21st Century Holding's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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21st Century Holding Co. (TCHC) Q2 2011 Earnings Call August 11, 2011 4:30 PM ET

Executives

Michael Braun – President and CEO

Analysts

Douglas Ruth – Lennox Financial Services

William Meyers – Miller Asset Management

Kevin Hart [ph]

Jason Hurr [ph]

Operator

Good afternoon and welcome to the 21st Century Holding Company’s second quarter financial results conference call. My name is Karen and I’ll be your operator today. Please note that today’s call is being recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and –answer session. (Operator Instructions)

And I’ll take a moment to read the Safe Harbor statements. Statements in this conference call that are not historical facts are forward-looking statements without limiting the generality of the foregoing words such as may, will, expect, belief, anticipate, intend, could, would, estimate or continue or the negative other variations therefore or comparable terminology are intended to identify forward-looking statements. The matters discussed on this call that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized.

Actual events, outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements made on this call due to numerous risks and uncertainties including but not limited to the risks and uncertainties described in this conference call or press release issued today and other filings made by the company with the SEC from time-to-time.

Forward-looking statements made during this presentation speak only as of the date on which they are made and 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise.

Now at this time, I’d like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of 21st Century Holding Company. Please go ahead, sir.

Michael Braun

Good afternoon, and thank you for joining us to discuss 21st Century Holding Company’s second quarter 2011 financial results. I’m joined on the call by Pete Prygelski, our Chief Financial Officer. I’d like to start off with the highlights from our second quarter and then we will be happy to answer your questions. We are highly encouraged with our performance in the second quarter. Core operating results improved substantially.

We had built solid momentum in our underwriting as we continue write and renew more profitable business and removed non-profitable policies from our book of business. Continued discipline and underwriting and exposure management is paying off both in terms of improving underwriting profits and lower reinsurance costs. Our loss ratio dropped to 63% this quarter from 93.6% a year-ago and 75.8% in the first quarter. We recently put in place a new reinsurance program at a significantly lower cost based on the quality of our book of business and our exposure management.

We estimate a 16% reduction in reinsurance costs for our 2011, 2012 program which was effective June and July of 2011. In tandem with improving underwriting results, we realized a 14% reduction in operating expenses in part from the recent merger of our two insurance subsidiaries. In the second quarter, we continued to see the beneficial effect of our prior rate increases on our operations as rates returned to a more adequate and normalized level.

We also recently received a 13.9% rate increase from the Florida to Office of Insurance Regulation and our homeowner policies assumed from Citizens Property Insurance Corporation in 2009, to be effectively August 21st. As the year progresses, we will see an increase in benefit from our multiple rate increases as they continue to foreclose through our book of business. And now an overview of our financial results for the quarter. Full financial details are in the press release that we issued earlier today.

In the three months ended June 30, 2011, the company reported a net loss of $800,000 million or $0.10 per share, compared with a net loss of $2.3 million or $0.30 per share in the same three-month period in last year. Second quarter 2011 results included $500,000 of net realized investment gains compared to $1.6 million in the second quarter of last year. Excluding these gains from both quarters would further show the strength and improvement of our underwriting results as evident by the year-over-year and sequential quarterly improvement in the loss ratio.

As previously stated, the loss ratio this quarter was 63%. We are pleased and encouraged by this performance. The reduction in the net loss this quarter reflects discipline in underwriting and exposure management. Significant operating expense reductions and the continued flow through of approved rate increases.

For the six months ended June 30, 2011 the company reported a net loss of $2.8 million or $0.35 per share compared with a net loss of $3.3 million or $0.42 per share in the same period last year. Gross premiums written increased $400,000 or 1.5% to $28 million for the second quarter, compared with $27.6 million for the same period last year reflecting continued improvements in writing and renewing a higher quality and more profitable policies in our book of business. Homeowners gross written premium increased $400,000 or 1.6% to $2264 million for the quarter, compared with $22.2 million last year.

Gross premiums written increased $500,000 or 1% to $55.1 million for the six months ended June 30, 2011, compared with $54.6 million for the same period last year. Homeowners gross written premium increased $1.7 million or 3.7% to $45 million for the six months ended June 30, 2011, compared with $43.3 million last year.

Unearned premiums increased $6.7 million or 14.2%, to $53.8 million as of June 30, 2011, compared with $47.1 million as of December 31, 2010.

Net premiums earned increased $800,000 or 7.1% to $11.7 million for the second quarter, compared with $10.9 million for the same period last year. Net premiums earned increased $900,000 or 4.1% to $22.8 million for the six months ended June 30, 2011 compared with $21.9 million for the same period last year. Total revenues decreased $800,000 million or 5.7% to $14.2 million in the second quarter, compared with $15 million last year. Total revenues decreased $3.5 million or 11.4 % to $27.3 million for the six months ended June 30, 2011, compared with $30.8 million for the same six months period last year.

In summary, our second quarter results show positive trend on both revenue and expenses which will increasing flow through our income statement with each sequential quarter. Our underwriting business continues to strengthen as we are writing more profitable business while containing expenses. All of this is a result of our prudent decisions over the past few years to take a more disciplined approach to exposure management.

Looking forward we will see an increasing flow through of our prior rate increases as well as the positive effect of our 13.9% rate increase on our homeowner policies assumed from Citizens. In addition, as I already mentioned, we have recently put in place a new reinsurance program at a significantly lower cost. Before we open it up to questions, there were a few questions that were emailed in. And someone had asked about if we’re currently writing business? And the answer is yes, we are. We’ve been writing business continuously and we’re very selective in terms of what we’re writing both in terms of new business and renewals, to ensure that what we’re writing is profitable business to our company.

Another question was what’s the status on the consent order that we had signed back in January? And we are in compliance with all terms of the consent order. The biggest item that people have asked about is the Tri-County. We committed that we would have Tri-County exposure, the policy count below 40% at the end of the year. And we’re actually at 37% as at the end of July. So we’re ahead of schedule on that and that’s really once again the discipline of our Tri-County, making sure that we’re controlling that book, but also the success of our marketing team to expand our program throughout the state.

How has Senate Bill 408 changed your business? There is a few things that that does. It really kind of tends to bring in some of the challenges associated with sinkholes in the industry. We don’t have a lot of exposure in some of those sinkhole areas. So as it won’t only impact us perhaps as much as other companies, but it affects everybody, all the insurance companies in the state I believe in a positive way. In terms of these claims, it limits claims. What you can do in terms of a hurricane down to three years from five years to control some of the other expenses associated with public adjusters as I’ve said. And also ACV which is actual cash value is something that the department is allowing insurance companies to implement in their forms versus what’s called paying replacement cost or full cost.

And what that does is it ensures that the insurer, the claimant is made whole and then the property is brought back whole. They can take away from their potential for abuse of those policy limits. And also it also reduced the timeframe of long-term policy holders once they’re interested in not renewing them it drops them from 180 days down to 120 days.

Another question that I received was how did the reinsurance costs compared to the prior year and why is that different? The reason it’s different is because last year it was $46.2 million, this year its $39.3 million. That’s a significant reduction. And that expense has been decreased. It’s decreased by $7.2 million approximately. There are some adjustment dates in terms of our current reinsurance program, but right now that number we believe is $7.2 million.

So effective July 1, our reinsurance cost dropped by $600,000 per month. That’s significant. And what I am saying is that the reinsurance expense of July the third quarter as of July 1, it basically is going down by $1.8 million. So our expenses that we’ve controlled throughout our program, we anticipate that that will be another $1.8 million benefit in the third quarter. The composition of our reinsurance program continues to shift and what that is the FHCF is where we buy insurance from the state entity. And they continue to raise their prices and exit the market on what’s called some of the optional layers.

There is a layer that was called TICO. There is another one called TICL. There is another one that’s called LAC and then there is a traditional cover. But basically the FHCF is trying to contract and they’ve been doing this over numerous years by making their prices more expensive and limiting coverage so that the private market can step in and offer more – participate more, it’s much better for everyone in the industry and its less risk to the state. So our FHCF costs dropped significantly from about $19 million down to about $12 million and our private reinsurance stayed relatively flat. So our private insurance actually picked up a lot of the cover that was used to be covered by the state.

Those were the questions that we had ahead of time. So with that, we now would be glad to go ahead and open it to our callers.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We do ask that callers to limit themselves to one question and one follow-up. Our first question comes from the line of Douglas Ruth from Lennox Financial Services.

Michael Braun

Hi, Doug, how are you?

Douglas Ruth – Lennox Financial Services

I am doing well. Congratulations on the material improvement and the operating results.

Michael Braun

Thank you. We definitely feel that we’ve made significant headway and we think that it continues to improve with each subsequent quarter from here.

Douglas Ruth – Lennox Financial Services

Yes, that’s wonderful. I was wondering if you could comment maybe not just for 21st Century, but also sort of for the industry, with the rate increases now, do you feel that the rates now are fair for all of the homeowner and for the insurer or will rates still need to go higher do you think?

Michael Braun

I think the rates are much closer than they’ve ever been. And a long answer that I could give you, that I’ll try to keep as short as possible is that there was an overcorrection, after the storms of ‘04 and ‘05, rates went up quickly. One could argue that they went up to where they needed to be, but because they went up so quick, the state reacted and really suppressed rates by forcing rate decreases as well as mitigation credits.

So we’re in an imperfect world right now, that I think that some of these credits are a bit excessive, however they are required by statute and therefore what you’re seeing is base rates have gone higher than they would have been without that. So the short answer is I believe that you will – that our rates are a lot closer to where they need to be. And I don’t think you’re going to see significant rate increases that we received, that’s not going to continue in the future. As you know we’ve gotten a rate increase of 19%, 20% and the one at 49 and one at 39, those are all very big increases.

However, there is a lot more business that we could be writing, if our rates were a bit higher that would allow us the opportunity to write more business. And that’s why you see Citizens is the largest insurer in the State of Florida with about 1.4 million policies. So there is great opportunity to write business, but the challenge is making sure that you’re writing it profitably. So I think our rates are much closer than they’ve been in the past and they’ll be continued to be adjusted in the future but they are much closer.

Douglas Ruth – Lennox Financial Services

And what percent of the business does Citizens have now, do you think?

Michael Braun

Well they are the largest by far. You’re talking about 1.4 million. There is certain hotspots where they really are dominant. And that’s in the Tri-County which is Dade, Broward, and Palm Beach. They have a pretty big exposure over in Tampa and St. Pete. But also in the sinkhole areas which is traditionally in Pasco, Hernando and Citrus. But with some of the challenges with these sinkholes, that the sinkholes areas are kind of expanded into other counties. So they are the largest by far and then behind that you have some of the private carriers that make it up. But they’re about – they are over 20% of the market. And I don’t – I think that they are kind of as large as they may be, give or take maybe another 100,000 or so policies. But I think that you’re going to see that their rates thereon what’s called a light half where their rates are going to continue to increase.

They are known that those rates are too low but not to shock all the policy holders, they are implementing those at a cap of 10% per year. So those rates need to go up by about 50%. So you could argue that they are going to go up 10% per year for the next five years. There is a lot more detailed math around that, but their rates are – the tide of rate increases is lifting all boats. It’s lifting the rates of Citizens and its lifting the rates of the private market. But Citizens will eventually become much more actuarially sound.

Douglas Ruth – Lennox Financial Services

Okay. And what about – what is the competition now, I mean are you – is there still a pretty competitive market or how easy or hard is it now for you to sell the policy?

Michael Braun

Well I would say that the market is a – a big competitor is Citizens. Their rates are cheaper than a lot of carriers in a lot of territories. The big boys, the nationals have really kind of not been in the market active in the market and really have non-renewed over the last five years, a lot of the markets really controlled by domestic carriers like ourselves but there is some bigger ones obviously.

There is ample opportunity to write business, but a lot of people are continuously holding back including us by not writing more business. You need to ensure that it’s profitable before you write it.

Douglas Ruth – Lennox Financial Services

I respect and appreciate that. What about the commercial business, the commercial general liability, what’s the status of that business now?

Michael Braun

The commercial liability is a program that I feel that has come a long way with us. What we used to distribute that mostly through general agents and now we distribute it mostly what we call direct to retail, that means from us to the retail agent. We have a much tighter control over that over the last two to three years. We’ve contracted the book by making sure that we can underwrite it more thoroughly, better controls in place. So that program has contracted significantly over the last three to four years for two reasons, both because of our underwriting and our change in distribution, but the other is just honestly because of the economy and building is – the builders and the contractors as a big component of our business and they just aren’t working like they used to.

So that book is about $10 million, and I don’t see that contracting from there. I think that we have a pretty – it’s more stable of where we’re at and I think there is going to be some opportunities for us to grow it, but we are not take chasing top line on that. That we’re careful to ensure what we’re writing once again is profitable business. There is more business out there that we could write and some of the business that we see getting written for the price that it is out there, we think it’s inadequate. And that’s not the business we’re chasing.

Douglas Ruth – Lennox Financial Services

Yes, again I am grateful that you’re not – we don’t want revenue without profits. My final part is more about just a statement. I think that the investment community would really appreciate the management and the Board of Directors would consider showing your faith in the company by considering buying some stock. I think that the stock is undervalued at this level, and we could really see a pretty material increase in the stock price. I’m hoping that you’ll consider that possibility.

Michael Braun

Absolutely, and I appreciate you making that statement. And myself and the rest of Board will absolutely take that into consideration.

Douglas Ruth – Lennox Financial Services

Okay, thank you and congratulations again on the improvement on the results.

Michael Braun

Thank you for the questions. Thank you.

Operator

Thank you sir. And our next question comes from the line of William Meyers from Miller Asset Management.

Michael Braun

Hi Bill, how are you?

William Meyers – Miller Asset Management

Good. We just covered a lot with the last questioner, so if you could give us some idea of what the milepost would be and the time line towards profitability under this new improved margins that you’re seeing?

Michael Braun

We feel very good where we’re headed. We’re very careful with what we’re seeing in terms of on a go-forward basis. But I think that it’s evident that the second quarter is much improved over the prior year, and I think you’re seeing a lot of fundamentals have absolutely taken hold. A lot of things just have taken time to earn out in the book and show itself in the book. The one thing I can say to you is the third quarter has a $1.8 million reinsurance expense, less of a reinsurance expense that’s significant.

So we had a $800,000 loss in the second quarter, and we are anticipating a $1.8 million reduction of expenses in the third quarter. We think that’s significant. We can never guarantee what’s going to happen with our book of business in terms of losses and thinks like that, but we feel very good about that. So the next four quarters, each of those quarters, the expenses decreased by $1.8 million for reinsurance. On top of that, we see that the rates in our book of business are going to continue to earn out favorably. And just to remind everyone, when we have a rate increase that’s approved, it just takes time.

It’s a very slow process. We’re literally on day one. You have one out of 365 policies that are now correct. And then day two you have two out of 365. It’s a slow process that really takes about 12 to 15 months before all your policies are now priced correctly and earning out correctly. So I think you’re going to see our expenses continue to be contained and I think you’re going to see continued improvement on our margins.

William Meyers – Miller Asset Management

And if I could ask one more, last year you were reluctant to write new policies during the win season. Is that going to be true again this year, how is that going to work this year?

Michael Braun

We do write policies right now more selective. We are located in South Florida. We watch the weather. We’re very aware of that. We’re very – our number one expense is reinsurance, so we’re constantly managing our exposure, every policy we want to know what our cat, non-cat and acquisition cost is to ensure that we’re writing the correct business. So we’re kind of in where we are. I think that you’ll see us write more business as we clear hurricane season. Officially it ends December 1, but clearly the peak of the season is before then I would say by approximately October 1 to October 15 is well past the peak.

And I think you’ll see traditionally in the third quarter tends to be our slower season when we write business but our earn-out should remain fairly consistent.

William Meyers – Miller Asset Management

Thanks again, congratulations on the quarter.

Michael Braun

Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Kevin Hart [ph], a private investor.

Michael Braun

Hi Evan, how are you?

Kevin Hart

It’s actually Kevin, but I am good. The question I had is I know that some recent regulations expired that were put in place by Charlie – our former governor and that’s prompted the rates to go up. But do you see any other regulations coming up that might have an impact on the business?

Michael Braun

I apologize I got your name wrong there, but Kevin, right now the legislators meet every May and those usually get signed in by June 1. I think the majority of what they wanted to cover was covered in it. The House Bill 408 – Senate Bill 408. And I don’t see any significant changes from now until next May or June. I can’t say with certainly but I can tell you that I think the legislator of both houses are controlled by large majority tend to be more business friendly and less as well as the governor who has clearly indicated that he wants to see less government in the insurance business.

There has been some talk even of privatizing Citizens, dismantling and things like that. I honestly don’t believe Citizens should go away. I think 1.4 million policies is way too much. I think the correct amount of policies may be around 250,000 policies or just clearly some policies that are just not insurable. I think you’re seeing – the FHCF contracting to a more manageable level. The states not need to be exposed to financial catastrophe by having so much out there.

So I don’t see, I think specific on the horizon with any changes in legislation. I think that we’ve made some – the legislations are more favorable today than it was two, three, four years ago.

Kevin Hart

All right, thank you.

Michael Braun

Thank you for your questions.

Operator

Thank you. And our next question comes from the line of Jason Hurr [ph], a private investor.

Jason Hurr

Hi Michael, how are you doing?

Michael Braun

Hi Jason, how are you doing?

Jason Hurr

I’m doing okay. Question for you, how much of a benefit did you realized in the second quarter from lower reinsurance rates?

Michael Braun

Zero. Our reinsurance starts July 1.

Jason Hurr

But wouldn’t State of Florida start in June 1?

Michael Braun

Yes, there is FHCF goes June 1 to June 1, and private goes July 1 to July 1. And we pay more in our private than we do on our public.

Jason Hurr

Yes, but I would have thought on amortization of the policy, it looks like you would have recognized like $0.5 million in a month?

Michael Braun

In terms of – I am just asking Pete there, the FHCF whatever the expense of the – let me answer it this way.

Jason Hurr

It is $6 million lower which over 12, if you straight lined it, it would have been over 500.

Michael Braun

Yes, the total of the FHCF last year was from June to June, it was $19 million this year, correct $12 million. So that’s amortized according to those applicable months.

Jason Hurr

So you’ve already got $0.06 worth of the benefit [ph] in the Q2 results?

Michael Braun

Well it’s not a straight line $500,000. It’s probably, I forgot the exact number. It wasn’t $500,000. It might have been closer to $400,000 to that benefit. It’s not a flat just divided by 12. So it’s about $400,000.

Jason Hurr

Okay. So but still that would be $0.05 worth?

Michael Braun

On a pre-tax basis.

Jason Hurr

Yes, which you’ve got NOLs right now so it’s still dropping straight, isn’t it?

Michael Braun

Well yes, so to speak, we feel – it’s not the way we do it, but yes. It essentially comes off the premium so.

Jason Hurr

So even when you get your full cost and then maybe your breakeven max right? I am having a hard time seeing that, I’ll tell you what, I am having a hard time seeing the earnings ramp and so the my next question is going to be what’s your policy count this year versus last year?

Michael Braun

It’s fairly flat. It’s about 43,000 which was last year, but we probably non-renewed, I am going to say around 7,000 to 8,000 policies. So what we’ve done is we’ve shed the non-profitable policies and what we’ve written have been profitable policies.

Jason Hurr

Which is why you’re staying flat roughly on the revenue side too?

Michael Braun

Correct, but it’s a significantly different book. And the challenge that we’ve had in Q2, the big challenge that we have is a lot of the policies that we non-renewed were policies that were not profitable. So we had bought the reinsurance for those policies. And then we go and non-renew them in December, January, February, March, and so on. So we have absolutely no revenue coming in on those policies which we’re still incurring a huge reinsurance expense on those.

So you bet something peculiar about Q1 and more specifically about Q2 that now we don’t have to carry that large reinsurance expense on those policies that we were upside down on.

Jason Hurr

Okay, but you’ll still need more policies at the end of the day and you actually need to actually need to significantly ramp it up to make your business significantly profitable?

Michael Braun

Well I think there is a great opportunity to write a lot of business out there, but what we’re focused on is making sure that each policy that we’re adding is profitable.

Jason Hurr

Yes, so I am going go ahead [ph], but as a share – as a Board of Director, you need to look at what’s the best for the shareholder. So at this point is do I go marginally profitable business or a slow ramp-up or do I go out and try to sell for book and honestly you’ve had 12 straight quarters of losses which is unacceptable.

Michael Braun

Yes, well you’ve made your frustrations clear and I understand that. The shareholders and our policy holders need to make sure that we’re financially stable and that we’re making money and I think there has been circumstances as to why we were in that situation and I think all of those issues have been addressed, when I say in terms of the profitability of the policies. And we’ve made a lot of – we’ve made all the changes that we’ve needed to make. And I think they will continue to earn out more favorably on a go-forward.

Jason Hurr

I think I would just like the company be and the Board to be little more shareholder friendly.

Michael Braun

Okay.

Jason Hurr

That’s all.

Michael Braun

All right, I appreciate that and we understand – I respect your opinion and we clearly are looking to create value for our shareholders. So I appreciate that statement.

Operator

Thank you sir. And we have no further questions in the queue at this time. I’d like to turn the conference back over to Mr. Michael Braun, for any final remarks.

Michael Braun

Well, Pete and I just want to thank everyone for calling in with the questions or listening in. And we’re always available other further questions might arrive. So thank you very much and we look forward to third quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

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