Q3 2019 Earnings Call
Greetings and welcome to the Hallmark Financial services 2019 third quarter Conference call. At this time, all participants are they listen only mode. A question and answer session will follow the formal presentation. You make you a question at anytime by pressing star one on your telephone keypad care move your question Press Star to these instruction.
It will be given again prior to the question answer session.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host David wed Senior Vice President corporate development strategy at Hallmark. Thank you Sir you may begin.
Thank you and welcome to the Hallmark financial third quarter 2019 earnings call. This is our second earnings call and we anticipate continuing based on a quarterly basis going forward.
Joining me on the call today, our novena non president and CEO .
And just pass more chief financial Officer.
During the call, we will be making forward looking statements.
These statements may reflect certain assumptions expectations beliefs, and intentions, which are subject to various risks and uncertainties.
Investors are cautioned that actual results may differ materially from such forward looking statements.
Please refer to our most recent Form 10-K , and other filings made with the FCC for additional details on some of the risk factors that may materially affect our results.
We may also reference certain non-GAAP financial measures and the call today, a copy of the press release containing a reconciliation of GAAP to these measures and an updated quarterly investor presentation.
On the company's website at Www Dot Hallmark GE RP dot com.
We will begin the call today with a brief overview of the quarter, Jeff will follow with some comments on the quarter. Its financial results and then the vein will discuss market conditions and our results.
That I will turn the call over tend to be.
Thank you David and good morning, everyone I'm pleased to report that through the third quarter Hallmark financial continues to produce returns in excess of 10% operating earnings were 35 cents per share for the quarter of 52% increase over the same period.
Their previous year and a dollar seven per share on a year to date basis, producing an annualized operating return on beginning equity of 10.2% net income was 29 cents per share for the quarter and dollar 80 to one a year to date basis, which translates to an annualized return on beginning equity of 17.4%. These results highlight the positive impact.
The transformative actions taken by the company over the last few years. We're just touched every facet of this organization that has laid the foundation for the company's take advantage of the current favorable market opportunities, particularly for specialty ensures the company is focused on building the talent base market presence to firmly established ourselves as a specialty company with a diversified portfolio, especially.
Hi, good products or timing as good a we're well positioned to take advantage of the opportunity created by the market dislocation in the specialty space.
We have been focused on expanding our specialty business, which now comprises 77% about total premiums and generated a combined ratio of 87.7, the third quarter and a combined ratio of 91% year to date most of our specialty products are seeing significant rate increases both the same time deploying smaller limits and improving terms and condition.
The combination of these three components rate billets and terms and conditions as critical to building a sustaining a profitable portfolio business in an environment where claim severity is increasing.
Now I'll turn the call over to just passed muster overview of our financial results and then come back in with them views on ARP segment.
Thank you intervene and good morning for the third quarter of 2019, we reported net income of 5.3 million.
This compares to 9.7 million the same quarter last year.
Moving the impact of unrealized changes in the market value of equity Securities. Our operating earnings for the third quarter of 2019 were 6.3 million compared to 4.2 million in the same quarter last year.
Gross premium written increased 33% to 224 million during the quarter compared to 169 million the same quarter last year.
This improvement relative to last year was attributable primarily to growth in our specialty businesses driven in large part by the favorable rate increases we are achieving in this portfolio.
Year to date, our specialty commercial segment represented 77% of our portfolio with our standard commercial segment at 11% and our personal segment at 12%.
Net premium written increased 45% to 128 million for the quarter compared to 88 million and the same quarter last year, while much of this is related to the growth and gross premiums the rate the higher rate of increase is being driven by the changes we made to our reinsurance program. Starting in October 2018, led by the consolidation of because LIBOR.
Business into a single treaty structure.
For certain of our specialty lines of business session rates in previous treaties were higher which has resulted in a larger portion or the other business being retained by the company translating to a larger growth rate and that premiums.
These changes to the reinsurance structural I was to retain the larger amount of the specialty business that we right.
At the same time to structure also provides protection against claim severity as we have more reinsurance coverage on claims in excess of $1 million.
Going forward. We currently expect that the net premiums will continue to increase at a slightly higher rate than gross premiums, but those rates should be much closer than they have been over the past four quarters.
Cash flow from operations was a positive 16.2 million inflow for the quarter and a 22.9 million inflow year to date, a 41.9 million increase over the first three quarters of 2018.
The net cash outflows that the company experience in 2018, where a direct and deliberate result of the improvements made in the claim organization seeking to close claims more quickly than the company has historically.
That dynamic as no normalized than we anticipate the current trend will continue.
The expense ratio was 26% for the quarter and 25.8% on a year to date basis.
We continue to emphasize our expense ratio as a competitive advantage relative to our peers, which we believe is achieved by a careful management of expenses intelligent usage of technology, an external resources and our mix of business, we generally target and expense ratio that is 28% or lower.
Net investment income increased 4% to 5.1 million during the quarter as compared to 4.9 million in the same period the prior year.
Net investment losses were 1.3 million for the quarter, resulting from a 1.5 million reduction and that unrealized gains.
In August we issued 50 million over 10 years senior unsecured note in the public market with a six in the quarter present coupon.
We used 30 million of these proceeds to repay in existing bank revolving credit facility and the remainder with contributed to our insurance subsidiaries to support additional premium growth as we see opportunity in the current market to achieve returns in excess of our target.
Total cash and investments increased 9% since year end to 730 million or $40.26 per share.
Improved kept operating cash flows driven by both increased bringing production and stabilization and claim payments proceeds from our senior unsecured note offering during the quarter and a year to date increase in evaluation of our investment portfolio are the main drivers of this increase.
Stockholders' equity for the group ended the quarter at 296 million up 41 million since year end 2018.
Our book value per share has increased 15.5% since year end to $16.36 per share as compared to $14.17. This is not an annualized number and reflects the actual change and book value per share over the nine month timeframe.
With that I'd like to turn it back over to intervene.
Thanks, Jeff I'd like to spend a few minutes on the company's core results and won't and then we'll discuss our performance at a segment level, our combined ratio for the quarter four of 29 team.
Was 95.8 compared to 98.1 in the same period prior year year to date. The combined ratio was 95.6 as compared to 97.5, an improvement of almost two points. We continue to make progress toward our target of sub 95 combined ratios. While there has been much discussion in the market recently over the cat events.
I have been primarily driven by hurricane Dorian and type who in fact site Hallmark financial has had a relatively quite cat year, owing to minimal impact from any major weather event.
Net losses were half a point in the quarter and why don't have point for the year, which is below our historical average of between two and four points.
Also as noted in our earnings release, the recent stores in the Dallas area, while impactful to our community and colleagues is not expected to be a meaningful cat event for hallmark.
We've been mentioning increase in claim severity impacting our casualty lines and particularly commercial auto for the last two years and we've been aggressive in addressing this trend in response to this we've taken steps improved pricing risk selection and claims management.
The company experienced an increase in prior development in the quarter driven by increased claim severity and our commercial auto line above what was previously anticipated with unfavorable development the quarter, a 5.7 or 2.4 points year to date.
Claim management has been an important part of our strategy sought to close queens quicker and reduced our exposure to increase in claim costs associated with longer time frames and litigation. This is clearly evident in our commercial auto book, where the company has been diligent and working to close claims or your accident years. That's close at this point, 99.1% of all primary commercial auto claims were.
Ported for accident years 2012 through 2017 as illustrated on slide 12 of our Investor presentation, if you'd like to review.
Most of them very focused on addressing the issue on the pricing side of our auto book.
Over the past year, the impact to the underwriting decisions and rate increases in our primary trucking portfolio has been notable since 2015, we have reduced enforced customer count by 53%, while premiums are only down 4%.
On a more recent comparison just year end 2018 policy counts are down 9%, while premiums are up nine publicans down 16% or premiums are up 9%.
Our underwriting actions supported by improved risk selection predictive models, we start to claim efforts seek to fast track new claims to closure positioned the company for long term success in this line.
Overall, our specialty commercial segment is performing very well in the third quarter. The segment produced a combined ratio of 87.7 for the year segment generated a combined ratio of 91.
Our 85 and a half on an accident year basis. In addition, we continue to see great momentum in this segment with rates increasing over the course of the year in the third quarter average rate increase across this portfolio was in excess of 15%, which is helping to drive improved underwriting margin into the business. This was particularly evident in our Ns property book.
In our professional liability segments as well as in our commercial auto product line.
We're in very good we're in a very good position to capitalize on the current market conditions, which in our view of shifted from broad appeal, what headwinds to tailwinds and particularly our core specialty lines.
As I mentioned earlier compressing limits as a critical part of our strategy and reducing the impact of claim severity in the market at this point nearly 90% of a liability policies, a 1 million or less and limit.
In both our specialty commercial and in our center commercial segment, which will greatly minimizes our exposure to claim severity.
In terms of other segments, while the company's overall cat experience for the quarter was good personalized segment saw an uptick in both PCF non pcls weather related claims, resulting in the loss ratio of 80.85 point increase over the same quarter last year year to date. This book is generating combined ratio of 96.9, which is an improvement over the one or one point.
Seven combined ratio for the same period last year.
Our standard commercial business also experienced an increase in attritional loss activity in the quarter.
This includes a non small non cat property losses as was some cat loss activity from severe convective storms.
Result, as a combined ratio one of 7.5 for the quarter at 99.4 year to date.
Overall I'm pleased with how we're positioned in 2020 and we're benefiting from all the work that we've done over the past few years and were able to take advantage of the favorable market conditions of the specialty lines of business that hallmark rights with the right people in place balanced growth, while still maintaining and driving pricing discipline.
With that operator, let's open it up for questions.
Thank you, ladies and gentlemen, we will now be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation total indicate that your line is my question Q.
Hey Press Star to you if he would like to remove your question from the Q for participants using speaker equipment, and maybe necessary to pick up your handset, but for pressing the star keys.
One moment, please let me pull for questions.
Thank you. Our first question comes from Greg Peters with Raymond James. Please proceed with your question.
Hi, Good morning. This is mark is calling in for Greg.
You guys then.
Talking about market dislocations for a couple of quarters now and I was hoping you could spend a minute and give us some hope they weren't. This this dynamic is it's more pronounced in the marketplace right now.
Sure.
Good morning, Marcus So overall, we're seeing a couple of things that are taking place in the market we are seeing.
Some of those standard lime carriers move out of the enough wanes and so certainly more businesses coming into the Anna's linens and overall through six months from a segment perspective, BNS has grown as growing at about 15% to 16% DNS didn't see that type of dislocation or growth I think last time DNS line. So saw that type of dislocation was back in 2001 too.
Thousand too we're seeing it in our Ns property line, where we're seeing much more syndication of limits.
Many more cares required to fill a tower and the program and as a result were in some cases seeing sort of inverted towers in some cases, where pricing is higher as as you go up the latter which is kinda opposite of what you would expect we're seeing it in our professional liability segments. Both in our health care as well as our financial line segment and we're much more of a small business small.
Small customer writer in those segments.
We're seeing it also in our commercial auto as well as our casualty segments. Both on the primary end the excess but much more so on the excess now. This is a combination of changes that are being driven by you know as I mentioned earlier, the standard lines markets kind of moving out of lanes and more business coming back into the yes segment, that's probably the biggest impact second is the changes at Lloyds.
Particularly as as Lloyds is walked away from smaller binding authorities and those.
Individual lists are now coming into the market as individual risk versus.
The willing mature programs gyrations with Lloyds and then just certain extend some of the changes that AIG and others that that are making in terms of.
There are limits and look profiles.
That's a little less impactful for us only because we don't necessarily focus on that sort of not large national and global account a market from from an overall standpoint.
Got it thank you for the color.
Your next question is on Slide 11, and you have your combined ratio broken down here.
See a remarkable.
Women expense ratio on your near your 95% Targa year to date, but that seems like.
You know.
If we weren't a had been average cat year, you would be running a little heitner.
So I guess, maybe you can you give us some perspective that you know where you see.
Your expense and core loss ratio heading towards so in order for you to hit that target.
Yeah. So.
We see continued as we continue to add rate into our portfolio to terms conditions and the changes that are going in the marketplace. We expect that you know and our mix of business as that evolve we see our accident ratio actually the loss ratio continue to improve I think from an expense standpoint.
In the range of 20, 520, 625, and a half to 26 at this point.
And we'll see some more in further improvement as from a growth as we continue to grow and benefit from the growth.
Tax expense ratio, we don't have any sort of major projects and things like that from a capex perspective, better on the horizon thats going to necessarily impact a lot of that work has been done over the course last four years. So it's going to comes from a combination of continued improvement in margin, but accident year loss ratio perspective, as an analytic from the expense ratio.
Even with a normalized cat scenario, which has been around.
Feed into three points over the last two years.
Got it. Thank you for that I guess, just my last question.
Would be on capital and I guess, it's a good opportunity for you guys to comment on your perspective on the balance of capital and grow that you are you seeing some pretty staggering growth numbers. There and then maybe you could talk about your excess capital position if there's any.
Essentially come back to the market to repurchase shares.
Yes so.
We generally target.
A leverage ratio between 1.4 times to one and half times were little bit above that right now 1.6, but not not really far out of that range and we feel fairly comfortable with ended the capital.
That we have the company.
In the past has been quite a bit higher in terms of leverage ratios, but my comfort level those kind of stay within this range. This point, we're adequately capitalized as Jeff noted we did add.
20 million recently from public debt offering into into our insurance companies and based on our projections of profitability, resulting from kind of what we will generate miseq capital perspective, I'd meets or expectations to keep the net premium leverage within that range of the one point for 1.6 range at this point.
The.
We did file a universal shelf as you may recall back in May at 450 million, we pull down 100 million of it.
End of it I'm sorry, so we have a 100 million available at this point. So we do have some optionality, we choose to do something done down the road, but at this point, we feel like we're generating enough from a stat profitability perspective, and stat capital perspective to support our growth ambitions based on what we see the outlook of market.
Okay. Thank you for your answers.
Thank you once again, ladies and gentlemen, Tequila question at this time, Please press star one on your telephone keypad.
Our next question comes from Bob Farnam, with Boenning and Scattergood. Please proceed with your question.
Hey, there and good morning, I'd like to she if I can tease out maybe a little bit more detail on commercial auto reserves. So you.
You see that 99.1% of the claims have been closed from actually years 27 in prior.
About how many claims are we talking now that are still opening I don't need an exact number just kind of ballpark. How many claims are still open from better how much does that 0.9% represent.
So.
So kind of an address that question in two parts Bob.
So 2015, and prior which was kind of the area, where we saw the most dislocation and drove primarily the the reserve charges in the past.
Were less than 50 claims open in terms of all of those accident years at this point.
And adequately case reserve from from dollar perspective.
We have you know with them over a couple of hundred claims open between 17 and 16.
From a from a wall crane perspective, but the key point as we feel case reserves from a case reserve perspective are probably the highest level we've seen in our company in our history and we feel they are adequately reserved but as you could kind of closer to closing out. The claims you do get some volatility and we thought it was prudent to add to our reserves on that basis based on this.
On the volatility we're seeing as we continue to continue the pace opposing other claims that we have.
And he's a and these claims are predominantly have up.
Are they on policies that have a million dollars limit on them as that.
The Gulf Primer, Yeah. This is all primary that's correct.
Okay million dollar yes.
And so.
Again, I'm sorry, you may not have the details there, but so in terms of the 150. So sounds like 150, so remaining claims around that area do you know what percentage.
That they are reserved to act in terms of are they.
As a percentage of the limits as how much is or how much potential is there for going up to limit on those claims.
Yes, so again its case by case basis, but those there's quite a few that oh I am at limits losses already so they're not going to develop anymore, but but on an average add added case reserve basis, where we feel pretty adequate in terms of what the case reserves are.
In terms of terms if I don't have the specific information in terms of what that average case reserves says, but I'm happy to provide better as a follow on.
Sorry, I Didnt I didn't mean to.
Hammer you would like a little diminution detailed stuff there, but I was just curious about the commercial auto stuff just because of the adverse development again this quarter.
But you, but it looks like a 28 team has developed favorably thus far is that basically lower than expected severity or frequency or like what's what's been driving the.
Improvement in 2018 accident year.
A couple of things.
Obviously all of the changes we've made are going to coming through started making a lot of those changes in 16 and 17 in terms of our portfolio what's from pricing risk selection improvement standpoint, we put on put in our second generation of our predictive model capability, but but also this is going to exceed large reduction and this exposure base and the company. So.
When you look at 2018.
Page page 12 of our Investor deck give you some reference points.
On policies in force reduction it just sheer pauses enforcement rate that doesn't put on the Paul on the on the policies is driving the continued improvement in the portfolio from a portfolio standpoint in.
And that.
From a continues into into 19 as well.
Is there a specific type of claim you've been trying to tick didnt have policy I mean, not not claim but policy.
You know you've you've called quite a bit of your enforced policies. You know what has been the more problematic type of policy that a you've been getting rid of.
A couple of things so you know what were.
We're looking at a lot of variables in terms of risk quality and our models to that to give us better better and deeper insight on on risk profile and this quality.
And through that process in general terms, we noted that some of the.
Newer venture type truckers are problematic and so thats been a big part of the exit some classes flatbed trucking are problematic, it's down to kind of specific type of goods halden areas halt some of the regional truckers had been problematic in some of the regions of the travel and.
Well, we've seen hi, preponderance of activity and Thats, all coming through some of our some of our model modeling activity that we've done to really understand the portfolio. So.
And then broadly speaking we are we've also exited two states that we think we're really challenging and were unprofitable for us, which were Louisiana, and Mississippi and we exited those let's stop writing new business in those states in 2016 and in 2017 completed the exit out of those states from a renewal standpoint.
Great.
That'll do it for me thanks for thanks for the details I mean.
Pleasure.
Thank you. Our next question comes from Sam Hoffman with Lincoln Square. Please proceed with your question good morning.
Hi, Yes my questions around.
The ongoing nature or what the onetime in nature of some of the havens what happens in the corridor. So my first question is on personal lines was the entire hi access of the loss ratio in the core there due to cap and non cat weather and do you expect the combined ratio to be sort of in the 95% or.
Hello, Rins as it had been here in the prior four core there is going forward.
So.
We had a higher higher preponderance of losses related to.
Whether.
In the quarter that was the biggest part of the impact are there was also a little bit of movement higher increase on the expense ratio by a couple of points I think that sort of goes ups ebbs and flows in terms of that's what are kind of a quarterly impact, but I do expect to cut.
For you to come more in line and be on target.
As to our 95 target for that portfolio on a run rate basis.
Terrific and then on on the commercial auto.
Which accident years.
What was the prior year development coming from.
No because we've seen some companies like travel or is it take a strengthening from their more recent years and it sounds like the food is coming from older years than it would be implied since you closed more of your claims that we could view this as being more onetime because I just wanted to get your commentary on their where exactly you came from.
So.
It was actually we added to the reserves and the more recent years of 16, and 17, which is where were you know what's your what's left over of the of the claims that were closing out and 15 and prior as.
As I said earlier based on the number claims that are open at pretty much settled out at this point, but we did again those the years that we have the.
Leftover claims if you will and those are the ones that we're focused on at this point closing out and that's what we saw some volatility which we thought was prudent to.
But some more reserve additions on onto those years on that basis, Okay, but you can add to 2000, the pen or 2910 and the corridor.
No. That's that's correct. Okay terrific and then last question is do you still believes that a 10% return on equity and the 95% combined ratio is achievable I for 2019 and beyond.
So.
We don't generally give you know kind of broad guidance on that basis.
But our view is based on kind of if you look at our.
Metrics of the organization from a balance sheet standpoint.
We are targeting generally of 95 or better combined ratio based on our kind of less leverage ratios. Both in terms of our net premium leverage our asset leverage can financing ray.
As was the debt leverage and walk through all of that you know the ability for us to sustain a 10% or better as.
It is well well relatively good and we feel good about being in a position to do that.
Current year as well go forward based.
Terrific. Thanks for taking my questions.
Thank you once again Tequila question. Please press star one on your telephone keypad. Our next question comes from Andrew Board with Fenimore. Please proceed with your question.
Thank you. Good morning, guys, obviously was a good quarter. So congratulations and thanks for all the good day do you guys you put out these days it really helps.
My question would you you may have already hit I apologize, if I Miss something here, but on the standard commercial segment.
I'm a little surprise is down in a 15 million range for net premiums earned.
Hi, good anything you're pulling out of there or anything changing there that would explain that end up I'm not sure to risk or anything I'm, just trying to get my arms around psyche.
Yes, so Andrew good morning.
It's primarily driven by the changes we've made in the reinsurance treaty. So as we restructured our broad casualty treaty last year.
We ceded some of the liability.
And as of this portfolio, we had not been ceiling before that and so it's you know who and we were retaining more than some of the more to the specialty risk and so it's really been in about capital allocation and optimizing our capital allocation perspective to optimize our returns from that standpoint, so as really on that basis, that's driving that change.
Great. Thanks.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Mr., a non for any additional concluding comments.
Great well.
Thank you again, everyone for your participation. This morning, we appreciate your time and interest in Hallmark and we look forward to speaking with you again next quarter. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.