CRM Holdings Ltd. Q4 2007 Earnings Call Transcript

CRM Holdings Ltd. (CRMH)

Q4 2007 Earnings Call

March 05, 200809:00 am

Executives

Mr. Daniel G. Hickey Jr. – Chairman and Chief Exec. Officer

Mr. James J. Scardino – Chief Financial Officer

Mr. Chester J. Walczyk Arm – Chief Operating Officer

Mr. Louis J. Viglotti Esq. – Sec. and Gen. Counsel

Mr. John L. Sullivan – Pre. Of Majestic  and Chief Operating Officer of Majestic

Analysts

Matthew Carletti – Fox-Pitt Kelton

Alper Sungur – Sidoti & Company

Jason Kish - Prospective Partners

Presentation

Operator

Good day and welcome to the conference call and webcast for CRM Holdings Limited Fourth Quarter and Year-End Fiscal Year 2007 Conference Call.  Today’s call is being recorded.  It is my pleasure to introduce Mr. Mark Collinson, partner with CCG Investor Relations and Strategic Communications.

Mark Collinson

Good morning everyone, welcome to the call.  Before I turn over to CRM’s Chairman and Chief Executive Officer Daniel Hickey Jr. and the Chief Financial Officer James Scardino who is with him, I would like to remind the listeners that during today’s call management’s remarks may contain forward-looking statements within the meaning of Federal Securities Law including statements concerning plans, objectives, goals and 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 maybe important factors that could cause actual results that differ materially from the forward-looking statements made in this call.  Such risks and uncertainties are discussed in the company’s Form 10-K for the year ended December 31, 2006 and in other documents filed since then by the company with the Securities and Exchange Commission.

These facts does 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 with the outcome of any litigation or arbitration preceding is unfavorable, the 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 the forward-looking statements made.  Any projections as to the company’s future financial performance represent management estimates as of today, March 5, 2008.  CRM assumes no obligation to update these projections in the future due to changing market conditions or otherwise.

That is all for me, it is now my pleasure to turn the call over to CRM Chairman and Chief Executive Officer Dan Hickey.

Dan Hicky Jr.

Thank you Mark and good morning everyone.  I would like to begin by welcoming our valued shareholders, our board of directors,  our management team to our 2007 year ending earnings call.

I would like to personally congratulate and thank our executive team, our Vice President, managers and employees for their efforts in our results.  2007 presented itself with an external market filled with challenges and pitfalls.  I am pleased with our accomplishments and feel that the company is positioned to succeed far into the future.

I am very pleased with the final quarter and year-end results we are reporting today.  Full year earnings per share was $1.24, up 41% over 2006 and our return on equity was 21%.  Our management team started 2007 out with a clearer strategic vision and executed in an extremely soft market.  Out core objectives consisted of execution and efficiency, geographic diversification, strategic alliances and partnerships and vertical integration.

Let me begin with execution and efficiency.  Our management team successfully integrated the management talent and improve the operating standards at Majestic .  Reinsurance treaties were substantially improved.  Our targeted and focused approach on industry selection and broker development was our mantra.  We canceled poor performing business and exiting the US selling age business and expanded broker appointments.  We performed and hit our financial benchmarks.  This accomplishment was in spite of a $0.23 loss in our New York c-business.

Geographic diversification was a major goal and priority in 2007 and remains one into our future.  Nearly all of Majestic  writings were housed in the California market.  By yearend, primary premiums exceeded the $100 million milestone with nearly 35% of the business written outside of California.  We entered the states like New Jersey and in the fourth quarter New York.  Focusing on the franchise value distribution model that clearly differentiated our services from our peers, we were filed and approved in new states like Florida and have active filings in a number of hand selected states.  Today our business model is balanced between primary access the same business in nine states with new states online for 2008.

Overall, underwritings are better balanced and allow for a more consistent and stable top and bottom line earnings with great opportunities for growth.

Strategic alliances have been forged with key trading partners and the diversity of geographic markets.  Our slow and disciplined entrance into carefully selected products began with approval for surety in California and finally initiated in New York. . All of the key strategies executed have lead to a more balanced portfolio of opportunities moving ahead..

I will be back to discuss the 2008 outlook but first let us hear from Jim with a little more detail on our 20% return on equity, $1.24 earnings per share.

Jim Scardino

In the fourth quarter of 2007, we reported net income of $4.9 million or $0.30 per diluted share.  Fourth quarter earnings increased 18.5% from the $4.3 million or $0.26 per diluted share we earned in the fourth quarter of 2006.  Return on average equity in the final quarter was 4.7%.  Net income was positively impacted by strong underwriting results as both Majestic and Twin Bridges including overall favorable loss reserve development of approximately $0.05 per share.

Quarterly revenues increased 58% to $42.2 million from $26.6 million a year ago as we continued to grow our risk based business, especially at Majestic, whose results were included for full quarter this year as supposed to a partial quarter last year.  Turning to revenues from each segment, c-based management services revenues were $8.2 million compared with $10. 4 million a year ago.  The decline is attributable to a shrinking premium and customer base in New York, price competition and premium rate reductions in California and lower commissions paid by Majestic than by prior year carriers for excess premiums.

In New York, managed premium fell to $74 million from $122 million as two groups ceased operations during 2007.  California grew membership by 5%, that saw rates retreat by about 23% causing revenue to decline 11% to $3 million.  Overall, the c-base business has generated a pretax loss of approximately $1 million compared to an income before taxes of $1.1 million a year ago.  In the risk based businesses, Twin Bridge has generated net reinsurance premiums of $6 million compared to $6.8 million dollars last year.

The drop was a result of flower premium volume in the self insured groups.  Pretax income was $4.3 million for the quarter, up from $4.2 million in 2006 and the combined ratio was 46.1% compared to 48.1% in the fourth quarter of 2006.  In our primary insurance segment, Majestic earned premiums of $25.6 million, an investment income of $2.8 million compared with $7.7 million and $900,000.00 respectively during the partial quarter of 2006 when we first acquired Majestic on November 14th.  The business contributed $5 million in earnings before taxes compared to the $1.2 million a year before.

Loss experience continued to be favorable in California.  Majestic’s loss rates for the quarter was 60%, while its combined ratio was 89.4%.

To echo what Dan said, Majestic has become a much more diversified business.  It generated 73% of its revenues from the state of California in the fourth quarter compared to 92% for Q1 of 2007, the first full quarter for which we owned the business.

Finally, quarterly expenses for the corporate and other segments totaled $2.1 million, up from $1.9 million last year.  The marginal increase was attributed to interest expense on the debt we incurred from our acquisition of Majestic midway through the fourth quarter of 2006.  Looking at the balance sheet, as of December 31, we hold $301.5 million in investments cash and cash equivalents compared to $234.8 million at year end 2006.  Long term debt at both yearends stood at $44.1 million, at December 31, 2007, the company had $107.5 million of shareholder’s equity, up from $83.6 million on December 31, 2006.  There will be more detail in the 10-K, but a very quick rundown on the S&P ratings on Majestic $194 million systems and portfolio with the assignment.  55% is triple-A, and 29% in double-A, 15% single-A and 1% is triple-B.

We have not exposures to CDO structures with subprime loans, either in Majestic portfolio or in our short term investments.  Looking to 2008, the risk based business continues to show the most promise of future growth and you will hear more from Dan on that in the moment.  Note that in 2007 our earnings of $1.24 benefited from approximately $0.30 per share from the combined effects of innovation agreement from New York Marine and General Insurance Company previously disclosed capable of reserved development during the year.  Our 2008 guidance is from $1.00 to $1.15 per share in earnings.  This guidance assumes no material effect from further favorable reserve development.  As Dan said, our New York trust business will be much smaller this year following the closure of 2 trusts in 2007.  Four of the six remaining trusts voted to close operations during the quarter and the fifth has notified us that it will be discontinuing operations after April 1.  All of this has been taken into account in our outlook.

Now, I will turn the call back to Dan for more on the coming year in the company’s strategic position.

Dan Hickey

We will begin our in our initial formation as core principles was amplified in our IPO has been successfully realized with 2007’s objective in so many ways, basic principles remain the same.  Stay focused, internally improve, selectively diversify, and stay with a long term value based growth plan.  2008 presents the market with caution and one which makes you stay disciplined.  We have in our guidance absorbed transition expenses in our whole market of New York, responsibly addressed growth opportunities and has set aggressive with performance guidelines for our management team that are being driven down through the organization.  Those principles are simple, work harder, work smarter, stay patient.  With that being said we have not fully tapped into our geographic expansion opportunities, our broker development opportunities, our acquisition opportunities, and our vertical integration opportunities and do not contemplate that on guidance.

I remain confident that in spite external challenges we have hand-in-hand with our management team built a better earnings model for today and long into tomorrow.

With that, Jim and I are ready for the questions.

Question and Answer Session

Operator

(Operator Instructions)

We will go first to Matt Carletti with Fox-Pitt Kelton.

Matthew Carletti – Fox-Pitt Kelton

Let us see if you could give a little bit more color on, we talked about some of the New York’s  c-businesses and because of the market, how they are electing to hold or disband whatever the proper term is.  Could you talk about that and specifically what the opportunity for you is having Majestic and potentially being able to roll that business over to Majestic on a primary basis and maybe as a reference point, what kind of success you had with that, with Hitney?

Dan Hickey

Thanks Matt, I will take that question.  First of all we are in a transition period in the State of New York. We had some sweeping rerform change in the state with the new Governor.  We feel that New York remains – short term and long term, strong and viable worker’s compensation market.

What is recently happening is with tightening regulations on the self insurance side, we have seen across the entire industry the challenges within self insurance and the bottom line is that today for trust members, the choice to stay self insured comes with an expense.  There were mediation and breakeven guidelines, are putting the trust funding at levels above what can be offered through traditional guaranteed cost insurance.  So we realized that and thankfully put ourselves in the position to handle the insurance needs of the industries and brokers that we select to work with.

In the instance of Hitney. we were able to write a significant portion of that business.  We had to be selective in the process.  There were some material rate cuts in that book of business.  We have transitioned a good portion of our transportation business effective January 1 - Our real estate business, our manufacturing business.  Today, premium writings in New York  are North of $20 million in written premiums.  That is in a period of less than 90 days.  It does not account new business that we have written, beyond January 1 and are seeing very active volume on a submission activity.

What is exciting for the management team, when we look at the New York market, is unfortunately for the last couple of years, New York has been a hold and retain market.  We did not have an active primary alternative and the self- insured groups were not in a position to go out and acquire the type of business that you would like to selectively underwrite.

Today, we sit with over a hundred brokers, handpicked throughout the state and feel that New York will be a primary market leader for us in the very near future, so we have a lot of ambition in the state, we have guided very cautiously in the state.  We think we are well positioned again with our service model, our limited distribution model to bring value to brokers and continue to be a strategic provider in the state for the end-users.

Matthew Carletti – Fox-Pitt Kelton

Another question, you mentioned geographic expansion opportunity and recently approved in Florida, what other states do you find attractive right now and when you think about geographic expansion, whether it be Florida or somewhere else, is it a primary opportunity of the reinsurance opportunity, is it a selfish or group opportunity?

Dan Hickey

Thanks for that question Matt.  The geographic expansion is very critical to us. If you look back and think about our initial IPO.  We started out in late 2005 with a two state company just providing self insurance as an alternative.  Today, we now operate in nine states in terms of providing premium.  We are licensed 16, one of the newer states that have come online with an approval is the state of Florida. There have  been some very significant strategic partnerships in that state.  With key brokers, nearly 40 agencies have been licensed and appointed in the state.

I go back to our model in recent success.  We started writing business geographically in New Jersey.  That was a hand-picked 30 brokers and that state, with today risk premium exceeding $15 million.  We are very proud of that.  We went into that state, with a focused industry and distribution on selection criteria to write that premium.

Florida we went with the same approach.  The mid-Atlantic are attractive to us.  We have access filings in South Carolina, North Carolina, Virginia.  We are looking at some mid-west states like Ohio, Illinois, Missouri, and Michigan.  All of those filings are active. We are taking again in our guidance that a very benign and careful approach in those states.  There is literally no material guidance, for performance in those states but real broker development and insignificant opportunities and that that is what I have tried to touch on with not fully tapping our opportunities and our guidance.

Our disciplines are going to remain strong.  The filings are active and it will be a blend of primary and a blend excess workers comp that will hit on those dates.

Matthew Carletti – Fox-Pitt Kelton

Thanks Dan, and then just one quick question for Jim.  I saw in the quarter the tax rate seemed to jump up a bit, is that related to the stable development or what would be driving that and what kind of tax rate shall we kind of assume going forward.

Jim Scardino

The tax rate was driven by the sort of mix of income that was comprised by Majestic and that the growth that they have had. As you know you pay taxes on business before you earn it under the US taxation and insurance companies.  As we are going forward we do think that the tax rate or the overall effective tax rate for CRM Holdings will revert to the low teens because about half of that income is going to be half offshore half onshore and so you are going to get about one half of the margin tax rate at 35, so 15/17 should be the overall segment tax rate.

Operator

(Operator Instructions)

Next to Alper Sungur with Sidoti

Alper Sungur – Sidoti & Company

Hi good morning Dan and Jim.  My first question is regarding the investment portfolio, what is the percentage that was credit enhanced?

Dan Hickey

Credit Enhanced?  We do not have derivatives in the portfolio at all.  It is pretty much a straight ahead municipal’s bonds.

Just in terms of your asking - I am not sure I understand your question.

Alper Sungur – Sidoti & Company

What percentage of the investment portfolio was credit enhanced by the bond issuers?

Dave Hickey

None.

Alper Sungur – Sidoti & Company

I guess, 36% of premiums written in 2007 were generated up by the California Market, do you have an optimum target for 2008.

Jim Scardino

In terms of the spread of where primary premium will be split. It is important to note that we are very bullish on the California Market.  We have taken a cautious  approach we have done that with our files, LCM’s, we have done that with broker appointment.  We have done in the industries we have written – but that being said, a better balance CRM Holding as a company that has a good geographic spread.

I would expect on a written premium basis and there is a couple of things to deal with here, written earned premiums, but on a written basis, I would think it would be a 50/50 split by the end of 2008 and states that would take on momentum will be states like New York, it would be states of continued growth in the states like New Jersey.  We are seeing activity in some border California state, like Arizona and we would expect to see some writings in the State of Florida.

Alper Sungur – Sidoti & Company

So 50/50% led by the end of 2008 -, right?

Daniel G. Hickey Jr.

That is correct, right.

Alper Sungur – Sidoti & Company

What is your premium growth expectation from IMAR in dollar amount?

Dan Hickey Jr.

Very flat in terms of what we put in our projection. As we look at IMAR, we again have a very differentiated service model there as pricees soften.  We are looking at lower policy counts, so with the IMAR model, we put again, very conservative growth expectation in that projection.

Alper Sungur – Sidoti & Company

Okay, last question, what was the number of claims at Twin bridges?

James J. Scardino

Twin Bridges right now, we have twelve plans recorded.  We have not yet paid any medical or indemnity expenses, but we have some actually reported claims from case reserve, but vast majority of the reserves at Twin Bridges remain in the form of  IB&R.

Alper Sungur – Sidoti & Company

As far as the first question, nearly of our securities are Triple-A annuities, so I think that is the reason that we have a negligible amount of credit backed.

Operator

And, we take our next question from Jason Kish with Prospective Partners.

Jason Kish - Prospective Partners

I wondering if you have the actual net written end-growth, if you have it, at Majestic in the quarter and also could you help me out,  I think you said there was five cents of favorable development in the quarter, maybe I am missing something, I am having a tough time getting to that number, could you just help me out with that.

Dan Hickey Jr.

Let me handle the written premium question.  Again, we are very proud of the work that we are able to do with Majestic and for our management team that is out there listening, they are to be credited for their efforts and what we think was a team effort to refocus on writings in that company and by refocusing writings, simply what we did is make it a more pro-active industry focused approach.  When we came into the company, primary premium was approximately $60 million at the time we acquired it.  We sold off the US LNH renewal  rights, to achieve to SeaBright.

We are non renewed a good portion of business in exccess of $10 million and then began the writing process.  It began with a very invigorated field base campaign with our brokers.  We crosshold brokers between CRN on the West coast and Majestic and began to write business.  The written premium on the primary basis, today exceeds $100 million, so if you take into account the US LNH, which I believe Jim, we have written off the final policy will be on April 1.

We have written that premium off and now are standing on a written premium basis north of a hundred million.  We expect 4-1 to be very active premium writing period for us in that business.  So, we are thrilled with what we have done with Majestic to tap into the talent, the core disciplines there of underwriting claims, safety, the engine room, as I referred to it and we think that those are impressive numbers, given the market challenges.  And we did it with extreme underwriting discipline.

Jason Kish - Prospective Partners

Okay and actually the written in the quarter, you have that number?

Jim Scardino

Yes, written in the quarter, the earned premiums were for the quarter.

Dan Hickey Jr.

Are you asking …

Jason Kish - Prospective Partners

No, I know what the earned where, I am just wondering what the actual net written to help with modeling out future quarters.

Jim Scardino

We had a very substantial 10-1; I do not have the exact numbers and results for 10-1, 11-1 and 12-1 but new business I would think in that quarter very conservatively exceeded $10 million but between the period of October, November and December on a new business basis and retention were strong.

That is Majestic.  I am sorry John we actually do not track written premium for financial statement purposes here and I do not have the production numbers with me and so I will have to get you that and I apologize not to have a written premium.

Jason Kish - Prospective Partners

And then on the, did you say a nickel on favorable development. How does that math work?

Dan Hickey Jr.

We had about a $1.3 million of favorable development at Twin Bridges during the quarter that was offset by about a net $500,000.00 going the other way from all the other sources of the business so that our overall favorable was about $800,000.00 which is about 5 cents a share.

Jason Kish - Prospective Partners

I thought in the release there was a Majestic favorable number of like….

Dan Hickey Jr.

We have for the year about $5 million overall favorable development at Majestic; if you take the $5 million tax effective you are still not going to get to the number we have because when Majestic experienced a favorable development they also incured a liability for return premium of the policy so it knocks down the amount that would otherwise go back, or otherwise hit the bottom line.

Jason Kish - Prospective Partners

I see, okay one last question you mentioned something about a surety; I do not know if that is a strategic alliance could you just give me some color on that?

Jim Scardino

Yes, our largest industry constituent is the construction business that business is made up primarily of commercial trade contractors, these are individuals that we underwritten going back to our origins to 1999 we have looked at the profitability and performance in this hybrid of surety; surety is a broad term and for us when we use the words careful entrance.  We have looked at the commercial trade contractor, we are not contemplating any earnings in our 2008 guidance but we do feel with our approval in California that we can handpick a portion of those contractors with even further limited handpicking of brokers and we think that there is real upside in our analysis and we worked with our intermediary partners at looking at results in this stand of the surety business; and we think this is a good vertical integration move for us.

Obviously the market is soft but we think this is an area where we can add the policy holder top and bottom line revenue, and an area that again we have great comfort because we would be adding this product to known entities, folks that we have done business with for a number of years and have a lot of intimate information in terms of their financial well-being.  So that is the key when you look at surety; we are not going to be targeting large general contractors; we are not going to be offering other products within the surety product portfolio.  Very limited, very selected in terms of end-user and broker.

Jason Kish - Prospective Partners

Thanks guys.

Dan Hickey Jr.

With that I would like to again thank our valued chair holders that have participated on our call.  Thank our folks for questions. We again are very proud and excited with the results in 2007.  That being said, our eyes are into the future, we are focused, we understand what needs to be done with the external market challenges and we feel with our differentiated service our limited distribution model, we do bring values in a tight market place and we’re seeing that with brokers who are coming on board with appointments and we look forward to reporting a strong and successful 2008.  So that our call will end, and take care.

Operator

This thus conclude today’s conference call, we appreciate your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at:. Thank you!