Q3 2019 Earnings Call
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I would now like they had the conference over to your speaker today Diane Weidner. Thank you. Please go ahead ma'am.
Good morning, and welcome to American Financial group's third quarter 2019 earnings results Conference call I'm joined this morning by Carl Lindner, The third and Craig lender co Ceos of American Financial group, and Jeff Consolino AFG CFO .
Our press release Investor supplement and webcast presentation are posted on <unk> website. These materials will be reference drink portions of today's call.
Before I turn the discussion over to Carl I would like to draw your attention to the notes on slide two of our webcast certain statements made during this call may be considered forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
These statements are not guarantees of future performance.
Investors should consider the risks and uncertainties that could cause actual results and or financial condition to differ materially from the statement.
A detailed description of these risks and uncertainties can be found an after these filings with the Securities Exchange Commission, which are also available on our website.
We may include references to core net operating earnings a non-GAAP financial measure in her remarks or in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.
If you are reading a transcript of this call. Please note that it may not be authorized or reviewed for accuracy dust. It may contain factual or transcription errors that could materially alter the intent or meaning of our statement.
Now I am pleased to turn the call over to Carl Lindner, the third to discuss our result.
Good morning.
Really start 2019 third quarter results yesterday afternoon.
If you please turn to slide three of the webcast slides for an overview.
And she reported core operating earnings of $2.25 per share, reflecting strong operating profitability and investment results from both or specialty property and casualty in annuity operations.
Third quarter 2019 annualized core operating return on equity was 15.3%.
Net earnings per share were dollar and 62 shots and included 15 cents per share an after tax net realized losses on securities.
Negative impact of 23 cents per share for annuity noncore items, including the impact of fair value accounting for fixed indexed annuities are.
Other items related to changes in the stock market interest rates and unlocking.
<unk> also included 25 cents for sure to strengthen or any reserves.
Craig and I, thank God or talented management team and our great employees for helping to achieve these results.
We have narrowed the range for expected 2019 core net operating earnings per share to $8 on 50 cents eight hours in 70 cents from the range of eight hours and 48 hours and 80 cents a announced previously while keeping the mid quite at the same $8.60 for sure.
Sure.
Craig and I'll discuss our guidance for each segment of our business in more detail later on the call.
Now, let's turn our focus to our property and casualty operations.
Please turn to slides four and five of the webcast, which include an overview third quarter results.
As you'll see on slide four gross and net written premium center specialty property and casualty insurance operations grew by 12, and 11% respectable year over year.
As we previously reported the weighed planning of spring crops resulted in late acreage reporting in our crop operations, which increased our overall third quarter premiums but.
When you exclude crop premiums gross and net written premiums each increased a healthy 9% when compared to the 2018 third quarter.
Core operating earnings and they have cheese property and casualty insurance operations were $194 million in the third quarter of 19 compared to $158 million in the prior year period, an increase of $36 million or 23%.
Specialty property and casualty insurance operations generated an underwriting profit at 88 million in the third quarter compared to 55 million in the third quarter 2018.
Higher year over year underwriting profit center property, and transportation and specialty financial groups.
Were partially offset by lower underwriting profit in our specialty casualty group.
The third quarter 2019, combined ratio of 94% was 1.7 points lower and the 95.7% reported in the comparable prior year period, and included 1.6 points and catastrophe losses, and 3.1 points a favorable prior year.
Reserve development.
Average pricing across our entire property and casualty group was up in excess of 3% for the quarter.
When you exclude our workers comp business were no pricing was up about 6% in the third quarter, reflecting a continued improvement from the renewal rate increases achieved during the first half of 2019.
Hi in fact renewal pricing in our specialty property and casualty group overall, it's the highest we've achieved in over five years meeting or exceeding our expectations in each of our specialty property casualty sub segments.
I will discuss in more detail, let's review the results of beach.
Although lost cost trends across our specialty property and casualty businesses remained stable overall.
We do continue to close we monitor loss activity in the impact of social inflation, along with general loss cost inflation and interest rates.
Now I'd like to turn to slide five.
To review a few highlights from each of our specialty property and casualty business groups.
Property and transportation group reported an underwriting profit of $38 million in the third quarter 2019, compared to breakeven underwriting results in the comparable prior year period.
Although nearly all businesses in this group reported higher year over year underwriting profits are the increase was driven primarily by higher underwriting profit in our transportation and property in inland Marine businesses and these increases were partially offset by the absence of underwriting profit in our crop business and the.
Third quarter 2019.
Catastrophe losses in this group were 8 million a third quarter this year and 13 million in the comparable 2018 period.
Third quarter 2019, gross and net written premiums were 17% at 18% higher respective way down the comparable 2018 period.
The increase was largely the result of year higher year over year premiums in our transportation businesses and the timing of a recording of crop premiums.
Now if you exclude crop gross and net written premiums were very strong increasing 13, and 14% respectively year over year.
Overall renewal rates in this group increased 4% on average in the 2019 third quarter.
I continue to be pleased with a broad based rate strengthening in this and this group, but nearly all businesses reporting increases in the quarter and corrective rate actions in our Singapore and aviation businesses.
Excessive rainfall early in the planting season in the Midwest and the upper plain States have made for a challenging 2019 crop year.
So I discussed last quarter, we incurred a record number of prevented planting claims due to spring flooding in excess moisture and turned our expectations for the crop year as below average.
Higher profitability in our workers compensation and social services business was more than offset by higher underwriting losses in neon and adverse prior year reserve development in our excess and surplus businesses.
I am pleased with a healthy growth achieved in this group for the third quarter gross and net written premiums increased eight and 7% respectively when compared to the same prior year period.
The growth in our ANS in excess liability businesses is primarily the result of new business opportunities rate increases and higher retentions on renewal business.
As well as lower premiums in our workers comp businesses, resulting from rate decreases partially offset the growth than the other businesses in this group.
The excluding workers comp year over year growth and third quarter gross and net written premiums was healthy.
In this segment, a 12 and 13% respectively.
Very pleased with these results.
Renewal pricing for the specialty casualty group was up 4% during the third quarter.
Excluding rate decreases in our workers comp businesses renewal rates and this group were up a very strong 9%.
Both measures aren't improvement from renewal rate increases achieved in the second quarter of 2019 and are the highest we've seen in five years.
I'm really pleased with the broad based pricing momentum across the businesses in this group during the quarter.
Including double digit increases in our excess liability in umbrella businesses.
Specialty financial group reported an underwriting profit of $26 million in the third quarter 2019, compared to $9 million in third quarter of 18.
Higher underwriting profit in our financial institutions business was the primary driver the increase.
Catastrophe losses for this group were 333 and $13 million in the third quarters of 1918, respectively.
The businesses in this group continue to produce excellent underwriting margins.
Third quarter 2019, gross and net written premiums increased by six and 9% respectively. When compared to the same 2018 period, primarily as a result of higher premiums in our Fidel winning crime and equipment leasing businesses.
Renewal pricing for this group was flat during the third quarter.
Now please turn to slide six for some review of our 2019 outlook for the specialty property and casualty operations.
Based on results to the first nine months of the year. We now expect to 2019 combined ratio for the specialty property and casualty group overall between 93 and 94%.
Well, we narrowed the range from our prior estimate about 90% to 94%.
We've also adjusted our estimate for overall growth in net written premiums to be in the range of 4% to 7% an increase from the range of 2% to 5% estimated previously.
Looking at each segment.
We now estimate a combined ratio in the range of 93% to 96% in their property and transportation group narrowed a bit from our previous range of 93 97.
As noted earlier, our revised earnings guidance includes the expectation that based on a poor 2019 crop year, we won't record any crop profits in the fourth quarter.
The first half of 2019 included 2018 crop year earnings that were recorded as claims were settled following a strong 2018 crop year.
Given our expectations for poor crop results. This year, we don't expect to record any 2019 crop your earnings in the early part of 2020.
Growth in net written premiums is now expected to be between five and 8% an increase from the previous range of for an 8%.
Our specialty casualty group is now expected to produce a combined ratio in the range of 92% to 95% up from the range of 90% to 94% estimated previously.
We now expect growth in this and net written premiums for this group to be to be between four and 7%.
An improvement from the previous range of to Institute of two and 6%.
Reflecting growth opportunities and strong pricing momentum and the majority of businesses in this group.
And we now expect a specialty financial group combined ratio to be in the range of 86, 89% an improvement from our initial estimate of 87% to 91%.
Additionally, we raised our projection for growth in net written premiums to be in the range of flat to up 3% a change from the previous estimate of down 4% the flat year over year.
Our guidance with regard to property and casualty net investment income has changed with results in 2019 expected to be up 4% to 7% an improvement from the previous estimate of 2% to 6%.
And we expect to overall property and casualty renewal pricing and.
In 2019 to be up approximately 3%.
Excluding workers comp, we expect renewal rate increases to be in the range of 5% to 6%.
Thank you and I'll now turn the discussion over to Craig to review the results in our annuity segment and and cheese investment performance.
Thanks Carl.
I'll start with a review of our annuity results for the third quarter beginning on slide seven.
Statutory annuity premiums were $1.1 billion into third quarter of 2019 compared to $1.4 billion in the third quarter of 2018, a decrease of 22%.
Higher traditional fixed annuity premiums were more than offset by lower fixed indexed annuity premiums.
In response to the contingent drop in interest rates in 2019, we have implemented numerous crediting rate decreases in order to maintain appropriate returns on annuity sales, which has tempered new sales.
In the second quarter of 2019, we changed the way we define annuity core operating earnings.
Beginning with the 2019 second quarter annuity core operating earnings exclude the impact of items that are not necessarily indicative of operating trends such as the impact to fair value accounting for fixed indexed annuities unlockings and other items related to changes in the stock market and interest rate.
Yes.
Core operating earnings now include an expense for the amortization of fixed indexed annuity option costs, which is a better measure of the cost of funds for fixed indexed annuities.
We believe these changes provide investors with a better view with a fundamental performance of the business in a more comparable measure of the annuity segments business compared to its peers.
Turning to slide eight you will see the components of pre tax annuity core operating earnings under this new definition.
Results for the the prior.
For the periods prior to the second quarter of 2019 are shown on a comparable format to the new definition of annuity core operating earnings and are reconciled to previously reported annuity core operating earnings.
We'll evaluate our excess capital position before the end of the year.
Or opportunistic share repurchases through the balance in 2019.
Slide 16 shows a single page presentation of our updated 2019 core earnings guidance.
We've narrowed the range from 850 to 72 850 to 70.
Our guidance assumes an effective tax rate of approximately 20%.
On core pretax operating earnings.
Such as realized gains and losses.
Annuity non core earnings in Washington, and other significant items that may not be indicative of ongoing operations.
As a reminder to ask a question we need to press start wondering your telephone.
To withdraw your question. Please press the pound key please stand by what we compile the Q and a roster.
I wanted to ask about.
Business being done in New York.
Our knowledge were not.
It's it's not an issue at all with us.
Great.
And then switching over the property casualty side.
The topic does your this quarterly earnings.
I would happen travelers with their.
Commercial auto business and.
I think.
There are you at least that.
Besides the relevant point of where you start.
Profitability point, your starting point that there seems to be an acceleration.
The attorney.
Involvement in claims been released over 2018.
As you probably saw they put some slides out.
Suggest that.
Is that something you're seeing as well at your business that acceleration in the tort environment or is it just not in here.
Or maybe something else going.
Business.
Is different from.
Trim line on the claim side.
This is Carl.
I think we've seen an uptick in severity going back.
Two 2012 so.
Hard to say, whether you know there is a acceleration over the past year.
We identified.
The the first uptick like I said back in 2012, and we're in our eighth year of rate increase so.
And in underwriting actions and I think Thats why were blessed to be where we are.
You know profitability wise.
At National Interstate in in our Great American trucking.
That said.
We continued in the commercial auto liability part of the business, we continue to see.
The severity trend you know up and Thats reason why.
We we took 9% in price.
And the quarter.
And because of those trends will continue to be aggressive.
On price we we.
That's one part of our commercial auto.
Business there at National Interstate that we feel we want to.
Improve our underwriting profitability on even though we're making a.
Probably a small underwriting profit.
Thank you I'll, let some other please go ask questions, but I appreciate the answers and health.
Thank you and our next question comes from the line of Greg Peters with Raymond James Your line is now open.
Good afternoon.
I will focus on two questions in the property casualty business and then give Craig good chance to have another glass so no sip of water.
In essence annuity question first in your comments Carl.
You mentioned.
How the 2019 year.
Included some benefits earnings benefit from crop business from 2018, and then you went forward and said it's reasonable to assume.
But because of the poor results in the 2019 crop year, you won't see that same sort of benefit in 2020.
Now assuming I heard you correctly I was wondering if you could give us some numbers around that.
We know we don't give specific crop numbers.
And that we don't we don't break those out.
But you heard correctly.
A lot of times, the we've not settled all the claims.
For a given year until the next year. So there's always the potential for favorable development or.
Unfavorable development.
Either way and generally were fairly conservative so.
There have been years, where we've had favorable development.
In previous years turned out to be very good and that was.
That was the case.
This past year. So yes, since we're saying this year, we feel like we're not going to make any money. There you know, it's a zero crop profit year Theres nothing at this point, we feel that.
I would get carried over.
Into next year in the first half.
Yes, so I guess since you're not giving us the numbers, it's probably not material to your overall consolidated financial position.
At least that's what I'm going to for.
If I can pivot to the casualty business.
I noticed you know.
Bunch of comments around pricing about growth.
And.
Usually came along with the caveat excluding workers comp I was wondering if you could update us on your views on your workers comp business is this.
Growth business for you.
Is the rate environments.
Still attractive for you to grow the business or give us a perspective on how you're feeling that business. Please.
Sure I'm happy to.
Just to put things in perspective workers comp is a little under 19% of our overall direct written premium that we're projecting for 2019.
Our overall nine month results for this year are very good.
A healthy accident year combined ratio on a very healthy calendar year combined ratio through nine months and the outlook is the same for for the whole year.
Gross and net written premiums.
Overall, our down low single digits for nine months and to be about the same through year end and mainly reflecting the price decreases.
That there have been.
And some of our.
Larger states and then.
When you look at the pieces of our business.
The large entities that make up or the the acquisition of summit.
We're making a small accident year underwriting profit a healthy calendar year underwriting profit.
Price premiums down 3% to 4% prices down about 11%.
The loss cost trends continue to be very favorable in California, small, which is a smaller part of our business. He stays premiums are down about 9%.
With the with pricing down 11% this year.
We're projecting a modest.
Accident year underwriting loss for our California business and about a breakeven calendar year.
Number.
So.
We feel California is stable claims environment.
We feel our reserves are strong.
Both are somewhat Republic parts of our business.
Loss loss cost trends seem to in California seem to be.
In control.
The other part of our business National Interstates comp business is doing well our strategic comp the large deductible part of our business very healthy.
Accident year calendar year.
And.
And some.
Little bit of growth there.
So I think what's really driving the premium change you're really.
Because the experience from the prior years has been.
Continuing to improve over the past couple of years.
That's brought about rate declines in a large number of stage so.
Thats I think because of the rate declines.
We don't foresee.
Really there being a lot of growth and in fact, as I mentioned before through nine months.
Our premiums are down low single digits.
Does that help it does.
Thank you Carl would you characterize your rate decreases.
In workers comp is being inline or better than what is coming out of any I see.
I think it's generally in line.
Okay.
Thank you for that answer.
So I thought I'd, just pivot to Craig that sounded like you are.
Frog in your throat during your prepared remarks.
Anyways.
On slide 15 of pure.
Supplemented you provided very detailed breakout.
Premium by.
Segment by by financial institutions by retail by broker et cetera.
And it's noted because of what you said about.
The interest rate environment that you're.
Total premium volume is down.
Pretty meaningful as a compared to certainly the for the third quarter last year, and then of course the fourth quarter.
The fourth quarter and first quarter of this year.
And I'm just trying to gauge.
Looking forward.
Because it seems like just further rate increases rate decreases that are possible is there going to be another step down in premium production or maybe I suppose it's contingent about how the plus the competitors on the market, maybe you could give us some perspective on that Craig.
Sure first of all thanks for good let me rest of my voice for a couple of minutes I appreciate that.
The environment has been pretty competitive this year Greg.
We historically have been faster to change rates, both on the downside any upside.
When we see significant.
Changes in interest rates.
Some of our competitors frankly, we'd.
Much much longer than we do some of them don't make changes for in some cases 345 months no matter what rates are doing.
We are much quicker to to make changes and therefore when interest rates are declining.
We're reducing credited rates faster it has an impact on our premiums has a negative impact on our premiums when rates are going the other direction.
We historically have been quicker to to increase rates again to to hit our target agreed to returned in consequently, and those periods our premium typically grew faster than the industries.
I mean my experience in the in the business is that.
Overtime, most competitors become rational so.
And if you look at our history.
Typically after a couple of very strong premier be years.
There can be declines for for some period of time, but I think we have a.
Great relationship with our distribution partners I think on the investment side, we are.
Among the best in terms of the performance.
And I think our costs are competitive with about anybody in the industry.
So long term I believe our premiums.
We're going to be justified our market position is going to be just fine I can't predict at quarter to quarter.
But I feel very confident confident that certainly over the next couple of years.
Premiums will.
We're going to regain the growth trend.
Thank you for your answers.
Sure.
Thank you and our next question comes from the line of Amit Kumar with Buckingham Research Group. Your line is now.
Thanks, and good afternoon.
It's a few questions maybe starting with PNC.
I want to go by choice I guess Paul's question on.
Travelers comments, if you look.
If rent versus what a travelers to commercial auto book might be can you just maybe a bit more about.
The quality of the nature of couple of course is some other players.
Well our book, obviously is heavier passenger transportation.
Probably.
Yes.
I don't I'm I'm, not a student of travelers business, but.
Travers probably is their book would be probably smaller to medium size.
Risks for the biggest part would be my guess.
I know that that would be my understanding of.
The differences in that were again, we're focused on.
You know.
Passenger transportation and different.
Niches within within the transportation side.
Okay.
That's helpful. Second question I had it goes on.
Neon and.
We've had a bunch of calls so I might've missed if you made any opening remarks.
Any thoughts on that.
Wallboard.
I know there with a lot of comments into trade press previously on that.
And I'm curious if you had an update or how should we think about that going forward.
Hello. This is this is Jeff.
Clearly we don't endorse.
Or comment on speculation in the trade press or things of that nature.
So I really don't have anything to say about that.
We were disappointed with Neons results this quarter.
It's disappointing because the third quarter of 2018 was one of Neons better quarters.
You will see in the press release that contributed to.
Little bit of negative variance in our specialty casualty segment.
We did hold our full.
Pat load in the quarter.
To evaluate Dorian and other events that happened.
So we didnt have.
Cash earnings in the quarter, which is the heaviest cat quarter of the year.
And then we were impacted by.
Large losses in our blend stock and some other areas.
That were above our expectations as well as some expenses related to the management changes that we announced earlier in the here.
So we're working hard on the business.
We believe that Lloyds can be a good place to be a specialty insurance and reinsurance company.
Hey, AFG has an excellent specialty.
Insurance company.
And we're working towards making neon beat the kind of business that's consistent with the results we can generate.
Our businesses here and.
We can get the appropriate return on capital there neon can be a part of our business for very long time.
That's helpful up the other question then.
Before you Jeff.
Excess capital and opening remarks, you talked about.
Nothing would preclude you from.
From a special dividend in Q4.
Can you talk about.
Your appetite for what's out there I'm curious just based on.
The market has been how the valuations out into PNC space.
Probably the should we lean more towards an excess I'm sorry, the special dividend at this stage or how should we think about that.
And that this is Jeff.
Yes, so I provide analysis and our CEO is determined what to do with with excess capital as I'm going to invite carload Craig to comment on that.
I think the anything we'd say at this point images that.
We're going to take a look at what our capital demands are you know over the next month or so and.
I will will determine whether we want to do another special dividend at that time so.
That's probably the best I can do.
Okay. That's helpful.
A question I had was.
On your investment portfolio you have.
Lows in that.
There's obviously been a lot of discussion on.
Going forward I was curious if you.
Add any thoughts on that asset class and how should we thinking about your exposure to see a lows.
Okay.
Yes. This is this is Craig.
We do have investments and see a lows the vast majority of the investments or in.
The very highly rated tranches.
And we're very comfortable with the credit quality, we do invest took a small amount of money in the equity portion is were.
In most cases were actually the manager this close it's been a.
A great business for US. If you include the the fees that we get for.
Managing.
That activity to the returns have been extraordinarily strong. So I don't think you're going to see a big change in our position there we.
It's something that we obviously monitor very closely but.
We're we're pretty comfortable with our position there.
And I guess thing or the topic of.
I know the segment can you.
Yeah.
Every 25 basis point shift.
What is the impact.
On on.
On your sales and.
How should we think about that impact on the book for 2020.
So when you say you mean 25 basis point change in interest rates, yes, Sir.
So as it relates to premiums it really depends upon what our competitors do with their credited rates were.
We're going to do our best to adjust credited to reach to earn or target had reached a return in.
Hopefully are competitors are going to do the same thing historically over time they get.
Disciplined in our expectation would be that will be the case again.
This time around but certainly the from the standpoint of industry sale was of.
Traditional fixed and indexed annuities the environment is better in a higher interest rate environment.
The lower interest rate environment.
In terms of our competitive position with a decrease in reach that we're trying to predict what.
Packed on premiums might be Thats tough for me to do and less on though with the competitors are going to do with there whether credited rates.
That's helpful.
Last question on on PNC.
Going back to I guess Paul's question.
Broadly when you look at the toward climate, the social deflation the jury awards.
Theres obviously a.
Differentiated commentary coming from different players regarding how to think about margin expansion from here.
Curious if you had any thoughts or are you thinking about.
Or loss differently.
Versus maybe one or two quarter cycle when you look at.
Climate out there thanks.
Yes.
We do.
Actuary reviews on all of our businesses and had discussions with management every quarter.
So.
As we see changes and trends are severity or frequency up or down severity up or down work.
You know numerous times during the year.
We're making whatever adjustments, we feel are necessary to.
The Conservative we project, what we think our current accident year profitability as business by business. So.
We're always thinking about those things and we have a.
A pretty specific process.
To address to address those changes in that so.
In our in our case sure we have some concern some more aggressive and effective attorney attorney activity and you know the jury awards seems like to de sensitive so de sensitive diseases.
Position of jury awards.
As it impacts various businesses.
I think in our case.
No.
We really see that in just a few more so in a few places there's only overall our loss cost trends are very stable.
It would be commercial auto liability, which I've kind of already talked about.
We've seen app for a long time and.
Actually.
We continue to take.
Pretty big rate increase in the commercial auto liability part of our business to keep up with things but.
That businesses is meeting our profit targets today and in fact, we look at that as an opportunistic areas, we have our house in order and.
Whether it's the Atlas transaction or being able to grow double digit organically even outside of that.
So we think we've been at that a long time.
The Dino area, you know is probably.
The second area that we kind of see the impact of those trends and of course, we're adjusting our perspective on things.
And that.
Okay.
In the Dnos side I think the good news bad news for US the good news as public DNL is really kind of where we're seeing those trends the most.
In our case public being only represents about 15% of or do you know premium when our executive liability business.
And our limits are low in our average than that limits under $5 million.
So we are.
Adjusting rates Retentions limits.
Along with the market there and are.
As our as with our commercial auto liability or commercial auto business, our our overall Dino businesses performing.
Fine, it's the public Dino part.
That.
We'd like to see performing better.
I think it's probably going to take a couple of years.
Even with the size of the rate increases.
For the industry to achieve rate adequacy with.
Some of the trends.
That everybody's seeing.
NVNO.
So.
We'll be increasing our that part of our business with rate and very cautious in our increase or appetite cautious way as we feel rates are getting.
More adequate but I think it's got to be a couple of years.
And then the other part of our business.
A big part of our business Thats very profitable today and that we're pleased with.
We're watching the loss cost trends, which are a little above normal for some of these same reasons is the excess liability in umbro area.
Upper business.
Hi.
In particular in and when we look at our book, it's accounts with underlying commercial auto liability exposures that.
Seem to be contributing to the severity in the excess layers and.
We're taking significant rate.
And and taking underwriting actions also in our Habitational part of our business there that we see some of those trends.
Affecting.
So.
Overall, very pleased with our excess liability number all business and it's probably those two pieces of the business.
That you know, we're seeing those trends impact the most.
I think as we're opportunistic and entrepreneurial.
I think.
It's giving us some opportunities in that area.
Frankly.
We're growing double digit and were our renewal rate increases are double digit.
In our overall excess liability in Umbro business. So.
I see that as an area of opportunity for US again. Another example, kind of like commercial auto were I think we have our house in order.
And it's just a few pieces of the business that were.
You know paying more attention too so.
Does that help yes that color. It's very helpful. I will stop here. Thanks for all the answers.
All right.
Thank you and our next question comes from the line of Christopher Campbell with KBW. Your line is now open.
Yes, hi, good morning.
I guess my first question is on property and transportation were there any benefits from Atlas this quarter.
We're early on in into the Atlas.
In a real transaction there were some small amount of premiums in the quarter from Atlas, but I think it'll be more significant as we move into the fourth quarter in next year.
Okay got it and then how much of that premium estimated is that about 100 million annually.
Chris This is Jeff what was disclosed as part of the transaction and by Atlas is the paratransit book is approximately $120 million.
We've got the right to go through work with them to write the business on our pricing terms, we hope to.
Right at the rates that we're comfortable with and will renew whatever business stick at what we considered to be the right rate.
Hi, that'll be a 12 month cycle from start all the way through.
Yeah, Chris if I, if I would have put a dollar amount on I think probably in the fourth quarter, we might see $10 million to $15 million of.
A business and then.
As we're working through some.
Systems transition and that which I think will improve.
In our ability to renew the business going into 2020.
Okay. That's helpful.
Also within property and transportation you guys had some core loss ratio improvement this year, which has been the first time, we've seen that get better year over year in a while I guess, what's what are the big drivers there.
Well I think the transportation results continue to be very strong property inland marine and thing.
Vince improvement.
Chris we improved in the quarter on the accident year ex cat loss ratio by about two points.
Property and Marine our unit there was responsible for the majority of that.
And aviation, it's not the result, we're hoping for but.
Compared to a year ago quarter, we've seen improvement there as well.
Okay great.
And then switching over to specialty.
I think the press release noted.
Part of the growth was driven by DNS, but then you also had an adverse charge and so I guess, just how do you feel comfortable growing that business and.
Feeling that your rate adequate right now.
Chris could you repeat the question about the adverse charge. Please.
Yes. So I was just wondering as a big part of the growth this quarter in specialty casualty was called out to be an ad.
Excess and surplus within the press release, but then you also had a reserve charge within that so I'm just trying to get a sense.
Where are you guys feel you are in terms of rate adequate.
Well I defaulted, what Carl just said overall, we're very pleased with the excess and umbrella businesses that operate within that.
They are performing at a high level. There are places, we're taking a look at and making sure that we're applying our underwriting criteria appropriately and writing the business. We wanted the rate we won nuts.
Ongoing.
But overall I.
I think Carl's comment was we feel like our houses in order there and we've got the opportunity to grow that business.
Okay got it and then just what loss cost assumptions do you have on the overall book like I know some competitors have Chad three to four and they've increased those to maybe four and a half where do you guys said in general like on that but what's the long term.
Loss costs assumption that you guys bake into price.
I think probably in the range of 3.5% to 4% something like that on a loss ratio trend.
Per unit for just that just that segment.
Got it and in it that would that be similar overall or would that be slightly higher with commercial auto or I guess.
Hi, Chris probably commercial auto is seeing the highest loss ratio trend but.
When car always talking in response to mentioned earlier question.
And recognizing social inflation.
Do you know is one place, where we're seeing it but that excess and umbrella business is certainly a place we're seeing it as well.
The double edged sword, you need to make sure that you.
Properly reflected it.
Maintain reserve adequacy and pricing integrity.
But since these trends are well known that creates the rate opportunity.
We're seeing and since we believed that we are prudently reserved.
And well aware of the of the loss cost trends.
We feel like in a lot of ways, where in a position to grow effectively in that kind of environment is we're not for the most part dealing with big problems.
Okay got it and then just I mean, so so if you're thinking about commercial auto or like the rate flaky loss cost trend like high single digits.
Kevin said I think Karl said, you guys were at target profitability.
And looking to grow so I mean is it.
Taking rates like in line with that any guys. Thank you can grow because everybody else in the industry needs to take more I guess, just what's the opportunity to take market share in.
Well, we back again were in our eighth Europe rate increase.
And.
National Interstate we took I think we got about 5% in the quarter and we had 9% commercial auto light commercial auto liability.
Overall national Interstate loss ratio trends are for Percentish.
A little higher than average you know.
And again was one of them the areas that I mentioned that.
Severity is higher.
And that were appropriately continuing to take rate, we'd like to improve our commercial auto liability combined ratio.
Even more even though you know were profitable today.
So.
We feel our houses in order and were able to it you know to can tenure to.
Take advantage of opportunities, we're pleased to have the opportunity on the Atlas transaction at our prices.
We're pleased to have an opportunity as the markets and distinct isn't disruption.
With a.
Lots of people.
Taking care of business.
We see that as we were opportunistic.
With our house in order, we feel that we can.
Carefully.
Grow our business and.
We are growing at double digit today.
And also take it.
Pickup some opportunities on the M&A side so.
Does that answer your question, yes. The guys. Thank you had very helpful and one on annuity.
Is 95 million good quarterly run rate going forward like as we think about modeling into 2020, any what factors could put that at risk score either way right which were.
What could help drive outperformance and then what could what could lower that run rate.
Sure well first of all growth in the assets and reserves obviously is a.
It is additive I mean, that's that's a plus factor.
Swings in Mark to market on.
The investments that are in that category that are more can work at quarter to quarter there.
Those investments continued to grow but you know the returns have been.
Very very strong historically over the last couple of years and our hope is that that will continue but.
No that can obviously impact the.
Quarterly numbers.
And then you are the negative impact of lower short term rates.
On our.
3 billion or a little over $3 billion of floating rate securities and.
And we do hold some cash in addition to that but I think as a starting point the number that you threw out is probably a.
A reasonable number and then you have to make adjustments.
For growth on the positive side.
Impact of lower short term rates on on the negative side. So there are lot lot of obviously lot of moving pieces that.
Impact the profitability, but.
And just reinvestment rates run off of the existing portfolio.
And reinvestment at lower rates, but I.
I guess.
I would say the.
Flip side to the negative impact of lower short term rates is there certainly or some investments that we've made over the last three four years that are.
Our big beneficiaries of the lower rates, we've been a fairly meaningful investor in.
Real estate specifically apartments.
Over the last several years and cap rates on the apartments, just continue to come down.
Most of those are held in partnerships that are mark to market. So if I were taking to guess on the works.
Assuming interest rates.
Remained low I think them works on those investments should be pretty positive going forward. So it's not all negative in terms of.
Impact on investment income there are some.
Investments that we've made it will will benefit from the lower rates.
Okay, great. Thanks, all the answer is that the lock in the fourth quarter sure. Thanks.
Thank you and our next question comes from the line of Jay Cohen with Bank of America. Your line is now open.
Thanks for your keeping the call going for me.
Just I think into the answer to this but just from my modeling purposes.
The crop business the benefit you had in the first quarter from the 2018 year that all showed up in favorable prior year development is that correct.
No not entirely Jay some of that would show up in commission adjustments, which would show up in acquisition costs.
Okay, I think I got that alright, good on and then the other question specialty casualty as we look into 2020.
And it seems as if the Ns business given the rate increases has the potential to improve margins one with respect neon given the actions, you're taking should see better margins and price increases better margins next year.
Arguably the workers comp business could feel some pressure on margins.
All in just Directionally do you think the margins in that business should improve in 2020 versus 19, forgetting any big catastrophes.
Jay where we haven't issued guidance for 2020, and we generate try to do.
Pretty accurate thoughtful job when we when we discuss that.
So we havent issue debt as far as.
Your assumptions of you know with with rate.
Should come margin improvement, where where we're getting rate head of loss cost trends that that would be accurate and workers comp.
As rates move down I think it's.
You know a good assumption that.
Even though our workers comp underwriting profitability is excellent.
We probably won't earned the same margins.
Now going forward. So I think all those things will get as we consider.
We consider what our guidance should be segment by segment sure will.
Pack all those things into the guidance that will issue so.
Got it I will await that guidance when we hear it. Thank you.
Thank you and our last question comes on line of Larry Greenberg Janney Montgomery Scott. Your line is now open.
Good afternoon, and thanks, and I really just have one question and it also relates to crop and maybe picks up a little bit where.
Greg NJ lift off.
If I look at the property and transportation unit.
Over the last four years, so 2016, and then inclusive of this year the first quarter almost always had the biggest reserved for leases.
And so I guess two questions.
One was there a favorable crop in each of these 2016 to 2019 years and then.
To is it reasonable to assume that the difference between the first quarter reserve development versus the other quarters of the year.
Is mainly attributable to the to the crop contribution.
Larry This is Jeff.
I have to say that.
I am not walking around with with quarterly development going back all the way to 16 so.
Not really comfortable giving you.
Specific answer on that.
Take directionally.
You would've seen variable crop development, making a big contribution to last year's quarter.
Maybe just taking a step back why did we feel like it was appropriate to make a comment about crop.
Given that we're not issuing guidance for 2020 yet.
We're saying where you have zero crop earnings in the fourth quarter.
And we're not likely to.
If we don't say that were not likely to see favorable claims development early in 2020, we just didn't want you. All this day well crops is zero this year, but we're going to throw some amount in 2020, and thats going to be significant growth because.
You need to be aware to factor is favorable development in the first half of 19.
Well, we'll give you a thoughtful answer on guidance.
Which I know James eagerly awaiting and we'll put that out when we put on our earnings in February .
Thanks.
But just can you could pass on this one too I mean, just conceptually would would bid.
Between the first quarter and and other quarters of the year.
Be largely attributable to crop.
Larry It depends on the year and.
So we've had.
Favorable reserve development from other units within property and transportation overtime, So I wouldn't want to isolate that just to crop.
Okay fair enough.
Thank you and that does conclude today's question and answer session I would now like to turn the call back to Diane Weidner for any further remarks.
Thank you all for joining us. This morning, we look forward to talking with you again as we share our results for the fourth quarter. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.