Susan Spivak Bernstein - SVP, Investor Relations
Marty Becker - Chairman & CEO
Joe Roberts - CFO
Mark Dwelle - RBC Capital Markets
Ian Gutternman - Adage Capital
Max Capital Group Ltd. (MXGL) Q1 2010 Earnings Call May 4, 2010 10:00 AM ET
Good day ladies and gentlemen and welcome to the first quarter 2010 Max Capital Group earnings conference call. My name is Alisha, and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We’ll be conducting a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to your host for today’s call Susan Spivak Bernstein, SVP, Investor Relations.
Good morning and welcome to Max Capital first quarter 2010 earnings conference call. Last night, we issued our press release and financial supplement which are available on our website at www.maxcapgroup.com. Speaking on today’s call will be Marty Becker, Chairman and CEO; and Joe Roberts, Chief Financial Officer. Following the prepared remarks, we’ll open it up to Q&A.
Before proceeding with the discussion, we’ll remind you that this call may include forward-looking statements with respect to [Max Harbor] point in the industry that reflects its current views with respect to future events and financial performance. Statements that include the words expect, intend, plan, believe, project, anticipate, will, may and similar statements of a future or forward-looking nature identify forward-looking statements. All forward-looking statements address matters that involve risks and uncertainties.
Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and you should not place undue reliance on any such statements. Any forward-looking statements made in this call are qualified by these cautionary statements and there can be no assurance that the actual results for development anticipated by Max will be realized or even if substantially realized that they will have the expected consequences to or effects on Max or its business or operation.
Max undertakes no obligation to update publicly or revise any forward-looking statements whether as a result of new information, future developments or otherwise.
With that I’ll turn the call over to Marty Becker, Chairman and CEO.
Thank you Susan and good morning and welcome to Max Capital’s first quarter 2010 conference call. Max’s first quarter continues the nice consistency of financial performance that we achieved in 2009. Max’s strategy to emphasize diversification and balance between our specialty insurance and re-insurance businesses as well as between short and long tail business based on market conditions continues to serve us and our shareholder’s well. Most importantly, during the quarter we announced our merger of vehicles with Harbor Point. This transaction is a valuable and strategic next step for both Max and Harbor Point and should close later this quarter.
For the first quarter we reported net operating income of $40.7 million or $0.71 per diluted share compared to $46.9 million or $0.82 per diluted share last year. In line with our plan for the year, our overall PNC gross written premiums were 14% lower in the first quarter compared to a year-ago. The only meaningful difference to plan is on our Ag reinsurance book where we lost one meaningful contract due to an M&A transaction.
I am very pleased that all four of our profiting cash, the underwriting segments produce favorable underwriting results with a combined ratio of 90.5%. Fully diluted book value per share of 27.86 was up 27% from a year ago and almost 2% for the quarter. Our ROE was below our previously disclosed target as we not only had to suspend our share repurchase program as a result of the Harbor Point announcement but our asset values grew in the quarter more than we had anticipated.
Market conditions continue to be challenging globally. Max’s renewal book has performed well. Our Bermuda/Dublin insurance and re-insurance segments produced less premium in 2009 given market condition.
Pricing on renewals has been flat to down in the low single digits in most lines of business. Property CAD has actually been down more with pricing reductions around 10%. Renewal retention has remained good in the mid 80’s, but when we loose an account, it is typically the result of a significant price deviation. There remains select pockets of opportunity in the marketplace, but the overall pricing trend is clearly lackluster. Max is well positioned with both our product and geographic diversity to continue to maintain our book where we can earn attractive returns while scaling back in areas with softer pricing. As a result, our combined ratios have remained at reasonable levels even as we’ve been decreasing gross premiums written.
In a quarter where the industry has suffered a remarkably high level of worldwide catastrophe losses that are estimated in the $16 billion range, Max once again demonstrated how our conservative underwriting strategy limited our aggregate exposure to these property catalogs events.
Our losses of approximately $10 million were low compared to our peers in less than 1% of our opening shareholders equity for the quarter. This compares to our initial estimates of $10 to $20 million for the Chilean earthquake and winter storms (inaudible) and actually also includes our losses for the Australian hailstorm. Our pro forma losses combined with Harbor Point of 30 to 50 million were also at the lower end of our peer group.
Following the quarter there was another large property CAT loss with the trends ocean DP Gulf of Mexico oil rig situation. We would anticipate $8 to $12 million of losses from this event spread between our marine and workers comp book and losses at Harbor Point are expected to be in the same range. Looking forward, our new Latin American team is firmly establishing itself in that market, and we expect it to make a meaningful contribution to our group results before the end of this year.
Property rate increases in Chile following the earthquake are up between 50% and 100% over last year albeit they were previously at very low levels. While property CAP is expected to only represent about 15% of our premium in Latin America, rates in other lands in the region should benefit as well.
While the market place is providing a scarcity of exciting opportunities, it has fortunately been an exciting few months at Max. Our early March announced merger of Equals with Harbor Point will further enhance our ability to write a broad mix of short and long tail product lines both insurance and reinsurance from multiple jurisdictions. The combined entity will re-branded as Altera Capital Holdings Limited.
Last Thursday April 29th, the respective shareholders of Max and Harbor Point both voted overwhelmingly in favor of the requisite proposals for the merger which we expect to close later on in the second quarter. By bringing together two strong and complimentary organizations, each with well developed and profitable operations, we will create a more diversified and balanced global specialty insurance and reinsurance company that is both financially stronger with increased scale and a capital base of approximately $3 billion and more operationally capable given the depth of our combined underwriting expertise and the breadth of our established platforms and client relationships in wide variety of markets. We are excited about the many opportunities to build value that the combined resources of Altera will bring to each of our underwriting platforms.
Let me now turn it over to Joe Roberts our CFO to discuss our business segments in more detail. Joe?
Thank you, Marty and good morning everyone. Our overall cost premiums written from property and casualty operations in the first quarter declined 15% to $370 million. The decline in premium was anticipated as market conditions became increasing more competitive in 2010. We experienced declines in our insurance and reinsurance segment which were partially offset by growth in our new operations. US specialty up 11.8% and Lloyds of London of 63.1%. This growth was supported primarily by the strategic addition of new underwriting teams.
Property and other short tail lines represented 55% of our gross premium volume for the first quarter of 2010. We experienced solid underwriting profits across the organization with the first quarter 2010 combined ratio of 90.5% compared to 89.7% in the prior year.
Favorable reserve development in the first quarter was $17.1 million representing 8.8 points on the combined ratio. Property catastrophe losses were $9.6 million versus $3.4 million in the 2009 first quarter; again, a very favorable comparison to peers.
Let me run through the results of each of our segments now. On our insurance segment, the first quarter gross premiums written declined 24% to $66 million from $88 million in 2009. The decline was across all lines of business primarily in professional and excess liability lines. The professional lines market stabilized towards the end of 2009 and we are not seeing as many new opportunities. We also did not renew from specific contract due to merger among clients. However, we continue to make profitability on our existing business retained.
The excess liability market remained highly competitive but we are encouraged that the overall rate of premium decline appears to have slowed a little. Max continues to have both strong renewal retention in this class and also positive development on prior year’s business. The combined ratio for insurance operations was a favorable 86.1% in the first quarter compared to 80.3% in 2009. Favorable development in prior year reserves represented 11 percentage points on the combined ratio in the first quarter and was primarily related to aviation and property lines of business. Through our reinsurance segment, gross premiums written were down 34% to a $155 million in the first quarter from $233 million for the prior year quarter.
As Marty mentioned the decline in premiums were primarily in the agricultural sector and secondary in the workers comp and medical malpractice lines business. The decline in agriculture reflects a significant contract that was not renewed in 2010 due to a recent M&A transaction.
In worker’s compensation, we previously rode a significant quarter share that was intentionally renewed at lower premium level in 2010, given our current perspective on worker’s compensation trends.
Profitability remains favorable with the first quarter combined ratio of 92.7% compared to 93.6% in the first quarter of 2009. In the current quarter favorable development in prior year reserves represented 11.6 percentage points on the combined ratio. Favorable development was primarily in property lines of business.
Cap related losses represented $4.5 million or 5.6 percentage points on the combined ratio mostly from the European Windstorm Xynthia and Australian hailstorms.
Gross premiums written from Max at Lloyds were 63.1% higher than a year ago at $72.1 million compared to $44 million in 2009. [Process] being driven by the relocation of part of our aviation team. And the addition of international casualty product lines in the fourth quarter of 2009 and first quarter of 2010, generating $4.4 million and $13.7 million of gross premiums written respectively.
We also began writing business in Brazil generating $1.1 million gross premiums written in the quarter. Generally conditions experienced during the January renewal have prevailed throughout first quarter. That is to say the market is suffering, but so far this continues to be in the control manner. Rates continue to fall in most business lines by up to 5% year-on-year. Anything more than this with the exception rather than the year.
The first quarter 2010 combined ratio improved to 82.5% from 85.5% in 2009 principally due to ongoing efforts to lower expense ratio. General and administrative expenses were $2 million lower than a year ago. Benefiting from profit commissions earned through the two Lloyd syndicates that are not wholly owned by Max, and regional favorable underwriting results.
The loss ratio was 6.5 percentage points higher than the first quarter 2010 due to $4.7 million in catastrophe losses and the increase in longer parallel lines, financial institutions and international causality businesses which are all booked at higher loss ratios in accident health of property lines of business.
Reserve releases represented 5.5 percentage points combined ratio percentage points in the first quarter 2010 primarily again in the professional liability line. US specialty gross premium written grew 12%, $77 million in the first quarter compared to $69 million a year ago. Growth is primarily being driven by the addition of professional liability to our product offerings in the fourth quarter of ‘09 and by the incremental expansion of our general liability line.
Our US specialty client base has a much smaller offer policy size compared to similar business written in our insurance segment and therefore pricing tend to be less volatile. The combined ratio was 98.8% in the first quarter of 2010 compared to 98.4% in 2009. The higher loss ratio this quarter of 63% compared to 57% a year ago reflects the increase in general liability in professional line which have higher loss ratio to property business.
The overall expense ratio improved to 36 percentage point from 42 into 2009 period, reflecting lower general and administrative expenses. The G&A expense ratio improved to 25% in the first quarter of 2010 from 36% a year ago. The ratio has steadily declined as our net premiums earned have grown and as we continue to get closer to the level which we expect to operate over the longer term. Market conditions continue to grow increasingly more competitive in the first quarter as competition from standard markets throw business out of the ENS market place.
Our strategy is to continue to be conservative pursue opportunities for growth where our underwriter can leverage relationships to gain share of profitable business. We did not write any new life business in the quarter. We did have an increase to the claims of policy benefits cost to $1.4 million which was adjusted to the revised policy date received from one of our client.
Net investment income was $48.4 million for the quarter compared to 19% increase over 2009. The increase reflects the shift from cash to fixed income securities where we are picking up additional yields. The cash allocation has been reduced to 13% of invested assets from 18% on up this June first quarter 2009.
The total return on our investment portfolio for the quarter was 1.7%. The current annualized yields on our portfolio of cash and fixed maturities is approximately 3.9% in the quarter to March 31, 2010.
Our balance sheet remains strong given a significant financial flexibility. We ended the quarter with $1.6 billion in shareholders equity an increase of 3.1% over December 31, 2009.
Invested assets were $5.3 billion as of March 31, 2010. Our debt-to-total capital ratio is now 5.3% which is lower than our long-term expectations. Total repurchases were 517,000 shares at an average of price of $23 per share during the quarter for a total repurchase of $12 million.
Before we turn it over for questions. I would like to briefly hit the highlights of Harbor points own first quarter results.
First quarter 2010 net income was $33.5 million. Harbor Point drove $307 million of premium up from $229 million in 2009 first quarter. Of the $307 million of first quarter premium $94 million or 31% was in property business. $102 million or 33% was in casualty business and $110 million or 36% was in specialty lines business.
The majority of growth is especially booked driven by favorable opportunities in concentrated credits coupled with a significant renewal which was recorded in the second quarter of 2009.
The first quarter 2010 combined ratio was 94.3% compared to 82% in 2009. The loss ratio for the quarter was 63.7%, an increase of 16.9 percentage points from the first quarter of 2009. The increase was driven by $35 million of losses from catastrophe events in the quarter which is partially offset by favorable reserve development of $9.6 million in the quarter. Similar to Max, Harbor Point has its conservative underwriting strategy which is designed to limit exposure to CAT related losses.
First quarter catastrophe losses primarily related to Chilean earthquake were less than 2% of Harbor Point’s opening shareholder’s equity. At March 31, 2010 cash and invested assets were $2.7 billion and shareholder’s equity was $1.9 billion.
With that I would like to turn the call back to our operator for any questions.
(Operator Instructions). Your first question comes from the line of Mark Dwelle from RBC Capital Markets. Please proceed.
Mark Dwelle - RBC Capital Markets
On the reinsurance book in particular, there was a fairly significant decline and I guess what I am trying to triangulate on a little bit is was there some portion of that, that was sort of quarter share, that will continue to impact the numbers going forward? Were these renewals that were 1Q renewals and most of the gross premiums in that quarter and so the forward quarters will be left to their own devices as far as whether they will be up or down.
The forward quarters would really stand alone but for workers comp mark. That was a quote a share so that will trend through most of the year.
Mark Dwelle - RBC Capital Markets
Okay. In my second question, similarly as respects to the crop was in re-insurance lines. In terms of the professional liability lines, was the declines there primarily price driven or was that just a lot of non-renewal.
Well the decline in the insurance professional liability was $4 million and that was a combination of some merger activities as well as pricing.
Mark Dwelle - RBC Capital Markets
Okay. Next question just in terms in terms of the merger, I understand the second quarter cause is there anyway to be a little more specific or is it like the very end of the second quarter, is it tomorrow? Is there any way to kind of triangulate, I understand kind of within the balance of those things that matter aren’t entirely in your control at this point.
We are obviously pushing as hard as we can to get all of the various closing components pulled together. The only material items left outstanding is we have to get final approval from a couple of regulators and your estimate is probably as good as mine as to how quickly we can get them to act but we’re confident it will be in the second quarter.
(Operator Instructions). Your next question comes from line (inaudible) from Adage Capital. Please proceed.
Ian Gutternman - Adage Capital
Hi, I guess a couple of things. One, I know you sort of explained as some of the components you walk through in detail but I guess it was just interesting to know that Harbor Point shows such growth when you are shrinking pretty aggressively. Can you just talk about how I should think about that as far as on go forward basis and again the (inaudible) sort of makes sense on the surface but just seemed a little interesting when I saw those numbers.
Ian, the reinsurance as you know is a pretty lumpy business, one or two contracts can make a big difference. You should think of their growth as being heavily influenced by timing on one contract that was in their second quarter last year and is in their first quarter this year as well as a couple of just unique opportunities in the specialty lines area for contracts that they were comfortable had good economics in them, so you shouldn’t read anything into it particularly.
Ian Gutternman - Adage Capital
Okay, fair enough and then on your action combines the quarter was a lot better than last three quarters those about equal to last year’s Q1. Is there seasonality in Q1 that you are going to tend to have [low axe] in your picks or do you feel that you have improved from where you were at the end of last year?
I don’t think the seasonality per se and sort of my view would be really depends on what underlying catalog loss activity or progress goes various different lost events that we have in each period. We tend to be consistent in our underlying lost picks from period dependant on where the market is. And the other factor but it’s the business mix as we may be changing and have a little bit more own premium in certain lines of business than the others. It would make a difference. For example, in our agricultural business which we didn’t renew as much as this year would have a different loss picked in some of the business that we are renewing our business in. So, it’s purely that no other views.
Okay. So can you give us a feel for is your sense of your picture about the same as last year lifeline for lifeline or they’re higher year-over-year?
Our picks are up very modestly from last year.
And I think that’s all I have at the moment. Thank you.
There are no further questions at this time.
Al right, operator. Well thank you so much. We really appreciate you joining us. It has been a good, clean, consistent quarter and we hope to keep that performance during the year but most importantly we are very excited about the pending amalgamation with Harbor Point and the creation of Altera and next quarter we will be talking to you about Altera Capital Holdings. So thank you so much.
Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today’s conference. You may now disconnect. Have a great day.
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