Q4 2019 Earnings Call

Good morning, welcome, ladies and gentlemen to the ROI for fourth quarter earnings teleconference.

Most of the company, we will open the conference that for questions and answers after the presentation.

Before we get started let me remind everyone that through the course of the teleconference. Oral <unk> management may make comments there.

Intentions beliefs and expectations for the future.

Always these forward looking statements are subject to certain risk factors, which could cause actual results to differ materially. These risk factors are listed in the company's series actually see filings, including in the annual report on Form 10-K , what should be reviewed carefully.

The company has filed a form 8-K with the Securities and Exchange Commission that contains the press release announcing fourth quarter results.

ROI management May make reference during the call its operating earnings and earnings per share from operations, which are non-GAAP measures of financial results.

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

<unk> management believes these measures are useful engaging where operating operating performance across reporting periods.

Not be comparable to other companies definitions operating earnings.

The form 8-K contains a reconciliation between operating earnings and net earnings the form 8-K in press release are available at the company's website at Www <unk> for Dot com.

Now, let's turn the conference all lines, Vice President Chief Investment Officer, Treasurer, Aaron's decent dollar Sir Please go ahead.

Thank you and good morning, welcome to our lives first earnings call of the new year.

Covering financial results through the fourth quarter of 29 team.

Joining us today, our Jon Michael Chairman, and CEO , Craig Kliethermes, President and Chief operating Officer, and Todd Brice, Chief Financial Officer.

Todd will give some opening comments on the quarter's financial results.

Greg will then discuss operations and market conditions.

We will open the call to questions and John will close with some final thoughts Todd. Thanks, Erin good morning, everyone.

Last night, we reported fourth quarter operating earnings of 63 cents per share up 58% from the same period last year.

Well for 2019 reflects fairly benign loss activity from catastrophes and other storms as well as increased favorable benefits from prior accident years reserves investment income continued to outpace prior years, driven largely by our increased asset base.

It's premiums written advanced six person in the quarter and cash flow from operations remain strong at 90 million for the quarter and 277 million on a year to date.

Book value per share ended the year at $22, an 18 cents sub 33% inclusive of dividends.

And we'll talk more about products and market conditions in a minute, but from a topline standpoint as mentioned.

Gross premiums written was up 6% in the quarter ended the year up 8%.

The majority of products and our diversified portfolio experienced growth in both the quarter and a full year and on a full year basis, excluding previously announced exits and repositioning.

None of these decisions premium was up 14% in the quarter and 15% on a year to date basis.

From an underwriting perspective, we posted a fourth quarter combined ratios 92.4.

Third the 98.9 a year ago.

Loss ratio declined 11 point.

Just catastrophe losses declined and benefits from prior years Reserve development increased you may recall that losses from Hurricane My glad about 10 points to our combined ratio during the fourth quarter last year.

This year storm activity and modestly elevated property losses, only added about two points to the quarters combined ratio for.

From a reserve perspective.

Net of expenses prior years benefits were 16 million for the quarter and totaled 63 million on a full year basis up nearly 20 million from benefits recorded in 2018.

From a segment perspective, the majority of favorable reserve development for both the quarter on the full year was in casualty, where a majority of products posted favorable experience.

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

Moving to expenses metrics that drive performance based compensation combined ratio operating or are we in book value growth.

Improve significantly during the quarter and on a full year basis amounts accrued on a bonus and incentive programs account for the majority of the increase in our expense ratio compared to last year.

In addition, these amounts represent the bulk of the increase in general corporate expense in 2019.

Overall, we're pretty pleased with the underwriting performance of each of our segments. Our diversified portfolio continues to deliver solid results.

On the investment front December entered a very strong year for the capital markets fixed income in equities were positive contributors to book value growth.

In total return ended the year up 11.6%. We saw continued increases in investment income up 5% in the fourth quarter and 11% for the year.

Fields have stabilized for now and that puts portfolio growth at the center what income will look like over the next 12 months.

Outside of the core portfolio, our share of earnings in Maui, Jim and Prime.

It was up on a quarter and a full year basis, both investments continue to perform well.

Maui, Jim results for the quarter well improve.

Reflect lower seasonal results, which as expected results for prime or higher.

Reflective of the girls they have experience in both revenue and net profits.

All in all the good quarter and solid year, we achieved a couple of milestones as we surpassed 1 billion in both topline premium and statutory surplus our combined ratio was 91.9 for 2019, which represents our 24th consecutive year sub reporting an underwriting profit.

Our operating how are we ended the year over 14% operating income and strong investment performance resulted in capital generation in excess of current needs, which was returned to our shareholders in the form of a $1 special dividend in December .

2019, we marked our 44th consecutive year of paying or increasing or quarterly dividend with a special dividends. We've returned over 1.2 billion and dividends to our shareholders over the last 10 years.

With that I'll turn the call over to Craig.

Thank you Todd and good morning, everyone.

As Todd mentioned, we grew the topline 6% for the quarter, an 8% year to date, while recording a 92 combined ratio for both periods.

We did have a little more headwinds on the topline this quarter as a result of previously announced reshaping of our portfolio.

Growth was over 10% in the quarter for ongoing businesses overall for underwriters pulse on the market is cautiously optimistic as we move into 2020.

We continue to see positive momentum across most of the property and casualty portfolio.

Increases our differentiated any opportunities to get rate our greatest in the most distressed portions of the market.

We caution and drawing conclusions about market conditions. So weve found in the size of the rate increases or submission counts large rate increases are often the result of significant underperformance.

The disciplined underwriter doesn't anchor on the size of the increase but whether the market rate adequate for the risk.

Weird appointment cycle, we're having experienced underwriters consistent appetite and confidence to execute are beneficial.

I'll offer a little more color by segment.

In casualty, we grew the topline one per cent for the quarter, an 8% for the year.

We reported a 96 combined ratio for both periods growth in ongoing business was 12% for the quarter.

Both commercial and personal excess liability have grown over 15% for the quarter and here from a combination of rate increases and.

And exposure, while generating good bottom line results.

We're also seeing double digit growth in our executive products group, where rates have been up nearly 30% for two consecutive quarters.

Most admitted contractors primary liability business is also growing at a rapid pace as a result of retrenchment in the market.

Our transportation book struggled on the topline this quarter, but was able to achieve double digit rate increases for the quarter and for the third consecutive year. We continue to see variation in the market where rate is easier to achieve on business with a little blemish.

Overall casualty rates were up 9% for the second quarter and 7% for the year with rate realization varying significantly depending on loss activity and a bigger limits are required.

We did place our largest casualty treaty on one one and our reinsurance rates were up 3% to 4% overall.

Which is more than covered by our underlying rate increases.

In property, we grew 35% for the quarter and 19% for the year. This growth was across all the underlying products in the segment.

We achieved a 91 combined ratio for the quarter and 89 year to date.

Rates are up mid single digits for the portfolio for both the quarter and the year.

We're seeing some hopeful signs of increasing price momentum and marine wind and earthquake business new business opportunities are much more plentiful at acceptable rate levels as the market is coming to us.

We place both for catastrophe reinsurance and property per risk treaties at one one cat reinsurance rates were up about 2% to 4%, while the poorest treaty, where we have ceded more loss activity in Russia. In recent years was up seven to 10.

A fair outcome, given our loss experience and reflecting the underlying rate increases we were able to achieve.

In surety topline was off 7% for the quarter.

5% for the year.

We were able to achieve an outstanding 78 combined ratio for the quarter and 75 for the year.

Most of the topline challenges attributes or exiting up a couple of programs that no longer fit our appetite.

As well as decreasing offshore energy activity, which are typically larger accounts.

We still see this is our most growth challenge segment, but we sent some disruption maybe building with competitors taking losses on some larger accounts and capacity starting to level off.

Our underwriters continue to be disciplined looking for opportunities to broaden existing relationships.

Overall, we completed our 24th consecutive year of underwriting profit and topped $1 billion of gross written premium.

Continued to build on a broad diversified product portfolio, and our narrow and deep talent base of underwriting and claim experts.

We like extent established horses and experience jockeys, who had been in this position before and have the confidence unsteadiness to execute on a muddied track.

We will continue to be prudent and purposeful.

I want to thank all of our associate owners for delivering once again on differentiating performance this quarter and on another great year being different continues to work.

With that operator, we can open it up.

For questions. Thank you Sir.

Question answer session will begin at this time, if you're using a speakerphone. Please pick up the handset before pressing any numbers should you have a question. Please press star one on your time.

I wish to withdraw your question Please press star to.

Your question will be taken an order in which others is received please standby for our first question.

Our first question will come from Randy Binder with B. Riley FBR.

Hey, good morning, Thanks, I wanted to ask about the bonus accrual that hit the the corporate DNA line. If if we were to expect a similar level profitability in 2020 would would we see a roughly similar level of accrual in the fourth quarter <unk>, meaning is it is driven by <unk>.

There's something else we should look at.

Hey, Randy it it's Todd.

I think from the standpoint, if you think in terms. If we were again it did $6 roughly of comprehensive earnings. So if you like it where we're at from a combined ratio standpoint.

And those types of things I think it's reasonable it'd be that would be fairly similar.

It's really it really is the larger driver of what's what's going on but with those expenses.

Okay, and then continuing at the.

Kind of holding company level.

What was the reason that.

Spend in prime.

Was higher on profitability this quarter.

Yeah. They are any Todd again, if you their growth has been significant so I mean revenue is up considerably.

And net profits are armed our nearly a nearly double what they were last year.

So that's that's what's going on there great great year for Prime.

Okay and.

I'm sorry, just what is it about their market then able then to double rose.

Yeah, I think there's a couple of things I mean, I think they're seeing there just seems so much more opportunity from from a from a rate standpoint, and more distressed business I think going their way.

Yeah. This is Randy this is Craig I mean their target as much more of the trust.

Business I mean, we that's not something we necessarily targeted ROI, but it's something that's a specific target of those there's there are deemed to be the market of last resort.

Okay and then.

Speaking of markets of last resort or different markets can you did I Miss it if you covered in your opening script, but.

Can you discuss non admitted submission activity and maybe quantify where that is relative to previous periods.

[noise] sure Randy This is Craig I mean, we're seeing on or on our excess and surplus lines book of business, which is about 30% of our overall portfolio I mean submissions are up.

I'm going to say, 10% year to date, and maybe a little more than that for the quarter collectively so.

That's what we're seeing the enough space I mean actually frankly, it exists or submissions are up even greater in some of our specialty admitted lines of business.

And just I'll just do one more the it was the executive products is that a new category that you called out in casualty lines, and you know I, but I apologize I know, it's not very descriptive, but I mean, I think that's how we define it in our K in Q, but it's basically covers do you know and other management liability products could.

He fiduciary fidelity.

He POI site some are cyber isn't there.

But it's it's you know half of it is public and private do you know.

Does that tend to focus on smaller and smaller business like small and medium size businesses or is it across the board.

Well it has both obviously the public part of that is obviously bigger accounts, we typically we play excess on most of those bigger accounts.

That's I think where you're seeing the most disruption in the market right now is public being though.

Okay perfect. Thanks, a lot.

Thank you. Our next question comes from Christopher Campbell with KBW.

Hi, good morning gentleman.

Good morning warning.

I guess first question is it just didn't shirky, it's like the second quarter, we haven't seen any developed man I guess can you just give us color on on you know what you're seeing in terms of say at the prior year loss activity in that line.

Hey, Chris It's Todd I mean that that can you know move up and down a little bit I mean, I think full year. It's it's in the 7 million range. So I don't know that there's anything particular call Adam I think their current accident year loss ratio is very solid so.

I don't think there's anything particular or any conclusions to draw on that on a one or two quarter basis still very solid from a from a loss and combined ratio.

Okay got it because I know I think Craig you mentioned that you all we're exiting some of the programs in there and so I didn't know if if there was a potential that some of those can develop adversely.

No I don't I don't think that the exited programs, we expect that at all.

Okay. It wasn't it wasn't due to loss performance.

Oh, Okay got that that's helpful. What was that due to towards [laughter].

Yeah.

I don't I don't know that there's anything specific that we would want it talks talk about I mean I think.

It was the individual program with with a individual relationship I mean, it's a program actually that we feel pretty good about so from a product standpoint. So we're working on some things in that area.

Okay, no broader trends that that we would return to the rest of up [noise].

No not at all.

Okay Wonderful and then just one last one on the casualty reserves, which were obviously really strong this quarter.

What accident years and lines are contributing the most too.

The strong releases in that segment you know yeah. It is fairly widespread from a line standpoint, I mean, GE Ella's is certainly a decent amount transportation is more favorable cup is the excess liability I mean, it is pretty broad Randy, but and even from an accident year standpoint, I mean, it's there's some in there.

Team 14, I mean, all the way through 17, a little bit and 18. It it is perfect for the shorter tail stuff, they're very broad.

Okay, great well thanks for all the answer it's best to lock in a 2020.

Thank you.

Thank you. Our next question comes from Jeff Smith.

William Blair.

Hi, good morning, everyone [noise].

Question question on the construction book, which I think in the past you've said you know majority of you know book is in construction.

Do you maybe discuss what you're seeing there just in terms of loss activity and and rate levels, I mean, how's that market looking.

Sure Jeff This is Craig.

I mean construction, we play in the construction space and the liability side. Both on admitted into you know spaces primary and excess so I mean, it does vary a little bit and also geographically or somebody on the primary business to start with that's really a business that we acquired when we bought C.B. I see some.

I'm years back.

And it's been more regionally focused and just happens to be that weve. There's been some exits of some competitors in that space and it's created an opportunity for us within you know admitted pretty much box underwritten product that we haven't loosen a same under same team. So we feel like that's just an opportunity to take advantage of someone else's either misfortune or decision.

To exit.

As you move into the enough space I mean primary construction business, it's still very very competitive across the country.

So on the you know side.

For the most part and a and then excess it really depends regionally.

Some places it's still competitive although I think that we're able to get more rate than we had been in the past.

Part of that I think is driven because excess you typically you're talking about $5 million limits, sometimes $10 million limits are so what you're finding is any place where limits are required.

Your good people were under casualty space are having opportunities to raise rates. So that's where we're seeing a greatest opportunity for rate increases on excess business and the construction space.

[laughter], which regions is that more focused on.

Well I think it's I mean, I think we're seeing momentum abroad broadly across.

Country.

More recently across the country.

Brian bit untimely your construction, that's where it was there was.

<unk> Metro areas are more difficult and then rural areas.

[laughter].

Okay.

And then just thinking about the books you moved out of work for that health care facility and then I think some.

Underperforming G. Allen.

<unk>.

Have you completely exited there I mean should.

Not be a drag going forward or is there more.

So expected real Jeff we that we did have I mean, because we announced that and that we announced that we were exiting that business last year at the very beginning of the year I think it was during this call last year, but it but we were still in some of that for I'll say a couple of months. Although you know it was declining fairly quickly. So I mean, I mean, we might have a little bit of headwind but.

Not that big in next quarter, but.

After that I think it's pretty much gone.

Okay and.

And then do you have much exposure in the Habitational market.

You know, Jeff we used to write a lot of Habitational business and we couldn't figure out how to make money. So we're not really a major player in habitational space, whether it be on admitted or excess or excess and surplus lines basis. Although it is yeah, there's big disruption there.

Yeah got it okay.

For the answers.

Thank you.

Thank you. Our next question comes from Mark Dwelle with RBC capital markets.

Mark Your line is open please make sure you're going is not on mute.

Hearing no response to the next our next question comes from Ron Bobman capital returns.

Hi.

Good morning, Arnie I could you expand on your comment about them I think was commercial auto struggled and I think you're referring to topline in the quarter and what was the dynamic.

By now.

[noise] Ron Yeah. This is Craig I mean, we write a little bigger accounts in that business. So you know whether we write a few or we don't right. If you can move the top line a little bit.

We were able to continue to get rate increases I mean, we're in a fair number of broad I'll say classes of business. There. So we still see some competition from time to time.

More than we want to look like but especially in the I'll say in the trucks space is still very very competitive.

And so it can be a little lumpy I guess in that line, but I mean, we feel good about the product line or bottom line was very good.

The rate topline rate increases continue to be very good and I wouldn't say read anything into a given quarter in that particular product.

Okay. Thanks appreciate that.

Thank you if there are no further questions I'll now turn the conference back to Mr. Johnson Michael.

Thank you and thanks for.

Attending that.

Oh, it's very satisfying your Freeman premiums advanced 8%.

To close a billion dollar mark for the first time ever.

24th consecutive year of underwriting profitability.

Combined ratio in the low nineties.

33% increases book value per share two.

Billion dollars basically.

I want to say a big thank you to all of our associates for delivering once again.

Thank you to Oliver stakeholders, so we're continuing to hold us accountable.

For having space and our ability to deliver these results. Thanks again, a will talk to again after the first quarter.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 182 through 311 once you with an I'd number of 531 to five to three this concludes our conference for today. Thank you offer participating and have a nice day.

All parties may now disconnect.