Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Three Q2 019 quarterly earnings Conference call. At this time, all participants have been placed on the listen only mode and we will open up the floor for your questions and comments after the presentation and it's now my pleasure to turn the floor, but to your host <unk> Anderson, Sir the floor is yours.
Thank you good morning, and welcome to the National General Holdings Corp. third quarter 2019 earnings Conference call. My name is pull Anderson director of Investor Relations with me. This morning, a Barry Karfunkel, Chief Executive Officer, Mike way, not Chief Financial Officer.
Mr. Conklin Mr. whenever you hours. So please note the following with respect to forward looking statements members about management team may include statements other than historical facts in that remarks.
These statements are based on current expectations and involve assumptions difficult or impossible to predict accurately many of which I'll beyond our control.
That can be no assurance that actual developments will be consistent with these assumptions actual results may differ materially from those expressed or implied any statements as a result, a significant risks and uncertainties.
Including the fact is set forth in <unk> filings with the Securities and Exchange Commission.
The projections and statements in this presentation speak only as of the date of this presentation as we undertake no obligation to update or revise any forward looking statement, whether at the result of new information future developments or otherwise, except as may be required by law.
Our management will refer to financial measures not derived from generally accepted accounting principles.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures unrelated information is provided in the press releases from third quarter 2019 earnings which is available in the Investor Relations section about website at National General Dot Com.
It is now my pleasure to turn the call ever 12, CEO Mr. Barry Karfunkel. Thank you Paul.
Good morning, Thank you for joining our third quarter earnings conference call.
While our overall combined ratio came in in line this quarter, our PC segment underperformed, while our any segment outperformed.
I think into the issues that caused our PNC underperforming we realized prior year adverse development.
Related to small business auto driven primarily by higher jury verdict and what we believe with increased litigation financing on higher limit policies. In response to that we are taking guns rating actions that include cutting out island policies for certain business classes and territories.
There are a host of other actions that will be taking which I will review on this call, but we believe we have taken appropriate actions with respect to this product line I lower limit business remains profitable.
Also contributing RPC result were elevated non cat weather claims in the Midwest during the quarter, which had a 4 million net impact on our property book. We also had prior quarters can't development, which had an approximate impact a $5 million.
Lastly, we added some significant new account for lender placed products.
Within LPI, we start fracking flown on day, one, but first policies in place and filling in for days out and they count doesn't reach maturity level until one year out.
This product line is performing well in accordance with our expectation.
Our personal auto product is performing extremely well.
While our total personal vehicle gross written premium increased by 6.7% year over year I'd direct consumer business, which now comprises roughly 19 person of our total personal auto business has increased by 17% year over year with strong margin.
Contributing factors are.
We're in the process of revamping our online e-commerce experience, which we expect to significantly increase I quote completion and conversion rate.
Especial things start direct marketing team for their amazing work.
While our growth on the independent agency channel is more muted based on pure premium trend that we see we believe the market softness should begin system side.
Driven primarily by B. I severity.
Vehicle consumer price index has been increasing by 1.6 person.
We think stand out in front of at friend I, taking great equal to last call.
This is free catches up to pure premium trend, our independent agency business should be a primary beneficiary of that.
Turning to accidents and health.
Team has been able to produce spectacular where our small groups stop loss business continues its strong growth with solid margin our individual product, which is comprised of our short term medical and supplemental products grew at 9.4 person.
We recently launched our new short term medical product, which adds a lot more segmentation from the beginning of September when we launched a product until about a week ago I gross written premium from those states.
This is the value that we're able to bring additional lines of business with power of analytic segmentation.
You think additional data points, we have the insight into an additional segments performed well, but we're being overpriced and we focused our product accordingly.
Caution you against expecting topline growth of 44% as there were offsetting factors in other states, but it's an exciting data point.
We also launched our Vera health direct to consumer short term medical frame.
We would expect there to be contributor to growth during this open enrollment period as well.
You'll notice our third party fee income increased by 60% year over year to 26 million. This is comprised primarily of her agency and technology businesses.
One of our agency businesses that I'd like to call out.
Health compare right.
When we acquired H.T.I. in January 2017.
7 million during the quarter service.
Technology assets include a lead marketplace comparative rating.
Required our CRM capabilities and added further enhancements and integrated it within our other services to offer agencies, a full turnkey solution.
One of our claims utilizing our CRM functionality purchase the license to our CRM, which resulted in proceeds to the company of 5.75 million.
While it's not our normal course of business to pursue century instruments, we feel extremely excited about the longer term values that we're building and it's indicative of the value that weve, thus far created.
We're looking forward to closing on the sale of Euroaccident during Q1.
Summary, despite the headwinds that we face this quarter given that our diversified platform. We experienced an all in combined ratio of a 92.5, we have a lot of exciting initiatives, which we believe we'll continue to expand our top and bottom line I like to now trying to call over to Mike for further review of our financial results.
Operating diluted EPS was 59 cents compared to 65 cents in the prior year quarter. Our results in the quarter were impacted by 11.5 million of weather losses, which compares to 35 million of losses in the prior year quarter.
Catastrophic losses were lower than prior year, but we saw higher non catastrophic weather losses and development in our 2019 cats, which are not included in the 11.5 million dollar number.
Trailing 12 month operating return on equity was 14.5% as of September Thirtyth 2019, our fully diluted book value per share grew 19.1% from December 30, Onest 2018 to $18.16 no I'd like to give some additional details about our two operating.
Wins within the property and casualty segment gross written premium grew 5.9% to $1.2 billion driven by organic growth of 3.1% and the additional premium from the acquisitions of National forms Union insurance personal auto grew 4% organically reflecting can.
Two nude investments in our direct consumer distribution.
Servicing fee income grew 1.4% to $115.6 million driven by growth in personal auto.
The PNC combined ratio was 97% versus the prior year quarter at 94.4%, excluding amortization of intangible assets the year to date combined ratio was 93.3%.
Overall, our model line auto book and that trend defined as loss trend divided by premium trend is moderately favorable, thereby helping the year over year accident year results on our Monoline auto.
Which included the previous mentioned 5.75 million pretax gain on sale of software licenses in the <unk> to a third party in the quarter.
The accident and health combined ratio was 70.2 versus 77 in the prior year quarter, excluding noncash amortization of intangible assets.
Loss ratio was 41.8% versus 46.8% in the prior year quarter loss ratio reflects continuing improvement in the current accident year loss ratio for both small group to self funded and individual products.
We also had continued favorable prior year development of 18.8 million versus 13.2 million favorable development in the prior year quarter continue reflecting strong recent accident year trends in 2018 in both our individual and group business.
The expense ratio was 28.4 versus 30.2 in the prior year quarter, reflecting the increase growth in fees and third Party Commission revenue in our domestic business now I'd like to turn the call over to moderator for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posting your question you. Please pick up your handsets listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
Your first question for today is coming from Randy Binner. Please announce your affiliations and pose your question.
Hi, good morning, I'm with B. Riley Fcr and I have two questions. One I think you mentioned in the prepared remarks that there was a new lender placed account I just wanted to get some more color on that if I heard that correctly.
Yes, there were actually a three new lender placed accounts, we won't go into names.
Is there a typo financial institutions that had to impact of increasing our track loans a year over year by 45%.
<unk>.
And it's a definitely exciting.
To be able to grow that business. Yeah, I'd also add to that Randy as Barry alluded to in his prepared remarks, when we begin onboarding the tracking of it and so we have accelerated expense associated with that and the premium on track loans, where it needs to be place comes in on delayed basis. So we.
We have a higher expense load early on on it.
Yes, it is that.
The books of business is the penetration rate on the book, increasing meaning theres more folks who are are being placed into the insurance or is it just.
When you say track loans are increasing jimmied, because you added the accounts or because of the penetration rate on that book is increasing.
The loans that we actually track our.
Yeah, It's still say, okay. That's what I thought and then just an accident health.
Got it clearly is good result that just kind of thinking ahead, though can you give us an update on kind of initiatives around open enrollment and kind of expectations as we get.
Very close to two that period of time when you when you sell out of your product.
I can't give a specific guidance as to what's going to happen with top line.
However, just based on the initiatives we mentioned in his prepared remarks that we introduced new product with increased segmentation that we're really excited about we have we're launching car Vera health brand for that period, we feel.
Ill have really really excited about our position within the Medicare industry as a whole so I'm I'm excited about.
With a near and longer term prospects of our accident and health segment as a whole and we've also allocated some resources and head of Oh, we pay which will manifest itself. When we went when it opens up Mr itself. So at some really expenses, we put through associated with it.
Like call, but agent having agent.
Calls.
That would be how they'll centers that.
Your next question is coming from Matt Carletti. Please announce your affiliation and pose your question.
Sure Thanks, Matt Carletti with JMP.
Barry you touched on kind of nonstandard auto market conditions in your opening comments I was hoping you might be able to dig in a little bit further just in terms of what you what you're seeing in kind of frequency and severity in your book as well as what you're seeing.
Headedly you know what you expect kind over the next politics 12 months.
Yes, let me, let me, let me dig and I'll do a little on the frequency and severity on that Matt It's Mike.
So on our model on auto book, what we've seen is frequency declining slightly industry declining.
As well so roughly in line that.
Severity is up for the industry noticeably and up for us at a fractional rate of what we're doing and again, we attribute a lot of that to some of the works, we're doing and the and our business as a whole.
I think Barry did a great called out a few numbers earlier when you talked about loss trend. So the one of the ways, we're kind of thinking about it as we talked about is at CPI or consumer price.
And then you know what are you seeing competitively in the market I mean as it sounds like from your comments very that maybe you sounded like you expect.
More rational competition to to emerge as kind of the competition, maybe realizes that growing gap in the coming months like interpret that correctly.
So let me I'll talk about buried in one check yet and that's what we've seen in if you think about what we've seen and we played out this trend two three years ago, situated but by maintaining that underwriting discipline right and we've been that steady Eddie producer I think it's going to revert back you know, we talk about that gap between loss trends and where the industry is it's going to catch up its remember these are six month Paul.
She's we've also seen a number of sales incentives out there on the industry, which are somewhat on economical but on our through an add on to affect yeah. There have there.
You'll still be able to see.
I think giving agency.
Aggressive commission.
Plan.
Cash for at plans et cetera, So within independent agency market.
It's a quite competitive.
Right now and that's what.
Mike.
Alluded did too.
Within obviously, having a strong direct to consumer business during market conditions.
Like this is extremely helpful.
As industry.
Revert back to the mean with having the CPI catch up with pure premium trend.
Again, we should be in a.
Prime position to be able to capitalize on that and realized.
Some nights or growth returning to our independent agency channel.
Great. Thanks, a lot more affected.
And just if you could provide a little color on that was it just a big specific to that business or should we think about it more and more holistic view of I'm kind of getting back to say that the core of national general more domestic business.
And if it did the ladder.
Sure.
The business was a is that what's a standalone.
A business.
So.
Oh out focused on a domestic operation.
That we have.
That being said, we were able to leverage some of our core capabilities to add value to that of business, namely introducing segmentation that is something that never really happened Swedish marketplace.
So we added some value to the business and some found a a a good home for the business going forward as far as our business I mean, we believe that we.
Our businesses are a core tests, they have great growth prospects to them going forward and don't have any other such a businesses them that we would.
Think about them.
Selling at this point.
Matt just like that onset world I think were relatively good it being prudent allocators of capital throughout the company, where we get the best returns on the business right. So with the if you look at the interest rate environment that you, let's see what is your domestically to actually think about what it is in some areas like Sweden, where essentially there is negative interest rates to earn turn our return there is going to be increase.
In that space, we found a good home for it will take that capital and redeploy factoring in an adequate amount of return on it meant again, but we had one thing I do take away from it we had a lot of nice learnings and synergies throughout the organization, which we're going to be able to leverage here's to gone.
Thank you.
Your next question is coming from Jeff Smith.
Please announce your affiliation and pose your question.
Hi, Jeff Schmidt with William Blair.
Question on the the PTC segment looking at the expense ratio at 21%.
As you ramp up more I guess in some of that direct to consumer business here going forward, where do you think that can go I mean, what level improvements to expect there I mean can that reasonably go longer.
20% overtime.
Hi, This is Mike when you're talking well I think the biggest driver of that when you're looking at that number in our disclosure. It takes into account Smith ceding Commission income we have on the changing of the quota shares right as well as the mix our business the impact for US is relatively muted in terms, what we're spending on the direct to consumer side from that so.
I think it if you think about the level that is now in the 20.5% to 21% is probably a good number on a go forward basis for us.
Okay.
Yeah. It's great question. So it's roughly roughly split 50 50 between our group business as well as or individual business and it's coming from 2018, but I actually when I think about it it's not just coming from last year 2018, it's coming from third and fourth quarter of 2018 when people think.
About the business, we don't write all one one effective dates on our business. So theoretically if your wrote a policy.
This time, a year ago, right and that policy has gets more credible from an action to expected basis. When it comes to you know its annual.
Annual number that prior year that.
A couple that development pattern shows up in our disclosure as prior year development. So it's it's it's very short tail business. So it's all 2018 second half.
Okay, great. Thank you.
The next question is coming from Sean Inbox, Please announce your affiliation and pose your question.
Good morning, Sean right KBW.
How much of the PMC loss ratio wasn't true up for one or two in Twoq units here.
So we haven't done we gave it out in dollars on a net basis.
Which is $5 million.
On just talking on the Cat development from one Q in Twoq.
HM.
Well I guess I should say is there any true up to the small commercial stuff within the PMC loss ratio.
No. The PNC loss ratio, if you want to think about it from that perspective, not really a true up we've had prior year development in there for some prior accident years.
The of the number we disclose the 14 or some odd million dollars.
It wasn't any accident year, there wasn't any accident year catch up if you will think leaving the observing for that adequately.
Perfect. Thank you in terms of Texans or the homeowners book in Texas, I know you guys have taken some underwriting actions in California. Some growth in Texas is held material difference is the exposure there from the end of 2018, and specifically thinking about the Dallas area weather events that are I'm assuming.
Too soon for any loss estimates.
Sure I mean, where we've done the most of our reduction in terms of our exposure has really been out in California, but if you're thinking about the update in terms of the Texas tornadoes and presumed that's really until it's not going to having wasn't a material hit for us thus far.
We're still a few weeks out of it still relatively green, but that wasn't a large event for us.
Okay, and finally can you guys give an update on how the high net worth a book has been doing a year to date.
Sure it's been doing well, obviously, given the re underwriting of our California book, where that had a.
I had a deep a sizable presence and in the state. So a good amount of that business was non renewed along with but their policies in the state of California.
And outside of California, the businesses.
Growing getty at a moderate rate.
Thank you.
The next question is coming from Yaron Kinar. Please announce your affiliation and pose your question.
Hey, this is actually a Rob Cox filling in for your own cannot Goldman Sachs.
Just wondering if you could elaborate on a few I'd and small business auto talk a little bit about to litigation environment and what accident years caused the development.
So.
Accident years.
That caused.
Development in 15 through 17.
Primarily and litigation environment is the is one where as I mentioned both.
Juries are handicap larcher.
Verdict and due to.
The due to a lot of litigation funding.
Some of.
The the.
Cases have longer staying power, which has definitely had an impact on our development to try and calls.
So we we believe.
That's the 14.9 is definitely reflective of where.
Of Ah, we are reserves need to be and [noise] and we've taken on a go forward basis.
Underwriting and pricing actions.
It to be able to returned to profitability.
Okay, great. Thank you.
Sure.
There are no further questions in queue at this time.
Okay.
Very much everyone.
We'll end the call here.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.