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Executives

Jim Scardino - Deputy Chairman & Chief Executive Officer

Joe Taylor - Chief Financial Officer

Mark Collinson - Partner, CCG Investor Relations & Strategic Communications

Analysts

Matt Carletti - Fox-Pitt Kelton

Gregg Hillman - First Wilshire Securities

Robert Bolton [ph] - Benton Capital

CRM Holdings Ltd. (CRMH) Q3 2009 Earnings Call November 5, 2009 9:00 AM ET

Operator

Good day everyone and welcome to today’s CRM Holdings third quarter 2009 financial results conference call. Today’s conference is being recorded. For opening remarks and introduction, I would like turn today’s conference over to Mr. Mark Collinson, with CCG Investor Relations. Please go ahead sir.

Mark Collinson

Thank you, Lisa. Good morning everyone and welcome to the CRM Holdings Limited third quarter fiscal 2009 conference call. With us today as usual are CRM’s Chief Executive Officer, Jim Scardino; and its Chief Financial Officer, Joe Taylor.

Before I turn the call over to Jim, I’d just like to remind listeners that during today’s call management’s remarks may contain forward-looking statements within the meaning of the Federal Securities Law, including statements concerning plans, objectives, goals, strategies and projections of future events or performance and underlying assumptions, many of which are based in turn on further assumptions. Also, forward-looking statements involve risks and uncertainties.

Although CRM believes its plans, intentions and expectations are reasonable, it may not achieve those plans, intentions or expectations. There are or may be important factors that could cause actual results to differ materially from the forward-looking statements made in this conference call and such risks and uncertainties are discussed in the company’s Form 10-K for the year ended December 31st, 2008 and in other documents filed by the company with the Securities and Exchange Commission.

These factors include but are not limited to the following, the cyclical nature of the insurance and reinsurance industry, premium rates, investment results, regulatory changes, the estimation of loss reserves and loss reserve development, the occurrence and effects of wars and acts of terrorism, and the effects of competition, the possibility that the outcome of any litigation or arbitration proceeding is unfavorable, failure to retain key personnel, economic downturns, and natural disasters.

These risks and others could cause actual results to differ materially from those expressed in any forward-looking statements made. Any projections as to the company’s future financial performance represent management’s estimates as of today, November the 5th, 2009, and CRM assumes no obligation to update those projections in the future due to changing market conditions or otherwise.

The information provided today may also contain certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures is included in the press release we issued this morning.

Now, it’s my pleasure to turn the call over to the company’s CEO, Jim Scardino.

Jim Scardino

Thank you very much Mark, and good morning everyone. Thank you for joining us. Our bottom line results for this quarter is a startling number and until one realizes that tax considerations account for much of our loss. After careful examination, we decided it was appropriate to establish a reserve against a deferred tax asset that we have been carrying.

While this entry had no economic or operating effect, it resulted in an increase to tax expense of $11.3 million for the quarter. We took this action not because we do not expect profits in the future, because we definitely do expect to be profitable, but because accounting principles mandate a conservative presentation of deferred taxes. Notwithstanding the valuation allowance, loss carry forwards will be available to offset income taxes for up to 20 years.

Our operating results for the quarter were up due staged by several factors originating in prior periods. We recognized $3.1 million of reinstatement premiums rising from our 2008 excess of loss reinsurance contracts. We absorbed $1.4 million of reserve development from 2008 and we assumed about $1 million in losses from NCCI pools.

These items reduced our net earned premiums and increased incurred losses, turning logistics 2009 accident year loss ratio of 81% into a calendar year loss ratio of a 112%. So you can see that beneath the calendar year, we actually had a palatable quarter result, that underlying performance is encouraging. In addition, we have a strong forward business opportunities from a terrific broker network in California.

Our hit ratios bear a testimony to our selectivity and we are realizing pricing improvement and very good renewal retentions. We have taken underwriting actions on our East Coast business resulting in improved loss ratios. Our forward business opportunity in New York has diminished due to our pricing limitations and legacy issues, but the enthusiasm of and submissions from our New Jersey brokers are quite strong.

I’m also pleased that our operating expenses are being managed downward and we’re continuing to make strides. In fact, our 2010 expense reduction efforts are being led by the decision of our management team and Board of Directors to take voluntary pay cuts. We are also being aggressive with other cost reduction efforts that will move the company closer to our goal of an expense ratio in the mid 20% range.

I’ll be back with some additional comments, but first, Joe will talk about our results in more detail. Joe.

Joe Taylor

Thanks, Jim. Good morning, everyone. In the third quarter of 2009, the company incurred a net loss from continuing operations of $15.7 million or $0.93 per diluted share. In the same quarter of the prior year, the company incurred a net loss from continuing from operations of $2.9 million or $0.18 per diluted share.

As Jim mentioned, the net loss includes a non-cash, full evaluation allowance of $11.3 million or $0.72 per diluted share on its net deferred tax asset, this relates to tax loss carry forwards which remain available to offset taxes over the next 20 years. Total revenues in the quarter of 2009 were $21.8 million compared to $29.2 million in the same quarter of the prior year. There were three principal reasons for the decline.

First, underwriting actions taken on business written by Majestic reduced business in New York by $2.8 million. Second, the execution of quota share treaties effective July 1st, between Majestic and third party reinsurers resulting in seeding 47% of earned premiums compared to seeding 40% in the third quarter of 2009. This additional fee impacted net premiums earned by approximately $2.5 million.

Finally, prior year loss sensitive reinsurance treaties required the accrual of additional premiums payable of $3.1 million. These are known in the industry as reinstatement premiums. Investment income during the quarter increased to $3.5 million from $2.9 million in the third quarter of 2008 due to higher realized capital gains, while interest income was relatively unchanged from 2008.

Total underwriting expenses for the third quarter declined to $20.9 million from $23.8 million a year ago, loss and loss adjustment expenses are reduced due to the new seeded quota share treaty. For the third quarter of 2009, the company’s overall loss ratio was 99% and overall combined ratio was 142%, as compared to an overall loss ratio of 81% and an overall combined ratio of 124% for the third quarter of 2008.

Losses included $1.4 million of net unfavorable development in 2009 compared to $1.6 million of net favorable development in 2008. The 2009 development is comprised of $1.9 million of adverse development in our primary business, which is largely from the 2008 accident year offset by $600,000 of favorable development in our reinsurance operations. Loss from continuing operations before taxes was $7.3 million compared to a loss of before taxes of $5.3 million in the third quarter of 2008.

Now I’ll discuss our individual business segments. In our primary insurance business, Majestic experienced a decline in revenues compared to the same quarter of 2008. Net earnings premiums for the quarter ended September 30th were $14.1 million compared to $20.5 million in the same quarter a year ago.

Largely as a result of the three items mentioned previously, namely underwriting actions taken on the company’s New York primary insurance business, (inaudible) 7% seeded quota share treaties and the reinstatement premiums. These effects were partly offset by higher rates on renewing business and growth in the number of policies written in California. As of September 30, 2009 in-force premiums from primary insurance policies were $152 million compared to $154 million last year.

The loss ratio over 2009 third quarter 112% was impacted by the effects of reinstatement premiums and the $1.4 million of prior year development. Excluding those items, the loss ratio for the third quarter of 2009 was 81%. Majestic’s underwriting loss was $8.2 million for the quarter ended September 30, 2009 compared to an underwriting loss of $6.9 million a year ago.

Turing to our reinsurance business, Twin Bridges’ generated $3.2 million of net earned premiums in the third quarter of 2009, down from $4 million a year ago. The reduction was principally due to a decrease in the volume of reinsurance premiums and on excess insurance policies issued to the self-insured groups managed by the company’s Fee-Based business segment.

The underwriting profit of $900,000 for the quarter was essentially unchanged from the same quarter of 2008. Twin Bridges’ combined ratio for the quarter was 71% as compared to 77% a year ago.

Finally, in our Fee-Based business, revenues were $1.1 million for the third quarter of 2009 compared to $2 million last year. The reduction reflected a decline in insured payroll and a contraction in the number of groups from five to two. This segment broke even for the quarter. Effective January 1, 2010 the contractor’s Access Program Self-Insured Group will terminate active operations.

Turning to the balance sheet, as of September 30th, we held $36.6 million in cash and cash equivalent compared to $30 million at year-end. Our investments portfolio stands at $319.7 million and is comprised entirely of fixed income securities.

The portfolio has an average credit rating of AA plus with an effective duration of 3.4 years and an average portfolio yield of 3.7%. Our portfolio contains no equities or structured debt products. At quarter-end, the shareholders’ equity was $85 million compared to 108.9 million at year-end. Our book value per share is $5.4.

Now, I will turn the call back over to Jim for some final remarks. Jim.

Jim Scardino

Thank you, Joe. So, if everything had gone as we expected, we still would have lost money in the quarter albeit far less than we did. Without the valuation reserve, the reinstatement premiums, the adverse development and assumed pool losses, our pretax loss would be have been about $1.9 million.

As you all know, Majestic has had to rely on quota share reinsurance for the past five quarters in order to achieve a credit score sufficient to retain its A minus rating. While necessary at the present time to maintain our rating, quota share reduces profitability and makes little economic sense. In fact, as long as we must rely on quota share reinsurance, we will find it difficult to earn the profit.

Our choice is to shrink our business or increase our capital so as to support our current business and enable us to grow in the impending hard market. We believe the former path is a dead-end for shareholder value but the latter will enable us to achieve profitability and a rise in stock price. While we have enlisted the assistance of our bankers to help us examine alternatives for enhancing our capital position, the hard fact is that until the current investigations of the company are at least clarified, if not resolved all together, we are unlikely to be successful in raising addition capital.

Despite this limitation and uncertainty, we are holding our own in an intensely competitive environment and believe that we have resilience to perform our best in 2010. We will have a lower cost base, robust submission flow, better rates for our next renewals and a chance to start another year writing good business. Working within the constraints we have, we continued to focus on fundamentals. We think we can strengthen our position in the New York and New Jersey markets and anticipate enjoying the full effects of stronger pricing in California.

In some, we like our prospects and we like them even more if we can clear the path for enhancing capital. We thank all of you for your interests and thank our shareholders for your continued support.

Now, Joe and I will take your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Matt Carletti with Fox-Pitt Kelton; please go ahead sir.

Matt Carletti - Fox-Pitt Kelton

Hi, good morning.

Jim Scardino

Hi, Matt.

Matt Carletti - Fox-Pitt Kelton

A couple of question, one, it relates to the fee business, the SIGs and in the release you talked about how essentially going forward you’ll be down to one SIG in California. What are the plans for that business, I mean, it doesn’t seem like right now it’s the time where insurers elect to go that route given that is a pretty soft market, and one SIG doesn’t seem like a cost effective business operation. What’s the longer term plans for that business?

Jim Scardino

That’s a good question, thank you. We obviously, the product, so group self insurance is a product that does very well in hard markets. It is difficult in soft markets, because the capital structure and these things are such that you cannot go down as far as the voluntary writers or state funds are willing to do.

We cannot go down that far and maintain the financial integrity of these groups. The record speaks for itself. 2010, we’ll have one self insurance group. It is a sizable group. It is in an industry sector that is somewhat less elastic, let’s say in cycles, and it’s a group that we understand.

We plan to continue to manage if the economics are such that we were able to do that with a staffing infrastructure that is not uneconomic for us. We don’t want to abandon the fee business all together because we think in the future there may be some prospect, perhaps not in group self insurance, but in some other fee-related businesses to reinvigorate the segment.

Matt Carletti - Fox-Pitt Kelton

Okay, and then I guess the second question is, you talked about how really right now the road block to getting a capital infusion is the Attorney General, can you give us any update you can just on where that stands or what your communications have been and any sort of indication of timing if that at all possible?

Jim Scardino

Yes, we’ll have to further the disclosures in our Q. The investigation is ongoing. There had been no formal suit or nor indictments. The Attorney General has continued to ask for information. Our counsel has been in contact with the Attorney General’s Office, but the process at this point, it must still be described as a request for information and the evaluations that are going on at the AG’s office. I wish I could give the timeframe.

We at this stage, we do not know what will come out of this investigation if anything and the uncertainty obviously is a bit of a headwind when as we try to steer the company forward. But if we have to steer yourself and other listeners to the disclosure in the 10-Q, which is lot much more than what I just said.

Matt Carletti - Fox-Pitt Kelton

Okay. Thanks Jim.

Jim Scardino

Thanks a lot, Matt.

Operator

We’ll take our next question from Gregg Hillman with First Wilshire Securities Management.

Gregg Hillman - First Wilshire Securities

Yes, good morning, gentlemen. Could you help me with I guess a couple of definition, what’s the reinstatement premium?

Joe Taylor

Okay. Thanks Gregg. Reinsurance treaties are contracts whose price is sometimes a hard and fact amount or hard and fast amount and sometimes dependant on ceded loss results. In the case of our 2008 reinsurance contracts, some of the contracts written such that when losses are paid from them, there is an additional premium due to in effect reinstate or maintain the coverage offered by that layer.

So, in the case of our 2008 excess of loss treaty, this gets perhaps, it will takeover the first layer, that is the part of these contracts that cover losses that go from a million and from $500,000 to $2 million. That million and a half layer are written such that when losses are paid from there, there is a reinstatement premium due.

Obviously, we have no losses have been paid at that level yet from 2008, but our actuarial evaluation is that we are ceding IBNR or Incurred But Not Reported loss reserves to those treaties and even though, the premiums will not be paid until those losses are paid, which is likely to be many years from now.

We still have to approve the additional premium that will be paid to reinsurers when they reimburse us for losses in excess of that $500,000. I hope that was clear enough, did that make sense Gregg?

Gregg Hillman - First Wilshire Securities

Is that a cash charge or is that a just sort of accounting charge?

Joe Taylor

At this point, it’s an accounting charge. As I said it is unlikely that these losses, because you are talking about losses in excess of $500,000, both these comp claims are composed of medical payments and indemnity payments.

Typically, indemnity payments are $700 per week and if you are paying $20,000 a year in indemnity, you can see that it would take over 20 years to reach $500,000 paid in indemnity. Medical is a little different question, that can be a lot of money very, very early on in the claim, but for the most part, we do not expect that these reinstatement premiums if they will ultimately paid at all will be paid for many years.

Gregg Hillman - First Wilshire Securities

Okay, and the valuation reserve, what was that?

Joe Taylor

We were carrying a deferred tax asset on our books of about $12 million. GAAP accounting, if Joe you can jump on this, but GAAP accounting essentially requires that the recoverability of those be pretty eminent. We have to have a record and a realistic expectation within the next few years we are going to generate net income sufficient to amortize that.

So, that would suggest that our net income over the next few years would need to be 35 to $40 million. We cannot realistically forecast 35 to $40 million in the next three years. So that the asset is there it is reserved against and the effect of this is that, as we do earn a profit in the future, we do have an asset that will come back on the books to offset the federal income tax that will be due on those profits, but we are not just able to recognize it has a current asset on our financial statement set at this point in time.

Gregg Hillman - First Wilshire Securities

Okay, and in terms of just a couple of other points, just in terms of profitability you mentioned you are going to kind of hunker down and are basically you are going to try to operate it at breakeven situation until these investigations are going to get cleared up or be able to operate above breakeven?

Jim Scardino

Well, obviously we want to operate as profitably as we possibly can. Realistically, given the stage in the market cycle that the workers comp product is in the markets we operate in California, New York, New Jersey. And the effect of our quarter share, I don’t want to sound like I’m trashing this whole idea of quarter share obviously, it’s necessary for us to maintain our best rating.

The down side of it is that while you are symmetrical on losses on these things, the expense ratios are not symmetrical. We incurred about 6 points of premium to manage our claims and somewhere in the low 30s, 32 or so to 34 to run the rest of the company including agents, commissions, premium, taxes other underwriting and so forth. So that’s a somewhere around 38% to 40% of premium.

For expense of 38% let’s say the reimbursement quota share is 25, so you can see we are running about a 12 or 13 point deficit on the expense side, and that when you are talking about the $16 million seeded that is somewhere around $7 million per year in expenses that we are incurring for the benefit of our quota share partners. So that is the 7% bogie that’s pretty tough overcome with you, if you excise the quota share right way you would have $7 million profit or it seems to be in equal.

So as I said in the note, these are not making economic sense, but they are important from a leverage management and from credit, of the credit scoring aspect and that’s the situation we found ourselves in at the moment.

Gregg Hillman - First Wilshire Securities

Okay, again so, but in that shale, does that bring you to breakeven or that’s brings you little below breakeven on ongoing basis?

Jim Scardino

We would be low - probably not much better than breakeven ongoing, with the quota share in place, I believe given where the current loss ratios are in the immediate future we’re talking about a no better than breakeven as we’re going along we’re seeing pricing getting firmer, it’s takes a while for us the term of prices to work their way all the way through you’re book of business. We do expect that our loss ratios will decline to the point that even with quota share we will be profitable, but its not going to be in this next quarter.

Gregg Hillman - First Wilshire Securities

Okay, but it would be in the next year or two?

Jim Scardino

We are hopeful that by the latter part second half of 2010 we’re going to see the full effects of the pricing in place and that may lead to a net profit.

Gregg Hillman - First Wilshire Securities

Okay thanks, I’ll get back to the queue. Thanks.

Jim Scardino

Thanks Gregg.

Operator

(Operator Instructions). We’ll take from Robert Bolton [ph] next with Benton Capital.

Robert Bolton - Benton Capital

Hi, good morning Jim.

Jim Scardino

Bob, how are you?

Robert Bolton - Benton Capital

Good. Thank you. Unfortunately, at this point I can only applaud you guys for being consistent that is to say we don’t share your optimism. We’re again disappointed on the core earnings strength. There is been what I consider further erosion to shareholder value and we don’t really hear much of a rational tactical plan into the future in the near or immediate future that is.

I have three quick questions, I would like to ask them all at once and then hear your respond accordingly. I am not sure, if I missed the press release previously, we’ve been talking a lot about quota share this morning, but I know in previous quarters, we’ve talked about getting rid of all together quota share instead we are greeted this morning with an 18% increase, I am not sure I missed a press release that was put out in June or July when that all took place.

If it did take place and if it didn’t, I would like to know why? I think that’s pretty material. I know you talked also about the near opportunity general status, I think this was our sense that we are not aggressively pursuing getting rid of it instead we are passively waiting for them to ask for information instead of being proactive instead of reactive and I would like to know why because I think that’s a big barrier to again at least you for why not getting them off your back?

Then lastly, I would like to hear what discussions have been held as an alternative strategy with regard to breaking the company up all together because I think clearly with you guys trading at 20% book value you were at probably more to at some long-term shareholders fragment and then broken up in your as a going concern? So I thank you and I look forward to your answers.

Jim Scardino

Okay. Just responding in order, I believe we met in March or April Robert, and at that time we were hopeful that the credit score requirements which are known by our rating agency BCAR, Best Capital Adequacy Ratios, that given some changes in the company that those would be lightened a bit. Best determined that that was not going to be the quarter of the day for 2009 and perhaps longer, they required that we maintain our BCAR score at the level that they have mandated during 2008 for that reason.

We were required to continue to purchase quota share and the amount of quota share needed to maintain BCAR based on the best estimates or actuaries and reinsurance intermediaries is the 47% treaty, that approximate treaty that is in place, that’s what we want. It doesn’t make economic sense, we all agree with that, but that’s the reality. The most important thing we have growing forces of A minus leading in, is imperative that we retain it.

With the AG, I’m not going to comment on that to you, with all the respect Robert. You don’t know what we’re doing, what conversations were taken place and I am not about to disclose them.

Then finally, to break the company up, this is not the time to do it. We are not in place to do it; whether that’s the right thing to do or not, this is not the time to do it. Until the regulatory, investigatory and legal issues are resolved, any action that involves the shareholders of our company could be jeopardized, and we do not want to jeopardize the value that our shareholders have in this company and we are where. It’s not our making, but that’s the situation we are in and we are just kind of have to deal with it.

Operator

And Mr. Bolton, do you have any further question?

Robert Bolton - Benton Capital

No, I’m just sitting here with my jaw and my desk, but thank you very much.

Operator

Thank you. We’ll take our next question and follow up question from Gregg Hillman with First Wilshire Securities Management.

Gregg Hillman - First Wilshire Securities

Okay, just getting back to law suites again, there is civil law suite from the self-insured group or groups in New York, and then the AG investigation, is that correct, that’s the two major ones?

Jim Scardino

Those are the two categories, yes.

Gregg Hillman - First Wilshire Securities

Okay. Then did you comment in the call anything about the civil one, what was going on with that?

Jim Scardino

No, we didn’t.

Gregg Hillman - First Wilshire Securities

Are you able to or…

Jim Scardino

Well, there’s been no activity on the losses that were filed, that were described in the previous 10-Q. There’s been zero action or activity. During the quarter there were two additional losses received on behalf of two other self-insurance groups, so that we now have four lawsuits that have been filed. There was one that was dismissed, that had been filed on behalf of one of our self-insurance groups, but currently there are four that have been filed. I believe they are all in Erie County and they are in the initial stages of presentation.

Gregg Hillman - First Wilshire Securities

But you say there is one that was dismissed but there is just three now?

Jim Scardino

There are four right now, and one was dismissed that was involving a action filed in Manhattan County by representatives of another one of our trusts, but that one was dismissed.

Gregg Hillman - First Wilshire Securities

So, there were five and now there is four.

Jim Scardino

That’s correct.

Gregg Hillman - First Wilshire Securities

Okay, and I guess this is in the press release, but did the AT&T of the press release when they initiated in the investigation surely?

Jim Scardino

No I don’t believe the Attorney General itself executed a press release. We announced it once we received the subpoena from Attorney General.

Gregg Hillman - First Wilshire Securities

Okay, and just in terms of the subpoena, what were they like? Did they allege anything or they just asked for information?

Jim Scardino

They asked for information regarding our Health Insurance Trust of New York, our HITNY Trust, and we provided them a great deal of electronic and paper information in accordance with their request.

Gregg Hillman - First Wilshire Securities

But they didn’t ledge anything in the request for information?

Jim Scardino

They have only asked for information. There have been no charges brought against the company or any individuals at this point.

Gregg Hillman - First Wilshire Securities

Okay, that’s fine, and just in terms of your cost reduction efforts, are you through that or are you able to further reduce cost more, without hurting the long-term prospects of the company?

Jim Scardino

We will be taking measures to reduce the cost. We obviously do not want to hurt the long-term prospects of the company, but there are some sacrifices that will need to be made and the need to control what we can which is our expenses is preeminent. So we are going to make every effort to run the company as lean as we can.

Gregg Hillman - First Wilshire Securities

Right, and certainly where you could develop your fee business in terms of under a matching claims after they occur for other companies or something of that nature, that you could actually create a profitable fee business, that would at least cover the overhead for the company?

James Scardino

That’s a good question; we currently are focusing our resources on just the management of the workers’ comp business and writing ourselves from some of the issues that have overhung us. In New York of course, we no longer have a TPA license, so the type of business you are talking about would not be available to us there.

We are looking at some other alternatives that could enable us to broaden our product offerings to clients, while not taking underwriting risk, and we will talk more about those probably around the middle of 2010, but for the moment those are in development, sort of R&D stage.

Gregg Hillman - First Wilshire Securities

Okay, good. Look forward to hearing about that.

James Scardino

Thank you Greg.

Operator

And there are no further questions. I would like to turn the conference back over to Mr. Scardino for any additional or closing remarks.

Jim Scardino

Well, obviously this is not the kind of quarter that we envisioned. It’s a quarter that I expect never to have to announce again. Despite the some of the concerns raised by Robert in his question, we do think that the core operations are becoming more and more solid. This is a business that I wish the flip of a switch can turn things around, but when a company engages in rapid growth, there are usually consequences for that, that impair the future performance and financial position of the company, and the resolution of that takes longer than a couple of quarters.

I firmly believe that we are going to be seeing improved performance. I think our fundamentals are good. I’m pleased with what I’m seeing in pricing in California, as well as New York and New Jersey. I am very hopeful that the future quarters are going to bear the fruit of the very hard work that’s been done by all of our people as we move forward.

So, I thank you for the patience that you’ve had with what I admit is very obviously a distressed and difficult situation, but I firmly believe in what we are doing and I believe that we are going to start seeing the fruits of that. So thank you all very much and I wish you all a good day.

Operator

And that concludes today’s teleconference. Thank you for your participation.

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