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Executives

Michael Braun – President and CEO

Pete Prygelski – CFO

Analysts

William Meyers – Miller Asset Management

Douglas Ruth – Lennox Financial Services

21st Century Holding Company (TCHC) Q3 2011 Earnings Conference Call November 10, 2011 4:30 PM ET

Operator

Good afternoon, and welcome to 21st Century Holding Company’s third quarter 2011 financial results conference call.

My name is Jonathan and I will 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).

Please also note that 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 thereof 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 expectation involve risks and uncertainties that may result in these expectations not to be 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 speaks 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 call over to 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 third quarter 2011 financial results. I’m joined on the call by Pete Prygelski, our Chief Financial Officer.

Our full financial results for the quarter can be found in our earnings press release on our website.

I will go over some brief highlights from the quarter, and then Pete and I, will open up the line for questions.

You have heard us talking over the last two years about initiatives undertaken to improve our underwriting results and return to profitability. These include: enhanced analytical approach to underwriting all new business, reevaluating our existing policies, and managing our geographic diversity. At the same time, we also focused on maintaining tight control over our operating expenses and taking a more conservative approach to risk retention. We have been steadily building positive momentum in our quarterly results, and today we are pleased to announce a quarterly profit.

Highlights of the third quarter include: net income of $428,000 or $0.05 per share, compared with a net loss of $1.3 million or $0.16 per share a year-ago, and a net loss of $800,000 or $0.10 last quarter.

Significantly improved underwriting results; our core underwriting business continues to benefit from our more disciplined long-term approach to exposure management. We continue to write and renew more profitable business and remove non-profitable business from our book of business. Our loss ratio improved to 60.9% from 74.6% in the third quarter of 2010, a substantial improvement.

Accelerating flow through of rate increases to premiums; increases that we received earlier this year on both our voluntary and assumed books of business are being realized. The latest was a 13.9% increase on the homeowner policies that we assumed from Citizens Property Insurance Corporation in 2009. Continued flow through of those rate increases will have a growing positive effect on revenue going forward as we continue to write new business and renew our existing policies at the higher rates.

Continued reduction of our operating expenses; we saw a 9% reduction of operating and payroll expenses versus prior year and we continue to keep tight control over our operating expenses going forward.

We are pleased with our results this quarter and our efforts undertaken to get back to the core fundamentals of our business. The combination of our improved underwriting and reduction in operation expenses, position us well for 2012. We remain focused on creating a book of business that produces favorable underwriting results that can be sustained over the long-term to generate attractive returns for our shareholders.

With that, we are glad to open up the call for your questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Our first question comes from the line of William Meyers from Miller Asset Management. Your question please.

William Meyers – Miller Asset Management

Yes. Hi. Congratulations on the profits in the quarter. I guess, despite that, my job is to be critical, and so my first question is, I see your – on your automobile line, you have a higher loss ratio than on the other lines, and I’m wondering whether the automotive business is a good business for you to be in? And any color you can give on that would be great.

Michael Braun

Yes. We do have a small book of auto premium. The majority of our business by far is homeowners, and homeowners is just performing very well. In terms of the auto, because it’s such as a small book, it’s subject to volatility as well, one claim can really kind of spike things one way or the other. But it’s a small book of business that we do not really see growing much in the near future.

There is challenges in Florida with PIP legislation and things like that that really are not attractive for growing that book. But we do see some small opportunities on that that will exploit where we can some niches in the market. But I really don’t see that book having a material growth over the next year. But you definitely will see the continued control of our ratios on homeowners. And even the GL has some volatility on it, but it’s substantially lower than where it’s been in years past.

William Meyers – Miller Asset Management

Okay, fine. And then, your listing total cash and investments over a $143 million, and I was wondering if you could explain how does it work in terms of what has to be – what does the State of Florida require you to keep in reserve against future loss payments, and how would we know how much would be available for use for acquisitions, stock buybacks, dividends, that kind of thing. Can you explain that?

Michael Braun

There is two separate questions there I think. Generally, in terms of what we have in reserves that’s a much larger number that is about. Pete can give us the number on that. But what we have is actuaries that help us not only look at what we have in case, individual files, but bulk reserves which is IBNR. So that plus our statutory surplus as well as prepaid premiums make up the total amount of the cash and the investments. But I think Pete can answer that in more detail.

Pete Prygelski

William, there is roughly – at the end of the third quarter, if you look at the cash in the holding company, which would be unencumbered cash sort to speak, so if we were able to issue a dividend or if we were able to do a buyback, there is about $5.6 million in unencumbered cash. The rest of it is in insurance company, either as surplus or marked for a payment of the future claims which is all invested funds.

William Meyers – Miller Asset Management

Okay. And what exactly is the surplus?

Pete Prygelski

The surplus as of – the surplus, you mean what is the number or what does it represent?

William Meyers – Miller Asset Management

What does it represent? Is it something that can be at some point transferred to that unencumbered cash? Do we have more – I don’t need the number, I need what it represents.

Pete Prygelski

Yes, the statutory surplus is about $35 million. So what that means is really it’s just – the assets minus the liabilities in the insurance company itself. The majority of the liabilities is really just reserves, both cash involved. But in terms of getting the cash out of an insurance company, that’s a pretty difficult process. That’s subject to obviously the OIR, and that’s a very difficult process to taking money out of an insurance company.

William Meyers – Miller Asset Management

Okay. Well, that’s what I wanted to know, and I appreciate the answer. Thank you.

Pete Prygelski

Thank you.

Operator

Thank you. Our next question comes from the line of Douglas Ruth from Lennox Financial Services. Your question please.

Douglas Ruth – Lennox Financial Services

Congratulations on the improved results. You told us what you were going to do and then you did, and I feel that you should be credited for that.

Michael Braun

Thank you very much, Doug.

Douglas Ruth – Lennox Financial Services

Could you just comment on what you’re seeing with Citizens and the state of the industry in Florida at this point?

Michael Braun

Well, the Florida property market is a difficult market to operate in. Citizens is by far a very big – one of the largest competitors. They have about 1.5 million policies, they continue to grow. There is – the new Governor, Rick Scott, is proposing some type of legislation for the spring to control that, to shrink it. And I think I’ve said in the past that I believe Citizens is required in the marketplace, but it is far too big. I think probably a more realistic size would be 250,000 policies. They’re making – they’re doing certain things to encourage people to not come in including the increases that they’ve taken. Also, they have beefed up the language in the policy, explaining to people that if they do take a policy with Citizens that they could be on the hook for potential assessments, individual policyholders. So I think those are big steps.

There is no shortage of policies to be quoted in this marketplace. We quote a high amount of policies every day and we’re not writing as much as we would like to. I’ll give you an example. In the month of October, we have – obviously there is two components, new and renewal. But for new business, we only wrote about $1.8 million, yet we probably quoted about 10 times that. And really what it is is the challenge of where we find the rate that we have is not profitable for a policy, so we won’t take the policy. Or sometimes there is the case where we do have interest in taking the policy, but we could be – it could be cheaper elsewhere including Citizens. So there is a great appetite for people to get to place business. We have a very good system where we analyze it and we’re committed to taking business that is profitable.

Douglas Ruth – Lennox Financial Services

I appreciate the discipline and I hope you’ll never change that. Should Citizen be - should they be raising the rates faster, because in effect they’re not supposed to be doing what they’re doing?

Michael Braun

Well, they’re on a glide path, which means that they’re supposed to be going up about 10% per year. Just came out some press today that they’re looking at commercial ad that they may go up 20% perhaps. But primarily homeowners, the number is about 50% where rates can go up. Now that really varies from territory to territory. By January 1, in about seven weeks from now, the rates are going to be going up about 6%, not 10% because of the way they’re weighted. It’s no more than 10% in any one territory, but the blended average is coming out around 6% and change. So yes, their rates are too low. They don’t – they don’t buy the required reinsurance that the private market does obviously. They’ve been able to build up surplus over the last couple of years, because that huge expense they don’t incur. They do buy it from the FHCF, but they really had not bought much from the private market. So their rates will continue to go up.

Douglas Ruth – Lennox Financial Services

All right. Going into the Q4 quarter, would you expect a higher than 5% increase in revenue from the homeowners insurance?

Michael Braun

I think what you’re going to see is, there is a couple of pieces there. Obviously, I’ve said that we have a normal course of business that renews. We do still have some business out there that we non-renew and we’re writing business. The in-force book has been fairly stable for the last year to year and a half at about $43,000 risk and about $80 million of premium. This is the homeowners book. And that really hasn’t changed significantly.

Now, the reason for that is, is because like I said, we’ve non-renewed certainly policies and have brought business in. But the margins on the new business is significantly greater than the policies that we’ve been shedding. Once again back to the month of October, we’re seeing business coming in with a margin of over 15%, new business only that is. So our existing book of business will definitely continue to improve. We could ramp up more production, but that’s not what we’re doing, we’re looking to steadily write profitable business.

Douglas Ruth – Lennox Financial Services

And please don’t change that. I’ve got a couple of more questions, I don’t know if you want me to get back in the queue or keep asking questions.

Michael Braun

No, keep on, that’d be great.

Douglas Ruth – Lennox Financial Services

Can you comment some – I’m not sure if this has come off the ad, but on the employment contracts for you and Pete, I know that they are closer to the end and the beginning. Is there a talk from the Board about renewing the employment contracts of the senior executives?

Michael Braun

Yes, there is. We’re aware of that and the Board’s aware of that. And yes, there are conversations going on between us and the – Pete and I individually with the Board. Yes, that’s underway, and that will be worked out in the coming – probably in the coming next one or two months.

Douglas Ruth – Lennox Financial Services

So there might be an announcement before the end of the year?

Pete Prygelski

I don’t know specifically when that would occur, but as soon as it occurs, then they will be filed. There will be an 8-K on them. So like Mike said, the Board, the Compensation Committee when they meet, I think their goal is to get it done by – for all of us to done by the end of the year. But – and soon as we do and have it ironed out, we’ll definitely – there will be an announcement.

Douglas Ruth – Lennox Financial Services

Okay. And what about the building you had talked that you might move from your current property to a new property, what’s the status of that?

Michael Braun

Yes we are moving. We’ve signed a lease and we’re going to a new location. We’re located in Broward, which is the Fort Lauderdale area. We think we’re going into a much better building and actually more favorable terms. Our current rent is about $55,000 a month and we’re going down to – it’s about 18,500 square feet at about $20 a square foot. So it’s going down significantly about $25,000 a month decrease. And it’s a much better design for us for the company. I think it works well for our employees and it works well for our visitors that we get, all of our vendors, and when we do get customers. But at the same time, I think we’re mining – the remaining committed to keeping our expenses out.

Douglas Ruth – Lennox Financial Services

So you’re going to go from $55,000 a month to $30,000 a month.

Michael Braun

Yes.

Douglas Ruth – Lennox Financial Services

And it will be approximately the same size?

Michael Braun

Yes, it’s similar, but it’s a much better layout. It’s one large suite. So yes, it’s a much better layout for us.

Douglas Ruth – Lennox Financial Services

Okay. And then my final question is, or more of a comment in that I think myself and some of the other investors on the call believe that the stock is undervalued, and we the investment community would really appreciate if the management and the Board of Directors would show faith in the company by buying some stocks. I think that would really move the price of the stock up quicker. So I think it’d really be a nice holiday gift for everybody else.

Michael Braun

Yes, and you’ve mentioned that in the past, and Doug, I appreciate you saying that. And we do believe in the company, and I think that you’re going to see the financial results much more favorable on a go-forward basis. Hopefully that will reflect in the prices of stock as well.

Douglas Ruth – Lennox Financial Services

Okay. Thank you for answering my questions, and congratulations again on the improved results.

Michael Braun

Thank you.

Operator

(Operator Instructions).

Michael Braun

Well, looks like we have no further questions. With that, we can wrap up the call. We appreciate the questions that came in, and for everyone that’s listening as well. Thanks for taking the time out in your day. We feel very good where we’re headed. We’ve had some struggles obviously in the past, but we’re clearly on the right path, and it’s nice to be back into a profitable quarter. We’ve got less than two months left in the fourth quarter and we see things trending favorably, and we’re very encouraged about 2012. So thank you and everyone have a nice day.

Operator

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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