Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the <unk> third quarter 2019 earnings Conference call.
This time, all participants are any listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
As a reminder, this conference call is being recorded.
When I like to turn the conference over to Rob Luther Vice President of corporate strategy and Investor Relations.
Great.
Thank you and good morning, everyone welcome to our discussion our third quarter 2019 earnings results, which were reported yesterday on the call with me today, Steve Donaghy, Chief Executive Officer, Jon Springer, President and Chief Risk Officer, and Frank Wilcox Chief Financial Officer before we get begin. Please note today's discussion may contain forward.
Sure, It's holdings Dot com and on the Fccs website.
A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release.
With that Steve I'll turn it over to you.
Thank you, Rob and good morning, everyone.
Thank you for joining us today.
Yesterday, we reported strong third quarter results with non-GAAP adjusted EPS of 61 cents on revenue growth of 11.4%.
Versus the year ago quarter.
Year to date total revenue was up 15.2% to 699.9 million.
Direct premiums written were up 7.4% due in large part two strong growth outside of Florida. In addition to rate increases within Florida and other states.
Year to date U.P.S. was $2, an 82 cents on a GAAP basis and $2.67 on a non-GAAP adjusted basis.
We believe these results combined with the outstanding work our claims servicing team has done in bringing closer to prior year catastrophe events and the launch this quarter of our multi raider quote to bind platformone Clover, where consumers can now receive up to five side by side quotes online from different care.
Others.
Positions us well to continue to deliver on our strategic priorities.
So with that in a moment John will provide an update on some risk management topics, but first let me now I'll turn it over to Frank to walk through our financial results friend.
Thank you Stephen good morning, everyone.
As a reminder, discussions today on adjusted operating income and adjusted EPS or on a non-GAAP basis, and exclude impacts from unrealized and realized gains and losses on investments and extraordinary reinstatement premiums unrelated commissions.
Adjusted operating income also excludes interest expense.
Total revenue grew 11.4% for the quarter and 15.2% year to date, driven primarily by continued organic premium volume growth.
Pre tax income margin was 12.1% for the quarter impacted by weather events above plan.
Partially offset by returns on our investment portfolio and integrated service performance.
To date pre tax income produced an 18.9% margin.
As for the quarter was 59 cents on a GAAP basis, and 61 cents on a non-GAAP adjusted EPS basis, and $2.82 in $2.67 year to date, respectively.
These results reflect positive momentum from premium growth investment performance and a reduced share count offset by a higher core booked loss ratio in 2019, when compared to 2018 weather events above plan and a lower benefit from integrated services.
In addition, the year to date EPS decline relative to 2018 was driven by a pretax 6.5 million nonrecurring benefit.
And book value per share growth of 12.7% year over year.
Turning to our underwriting results premiums enforce grew to approximately 1.3 billion.
An increase of 8.5% from the prior year.
Direct premiums written were up 10.9% for the quarter led by the full quarters impact of rate increases in Florida, and other states taking effect as well as strong direct premium growth of 27.6% in states outside of Florida.
Year to date direct premiums written were up 7.4% led by the rate increases taking effect as well as strong direct premium written growth of 29.1% in other states.
Where we increased first event all states reinsurance program coverage to 3.3 billion.
On the expense side, the combined ratio increased 15.8 points for the quarter to 97.8%.
And 11.9 points year to date to 90.5% driven primarily by geographic diversification an increase in our core booked loss ratio at the started 2019 weather events above plan.
And a reduced benefit from our claims adjusting business, partially offset by a reduction in our expense ratio as set forth in the following.
The expense ratio.
Improved by three points for the quarter to 33.5% primarily related to a 2.3 point improvement in the other operating expense ratio.
Year to date, the expense ratio improved by 70 basis points to 33.2% driven by a 1.7 point decrease in the other operating expense ratio, partially offset by 90 basis point increase in the policy acquisition cost ratio.
The improvement in the other operating expense ratio for the quarter and year to date was due to economies of scale executive compensation reductions in higher reinstatement premiums in the prior years comparison affecting the base of the ratio.
The increase in the policy acquisition cost ratio year to date relative to the first nine months of 2018 was due to a nonrecurring benefit of 6.5 million recorded in the second quarter of 2018 related to a refund of prior year premium taxes as a.
The result of a settlement with the Florida Department of revenue and higher reinstatement premiums in the prior years comparison affecting the base of the ratio.
We now expect the expense ratio for the full year to be between 33 and 34%.
The net loss and loss adjustment expense ratio increased 18.8 points for the quarter to 64.3% and 12.7 points year to date to 57.3%.
Quarterly and year to date drivers include.
Weather events in excess of plan of 15 million or 7.3 points for the quarter was related to weather events in Minnesota, and a series of wind events in the south Eastern states, including Hurricane Dorian.
This is in comparison to 7.5 million in the third quarter of 2018.
Year to date weather events in excess of plan were 22 million or 3.5 points compared to 12.5 million for the first nine months of 2018.
And 333.3 million or 53.2 points year to date includes diversified growth in the company's underlying business an increase in our core booked loss ratio at the started 2019 and they reduced benefit from our adjusting business as prior years.
Claims conclude.
Turning to services total services revenue increased 17.7% to 14.9 million for the quarter and 8.6% to 40.9 million year to date driven by commission revenue earned on ceded premiums by our reinsurance intermediary Blewitt Atlantic.
And an increase in Mg a policy fees and other revenue related to new and renewal policy volume.
On our investment portfolio net investment income increased 14.6% to 7.6 million for the quarter and 34.6% to 23.2 million year to date, primarily due to increased assets under management and an asset mix shift to higher.
We are yielding investment grade bonds during 2018, and 2019, which are having a greater impact on net investment income.
Yields from the fixed income portfolio are dependent upon future market forces monetary policy and interest rate policy from the federal reserve.
Realized losses for the year to date period were primarily the result of liquidating underperforming equity securities.
Unrealized gains were driven by market fluctuations in equity securities, resulting in a favorable outcome for the quarter and year to date periods.
Taxes.
Excluding discrete items the effective tax rate for the third quarter was 29% an increase of 2.5 points over the prior years quarter.
Year to date, the effective tax rate was 27% an increase of 1.1 points over the prior years first nine months.
These increases were largely due to a change in the amount of both permanent differences and taxable income.
Barring any unforeseen events the remainder of the year for 2019, we expect an effective tax rate of approximately 27% to 28% before discrete items.
In regards to capital deployment.
The 49.9 million returned to shareholders through opportunistic share repurchases year to date is the largest amount of capital deployed for share repurchases over any other corresponding nine month period in the company's history.
19.
Some comments on the current risk management market dynamics.
Third quarter saw us make major progress in closing pass catastrophe claims our in house claim staff has done a tremendous job in servicing or policyholders in handling over 100000 catastrophe claims in the past two years alone.
On Hurricane Matthew in Florence.
Nearing the end of the claims handling was approximately 20 claims remaining open on each storm at 930.
We did increase the total gross losses, just slightly to 47.5 million and 52 million respectively.
Our hurricane Michael total gross loss remains unchanged at 350 million with approximately 400 claims remaining open at 930.
On Hurricane aroma, we started the quarter was 5500 open claims and made significant progress during the quarter.
As of 930, we increased our total gross loss to 1.25 billion were just under 2000 claims remaining open.
We have made even further progress in October and stand here today with less than 1000 open Irma claims.
In regards to our current accident year weather events for the hailstorm in bombard County, Florida.
Q1, approximately 90% of claims.
Have been closed with incurred losses within our original plan for this event.
When looking at the weather events that took place nationally in Q2, we were fortunate to only be exposed to roughly half of the events due to our geographic business footprint.
In the third quarter, there were meaningful weather events in Minnesota as well as a series of windy Vince in southeastern states, including Hurricane Dorian.
This is a retention event, so gross would equal net for all intents and purposes.
When coming up with the estimated gross loss, we considered several factors, including model loss estimates specific to our book of business, which is obviously more granular than at high level state or regional markets Your analysis.
But also considered total market wide loss estimates widely reported by the generally accepted catastrophe models and applied load and market share estimates across several states.
Lastly, we looked at our own trend data, thus far for claims volume and looking at all these factors we've taken a prudent approach to reserving for this event and feel comfortable and are booked position this quarter.
As a reinsurance update the majority of the Atlantic Hurricane season is in the rear view mirror.
We believe this was a largely benign hurricane season for Florida with primary insurers absorbing the lions share of losses within their retention.
This result will serve as a strong bottom line outcome for our reinsurance partners in the Florida market.
Following the active last seasons of 2017 in 2018. This is a well earned result for all parties involved.
On June 1st 2020 reinsurance renewals as we will allow the hurricane season to formally and continue to track the positive effects of the Florida, it'll be legislation reform and of course monitor the reinsurance capacity effects of weather events around the globe with that I'd like to turn it back to Rob.
Thanks, John I'd like to ask the operator, we'll now open the line for questions.
Okay.
And then.
Again that star one and your Touchtone telephone.
First question comes from a line of Christopher Campbell of KBW Your.
Your line is open.
Hi, good morning, gentlemen, congrats on the quarter.
Good morning morning, Chris.
I guess I'll start off with the large amount of repurchases. This quarter I mean, obviously, a big slug, there so like how should we view the 25 million a approximately that you bought back. This this quarter as at like a good run rate going forward or how should we think about modeling repurchases.
Yes. So you know obviously those repurchases were in light of what we believed to be an undervalued price for us and we took the opportunity with some capital that we had to repurchase that I.
I wouldn't look at that necessarily is the run rate going forward. You know I think that there are lot of factors at play going forward, including what the stock price does.
You know capital that we may or may not have available to deploy we look at the best use of our capital at any given point in time.
Well, it's not a disclosure that we make on an interim basis. So the ended the year, we will have a holding company only financial statements.
And you'll be able to gauge that from there.
Okay perfect.
And then kind of looking at the commission revenue that rose year over year or how should we think about modeling that one that line item as well.
Well you know the amount that we earn went up for a couple of reasons first of all because our exposures have increased and with that the the amount of reinsurance that we buy.
But we also are purchasing a larger percentage of our reinsurance from third parties, which is the the portion that earns us that commission.
The Cat fund is a smaller percentage of our overall program because there's a higher participation rate among other participants in that program.
Okay got it though and so the way we should be thinking about the main like drivers behind that should just be on that commission. So that's not like commission revenue that youre getting from like debt from the new platform correct No no. The vast majority of that is the commissions earned on the reinsurance program.
No.
Okay got it and then looking at the expense ratio is pretty strong this quarter. I mean is like mid Thirtys like 30, 334 net expense ratio, where we should be thinking about modeling you all.
I mean, there are a lot the answer the short answer is yes. There are lot of variables involved in that equation. You know there are two sides of the equation there the spend itself, which is your numerator and then there's the net earned premium and both are affected by different things.
As far as the denominator.
Supply and demand of the product primary rates cost of reinsurance rents are all going to be at play there.
And those things can put pressure or east pressure, depending on which direction. They go on the expense ratio as far as our spend goes.
You know our ratio is right within the range that we've been sharing with our folks although on the lower end of that range and we feel good about that we feel that we've been disciplined with our spend we don't spend less we believe that it's going to generate good dividends.
So you know going forward it depends it depends on what happens with reinsurance prices it depends on what happens with primary rates.
That are driven by a variety of different factors.
Okay great.
All right so yes.
Crawled here is there any big storms I guess, just how should we be thinking about like you know media reinsurance renewals.
What would be the impact similarly, the potential impact of what's happening in Japan, and then how sensitive do you think like Nextshares reinsurance pricing is going to be tailored to the retro market that renews in one one.
Yes, well, there's a lot there in the short answer to almost all of those it's really too early to tell.
You know night I don't mean to be color. If you Chris I would give you more if I. If I had you we've talked to a lot of our reinsurance partners as I said in the in the opening it was or we are on our way I should say to a well earned relatively lost free year, which our reinsurance partners certainly deserve our Paul.
As you holders could use a year off from a major impact here in Florida, as well as well as our claim staff. So it's everybody has his deserve the year that were on our way too. It is just simply too early to tell impart because of what you just laid out there. So many factors that play including losses around.
In the globe, including how that impacts the the retro market for our reinsurance partners.
There's a lot to sort out and and it's too early.
Got it and then I guess just like when we're looking at you know the different renewals I guess, just how independent or not or you know.
Not independent is the Florida renewable versus right, we're going to get to read through on one wall there'll be some property stuff there and obviously you know for one is all like it's mostly Japan. So I guess just when we're looking at that like know what would be like if you had to like.
Come up with a growth you know correlation like what would be like like how reliable what looking at either of those two renewal b.
In terms of predicting what's going to happen in midyear I mean, they said like 10% correlated or yeah, I'm trying to think because the last few years within Florida right, Florida got hit by a lot of cap and then that Didnt impact the Japanese renewals. So it looks like there is kind of some independence between the different areas.
Wait at the reinsurers could be differentiating the pricing.
There is definitely independents and it will watch these things closely as as you do see what what the experiences of those that by at one one see what happens on the four one Japanese but at the end of the day, Florida renewals stand on their own and they can they can move directionally like the one one.
In the four ones, where they could do something totally different they really are independent.
Okay got it and then I looking at slide seven of the deck and it looks fine you guys had like I think John you mentioned, a little bits and your script about herbal often there are no gross losses, now 1.25 billion, but you're holding the Michael Michael off spec. So it looks like most of the 205 million of gross adverse development.
What are more so I guess, just where do you stand in terms of like you're in 2017 tower, what's like the breakout between the limit you have available and indemnity versus like what's still available in terms of like the Ellie.
Pieces of that.
Yes, even though we've increased thermal lost my statement is going to be very similar to the one that I made last quarter and that I made in the opening remarks, where we are in the lifecycle of this storm is that the vast vast majority of this increase is being borne by the Florida Hurricane Cat Fund.
And when you factor in some of the strategies that we deployed early on in this event with Frontloading some of the loss adjustment expenses.
We're in a position were an even greater share is being covered by the Florida Hurricane Cat Fund then may otherwise be apparent.
Okay got it and then I guess just are you guys starting to see any benefits all like on a core loss ratio from like the reform are there any like operational metrics that you're seeing within within the claims department that things are getting better and then if so how is.
I'm going to impact your upcoming rate filing.
Hey, Chris This is Steve.
You know from an eight will be perspective, we continue to be cautiously optimistic about that legislation and we have seen benefit since the run up at 611 thing that we lose sight of at times those that the it'll be legislation in conjunction with our own internal adjusting from and the fast track process we have.
People onsite at many of our claims within 48 hours of the call in on the initial claim and I think a lot of people get comfort from that and we issued checks on site. So I think our processes unique. So we may see benefits that others may not due to our operational structure and our focus on claims.
And again, it's not lost on all of this here that we sit here today was as John had mentioned under a thousand claims on Irma, which was roughly a 95000 claim event. So organizationally, we've proven that we can manage through the difficult.
Since that occur in any of the states that we do business.
I'll, let John handle the last portion of your question.
From a from a rate filing perspective again.
As we said last quarter, we're planning to make a filing by the end of this year. So we wanted to let a little bit of time pass. So we get some more data and more accurate data to use in this next filing. We also did have a florida rate filing that just went into effect on renewals at the end.
May of this year. So this upcoming filing will be made so that it times up with with another may effective date.
Got it and then if my understanding that the 20 is that the.
The new rate filings in a within 2020 have to account for.
Like any ASV benefits is that correct.
Well I think there's still some details to be sorted out in that space Chris.
Okay, well thanks, Bobby after its best of luck fourth quarter.
Thanks, Good day.
Thank you, ladies and gentlemen, once again to ask a question. Please press star one and you touched on telephone and getting that star one on your touched on telephone to ask a question.
Next question.
From a line.
Bill Broom all.
Selling and partners your line is open.
Great. Thank you.
Quick question on the strong growth outside of Florida, you might just telling this kind of giving some overview, where that's coming from where you are having the most success.
Hey, Bill Good morning, This is Steve and thanks for your question.
The growth outside of Florida really is predominantly from the various agents that we partnered with and as we see multiple agencies operate in many of our states we benefit from their growth relative to their their footprint. So when you look at specific states some are growing faster than others.
Many of them are a direct result of the relationships that we have in that state. So North Carolina for example, where we've been for a long time, we grow more than we do in Illinois, where we just got into what are kind of spreading our wings. So to say so there's really not a particular area that I would say is better than another it's more about.
I product of the relationships, we build and the trust the agency force and our direct to consumer channel can generate in the marketplace.
Okay. Thank you.
Maybe talk on a philosophical level about covert in.
Think about kind of ramping up and getting flow through that platform is there kind of a strategy, obviously theres a strategy, but maybe you could talk about your strategy to kind of grow that platform.
Yes, you know the Clover.
It was originally universal direct and has morphed into Clover, we continue to learn more and more about that space every quarter Bill and the byproduct of that is increased premium growth across the platform. So we're growing clover in every state that we operate in and as you know, we recently announced the ability to have multiple.
Quotes presented to the consumer which we see as the next generation of the online.
Efficiency in acquiring an insurance product for an insured. So now uninsured can look at a universal product next to four other carriers and make a selection that suits he or she the best and we feel very optimistic that that will continue to provide a platform for us and for the inch and for.
And for consumers to cut exercise their desire to get insurance on the road.
And is the quota bind capability available on.
Cross sold products that are offered through covert so like auto home.
Everything.
That's a great question.
A lot of it depends on the carrier we we have been what we've been the first quote to bind carrier that we were aware of that you could do without speaking to anyone many of the auto carriers present, something similar but in the home space. It's it's a byproduct of the technology of the carrier that we're trying to kind of pull them along with us too.
Allow us to bind online, but we want to make sure. We're following their rules and making sure they're getting the kind of risk they'd like to get within their portfolio and I think it's something that will evolve over time, but being a good partner in that particular venue. We don't want to do things that they are uncomfortable with so we kind of worked very closely with them.
I think over time more and more products will be presented in a multi quote.
Ability such as flood and others to really round out what the insured can acquire at one time online so we like the space.
We like the technology and we've always benefited from building that on home grown technology, rather than buying it from third parties.
Got it and the same.
Clover.
Quota bond I guess platform is it covering the same states that universal direct so it's an all the states it.
Florida plus outside of Florida.
The footprint, yes, sorry, it's an 18 states currently yes.
Great.
That's helpful. If I could choose one maybe or two clarifications on the cats.
During the full retention loss, so I'm assuming that was.
Im just taking that to mean that losses outside of Florida, where over the 10 million for your other states program that I hear that correctly no no I'm glad you asked for clarification. There Bill what I said is it is a retention loss, meaning that we would not be anticipating that the loss to reach a point, where we'd be able do.
Recover.
Got it got to kinda okay.
Sorry.
And just for.
Right.
Modeling purposes, when you see.
15 million above plan.
In your 37% loss pick how much in Q3 do you kind of built in there for kind of weather events.
Yeah, I've got the number here.
So our original plan as as set forth at the beginning of the year, we were setting aside a little over 21 million for all weather event.
In the third quarter.
And now with the the impact of three and as well as rather meaningful event in Minnesota in early August .
We've decided to add an additional 15 to that number.
Got it okay. Thank you that's a very helpful. I think that's all I had thank you.
Hi, good stable.
Thank you at this time I'd like to turn the call over the CEO , Steve Donahey for closing remarks, Sir.
In closing I'd like to thank our associates consumers agencies and our stakeholders for their continued support of Universal have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.