Mark Collinson – CCG Investor Relations
Jim Scardino – Deputy Chairman and CEO
Joe Taylor – CFO
Michael Ranson [ph]
Robert Bolton – Mendon Capital
CRM Holdings, Ltd. (CRMH) Q4 2009 Earnings Call March 4, 2010 9:00 AM ET
Good day, ladies and gentlemen, and welcome to the CRM Holdings fourth quarter and fiscal year 2009 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this program is being recorded.
I would now like to introduce your host for today’s program, Mr Mark Collinson, CCG Investor Relations. Please go ahead sir.
Thank you very much. Good morning everyone and welcome to CRM Holdings Limited fourth quarter fiscal 2009 conference call. With us today as usual are CRM’s Chief Executive Officer, Jim Scardino; and the company’s Chief Financial Officer, Joe Taylor.
Just before I turn the call over to Jim, I would 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, 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 that 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. 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, March 4th, 2010 and CRM assumes no obligation to update these projections in the future due to changing market conditions or otherwise.
Now, it’s my pleasure to turn the call over to CRM’s Chief Executive Officer, Jim Scardino.
Thank you very much Mark, and good morning everyone.
CRM as a niche workers’ compensation insurance company has a 20-year track record of providing highly valued and respected services particularly to markets in California and the western states through our subsidiary, Majestic Insurance Company. That is who we are today, and that is why we exist. We are good at what we do. We provide excellent service to our brokers and their clients and we provide good jobs for our people. We do all this with a goal of creating and sustaining value for our shareholders. Those things are worth restating, because as we all know, CRM is in a battle state, confronting current economic, legal and market conditions and laboring to overcome our own past mistakes in judgment.
Shareholders need to know, as Joe and I report to you another quarter of very disappointing results, what we are doing to provide hope for the future of the company, and why we believe that there is reason to try. There are some very harsh realities surrounding CRM today and I want to deal with each of them in turn and explain what we are doing, and why we believe we are taking the best course of action.
First, it is clear that the premium per payroll dollar that we are realizing has fallen too low. We have filed late increases and will continue to do so but must also be stingier in the application of premium credits on individual policies. Our current quarterly and annual loss ratios are distorted by the adverse developments and premium adjustments from prior years but nonetheless our current accident year loss ratios are just under 90%. We must improve this performance materially and can do so only through more adequate pricing and improved risk selection.
Many companies in the workers’ comp business today find themselves in similar position to ours with higher than expected loss ratios. We sought growth in the softening market and amidst deteriorating economic conditions in 2008 and reduced prices to achieve that growth. The actuarial estimates made at that time for loss ratios did not fully recognize the pricing dynamics or claim cost inflation, and we have absorbed $4.4 million in adverse development in reserve strengthening in the fourth quarter, and nearly $6 million during 2009 for business written in prior years. Compounding this, we began 2009 with business pricing indexed to what we now know were inadequate rates in 2008. We recognized this inadequacy in the fourth quarter and increased the loss ratio estimate for the full year 2009. This resulted in a corresponding increase in loss reserves. Fourth quarter results contain $5 million of increased loss reserves to true up the 2009 year to reflect the loss ratio we expect.
Second, as we all know, Majestic’s A.M. Best rating was lowered to B++ before the end of December in 2009. A significant percentage of our clients and prospects require higher ratings from the insurers who write their workers’ comp. In order to retain and compete for rating sensitive business, we have been seeking a partner with whom we can ally ourselves and provide an A- or better rating. We hope to have an arrangement to announce very soon.
Third, in addition to our efforts on pricing and rating issues, we are reducing expenses at our holding companies and in our operations. Fourth, we are entering new markets in order to find potential customers who value the things that we do well, claims management and loss control in particular. We value our broker relationships highly and will enhance the value of these relationships by being more proactive and defining specific classes of business we will target.
Finally, we are working diligently to resolve the legal issues that hang over the company. I hope you can understand that I cannot provide anything more than my assurance that we are doing all we can and we know first hand how much the threat of these issues means to the value and performance of our company.
In all, we expect our actions are likely to mean a much better year in 2010 but unfortunately not yet a profitable one. Better pricing, better risk selection, reduced operating expenses, and an A- rated partner would all improve matters. They move us towards a business structure that is positioned for profitability in 2011.
With that, I will pass you on to Joe, who will run you through the quarter and year-end results.
Thanks Jim. In the fourth quarter of 2009, we reported a net loss from continuing operations of $19 million or $1.13 per diluted share. This compared with net loss from continuing operations of $6.2 million or $0.38 per diluted share in the fourth quarter of 2008.
There are five items that I want to highlight that affected the fourth quarter results, and Jim has already mentioned some of them. First, $4.4 million of adverse development primarily from the 2008 accident year; second, $5 million of reserve strengthening relating to the 2009 accident year; third, $1.5 million of reserves from uncollectible premiums largely in New York related to the downturn in the economy; fourth, a write-off of $2.7 million of goodwill on our balance sheet relating to Majestic, Goodwill arose on the acquisition of Majestic in 2007 and can no longer be carried as an asset in light of recent results; five, an additional expense of approximately $1 million of legal fees related to various matters.
Total revenues in the fourth quarter of 2009 were $27.2 million compared to $30.3 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 and New Jersey by $3 million compared to the same quarter last year. Second, additional seeding on the quota share treaties reduced premiums. And third, the company experienced slightly lower volumes in the number of policies written in its major market of California although that was almost all offset by higher pricing.
Investment income during the quarter increased to $6.7 million from $4.6 million in the fourth quarter of 2008, due to $2.8 million of higher realized capital gains while interest income fell $2.3 million from $3 million in this generally lower rate environment. Total underwriting expenses for the fourth quarter increased to $33.2 million from $28.2 million a year ago, due to the adverse development and reserve strengthening of $9.4 million, partially offset by the benefit of quarter carrying [ph] insurance.
We reduced core SG&A for Q4 compared to Q4 last year, but that was offset by $1.5 million of premium write-offs to $1 million of additional litigation expenses, and $2.7 million write-off of goodwill. For the fourth quarter of 2009, the company’s overall ratio including Majestic and Twin Bridges was 152% and the overall combined ratio was 207% as compared to an overall loss ratio of 102%, and an overall combined ratio of 141% for the fourth quarter of 2008.
Majestic’s loss ratio for the 2009 fourth quarter was 157%, was impacted by the effects of the $9.4 million of adverse development, and reserve strengthening. Excluding prior year development and correcting for the cumulative effect of 2009 strengthening of our loss reserves in the fourth quarter, the loss ratio was 104%. Majestic’s underwriting loss was $19.6 million for the quarter compared to an underwriting loss of $7 million a year ago. Majestic’s loss ratio for the full year of 2009 was 105%, excluding prior year development and premium adjustment, which include reinstatement premiums, and final audit adjustments. Majestic’s current year loss ratio was 90%
Turning now to the balance sheet, as of December 31, we held $50 million in cash and cash equivalents compared to $30 million at year-end 2008. Our investment portfolio stands at $281.6 million and is comprised entirely of fixed income securities. The portfolio has an average credit rating of AA+ with an effective duration of 3.5 years and an average portfolio yield of 3.3%. Our portfolio contains no equities or structured debt products. At quarter end, shareholders’ equity was $60.7 million compared to $108.9 million at year-end. Our book value per share is $3.62.
And now, I will turn the call back over to Jim for some final remarks. Jim?
Thank you Joe. I recognize how frustrating it is for our shareholders to hear once again all the setbacks for CRM. However, setbacks are from the past and the (inaudible) for CRM to move forward. The road to increased value and maximization of value in the near term for shareholders is to recognize the value of Majestic, and how it made money over the more than 20 years it has been in business.
The underwriting actions we have described are central to the achievement of the goals. All other routes, and believe me we have considered them all, will be less optimal than pursuing what we have done so well when we are focused on writing business that we know. I hope you will stay the course with us as we make 2010 a rebuilding year and platform for the kinds of returns your investment deserves in 2011.
I thank you for your attention, your patience, and Joe and I will now take your questions. Operator?
Thank you. (Operator instructions) Our first question comes from Michael Ranson [ph] private investor, your question please.
Regarding the adverse developments in 2008 and the reserve strengthening in 2009, can you give us some indication of where you think these trends are going? You mentioned that most of these negative developments you are saying are all in the past, but I would say that those two years are in the kind of recent past, and am curious if you could give us some sort of guidance regarding what we might expect in future quarters in terms of development to the 2008, 2009 costs. Thank you.
Thank you, thank you for that question. You are correct that is recent past and this is a long-tailed line of business. You ultimately do not know your true cost until some amount of time has gone by. Your ability to project your ultimate losses is a function of a couple of things. One, obviously the economic environment changes in benefits structure, how you handle claims, the kind of business you are writing, and all those fit into this.
I think one of the big factors in the mist [ph] we had for 2008 is that we did expand our business particularly in California and secondarily in New York. The full effects of the 2007 reforms have not really been understood yet in the rate structure and loss development factors. Those two events add to the uncertainty.
We believe at each actuarial observation we make that we are incorporating everything we know about the claims and where they may be going. So when we publish our results as of the present date for example, we do not expect there to be additional adverse development from these years. You can see that our current accident year in 2009, we mentioned we are anticipating a 90% loss ratio, that is a significant boost from the expectation that we had at the beginning of the year and where we have the 2008 year posted.
So we believe that we are anticipating the effects of loss cost inflation, the medical cost, we think we have gotten our arms around the nature of the book, and the best judgments that are outside actuaries and we can make is that we have things pinned well. But it will remain to be seen whether we are on the money or not. I think if you look at our Schedule P, which was filed with the various state insurance departments, you will see each of the accident years that are recorded, the ultimate workout of what the claims are is different from where you are in the initial years. It just kind of comes with the turf. All you can do best is be consistent with what you know, adjust to the dynamics in the environment, and make the best projection. I think that is where we are.
Our next question comes from Amy Sullivan from Mendon Capital, your question please.
Robert Bolton – Mendon Capital
It is actually Robert Bolton, good morning.
Robert Bolton – Mendon Capital
I had a quick question with regard to what appears to be again some lack of management on the securities portfolio and why we are not even conservatively using that to offset some of the damage here? Why again nothing looks like it is being done with the securities portfolio? Can you talk to that point please?
On the securities portfolio, we did actively manage the securities portfolio throughout the entire year. One of the positions that the company found itself in is we are in a net operating loss carry-forward position. And as such, it made imminent sense to harvest as much as we could of the capital gains in the portfolio, and put that money back to use, being that we would not be paying taxes on those gains, weaker dollars for dollar and reinvest those gains.
One of the things we are doing going forward is that we do have a portfolio that is very highly rated, we have got a AA+ rated portfolio and we have got a duration of 3.5 years. We are going to be working with the investment manager to see what we can do to take a look at that AA+ rating, and look at taking on some additional credit risk, and try to get some higher yields on the portfolio.
Our concern Robert, I think, is we are less concerned about credit risks probably than we are duration risk. I think that it is likely over the next year and forward that we will see an increase in interest rate and I do not want to – we in the company and the organization that manages our portfolio want to avoid a drop in the value of the portfolio, which we have got three or four times the amount of equity invested.
So we are somewhat leveraged against our equity, and I am little concerned about duration risk and the effect that that could have in a rising interest rate environment. We do look at the amount of assets that are available to investment. We are able to increase our yield by 50 basis points, it would go a long way, and that is why here we are just saying if you have any suggestions with anything in your observations of the portfolio that you would think about.
Robert Bolton – Mendon Capital
Yes clearly it seems like it is a duration process and you guys are sitting on very conservative instruments and we talked about this last year and it does not look like much was done, and we have seen equity markets, capital markets and everything else kind of catapult forward and we did nothing. Yes, we have got a great rating because it is essentially in a cash, low yielding static environment where, I think, even from a diversification standpoint, you could up doing low vol type transaction and getting that 50 basis points and beyond in the return, and we are just simply not seeing that and this is probably one and only jewel left in the crown and again we are disappointed to see nothing that appears to be done with it. So, I think you have a lot of options and I do not know from a strategic perspective, who is involved in that decision process, and who actually sits around and makes these considerations, but it does not look like a win anywhere from here year over year.
Yes, I have to say that our objective has been preservation of capital but we will absolutely incorporate the parts you are presenting in our conversations with our portfolio management but I mean that and I thank you. Does that answer your question?
Robert Bolton – Mendon Capital
It does, yes, thank you.
Are there any other questions?
We have a follow-up question from Michael Ranson.
Good, thank you. Michael?
Those negotiations you have been through, I am curious if you could elaborate it all on the type of partnerships you are considering in order to be able to access a higher rating, can you just shed some light on that?
Obviously I cannot divulge any names but our objective is find a partner who has the ratings, first of all an A- or better who has filings in the states that we operate in, and with whom we would not be in direct competition. There are some companies that fit that mould, and we have been in conversation, it is a rather complicated process to cover.
I was hopeful that we were going to be able to announce something earlier in this quarter and prior to this call, but we recognized the importance of this, businesses, some businesses effectively write a fair amount of contractors, and the contractor is doing work with a public entity. the public entity has requirements that their workers’ comp carrier carry A- rating. There are other organizations who may have debt on the balance sheet and the debt covenants require A- or better on all of the insurance that carries.
So for those customers it is very important that we be able to offer them a rating and our approach would be to structure an arrangement whereby we would continue to control the underwriting, provide a loss adjustment services, have our marketing and underwriting people be the point of contact for the broker, but when it comes time to issue the policy, the policy would be on the name of the underlying [ph] carrier, and we would have a quarter share reinsurance arrangement with this carrier to take on the bulk of the premium and risk. That is the type of arrangement we have been seeking, and as I said, I am hopeful we are approaching a consummation of that.
Okay, great. Thank you.
Thank you very much for the question.
Thank you. There are no further questions in the queue at this time. I would like to turn the program back to management for any further remarks.
Obviously this was a very, very good quarter. We were surprised by how much development we got and when the ’08 year showed that it was not as good as we thought, that meant the beginning of ’09 was not as good as we thought, and it continues. We believe we have capsulated that in the loss ratios that we are projecting, we are looking forward to improving things in 2010 with rate and price adjustments, with management of expenses, and we would be hoping that there will be some resolution on the legal overhang.
So, a lot in front of us, we look forward to reporting back to you in two months in May. Again, I just want to thank you all very much for your patience and your loyalty. Thank you all, and wish you a good day and a good weekend.
Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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