average | | Shares Purchased | | Value of Shares That |
(1) | | of Shares | | Price Paid | | as Part of Publicly | | May Yet Be Purchased |
| | Repurchased | | Per Share | | Announced Plans | | In December 2018,Under the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million of its outstanding shares of common stock through December 31, 2019. As of March 31, 2019, the remaining availability for future repurchases of our common stock was $10.0 million.Plans(1)
|
July 2019 | | — | | | $ | — | | | — | | | $ | 10,000,000 | |
August 2019 | | — | | | — | | | — | | | 10,000,000 | |
September 2019 | | — | | | — | | | — | | | 10,000,000 | |
(1)In December 2018, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million of its outstanding shares of common stock through December 31, 2019. As of September 30, 2019, the remaining availability for future repurchases of our common stock was $10.0 million. Any such purchases would be made in the open market in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
|
| | | | |
Exhibit No. | Description |
31.110.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6 | |
10.7 | |
10.8 | |
10.9 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document***** |
101.SCH | XBRL Taxonomy Extension Schema Document***** |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document***** |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document***** |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document***** |
________________________
* Filed herewith. Certain identified information has been omitted from this exhibit in accordance with and as permitted by Item 601(b)(10)(iv) of Regulation S-K.
** Incorporated by reference to the comparable exhibit included in the Current Report on Form 8-K filed with the SEC on August 12, 2019.
*** Incorporated by reference to the comparable exhibit included in the Current Report on Form 8-K filed with the SEC on August 13, 2019.
**** Filed herewith.
***** In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of Exchange Act, except as shall be expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | |
| FEDNAT HOLDING COMPANY | | |
| | | |
| By: | /s/ Michael H. Braun | |
| | Michael H. Braun, Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
| | /s/ Ronald Jordan | |
| | Ronald Jordan, Chief Financial Officer | |
| | (Principal Financial Officer) | |
Date: May 8,November 12, 2019