Q3 2019 Earnings Call
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I would now like to hand, the conference over to your Speaker today, Kevin Copeland head of Investor Relations. Please go ahead.
Thank you Danielle good morning, everyone and welcome to the James River Group third quarter 2019 earnings Conference call.
During the call, we'll be making forward looking statements.
These statements are based on current beliefs intentions expectations and assumptions that are subject to various.
He is which may cause actual results to differ materially.
For discussion of such risks and uncertainties. Please see the cautionary language regarding forward looking statements in yesterday's earnings release.
And the risk factor section of our most recent Form 10-K Form 10-Q 's, and other reports and filings we make with the Securities and Exchange Commission.
Not undertake any duty to update any forward looking statements I will now turn the call over to Adam Abrams Chief Executive Officer of James Robert.
Thanks, so much Kevin and good morning, everybody.
Sarah Doran, Bob My run and I are all here together and before I turn the call to Sarah I have a few comments about the loss we reported this quarter and artist nation to walk away from our largest account.
I think those of you who followed us for a while no that we pride ourselves and our underwriting standards and this loss, which was driven by the lack of profitability on the upper account is not acceptable to us.
We decided that it is not in the long term interest of our company in our stakeholders to continue our contract with Hoover.
In 17 years since we found that James rubber, we've made underwriting profits and all but two years and we've never reported a loss of this magnitude before.
We canceled the account and after taking a reserve charge, we expect to resume producing low double digit annual returns on tangible equity.
2020.
In November we wrote a new type of risk, but initially seem to be highly profitable based on the data available to us, but hoover's business and the underlying risk evolved very quickly.
Our underwriting assumptions and the related pricing did not keep pace with changes in loopers business.
Hooper created a new transportation model that altered the American transport system, and presented new challenges and opportunities for the insurance industry.
The risk associated with this model shifted as the company expanded into new regions added tens of thousands of drivers and evolved beyond just right family.
All of these factors created a situation where the risk became too large and absolute terms given the size of our company and candidly in some years, we missed prices the risk.
Having said that.
We're comfortable with our pricing for the 2018 in 2019 years in response to poor results in 2016 in 2017, we negotiated substantial pricing increase for the contract on the 2018 renewal and renewed at similar rates for the 2019 read renewal.
We also purchased a quota share reinsurance contract for the third for a third of the account for the first time in 2019.
However, profits we anticipate burning in these last two years will not fully offset losses from prior years.
We decided to cancel this year, even though we believe there were at risk as well priced because a further complications related to the passage of assembly don't fly for 85 basis, though in the state of California.
We believe baby five adversely altered the claims profile for rideshare companies in 2019, our pricing had not anticipated MP five hence our concern.
Legislation becomes effective two months before policies would have naturally expire.
When we cancel the account we also drew upon the collateral established to pay the portion of claims claims cost retained by our clients.
The 1.2 billion in that trust account is now on our balance sheet and may be used to pay our former clients share of any claims as they arise.
The funds are invested in short term treasuries in the interest earned will accrue to our benefit.
Well, that's just not reduce our loss ratio the investment earnings will somewhat mitigate the effect of the losses, we have reported.
Last night. After we released earnings were sent to know asking the collateral be re deposited within the trust. We're confident that we've handled the trust appropriately and do not intend to redeposit the funds.
We expect to process approximately 18500 claims during the run off of this book of business, we're well staffed to handle these claims and are committed to handling them expeditiously and properly.
In the end I'd say the over account was a diversion from the steady engine that is always propelled our company highly profitable underwriting of small and middle market risk.
And that business is performing very very well in line with were ahead of our expectations.
We decided to reset our focus on the many positives in our core DNS business and attractive growth opportunities, we continue to see there.
And in our specialty admitted segment and to start the new year focused on those opportunities.
During the past quarter.
Our core Dms or.
Excess and surplus lines business, meaning our James River MNS business other than commercial auto.
Grew by 72%.
72% compared to the same period a year ago.
Rates in this segment have going up for 10 quarters in a row and increased 3.2% in the third quarter and were up 6.5%. If we exclude one large renewal of a profitable account.
We read $133 million some core EPS this quarter.
Our own a pace to write approximately $500 million in core Ns This year.
The growth in our core MNS business is very very strong submissions through the first three quarters of this year are up by 22% compared to the first three quarters of last 2018.
The pace this accelerating.
Submissions in the third quarter were up 29%.
We're continuing to book the current year on at or above 70% loss and LAE ratio and long term observers of the our company No art Ns book has historically developed at significantly lower loss ratios than 70% pricing is excellent.
A couple of anecdotes about will give you a flavor for parts of our market.
Liability for Habitational risks have seen very large rate increases, we recently wrote and DNS liability excess liability policy on a California apartment complex, where we've reduced the limit by 50% from the expiring limit.
And increase the rate by over 500%.
A similar example from the East coast, but where we write the primary layer.
Our premium with almost 400% of expiring premium with substantial supplements for salt and battery water damage and even an absolute button dog fight exclusion.
This illustrates that right now in Truing, the BNS business, there's an opportunity for improved pricing and more favorable terms and conditions.
Because these are new accounts to us and not in the renewable these increases arent incorporated.
In our rate increase information that I was quoting to you before.
In our Allied Health Division were seeing real strength in the smaller nursing home assisted living area larger facilities have not yet seeing rate increases, but in September we wrote multiple smaller accounts at increases exceeding 50%.
We have not yet seen significant increases in construction related accounts.
Our specialty admitted business turning to that also had a very good quarter growing slightly compared to a year ago and reporting a 94.1% combined ratio.
We believe our front end business in this segment has great potential to deliver high returns on equity, while taking only moderate underwriting risk.
Underwriting profits from the specialty admitted unit were $837000 for the quarter and we're just starting there.
New leadership at our specialty admitted segment has signed for new fronting deals, we anticipate will bring in over $50 million in gross premiums annually.
So the cause of the fundamental strengths of our company.
I expect going forward that we will deliver a low double digit return on tangible to tangible that.
Average tangible equity.
And before we get into your questions I know, we benefit from having additional insight from Sarah Doran, Our Chief Financial Officer Sarah.
Let me highlight a few of the financial points from the quarter.
Net earned premium grew over 16% in our segment this quarter at 30% in our core business alone.
Year to date or even as premium is up 20%.
Yes earned premium is up 20%.
This quarter BNS segment represented over 77% of our total group net earned premiums.
Starting in January 2020 court units will be the majority of our groups earned premium as the large commercial auto account will roll off by the end of this year.
Thinking about core TNS on its own is Adam mentioned, we're booking loss ratios at above 70% loss and LAE ratio.
<unk> expense and commission ratio for this business is in the mid to high Twentys.
As we've mentioned previously we're getting strong rate and our core yes line.
Given our strong pricing in our historical results inquiry Ns, we expect this business will generate very attractive return.
Let me take a moment to provide some additional color on the adverse development we experienced this quarter.
We had adverse development of $57 million overall, we had $50 million of adverse development in the overbook most of which was focused on the 2017 underwriting year with the balance in the 2016 underwriting year.
The most recent quarter, we had losses in excess of expected for the 2016 and 2017 years.
But we did not see this for that more recent 2018 and 2019 years.
So we took no action there.
As Adam mentioned earlier, we've mentioned before 2018, we raise rates had this accounts significantly.
We also had adverse development of about $8 million and our casualty reinsurance book driven by much higher than average claims volumes in the quarter related to several accident years.
We had a million dollars a favorable development from our individual risk workers compensation book.
Turning back to cash flow.
We continue to enjoy strong cash flow from our businesses operating cash flow was $145.7 million in the quarter alone.
$213.8 million year to date.
Third quarter cash flow is that materially over that of the first two quarters.
This year given the strong growth in court, yes, gross written premium which is up 51% year to date on itself.
Investment portfolio performed as we expected this quarter.
As we earned 17.9 million net investment income an increase of 9% from the prior year quarter largely in line with the growth of our portfolio.
More notably as Adam mentioned subsequent to delivering the early cancellation to our clients on October nine we brought approximately $1.2 billion of assets onto our balance sheet from Uncollateralized Trust, which overhead posted for our benefit.
These funds are invested in short term government securities.
Now earn additional net investment income for it.
The collateral secured claims payments for the portion of the risk that we effectively front if for no former clients not for Dr reserves.
We are entitled to ask for additional collateral should that proved necessary.
So through the first six months of the year, we've grown our book value by about $82 million are over 16%.
While the loss this quarter as a setback, we still increased tangible equity over 12% year to date, despite paying almost $30 million in dividends to the first three quarters of the year, given our healthy 3.6% yields.
Our balance sheet and capital position are well able to support the attractive growth we continue to see in our core GNS business.
Additional opportunities for growth we are realizing in the specialty admitted segment.
We expect that our casualty reinsurance business largely remain a similar premium volumes to what it has over the last year. So.
So while it's too early for us to provide guidance on 2020, I will echo what Adam said in that our opportunities to put capital to work at attractive returns for shareholders are plentiful.
Our topline likely be down modestly from 2020 in 2020 from where we end 2019, our core GNS business has typically produced a lower developed combined ratio that has our commercial auto book building, a case, where a compelling group wide combined ratio.
We will actively and carefully manage expenses over the next few quarters as we work to run off the bulk of the commercial auto phone.
And with that I'll turn the call back to Adam.
Thank you Sarah.
Operator, do we have questions.
As a reminder to ask a question you will need to press star one on your telephone.
Jim Press the pound key please standby, while we compile lucky when a roster.
And our first question comes from Matt Carletti from JMP Securities. Your line is now open. Please go ahead.
Thanks, Good morning.
Good morning, I could maybe just.
Good morning.
Maybe a couple of questions to start on.
The commercial auto reserve charge.
For starters can you.
Give us a little bit of color behind the scenes in terms of.
You know what change with the reserve charge. This quarter are you at a different point in terms of kind of confidence level in in the reserving numbers have you gone higher towards the top end of kind of the actuarial range as the percentage of I'd been our increase can you can help us understand.
How the reserve picture sits today versus.
A quarter or two ago.
Sure. Matt. This is Sarah I think I would say first of all.
We have fairly standard practices and procedures around this and we follow the same that we do every quarter in that we're looking at this book with monthly actuarial data and there were doing a deep dive every single quarter and what we reacted to with losses in excess of expected in this quarter, we put up the number that I think.
With demanding of that.
And we are we're certainly watching it very carefully and very closely.
Especially around the claims and for the development and behavior of that but we feel that we put up a number that is in response well in response to the data that we saw that we were presented with us and.
That's where we got to this quarter as I mentioned more of that was concentrated on the 17 year than on the 16 year clearly closer to the end of the 16 year just from a timing perspective than than we would have been at the beginning of the year.
Okay, and maybe can you remind us a little bit of some of the either be.
Fraud pricing changes or for underlying exposure going to state footprint changes.
That how 17 might be different the 16 on the underlying basis.
Sure I mean, I think and that's a great question, a big piece of moving from 16 to 17.
Was that we took a smaller share I think we've mentioned this publicly before a Florida and we mentioned, Florida as being an outsize contributor from an under insured and uninsured motorists perspective, and that causing some issues with regard to 16.
Clearly we in retrospect have underpriced 17.
From the reserve additions that we're making this quarter, but we have less exposure to that state in 17, and we did in 16, we did have a pricing increase from 16 to 17, but as Adam mentioned much more material pricing increased from 17 to 18 and I think that really provides a significant amount of the basis for our comfort.
In 18 and 19.
Okay, Great and then.
Upbeat and the reserve question here just one more.
Have you considered would you consider are you considering.
NBC on that book or some other form of reinsurance protection or transaction that would.
Kind of.
Put it out of investors' minds, Sir for good.
Yes, we certainly realized the value that something like that could provide for exactly as you said it for for putting it to the side from an investor and certainly from our perspective and those are options that we look at every day and our business with regard to this business with regard to other options.
Soft capital options that could that could make sense I think they need to make sense economically for us and they're not simple transactions, but they're absolutely things that we would and and should be considering for sure.
Great and then one last one if I can not on the reserves.
Bench can you help us understand kind of how that in that segment, maybe will look different and I know 2020 will be bit of a transition year and then longer term in terms of loss ratio expense ratio mix I heard you mentioned kind of mid to high Twentys expense ratio, it's historically, where the court CNS as Ron I would imagine maybe it runs a little higher initially.
Do you still have the the commercial auto Tpa business. All the 18500 claims kind of did run off so can you help us at least directionally I understand kind of how bad that's level look as we move forward.
Yeah, that's a great question in and we're still working through all maybe take a stab at it and then let Adam come in at the end.
We are still working through kind of the fine point on our 2020 plan.
But what I would say is it will probably carry a little bit of additional expense into the beginning of the year, but we'll have worked our way out of that certainly by the end of the here. So I'm comfortable with that mid to high Twentys expense ratio on a core GNS business for all of 2020 I.
I would say it would be at the low end of that once we work our way out of all of the additional expense related to the business and managing that those run off claims because we just to reinforce we do not expect to have any premiums coming in from that large account in 2020.
I think what's most important areas that we work our way out of the claims and we come to a good reserve results that were okay that carry a little bit of additional expense in the beginning with the big picture to up to come to a good landing.
Adam as or more you'd add to that no assist that treated I think you can get a good feel for how this book will.
Look if you go back and look prior to.
Our taking on the Hooper account at our DNS business.
For years that business has run at a loss in it and.
Eylea ratio.
Turning around 60, and we've been able to run that business and as Harris said.
Well below 30 in the mid.
25% to 28% expense ratio so.
That's where I would expect this bumped us settled out once we.
Move through all the other.
What I will now call noise I mean, because its.
Stuff, we're rolling off.
Great. Thanks, Thank you for the answers and best of luck on board.
Thank you.
Thank you. Your next question comes from Mark Hughes from Suntrust. Your line is now open. Please go ahead.
Yes, thank you very much morning.
What are the.
Hey, Adam.
The majority expenses you to kind of the mid to high Twentys.
What sort of corporate expense would you have on top of that I think you'd break that out in your earnings report if I am looking at it properly the other operating expenses corporate another 7 million last quarter.
Do we have the kind of mid 20 mid to high Twentys CNS expense loaded on the corporate on top of the.
Yes.
Yes, excuse me, Matt when I say mid to high Twentys, that's just CNS Gi core DNS expense ratio, we do have the ongoing corporate expense, which is roughly 7 million and change at quarter.
And then we've got the expense ratio as any other segments that we wouldn't expect to change materially.
Very good and then the when you're thinking about the Koreana, Adam you point out how usually book itself in the developed favorably over card.
As we think about a 2020.
The.
Hey, you have development I think it's all done.
You kind of caught up in the of the issues with the Goober. These last the last year too and so it's been hard to begin to look at what's going on in the core yes.
Can you maybe think about the either the pace of development in the Korean as it's been recently or is it likely could be.
At least in the near term I know that's something that's.
Difficult to predict or provide guidance going but just sort of trying to think held the model looks at least in the near term with respect to the moving pieces.
We we were booking.
Inserra, you'll Youre correct me I hope here, but we started booking the.
Yes.
No set of 70.
18.
And so we have the benefit of the 18 year, which is already.
Developing some maturity and we get more insight into that as it goes on but typically I mean, you don't have a script here about how we bring down reserves, we look at.
We look at the actual case reserves and we look at on our IB NR and and.
Measure the pace of claims and makeup.
A judgment.
That's a historically well informed judgment and it starts a couple of years. After we write the business you'll start to see those reserves.
Rolled into earnings as appropriate.
Very good and then just due to others.
I made.
The 1.2 billion.
Why a if it was available and you could.
Begin generating investment income.
Why.
Just economically speaking why wouldn't you have done it.
Sooner than you did the here what was the kind of the dynamic on the timing on that decision process.
No. It's just a it's a standard trustmark and we felt that we were.
Making a change and by canceling the account we just we felt like we wanted to be is.
Securities we could be at the moment and we made the decision to draw on the funds.
Commensurate with with the early cancellation of the account just out of an abundance of caution.
Is there is that what triggers that this is some sort of Ah you have to make a case that there's a reason to take the assets and then it becomes not the Yep go ahead, Mark no that Theres no case that needs to be made but I don't look this is an account with a client we had.
For quite some time and I don't really want to get us into a lot of specific sure.
About the account, but this is a very standard arrangement across the industry any insurer who enters into one of these standard agreements can at any time.
Typically drawdown that.
Trust.
Our our policy was we had canceled the policy, we're putting this book into run off.
We we thought carefully about our situation and made the choice that we thought was the appropriate choice.
Thank you for that and then the be five you say that the you think that they had firstly alter the claims profile for ride sharing could you expand on that a little but.
Well.
Look.
There's an awful lot written about that by a lot of experts, but obviously, it's something that we did not price for.
Nobody we didnt price for a be five and it was a change and we think some material change and so.
Having experienced.
Many different changes in the course of this relationship that affected losses.
We thought this was the right thing for us to do.
Just wasn't not incorporated in our pricing.
Thank you.
Thank you and your next question comes from Mer Shields from KBW. Your line is now open. Please go ahead.
Great. Thanks, so much so just a few hopefully quick questions.
[laughter] I'm trying to understand.
Let me ask this is the question given the significant rate increases embedded in both new and renewal.
Core CNS should we assume that 2020 could be booked at something below 70% initially or is that roughly a good initial guide with a favorable experience we reported later.
We're not far along their married to have a materially different view on the market. So you know and the absence of new data in the beginning of November I do think about that loss ratio that 70% accident year as being a reasonable assumption.
Okay.
That is perfect.
Can you give a sense of the timeline for paying down the $1.2 billion of.
Claims related collateral in other words, how long that will be augmenting investment income.
Yeah, that's very hard to tell because there are a lot of assumptions around claims payments and kind of future I guess interaction.
As well so I think in the absence of that I would just assume that is the $1.2 billion over the next year.
Okay perfect.
Does the funding arrangement in casualty reinsurance provide ceding commissions to be earned in coming quarters was that all booked in the third quarter.
No that will come over over the next few quarters the question.
Okay and then one last question if I Ken on the reserves I guess the one question then I'm hearing is that.
As you add sort of lead adverse experience on X. The your 16 and 17.
How do you have comfort that that won't materialize later on in the more recent accident years even.
In the context of the current improved underwriting performance.
I think I think the biggest buffer against that is a very very substantial price increase.
We got in the 19 year.
Does that preclude later development of.
Claims for later emerging information.
No. It doesn't preclude later emergence of claims, but we are we just aren't seeing that right now.
No we're not we're not seeing that kind of emergence right now.
Whereas I think we weren't earlier points up prior years, yes.
Okay understood. Okay. Thank you so much.
Thank you as a reminder to ask a question. Please press star one and your next question comes from Brian Meredith from you'd be at your line is now open. Please go ahead.
Yes. Thanks, one quick one in one or maybe a little bit longer on the first one I'm sorry, what kind of yields should we assume no short term funds.
Hi, John it's a money market.
Treasury T cell type type yield there right.
Okay.
Yeah, you material, Okay, Great and then my second question I'm, just curious with <unk> with the substantial growth you're putting on your E N S.
Korean Air business.
[laughter] do you have kind of the platform infrastructure to absorb that type of growth right now and then that I want to tie that in with what's going on right now with Hooper and just how integrated was that in the rest of your platform and just to avoid disruptions that could potentially cause some cost submissions as far as claims management underwriting all sorts.
Well there thanks.
Yes, absolutely we've got the infrastructure to manage the growth in the DNS business and our throughput.
Right now is growing without because of good hard work and <unk> and.
Very capable management an organization they are teams in the and asking it our throughput is.
Has grown that is the number of quotes that we've been able to put out we put some technology behind that that assist us in quoting faster and better.
And so we're not strain.
At all in terms of our ability to handle this growth we've added new people.
The underwriting a division.
Right now.
The.
Hooper.
<unk> is really strictly obviously a claims operation we have.
Sufficient people to handle those claims.
Easily efficiently consistently and within the four corners of the contract.
And we'll engage on a quarterly run off of that book and.
The Hooper claims segment this separated from our.
DNS claims segment.
They are under a common management, but.
People handling Hooper claims are different than the people handling the liability claims in our.
Segment that was over runs off by the way there maybe opportunities for us to move people over.
From some people over from Hooper claims into the liability group as that grows and in fact, that's kind of an advantage.
That we have right now in terms of this expanding book and as you think about.
The growth in claims that just a numerical claims.
But if we come we've we've got a lot of talented people handling claims who.
May eventually come over and and be part of it and Thats claims handling so it's actually a fortuitous in good arrangement.
Great. Thank you.
Thank you you have a follow up question for Mark Hughes from Suntrust. Your line is no open. Please go ahead.
Yes.
Oh no claims development.
There's been some commentary obviously round, though the commercial auto the development pattern as the lengthening or you're seeing that you, but others are seeking higher losses in the tail.
But then even on the.
Non commercial auto.
Risks or a.
Losses, there, perhaps have been developing a less so favorably the unexpected it have you seen the whole point about social inflation.
Just got a broadening up the conversation there in one of your notable competitors. The so talked about or are you seeing anything like that in your core units business where.
Some of the development patterns are.
Or a little different.
We're not a you know we're looking hard at it we certainly are aware of all the commentary.
Around that we've not seen what people are referring to is the social inflation in our core Dms book.
The middle market, basically small and middle market DNS book.
Today, but we are alert to it I will say, we've enjoyed 10 quarters in a row.
Significant rate increases then.
I was pointing up before the renewal book that those rate increases that we report to you.
I think our.
They are part of the story, but theres another part of the store where.
Can't quite capture the flavor it except to explain to you what the expiring premium from another ensure where it was compared to the premium we've gotten I gave you a couple of examples.
Several 100% here and I Didnt, just cherry picked those examples.
That's that's a phenomena that's going on in parts of the N. us market.
That at the same time I'm not saying.
Yes, the social inflation that people are talking about but.
You know if you look at our long term history in this business, which as I pointed out earlier 17 years, we've got a long history through many cycles of looking at you know fully developed Lawson Ellie ratios and those typically have then you know yet.
Right hovering right around 60.
Percent overtime, I think the price increases that were getting or.
A really good and I think that this book will perform in line with our long term.
History in good years, because I think we're really in good position in these years in the current environment.
Understood then when the vital quick question the up dip and have the written and earned for the commercial auto piece in the third quarter.
I think historically that maybe gets broken out later, but the owner of your you have done there in front of you again, the written and earned in commercial auto within the theater.
Yeah It was about.
$80 million.
There.
That was the.
The earn about.
Yeah. That's the net written into that are in there about the same right.
Because we basically earned the premium as we write it.
I guess, that's I guess, yeah. The net written there you have gross written by any chance.
Grows with the additional amount given the large reinsurance contracts, it's a little over $100 million.
Yeah Okay.
Very good thank you.
Thank you I'm showing no further questions in queue at this time I would like to turn the call back Adam Abrams from closing remark.
Well. Thank you everybody for your interest on our company and.
We look forward to reporting to you next quarter and the visiting with you from time to time.
And we appreciate deeply appreciate your interest and speak to you soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.