Federated National (FNHC) Earnings

Federated National Holding Company (FNHC), a company I wrote about over a month ago, reported first quarter earnings last Thursday. Results were great as revenue increased almost 50% and earnings per share increased 123%. Shares were up over 13% on Friday.

Even though the stock is up over 25% from the time I purchased it, I believe there still be more upside left. During the conference call, the CFO stated that business is booming in the current quarter. Last quarter, they were writing $2 million in new business a week. Just last week, they wrote $3.5 million in new business and are on pace to do the same this week. Here is what Peter J. Prygelski, the CFO said:

“I can tell you things weren’t trending favorably for a quite awhile where we used to write a $1 million and then went to $2 million, clearly since we’ve turned on all state, volume has increased. We’ve had more underwriters and more adjusters. I have no reason to believe that flow of premium will slow down. We’ve been at that – we’ve been kind of got up to that level of $3.5 million and I think we are going to hit probably close to that again this week.”

All my previous points remain in tact about FNHC. So, I will continue to hold the shares. The only concern I have is that hurricane season in Florida is approaching and a bad season is always scary for insurers. 

Homeowners Choice (HCI)

Another Florida insurer that has done quite well (much better than FNHC) has been Homeowner Choice (HCI). Even though, I own their bonds, I have concerns about this company:

  • The company was founded in 2006. It does not have much of a track record during the worst hurricanes seasons (2004-2005)
  • HCI has grown solely from assuming policies from the state owned Citizens and defunct companies such as Homeowners Choice. They have assumed policies from them in November of 2011 and 2012 (conveniently after hurricane season). Because hurricane seasons have been tame, the company has done quite well from assuming these policies. Look for them to do the same this year in November. If they don’t, expect revenue and earnings to decline.
  • Company trades at over 2.5 time book value (expensive for an insurance company).They hold most of their assets in cash and do not earn much money from investment income.
  • The company has 20% of their float shorted.
  • Nobody knows how profitable the assumed policies are due to the tame hurricane seasons. Also, the certain Citizens policies have restrictions on rate hikes. 

I don’t see much upside left in this stock. In fact, the company could in for a huge fall if:

  • A major hurricane hits Florida and we find out how profitable/risky these assumed policies are. To quote Warren Buffett, “You never know who’s swimming naked until the tide goes out”
  • At some point, they will not be able to assume policies from Citizens. At this point, expect earnings and revenue to decline.

Buying puts on this stock might be a good strategy.

Disclosure: I am long FNHC and HCJ 

2 thoughts on “Federated National (FNHC) Earnings

  1. UIHC is a solid Florida insurerer diversifying into new states and has been operating since 1999. It trades at book and earns a solid 15% ROE and unlike HCI, only selectively acuires policies from Citizens.

    • UIHC – I think the industry is lifted by Citizens dumping their policies. We will know which companies are writing good policies when a hurricane hits.

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