Q3 2019 Earnings Call

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Good morning, welcome ladies and gentlemen.

Third quarter earnings teleconference.

Well the company.

The conference thoughtful questions and answers.

Before we got started let me remind everyone that's where the teleconference.

Let me make comments that reflect their intentions beliefs and expectations for the future.

These forward looking statements are subject to certain risk factors.

Cause actual results to differ materially.

These risk factors listed in the company's various.

Filings, including the annual report on Form 10-K , we should do we viewed carefully.

He has filed a form 8-K with the Securities and Exchange Commission that contain the press release announcing third quarter results.

<unk> management May make reference during the call to operating earnings and earnings.

From operations, which are non G.P. measures the financial results.

<unk> operating earnings and earnings from operations consist of net earnings after the elimination of after tax realized gains or losses, and aftertax unrealized gains or losses on equity securities.

All realize management believes these measures all useful engaging cool operating performance across reporting periods, but may not be comparable to another companies definition up operating earnings.

8-K contains a reconciliation between operating earnings and net earnings.

Eight key and press release, all available at the company's website W.W.

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Dot com, that's www dot alright, like coal Dot com.

I would now like turn the conference over to all realize chairman and CEO Mr. Jonathan Michael. Please go ahead Sir.

Thank you and good morning, before we get started I want to introduce you to earn decent color our chief investment officer.

He has recently taken over Investor Relations you maintain responsibility for.

Our invested asset portfolio.

Many of you already know a D.

He's been a court member of the team for nearly eight years.

Fair, we'll get a started then we'll be glad to answer your questions at the end of our prepared remarks Eric.

Thanks, John welcome to our Allies third quarter earnings call for 2019, apart from John We're joined by Craig Kliethermes, President and Chief operating Officer, and Todd, Brian Chief Financial Officer first Todd will give some brief opening comments comments on the quarter's financial results.

Thanks, Craig will talk about operations and market conditions.

As John referenced we'll then open the call two questions and he will close with some final thoughts Todd.

Thanks, Aaron and good morning, everyone.

Last night, we reported third quarter operating earnings of 57 cents per share.

24% from the same period last year.

Notable improvements in both underwriting and investment income were accompanied by increased momentum on the production side. That's gross premiums written advanced 16% in the quarter.

Cash flow from operations remained strong at 81 million for the quarter and 187 million on a year to date basis at $22.30 per share book value has grown 27%.

Since year end inclusive of dividends.

On the topline standpoint as mentioned gross premiums written were up 16% in the quarter.

The growth we've experienced over eight quarters has accelerated recently.

The majority of products and our diversified portfolio participated in this trend, excluding previously announced exits and repositioning.

By segment casualty was up 16% and property advanced 24% as the rate environment improved and submission counts increased in both.

Surety premium declined 2% in the quarter modestly improved from the to the prior two quarters trend.

Greg will talk more about our products and market conditions in a minute.

From an underwriting perspective, we posted a combined ratio of 93.5 compared to 96.1 a year ago.

Loss ratio declined 3.3 points as benefits from prior years reserve development increased and casualty losses decline.

Net of expenses prior years reserve benefits totaled 12 million walk catastrophe losses from Hurricane Dorian and tropical storm, a melded totaled 3 million.

From a segment perspective, the majority of favorable reserve development wasn't casualty.

Notable amounts from general liability.

Excess liability, which we often referred to as umbrella.

Special services and transportation.

For more recent years, we remain cautious and our approach to reserving, particularly on auto related exposures newer product initiatives and those with outsize growth relative to prior periods.

From an expense standpoint on a comparative basis drivers of performance based compensation of improved adding one point to the expense ratio in the quarter and one of the have points on a year to date basis. In addition, we continue to invest in technology, including within our surety segment, which also has an impact on the expense ratio.

Overall, we're pleased with the underwriting performance of each of our segments for the first three quarters the year, our diversified portfolio continues to deliver deliver solid results.

Onto investments, which again contributed to book value growth.

Stocks and bonds offered positive results and total return came in at 1.9% for the third quarter investment income was up 7% in the quarter. Despite some dividends being recognized in the second quarter as mentioned on our last call portfolio growth will be the primary support for income going forward with lower reinvestment rates now well.

Established all in all the solid quarter.

Operating income in investment performance drove book value to near 1 billion or $22.30 per share up 27% from year end.

Adjusted for dividends now with that I'll turn the call over to Craig.

Craig.

Thanks, Todd and good morning, everyone.

Pretty good quarter by all accounts with top line premiums up 16% in a 93 and a half combined ratio.

Year to date, we reported 9% growth with the 92 combined.

We are beneficiaries of disruption that has been broadly observed in automobile liability excess casualty management liability marine and many catastrophe exposed product lines.

Changes being felt from underpricing for loss cost inflation and by many who have painted with a broad brush for too long.

At our ally we value the old Masters, who use a fine tipped sable hairbrush to color our campus.

With an improving rate environment. The market continues to come back to the disciplined underwriter, creating significant top line momentum.

We pride ourselves and stability and consistency of appetite.

It is enhanced by our underwriting and claim teams with deep knowledge and a long presence in our chosen markets.

Let me provide a little more detail by segment.

In casualty, we grew 16% well reporting a 98 combined ratio rates across casualty increased 9% for the quarter more than 300 basis points better than last quarter.

The largest rate increases were felt in our management liability transportation and excess liability businesses, where larger casualty limits are deployed.

Growth was widespread in our casualty portfolio, but to a greater extent extent, where we have observed significant market retrenchment.

Increasing rates shortening of limits and higher attachment points have become more common place.

We also see a few competitors growing in the town select classes and geographies.

We're not immune from the impact of social inflation. So we welcome the opportunity to take rate wherever a bit available.

We remain cautious in this environment, but we have experienced underwriters and claim staff, who share information regularly and who have navigated these waters before.

Despite the claim environment, we still find that primary liability coverages with lower limits and workers compensation remains very competitive.

Casualty submission flows are generally up which creates more opportunity, but there's still a lot of underpriced business looking for a home.

Opportunities exist for underwriting companies that know how to select risks that are appropriately priced.

Overall for casualty, we're pleased that we're realizing a lot of growth from improving rate levels and that growth is coming in established products with experienced teams that have a long track record of success.

In property.

We grew 24% for the quarter and reported an 85 combined ratio a few when related events resulted in a moderate amounts catastrophe losses for the quarter.

Overall rates were up 6% across the portfolio was slightly larger increases in our ocean marine catastrophe when products.

Albeit relatively moderate our earthquake business realized its first quarterly rate increase in six years.

We continue to see increased submission flow across all property products in the segments.

In surety, we were down 2% in the topline while reporting an 82 combined ratio. This remains our most consistently profitable segment, but also the most challenged by market conditions.

Also has also been hindered a bit buyer our decision to exit or program for underwriting reasons.

All of our major surety products groups remain profitable.

We continue to see some pretty aggressive competition in this space and feel the prudent approach is to mine, our existing accounts and relationships widen our remote and opportunistically write new business.

Overall, a good quarter for us underwriting profit and growth is represented across most of our diversified portfolio of products. We continue to stick to the basics of skillful underwriting and claim resolution and let the market come to us where our disciplined approach can carry the day.

At our alike, we focus.

And the fundamentals and what we know works, sometimes being different means having the courage of your convictions and forging your own path.

Avoiding big bets and foregoing the glitter is boring to some.

But to others boring could be beautiful.

I want to thank all of our ROI owner associates for the hard work and commitment they put into deliver another good result for our shareholders, who never get bored of differentiating performance.

I'll now turn it back to Aaron who open it up for questions.

Thanks, Craig operator, we can now take some questions.

Thank you.

The question answer session will now begin.

Speakerphone, please pick up the handset before pricing any numbers should you have a question. Please press.

On your telephone keypad, and if you wish.

Question.

Yes.

And your questions will be.

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Please standby.

Question.

We'll now take our first question from Christopher Campbell. Please go ahead Sir.

[noise].

Mr. Campbell. Your line is now open. Please go ahead with your question.

Hello.

Unless we can area.

Okay, great. So yeah, just if you decide that they have that wasn't working so.

I guess, just you know you had talked a little bit about the rate. So if we're looking at.

I guess just commercial auto what were your rates there this quarter.

[noise] tougher transportation business in general I mean, we were able to achieved double digit rate increase again this quarter, which is about the pace. We've we've achieved the last three years.

Okay, Great and I was like looking back at.

And your slide deck, you kind of the overview DAC and you know how you guys have bad that Pie chart that shows.

The breakdown of product lines within each segment.

I would just curious is there anything in that high then isn't profitable right now on a calendar year or an accident year basis.

Where are you would need more rate.

Well, Chris This is Craig I mean, I don't have the Pie chart in front me, but I mean, we always have products that we'd like to be performing a little bit better.

And obviously, we'd like to get rate and every product. If that's available. So I mean, I wouldn't I would say what I've said before is eight eight or nine out of 10 of those products are performing very well, there's always a product that we're always working on sometimes it changes from quarter to quarter.

But I think were pretty good about addressing the problems and and for sure. Our underwriters are aware of who that one or two out of tenders nonperforming they know who they are.

Okay got it and then I mean, obviously the rates in production and you need new submissions have benefited from increased competitor discipline I guess like how sustainable should we be thinking about that discipline, because I was reading a few days ago about Lloyds Guy you know going back to growth node and and.

2020, and then how would that impact some of the lines are you being able to benefit from from higher submissions and higher rates this year.

Well, Chris This is Craig I wish I could predict the future, but I can obviously, we'd like to take advantage of the market when it presents itself and the opportunities present themselves, but I mean, I think there's some paying out there I mean I've attended a lot of the conferences that seen people write about some of these conferences, there's widespread talk about.

You know inflation and excess liability some bigger claims in that space or that I think has some people concerned and obviously anytime you have dealing with long tail liabilities, which may or may not reveal themselves and reserves yet I think there's always some a little bit of fear or concern and people. So we're hoping that's a little longer lasting.

Okay got it and have you guys started to see any social and inflation kind of creeping into any of your your own losses.

Well, most I mean, I would say from a data standpoint, I don't think we've seen that yet although I'll tell you anecdotally a that our claim department or.

Has expressed some concern about that.

We are watching closely and.

We'll continue to try to take rate and be somewhat cautious in regards to our booking ratios in casualty as long as we have that concern.

Okay got it and then just one last one do you know just it just kind of curious since you guys have done stock splits in the past a last one was around like 97, a share and you guys are getting close now so you know how should we think about.

Potential stock split.

Go [laughter].

[laughter] exists.

That really doesn't mean, a whole lot to me.

This is Jon Michael.

So.

We're not thinking about stock split.

Okay.

Great well, thanks for all the questions best lock in a that fourth quarter.

Appreciate Chris Thanks, Chris.

Thank you ladies and gentlemen.

So one to ask a question and if you wish to withdraw your question. It is stock to well not proceed without next question.

Randy.

Please go ahead.

Hey, good morning, Thanks, So I have a follow up on.

Because of social inflation question and I guess, just specifically, it's about the trial bar and and so I I've always considered that the trial bar to be a pretty significant risk factor for casualty claims but.

From all the anecdotal.

Things you read it I guess, it's worse now or is it the same as it was before or or is trial bar involvement and success and prosecuting casualty claims.

Getting more significant I'd like the rate of change is interesting to me because it certainly talked about more it's just hard for me to tell if it's really change that much.

Randy This is Craig I mean, I can share with you anecdotal stories that I've heard from our claim department again from our I don't see it necessarily in our results yet, but we're watching for a magic. They would comment that the plaintiff bar you know, there's a small but growing number of skill.

Plaintiff bar attorneys are that are fairly narrowly focused they do a good job communicating and sharing their strategies and a better than they have in the past whether that be through conferences or core TV or you know there's a lot other ways to get your gets your strategies. After then maybe which had before in it I think when they run across the.

Right set of circumstances, when they have the right defendant.

The right plaintiffs are you know the good set of facts with big limits and maybe in a high exposure jurisdiction I think they've done a particularly good job of extracting some pain.

I think there's also been a change in mentality, you know just and and people in general in regards to what the value of a dollar is or what the value of a million dollars settlement is I mean, I think that you hear more everyday you know about we've got a lot of billionaires in this country and I think people become immune to what a million dollars is worth.

So you know you put that in front of a jury sick they do a good job anchoring people.

I've done a good job with you know setting the jury psychology, ER and generally desensitizing people to the value of money and so.

So I think the willingness of juries to hand out.

You know bigger I'll say seven digit eight digit verdicts is probably on the rise.

We're fortunate we don't put out very big limits. So we haven't felt that like probably some other people have.

But certainly it's an area of concern in an area that we want to watch.

All right I appreciate the color I have to quantification questions to follow up one is did you did you quantify.

How much excess and surplus lines submission activity is higher.

And if you know just looking kind of like that flow of submission activity. This quarter, a year to date versus a year ago period.

Yeah, I, Randy I do have that I mean, I think we've seen high single digit increases and submissions in the N.S. space I mean, frankly, we've actually seen increasing submissions and other spaces actually at a higher rates and DNS I just want to just make sure that we put a little a.

A little place holder here I mean are only a third of our businesses in the enough space. So I just want to make sure people understand that yes, two thirds of our businesses in admitted specialty space or surety. So.

Certainly we've seen an increase in submissions in the casualty side.

And the property side for that matter of our recently.

Similar level of growth that you high single digit.

Yes, yes, okay. Okay, and then did you did you quota and an overall casualty rate increase you said, 6% for property overall was there a overall casualty.

I did Randy it was 9%.

Super Thanks, a lot.

[noise]. Thank you well now take on next question from Ron Bobman. Please go ahead.

Hi, Thanks, a lot congrats on the results.

Again.

You want profile the management liability book.

And where you're sourcing opportunity there. Thanks.

Ron This is Craig Kliethermes I want.

He said medical management answer sorry, I'm, sorry, yeah, so sometimes we refer to that as our executive products groups. So so I don't want to confuse anybody I mean, that's pretty broad felt I mean, obviously that includes a public do you know as well site a.

Private.

Fiduciary employment practices liability fidelity products. So I mean, it's a pretty diverse portfolio products, there and we're seeing increased submission flow increase rates across the board pretty much in that and that product line.

Where do you play primary only and what are your limits profile. That's it for me. Thank you.

Well, we could typically we would put out $10 million limits, although for public baby see that's that's a site a in public a b C are probably our two biggest products in that group.

They probably make up a little less than half of the portfolio and those would typically be $10 million on a b C and and we could go as high as $25 million inside a but fairly rare.

And we significantly reinsure that book of business.

Through a quota share that excess by the way pretty much side, we will play primary but public HBC is only on an excess space and typically a little higher attachment points.

Thanks for all that what is the reinsurance bring you down to Internet basis, then I'm truly done.

[laughter].

I believe we play 70 play seven yes, 70%, 80%.

Of that on a quota share but rates.

Great. Thanks, gentlemen continued good luck in success.

Thank you.

Thank you, ladies and gentlemen, once again to ask a question. It is just one.

Next question from Jamie Ingles. Please go ahead Sir.

Good morning, guys.

It's a question about the in the release.

Michael says.

Focused and using capital generated from our businesses too.

Selectively expand our footprint and I don't want me to parse words here, but is that mean, what I would think that's where business as usual grow where you can where did it might be profitable or does footprint referred to some geographic distribution or product line distribution.

[noise].

No I really really means to to.

To grow.

What we know.

Yeah, that's where it was meant to be that we're really focusing on what we what we have and expanding.

Certain lines of business you know.

Out but.

Grow what we know is what it means.

We've used that quite a bit.

And my that probably reference to we had some maybe a little bit more growth in some of the newer initiatives rise to John's point, if you go back.

Calls going back you know a year year and a half and we're really seeing to John's point, a lot of growth in those mature coverages today.

Got it okay.

Okay, great. Thank you.

Thank you.

Next question from.

Please go ahead.

Yeah, Good morning, well give Aaron a question here since he hasn't had a chance to jump in yet is there anything you're contemplating from a an investment standpoint in view of lower interest rates any shifts in either class or duration or quality, whatever anything you might be thinking about there.

It's really not the case for us.

Doesn't time Mark we.

Our happy to have a stronger operating cash flow to put to work in the portfolio and as Todd referenced a portfolio growth is a meaningful support to the income profile.

That we can provide.

And so we're not making major shifts to try to reach for yield or or maintain that in another way.

Okay. Thank you second question, there's just kind of a numbers he question, but the.

The the proportion of though.

Net written premiums to gross written premiums in both the casualty and property segment, there's a little bit lower than the recent run rates.

So any particular reason for that other than maybe maybe some mix or something like that.

Yeah that that is nothing particular, there is a little we'll get a shift in mix from time to time, we have had on occasion, if you look over the different periods, mark or small amounts reinstatement premium at different points, but but nothing material from.

Outside of some mix changes a bit.

Okay.

A question for for Craig fan.

Let me just kinda characterizing the tone and feel over the market is you're looking at the pricing environment.

The submission flow et cetera.

I always use baseball analogy somebody who's a football analogy I mean are you are we on the 20 yard line over this market environment are we on the 50 yard line in the Red Zone, where would you say we are right now.

Hi, Mark before he answers. This is Todd he is a Kansas City Chiefs fan so any of this could be color.

[laughter].

[laughter].

Yeah, I don't I. This is Craig I wish I guess I was that an answer this question. So.

I mean, it's still feels early on me, but I mean, I hear I hear a lot, but certainly the reinsurers are talking up a lot about.

Loss cost inflation and the need for rate of course, the you know they've postured like this before so I can't say that you know the but it feels a little different.

But you know I'm hopefully, we're just getting started.

Okay. Just the just the started or they just started a successful touched on drive.

Well go to that but we like to start on the 40, our line just to be clear in Kansas [laughter], you probably are actually [laughter] relative relative to some of your peers. You certainly are already on the 40.

I guess the last question that I have and this is one that I've been asking for a long time, it's for for Jonathan just this is the time of the year, where your board often considers the payment of a special dividend.

Can you just kind of rehearse for us the things that there will be thinking about and what might go into that decision.

You know should they make such a thing or later this later this year.

Well Mark if we have a stock split as suggested.

[laughter] that's limited wouldn't be.

Less than what it otherwise would be.

So no we would oh, we would rather use our capital.

Said this before.

Grow our existing business okay.

Use our capital to expand our business that would be be evident in the event that we cannot do those things.

We would give it back to the shareholders. So.

Those are the things that our board will be looking at those are things that management is looking at.

So I Flippantly spoke about a stock split because everybody in this room knows that I just kind of.

I don't think bunch of split.

But.

They'll consider that as well.

You know when the when the time comes so.

Thanks for the question.

Okay sure thing Thanks, No no more for me thanks.

Thank you ladies and gentlemen.

If you would like to ask the question once again it is stall one we'll now take your next question from Jeff.

Smith. Please go ahead.

Hi, good morning, everyone.

Looking at the casualty premium growth 16%.

You said average rate there was 9% what was that growth I guess, if you exclude the recent exit so the health care facility the GL for.

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I think lowering the prime quota share what would that growth have been excluding that.

Yes, it would've been in the quarter it would've been 25%.

Okay.

And I guess with 9% rate you know just looking at the that underlying combined is around 69 per se that looks like.

Which what it was last quarter, which is what it was last year I guess, some price did not see that.

Drop if he had six <unk> rate in casualty last quarter, 9% now.

Why isn't that dropping more I know, there's some business mix shift maybe more conservative posture on.

New business.

<unk>.

What's the loss cost trend there I mean, it seems it seems pretty high.

Jeff This is Craig kliethermes.

Just to be clear so the rate increase for casualty year to date is about 6%, so and I think for we'd have a.

To be a little more cautious I think we've upped our severity or a severity assumptions in regards to loss cost inflation by about a point. So I think we're up to about five 5% or so for loss cost inflation on or casualty portfolio as well at least what we're assuming so it really only about a point above what we are assuming as loss cost inflation. So.

You're not going to see a lot of that dropped to the bottom line until you start earning premium either so.

Cod wants to add anything to that Matt I think that's that's the bulk.

We're going to can done I had kind of had that in my open or we're going to continue to be to be cautious.

Yeah with growth than with the commercial auto side.

Okay.

In just a question that you. This business are are you seeing any you know we're hearing some people talk about how some of the standard business is sort of not being renewed and kicking over into either us or are you seeing any that.

Yes that is I'm, sorry that is not being kicked over it is good for us. It was a state. It was written my standard insurer isn't there not renewing it.

And it sort of pushing it into the this market.

You know just I'm not sure were a good I mean litmus test for the whole industry, because our units businesses. So concentrated in construction space, but I certainly I think in the Habitational space, you're seeing probably even more disruption than we're seeing and we don't really do much in that space.

Hi, Matt from our underwriters in the field I still here.

No complaining about admitted carriers in our space. So I I can't really comment on on them exiting our space for.

Oh and stuff or what.

Okay. Thank you.

Thank you ladies and gentlemen.

The questions I would now like to turn the conference back to Mr. Jonathan Michael.

Thank you all for attending this quarter and certainly was a a satisfying quarter for us.

Nice top line growth nice a rate increases for the for the quarter and year to date we.

Do do have some tailwind now.

We like where we are well positioned the.

To take advantage of things certainly.

Experienced underwriters.

We are that are.

Those as to the grindstone and so to speak and the.

No worries is well positioned for the so thanks again for joining us this morning and.

We'll talk to you next quarter. Thanks.

Thank you.

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This concludes teleconference for today. Thank you for your participation and have a nice day all parties may now disconnect.