Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the American Financial Group 2019 fourth quarter results Conference call. At this time, all participants are in listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you would need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I like to hand, the conference over to Speaker today, Diane Weidner Assistant Vice President Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to American Financial group's fourth quarter 2019 earnings results Conference call I'm joined this morning by Carl Lindner, The third and Craig lender co Ceos of American Financial Group, and Jeff Consolino F. G. CFL, our press release Investor supplement and webcast.

Presentation are posted on <unk> website. These materials will be reference during portions of today's call.

Well I turn the discussion over to Carl I would like to draw your attention to the notes on slide two of our webcast.

Certain statements made during this call may be considered forward looking statements as defined under the private Securities Litigation Reform Act of 1995.

These statements are not guarantees of future performance investors should consider the risks and uncertainties that could cause actual results and or financial condition to differ materially from these statements.

A detailed description of these risks and uncertainties can be found in after these filings with the Securities and Exchange Commission, which are also available on our website.

We may include references to cornet operating earning a non-GAAP financial measure and our remarks or in responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.

If you are reading a transcript of this call. Please note that it may not be authorized or reviewed for accuracy bus. It may contain factual or transcription errors the could materially alter the intent or meaning of our statement.

Now Im pleased to turn the call over to Carl Lindner, the third to discuss our result.

Good morning.

We released our 2019 fourth quarter and for your results yesterday afternoon.

If you would please turn to slides three and four of the webcast slides for an overview.

Greg and I were pleased to report at GE core operating earnings at $8.62 per share for the four year nine 2019 up 3% from last year and generating a core return on equity or 14.9%.

Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and are confident today of cheese financial future.

Oh, we paid $446 million and dividends during the year.

Representing 149 million in regular common stock dividends and $297 million and special dividends.

Our quarterly dividend was increased by 12.5% to an annual rate of a dollar an 80 cents per share beginning in October last year.

Growth in adjusted book value per share plus dividends was an impressive 17.8%.

And at cheese, five year total shareholder return representing growth in share price plus dividends was approximately 120% exceeding the total return performance of the S&P 500.

The S&P property and casualty index, and the S&P life and health index wherever the same time period.

Turning to slide four.

We're pleased to report fourth quarter coordinate operating earnings of $2.22 per share.

The strong operating profitability in investment results in both our specialty property and casualty and annuity operations highlight the value of our diversified portfolio of insurance businesses, which has enabled us to produce consistently strong core earnings results over time.

Fourth quarter 2019 annualized core operating return on equity was 15%.

And net earnings per diluted share were $2.31 and included nine cents for share and net non core items, including the costs associated with her plans to exit the Lloyds of London insurance market and in 2020.

Craig and I, Thank God, our talented management team and our great employees for their work and helping us achieve these results and position our business for success.

Looking forward. We've established initial 2020 core operating earnings guidance for a F G and the range of eight hours and 75 cents to $9.25 per share.

Greg and I will discuss our guidance for each segment of our business in more detail later in this call.

Now I'd like to turn or focus to property and casualty operations. If you turn to slides five and six the webcast, which includes an overview of the fourth quarter results.

As you'll see on slide five gross and net written premiums in our specialty property and casualty insurance operations grew by eight and 9% respectively.

Pre tax core operating earnings and they have cheese PNC insurance segment were $199 million in the fourth quarter 2019, compared to 2002 $214 million in the prior year period, a decrease of $15 million or 7%.

[music].

I'm extremely pleased with a strong underwriting margins produce fire specialty property casualty group during the quarter, particularly in the wake of a challenging crop year.

Our specialty property and casualty insurance operations generated an underwriting profit of $89 million into 2019 fourth quarter compared to $102 million in the fourth quarter of 18.

Lower underwriting profitability in our property and transportation group again, primarily due to lower year over year earnings and our crop operations was partially offset by higher year over year underwriting profits in our specialty casualty and specialty financial groups.

Fourth quarter 2019, combined ratio of 93.5% increased one and a half points year over year includes 3.8 points of favorable prior year reserve development compared to 4.7 points a favorable prior year reserve development into 2018 fourth quarter.

We continue to see strong renewal pricing momentum.

Average renewal pricing across our entire property and casualty group was up about 5% for the quarter.

And when you exclude workers comp.

Renewal pricing was up approximately 7% in the fourth quarter, reflecting a continued improvement from renewal rate increases achieved during the first nine months to 2019.

Over one fourth of our specialty property and casualty businesses achieved double digit rate increases during the quarter or said another way nearly one third of our non workers compensation businesses achieved double digit rate increases during the quarter.

Renewal pricing in our specialty property and casualty group overall is the highest we've achieved in over five years meeting or exceeding our expectations and each of our specialty property and casualty sub segments.

I will discuss in more details who will review the results of each.

Although loss cost trends across our specialty property and casualty businesses remain stable overall, we continue to close we monitor loss activity in the impact of social inflation, along with general loss cost inflation in interest rates.

As we've discussed for many years renter eight year of rate increases in our commercial auto liability business dating back to when we first saw an uptick in commercial auto severity loss severity in 2012.

We were able to address issues through underwriting and rate actions and got this business back on track after several years of concerted effort.

We're also taking measures and a few other areas within our specialty property and casualty business, where loss costs are running higher and where we see more aggressive trial bar activity and increase jury awards during severity driving severity.

Similarly, we are addressing elevated loss costs through underwriting and risk selection and securing rate increases to stay in front of loss ratio trends.

I'm really encouraged by the pricing environment, right, now and especially our ability to achieve strong renewal rate increases in many of our specialty casualty businesses.

Concurrently we are increasing initial loss picks and several of our longer tailed liability lines, such as our excess and surplus lines.

Public sector and other businesses, where we have more exposure to social inflation and we are holding more IB NR.

We continue to think we're prudently reserved and no less so than we were a year ago based on the types of business, we write and on the way we operator business.

Now I'd like to turn to slide six to review a few highlights from each of our specialty property and casualty groups.

The property and transportation group reported an underwriting loss of $2 million in the fourth quarter 2019, compared to an underwriting profit of 64 million in the comparable prior year period.

Record levels of prevented planting claims in our crop operations, where the driver of lower year over year underwriting profit.

Higher underwriting losses in our aviation and disappointing results in our Singapore branch business also contributed to the fourth quarter underwriting loss. Both of these businesses achieved significant renewal rate increases throughout last year and can we continue to focus on improved risk selection, but we still.

Got more work to do.

I'm, particularly pleased with the excellent performance of our commercial auto operations in the fourth quarter and for the full year.

These businesses also reported these businesses reported strong underwriting profitability.

Also the growth in gross written premiums of 9% year over year.

Catastrophe losses for the property and transportation group or $7 million in the fourth quarter of 19 compared to a favorable impact of $2 million into 2018 fourth quarter.

Fourth quarter 2019, gross written premiums in this group were down by 4% and net written premiums were flat year over year.

Higher premiums in our property in inland Marine and Ocean Marine businesses were more than offset by lower premiums and our transportation businesses and crop operations.

Lower premiums related to our winter wheat, and rainfall index products, where the driver of the lower crop premiums the timing of the renewal of a large commercial auto account impacted 2000, and Nineteens fourth quarter transportation premiums.

Excluding this large renewal fourth quarter net written premiums for this group increased 3% year over year.

For the full year gross and net written premiums in this group grew by four and 7% respectively.

Overall renewal rates in this group increased 5% on average in the 2019 fourth quarter, 4% for the full year.

So our commercial auto liability renewal rates.

Continue to increase substantially and by 10% in the quarter.

Specialty casualty group reported an underwriting profit of $69 million and the 2019 fourth quarter compared to $22 million in the comparable 18 period.

These results were largely due to reduction in the core underwriting loss at neon, resulting primarily from lower year over year cat losses.

Higher underwriting profitability in our workers comp businesses, primarily as a result of higher favorable prior year Reserve development also contributed to these improved results.

Each of our workers comp sensation businesses continue to report very strong underwriting margins in the fourth quarter and for the full year.

Catastrophe losses for this group were $6 million and $28 million in the fourth quarters of 2019, and 2018, respectively and were primarily attributed neon.

As we complete or exit from neon, we do expect a significant reduction in catastrophe exposures in 2020.

Gross and net written premiums increased 19% and 15% respectively for the fourth quarter 2019.

When compared to the same prior year period.

Growth in our surplus lines in excess liability businesses.

Primarily the result of new business opportunities rate increases and stronger renewal retention were primary drivers of the higher premiums.

Addition, higher premiums reported by neon premium growth in our executive liability business and the addition of Abbey a insurance services contributed to the higher year over year premiums.

Renewal pricing for this group was up 6% in the fourth quarter.

And up approximately 3% overall for the year.

Excluding our workers comp mutation businesses renewal rates in this group were up 11% in the fourth quarter and 8% for the year.

Renewal rates in our specialty casualty group overall are the highest we've seen since the first quarter of 2013.

And when we exclude the impact of workers compensation. These rates for the highest we've seen in more than five years.

Specialty financial group reported an underwriting profit of $32 million in the fourth quarter of 2019 compared to $20 million in the fourth quarter of 18.

Higher year over year underwriting profits in our financial institutions surety and trade credit businesses contributed to these results nearly all businesses in this group continued to achieve excellent underwriting margins.

Catastrophe losses were $2 million in the fourth quarter of 19 compared to $10 million in the previous years fourth quarter.

The average calendar year combined ratio of this group over the past five years has been just over 86% I'm very pleased with these outstanding results.

Gross and net written premiums increased by foreign 10%, respectively. In the 2019 worked quarter when compared.

To the same 2018 period due to solid growth across all businesses in the group.

And a higher portion of retained business in the 2019 fourth quarter.

And renewal pricing in this group was up 2% during the fourth quarter and 1% for the full year of 19.

Now if you would turn to slide seven.

For some review of our 2020 outlook for the specialty property and casualty operations.

We expect 2020 combined ratio for the specialty property and casualty group overall between 90% to 94%.

Net written premiums are expected to be 1% to 5% lower than the $5.3 billion reported in 2019, primarily due to the runoff and neon.

Excluding the impact of neon, we expect growth the net written premiums in the range of 3% to 7%.

This year.

Now looking at each segment.

We estimate a combined ratio in the range of 92% to 96% and our property and transportation group.

Our guidance assumes no favorable reserve development for crop in the first quarter 2020, and a normal level of crop earnings for the year.

Net written premiums in this group are estimated to be up 6% to 10% in 2020.

And we expect our specialty casualty group to produce a combined ratio in the range of 90% to 94% in 2020.

Our guidance assumes continued strong renewal pricing in our SNS excess liability and several of our long longer tail liability businesses.

Neon accounted for $401 million in net written premiums in 2019.

As a result of this business being placed into runoff. We expect net written premiums in the specialty casualty group to be down 10% to 14% in 2020.

Excluding the impact of the neon run off growth in this group is expected to be in the range of 1% to 5%.

And our guidance for this group also includes the expectations that our net written premiums in our workers compensation businesses will be flat to down slightly in 2020.

When you exclude the impact of both the neon right runoff.

And our workers comp businesses growth and the net written premium.

And this business in this group is expected to be in the range of 6% to 10%.

Specialty financial group combined ratios expected to be in the range of 86% to 90%.

Our projection for growth in net written premiums in the range of 4% to 8%.

Net investment income is expected to be flat to up 4% year over year. This guidance reflects and assumed annualized return of 10% on investments required to be mark to market through operating earnings approximating. The return earned in 2019.

And on the pricing front, we expect overall property and casualty renewal pricing in 2020 to be up 3% to 5%.

And when you exclude workers compensation, we expect renewal rate increases to be in the range of 5% to 7%.

Thank you and I'll now turn the discussion over to Craig to review the results in our annuity segment and add cheese investment performance.

Thank you Carl.

I'll start with review of our annuities annuity results for the fourth quarter beginning on slide eight.

Statutory annuity premiums were $1.14 billion and the fourth quarter of 2019.

Compared to $1.48 billion and a fourth quarter of 2018, a decrease of 23%.

Higher sales of traditional fixed annuities into financial institutions channel and higher pension risk transfer premiums were more than offset by lower sales of fixed indexed annuities in all channels.

In response to the continued drop in market interest rates in 2019, 80 Mg implemented numerous crediting rate decreases in order to maintain appropriate returns on our annuity sales, which impacted premium volume.

Annuity sales of $5 billion for the full year in 2019, where the second highest level and our history and contributed to growth at average annuity investments in reserves of approximately 11% for the year.

We believe we're well positioned to continue to prop profitably grow our business and capitalize on our consumer centric model.

In the second quarter of 2019, we changed the way we define annuity core operating earnings to exclude the impact of items that are not necessarily indicative of operating trends such as the impact of fair value accounting for fixed indexed annuities unlockings and other items.

Related to changes in the stock market and interest rates.

Core operating earnings now include an expense for the amortization of fixed indexed annuity option costs, which is a better measure of the cost of funds for fixed indexed annuities.

We believe these changes provide investors with a better view of the fundamental performance of the business had a more comparable measure of the annuity segments business compared to its peers.

Turning to slide nine you will see the components of pre tax annuity core operating earnings under this new definition.

Results for periods prior to the second quarter of 2019 are shown on a comparable format to the new definition of annuity core operating earnings and are reconciled to previously reported annuity core operating earnings.

Growth in average invested assets and reserves in the fourth quarter of 2019 at higher earnings from investments Mark to market through operating earnings contributed to higher year over year annuity earnings.

In addition, fourth quarter 2019 results include an unusually high amount of investment income that is not expected to recur.

Earnings from investments Mark to market vary from quarter to quarter based on a reported results of the underlying partnerships and investments.

I'm pleased that our annuity segment earned an after tax core operating return on equity and excess of 12% for the full year of 2019.

Turning to slide 10, and you'll see that you have geez quarterly average annuity investments and reserves grew approximately 9% and 10% respectively year over year.

The benefit of this growth was partially offset by the run off of higher yielding investments.

As you can see on slide 11.

Over the past 10 years, our annuity segment cumulative net earnings have exceeded its cumulative core operating earnings with net earnings at 105% of core operating earnings over this period of time.

Now please turn to slide 12 for a summary of the 2020 outlook for the annuity segment.

We estimate 2020 pre tax annuity core operating earnings to be in the range of 395 million to $425 million compared to $398 million reported in 2019.

Incorporated in our and our guidance is it assumed annualized return of 10% on investments required to be mark to market through operating earnings similar to the return earned in 2019.

Our guidance also reflects the impact of lower interest rates in particular, the impact of lower short term rates, which will have a negative impact on the annuity segments approximately $4 billion.

Of net investment in cash and floating rate securities.

We expect 2020 annuity premiums to be in the range of port $4.5 billion to $5.2 billion. As we continue to remain focused on disciplined pricing to help us achieve are targeted returns.

We expect at this level of premiums will lead to growth and average annuity investments and reserves of 7% to 9% in 2020.

Now please turn to slide 13 for a few highlights regarding our 55.3 billion dollar investment portfolio.

You have GCE reported fourth quarter 2019, net realized gains on securities of $51 million after tax and after deferred acquisition costs.

This compares to net realized losses on securities of $188 million reported in the fourth quarter of 2018.

Approximately $43 million of the realized gains recorded in the fourth quarter of 2019 pertain to securities that have GE continued to hold at December 31 2019.

As of December 30, Onest 2019, net unrealized gains on fixed maturities were $862 billion after tax and after DAC.

As you'll see on slide 14, our portfolio continues to be high quality with 91% ever fixed maturity portfolio rated investment grade and 98% with an FDIC designation of one or two its highest two categories.

We provided additional detailed information on the various segments of our investment portfolio and a quarterly investor supplement on our website.

I will now turn the discussion over to Jeff who will wrap up our comments with an overview of our consolidated fourth quarter 2019 results and share a few comments about capital and liquidity.

Okay.

Thank you Craig.

Slide 15 summarizes fts fourth quarter consolidated core operating earnings results.

AFG reported core EPS.

I have $2.22 in Q4 2019.

Core net operating earnings in the quarter.

For $203 million.

The year over year increase in core earnings in the 2019 fourth quarter.

It was primarily the result of significantly higher core operating earnings in our annuity segment.

Offset somewhat.

By lower core earnings in the PNC insurance segment.

Interest and other corporate expenses were $21 million higher.

Year over year.

Parent company interest expense increased by $2 million from Q4 2018.

During the course of 2019, we issued to hybrid 40 year subordinated debentures.

And retired one of our higher cost hybrids, which became callable in Q4 2019.

In March we issued $125 million at five and seven 8%.

And in December we issued 200 million at 5.18%.

A portion of the proceeds from the December offering was used to redeem $150 million if they have cheese six in one quarter percent hybrids.

In 2054.

We like these hybrid securities due to their loan maturities the par call feature.

And the equity treatment afforded by many of the rating agencies.

Other expenses were $19 million higher year over year.

Higher expenses related to employee benefit plans tied to stock market performance.

Were the primary driver over this increase.

In addition, other expense in the 2018 fourth quarter was abnormally low.

The fourth quarter of 2019 is closer to an ongoing run rate.

Slide 16 reconcile core net operating earnings to net earnings.

In the fourth quarter of 2019, AFG recognize $51 million or 56 cents per share and net after tax realized gains on securities.

Annuity noncore items increased net earnings attributable to shareholders by $19 million or 21 cents per share.

We recorded a 58 million dollar or 64 cents per share noncore after tax charge during the fourth quarter.

For Neon reserve strengthening.

And expenses related to exit costs associated with the runoff of this business.

The exit from this business will allow FG to reallocate capital.

To its other insurance businesses.

Two opportunities that have the potential to earn targeted returns on investment.

Neon and its predecessor Marketform.

I had failed to achieve AFG profitability objectives since they have fuse purchase of market form in 2008.

Beginning with the first quarter of 2020.

Neon will be reported as non core.

We also recorded a small loss.

The early retirement today, a few six in one quarter percent hybrid subordinated debentures.

Which was $4 million after tax or four cents per share.

During the 2019 fourth quarter.

Moving to slide 17.

She is adjusted book value per share was $59 in 70 cents as of December 30, Onest 2019.

We returned $204 million to our shareholders in the fourth quarter.

With the payment of our regular quarterly dividend.

And the payment of a $1.80 cents per share special dividend.

Parent cash.

It was approximately $165 million at the end of the fourth quarter.

We maintained solid levels of capital in our insurance businesses to meet our commitments to the rating agencies.

Our excess capital.

Good at approximately $1.1 billion at December 31, 2019.

We define excess capital.

As the sum of parent company cash.

Excess capital within our insurance subsidiaries.

And borrowing capacity up to a 22% debt excluding hybrid subordinated debt to total adjusted capital ratio.

As we've said previously.

When AMG is excess capital reaches $1 billion or more.

In the absence of other alternatives for deployment.

We will evaluate opportunities to return capital to shareholders.

We plan to hold approximately 200 million to $300 million is dry powder.

To maintain flexibility for opportunities as they arise.

Our management team reviews, all opportunities for deployment of capital on a regular basis.

In closing.

Slide 18 shows the single page presentation of our initial 2020 core earnings guidance.

Our guidance assumes an effective tax rate of approximately 20% on core pretax operating earnings.

After he is expected 2020 core operating results exclude noncore items, such as realized gains and losses.

No the non core earnings and losses.

The other significant items that may not be indicative of ongoing operations.

We're now prepared to open the lines for any questions.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone. So would you are your question press the pound.

Please standby, while we compile the culinary roster.

Sure first question comes from.

Mark from Buckingham Research. Please go ahead.

Hi, Thanks.

Good morning, guys.

A few questions, let's talk a bit neon.

So.

Just going back to the guidance as well as Neons exit it goes to non core.

If you look at the quarters.

Going to be some.

I guess seasonality in.

Premium pattern I'm trying to figure out.

When I look at the individual quarters I should think about.

Those numbers differently.

Which eventually will come keeler eventual guidance for 2020.

Yes.

Hi, Matt This is Jeff constantly NIM.

First shift in terms of geography.

With neon moving to non core.

And the impact of neon in 2020 by quarter wont be below the core operating earnings item.

And so that would not affect our.

Overall presented operating earnings by quarter.

In terms of the seasonality of neon historically.

Neon did have a.

Reasonably sizable for its business.

Pretty reinsurance book.

As you know there are important renewal dates that occurred during the course of the year for that.

So neons premiums overall tended to be heavier.

In the first quarter.

And the second quarter.

Weaker in the third quarter.

And so that kind of seasonality would need to be neutralized and anything you are doing to estimated.

Overall, though I think if you focus on the.

Sub segment premium guidance that we've given.

It's probably a good indication of how things will rollout during the course in the year by quarter.

What there'll be any 8-K, which provide a historical.

Neons.

I guess results and premium.

And then we have no such plans to file an 8-K with that kind of disclosure.

Okay.

Moving on to the specialty PNC segment overall.

Ex out.

The impact from crop.

What do you see the underlying margins.

Teen.

Improved.

Versus 2018, making adjustments for any unusual items I'm trying to understand.

More.

40000 foot level, how the underlying book is improved versus 28.

Hi, This is Jeff I'll I'll.

Cover that one and im sure others might want to elaborate.

So if you start with the Investor financial supplement for our specialty group on page seven.

We do show for the full year 96.2, combined ratio, excluding catastrophes and prior year development for full year 19.

Versus a 95 seven.

For the full year 18, so on its face.

One might assume that margins are not improving tender stagnating.

But you were very good to indicate that crop will have an impact on that.

We've made no secret of the fact that the 2019 crop reinsurance here is not a very satisfactory one relative to several of the Goodyear two patent the past.

That alone would would move that by more than a point.

Possibly more than a point in half.

As an offset.

Neon did improve.

During the course of 2019 versus 18.

But what you're seeing there is underlying margin improvement across all of our businesses.

Somewhat offset by the impact of crop.

Got it that's helpful and just one last one on.

On on.

In terms of the reserve releases I think.

I was trying to.

Okay.

At least pattern.

For 2019 versus 2018 for the quarters and any sort of movement.

In terms of the reserve releases came from.

And then would you mind repeating the last part of that question came through a little trouble trying to understand is.

The reserve releases.

Look at them on an accident year bases and before we get the schedule piece.

How did they evolve over 2019.

The historic.

Okay.

I'm not sure you'd be able to get that out in the supplement.

Yes.

So it's.

Presented within the specialty casualty segment, you can see that pattern of development.

During the course of the year, but but more than just workers comp is going to affect that.

Also we have the other specialty liability lines in there.

As well as neon.

I think as a a blanket statement.

Our goal.

With the business is to be prudently reserved and appropriately reserved at every quarter end.

We have in depth actuarial reviews of every business unit.

Every quarter and adjustments are made to make sure there where adhering to our standards of being prudently reserved. So I don't know that one can connote any kind of a pattern.

As to how things would resolve to really as a factor of what our business people are claims people in our actuaries are seeing at each quarters actuarial review.

I was more focused on if you look at the comment in the press release are you talking about higher favorable.

Hello.

And I was just trying to set a forecast as we move to 2020.

I look at historic patterns seen if I was just trying to understand.

On a basis is workers comp business profitable and how are we thinking about.

Yes.

Im happy to to add some color about workers comp obviously, our 19 overall workers' comp results are very good.

Healthy accident year combined ratio on a very healthy calendar year combined ratio.

2020 underwriting margins will be somewhat lower.

Though we still feel that overall on an accident year basis, we'll make a small underwriting profit overall in our comp business and we'll make a healthy calendar year underwriting.

Healthy calendar year underwriting profit.

Premiums were kind of flattish last year.

Think we I said earlier premium some probably be down.

Low single digits this year.

We expect pricing to be down mid single digits overall on our workers comp business in 2020 as Jeff mentioned.

I mean, we feel like we have a strong reserve position.

On our overall business loss ratio trends continue to be.

And check our loss ratio trend actually which is loss costs offset by changes in exposure.

We still feel are kind of flat to maybe down 1% on our overall workers comp business. So.

No we feel very good about.

Prospects for profitability.

And for good returns in our workers comp business this year.

Okay.

Thanks for the answers.

Thank you.

Next question comes from Jay Cohen from Bank of America. Please go ahead.

Thank you good morning, no. Good afternoon at least in New York.

I want to ask about.

Knee on really two questions. The first is.

If you could talk more about the decision to pivot into run off because arguably that business is getting better now pricing is going up.

You could make a case hey, this just could be the profitability should improve quite a bit over the next several years, but you obviously didn't take that pass. So that's question one.

Second question is how much capital gets freed up by running off this business and over what time.

Hi, Jay this is Jeff and its afternoon here in Cincinnati as well.

With respect to the Neon decision, we did put out that pre release on January six I believe.

We.

Quoted it during our.

Comments here.

Market form and neon who have failed to meet.

Their return targets during the tenure they have cheese ownership.

And even though the business was clearly improving and we've we've made some comments here that speak to it.

Proving contribution to our overall results.

We were not convinced that it would reach that level of targeted returns.

That would justify remaining invested.

And Furthermore, when we look at the opportunities we have.

Elsewhere in our businesses, we felt like capital.

Could be better deployed elsewhere.

I mean overall.

We are maintaining funds at Lloyds to support the business.

And that will get released as the business runs off.

In round numbers I would say, we have about 300 million of capital.

Located to the business.

And that will be freed up in proportion to the runoff.

As it occurs.

And as the last caveat to that.

We have executed to reinsurance to close transactions in respect of Neons liabilities.

In recent years, one related to the 2007 in prior opened years of account.

And then a second one relating to the 2015 in prior years.

That is of a vibrant market with many participants.

So we will evaluate those types of opportunities as they come to us.

Making sure that we are compensated appropriately for the reserve position, we believe we have.

For the business and at that time, we if we did successfully implement such a transaction that would accelerate the release of capital from that business.

Got it that's that's very helpful. I guess it does demonstrate that the kind of discipline you've shown over the years, both entering and exiting businesses when when they're not working out. So it's certainly fits into the longer term narrative of the company.

Thank you.

Our next question comes from Paul Newsome from Piper Sandler. Please go ahead.

Good morning, good afternoon.

And congratulations on the quarter I was hoping you could talk a little bit more about your view on.

So clean cost trends.

Underlying basis, I know you said that.

You have in your view, Steve will loss trends.

[music].

I assume then.

Means that rate increases not changing but then you also mentioned that you are taking higher loss picks in certain casualty lines and increasing more I mean, our which I think suggested maybe an incremental increase in that.

These forward view on loss trends.

Can you maybe reconcile those thoughts and.

We just extend.

On your view on loss trend.

Yes, I'd be happy to take a crack at that this is Carl.

Our overall loss ratio trends about 1.5% when you look at loss cost plus the offsetting.

Factor of payroll or that type of thing.

And.

For the year average renewal rate.

Increases a little over 3%.

When you look at excluding comp our overall loss ratio trend is a little under 3%.

Versus about 6% and rate for the year.

I am I mean overall our.

Our loss costs loss ratio trends are stable and pretty benign across most of our businesses but.

As I mentioned before we do have a few areas.

You know that we've seen some of the same trends as others more aggressive trial bar activity and increase jury awards and.

We've been.

Taking the actions that we feel that we need to their commercial auto us as we mentioned we've been at that a long time, but.

Frankly, with a continuing severity trends in commercial auto liability.

Even though our overall commercial or overall commercial auto business were.

Satisfied with the commercial auto liability portion of that business still Scott a ways to go so we're continuing to take.

We took double digit rate, 10% in the quarter.

So thats an area, we talked about a lot.

I get the Habitational business as it relates to.

Within our MNS business.

We've mentioned that before and.

Thats a.

Business that we've.

Taken quite a bit of corrective action and that Weve.

You know tried to have more conservative picks on.

Also the public sector business, which is minnis municipalities.

That we right.

And.

In that area in our business there we tend to be.

Excess of higher Retentions and.

Annual aggregate deductibles that are retained buyer pool clients. So we are.

Do have a little bit of protection, there and our reinsurance policy soften our risks to but.

You know, we're seeing some of the same social inflation.

Type of topics as others.

And that within that business. So we the we've been.

More conservative I think in how we're approaching that in our picks.

That said there are public sector business has been very profitable.

But we have seen more impact from social inflation, we're reacting accordingly, you know with pricing with terms.

And in the way that.

From an actuarial standpoint.

We've talked about public do you know.

And some of the trends there now we're not a large rider Republic Dino but.

When that business clearly there has been.

Trends.

And that.

But along with that as others, we're seeing rates retentions.

Changing dramatically.

In that so.

Hope that gives you a little more color.

Absolutely.

Yes.

Second question I wanted to ask about the investment.

Expectations next year, we've got it you've got a couple appears to have been talking about essentially ratcheting down expectations for alternative investments perspectively by a couple of points. It sounds like you are thinking that those are relatively stable expectations.

If that's the case you what gives you comfort that those.

Alternatives.

I will return.

About what they've done historically.

Hi, Paul This is this is Craig.

When we put the plan together, we went through all of our investments kind of individually.

And did our best.

Estimate of.

What we expect in terms of returns.

Appointed income out of each of those investments.

Our mix is probably a little different than than many others.

Over the last couple of years, we have.

Invested the a fair amount of money in an apartment buildings.

Those who have performed extremely well both from the standpoint of.

Increasing cash flows and in terms of the valuation.

Cap rates, obviously have have come down so.

Probably puts us in a little different position than others in terms of the the mix of investments that are mark to market.

Thank you very much.

Thank you.

Next question comes from Larry Greenberg from Janney Montgomery. Please go ahead.

Thank you very much.

I'm wondering if you might be able to provide us a little bit more color on what we should expect for crop in the first quarter of 20.

I know you said in the past that we should expect any profits and I think.

This morning, you said no no people I'd from from crop, but is there any way to maybe compare with the expectation is relative to what we saw overall in the fourth quarter recognize saying that the.

The earnings impacts probably emerge and slightly different buckets.

First quarter versus fourth quarter.

Okay.

Larry This is Carl.

I mean generally in a normal crop year cycle.

The first couple of quarters.

If there is favorable development from.

The prior year those would be the quarters that that would go into and primarily probably the first quarter.

Most of the profit is booked for our crop year.

You know in the fourth quarter and some in the third quarter, if we feel good about the quarter.

So I think were fairly conservative as we.

Yes, we want to we want to be pretty far along in a given crop year probably into August or September before we're comfortable booking any kind of profit or making any kind of call.

We're just not that.

Smart to be able to forecast something.

And in that as there's a lot of variability.

I think we've been very clear.

That in 2020 in the first quarter.

Number one again going back we don't book any current crop year expectations generally in the first couple of quarters and we think we've been clear that there is no.

Favorable development.

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Leased for our which now based off of last year's crop year last year was a poor crop year.

There's no way around that.

So that helped.

It does.

But I was just.

Trying to make some you know relative comparison first quarter versus fourth quarter overall impacts.

Larry. This is this is Jeff and I know we.

Kind of talked about this after the first quarter.

With the way that positive impact from crop comes through in the subsequent calendar year.

This development, but also as ceding commission or negative commission expense for profit commissions.

The.

Replay of what Carl said.

As we try to recognize.

Yes.

The profit from the crop reinsurance year, primarily in the fourth quarter of that calendar year with a little bit if we're confident in the preceding third quarter.

We do want to be conservative and not unwind anything so.

Oftentimes in a profitable crop year, there would be some positive impact in.

Q1 in Q2 with the subsequent calendar year.

How that relates to the overall profit from the crop year.

Really depends on how accurate we are engaging what profit should have been released in Q4 and Q3.

Yeah Larry.

There aren't a lot of companies that give guidance.

Like we do and we try the best we can enter property and transportation segment guidance.

You know too.

Look put crop in there in a normal year end with a range of result, there you know.

And volatility within crop to give room for either a weaker year or a stronger year.

And that I mean, thats, how we so.

Best guidance on give you is we do our best to bake in.

The crop results into the segment guidance that we give everybody and I think we've been if you I think you go back and check us we've been pretty good over 40 years.

Yes, no I appreciate that and and thanks for the color.

The only other quickie its just.

On the available for sale fixed Eni line in annuities.

And you referenced that you don't expect that to re occur with that just driven by.

Coals and tenders or was there anything else in there.

Hi, This is Craig.

Primarily prepayment.

Fees.

And there was another item the acceleration of the discount amortization due to actual to expected principal prepayments on certain structured securities that we had invested in to cut kind of size those for you tend to quarter.

We hit around $11 million of income from the items that I just talked about in a normal quarter, we'd expect $2 million to $3 million.

So it did it did help us in the fourth quarter.

Great. Thanks very much.

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Thank you.

Our next.

Your next question comes from Greg Peters from Raymond James. Please go ahead.

Good afternoon, most of my questions have been asked.

I think either was in your prepared remarks, or and one of the answers to someone's question.

You referenced that you're catastrophe exposures or it could have risk for catastrophe losses would be down this year as a result of your exit from neon I believe.

And I'm just curious as we think about 2020 with the changing portfolio mix is there any implications on your reinsurance costs.

Hey, Greg it's Jeff.

We will be running neon off.

We exited the property treaty reinsurance business in Neon ahead of January Onest.

And put the business into run off there will be certain property and related exposures.

It will be live through the course of 2020.

But those will be decreasing.

As it relates to our catastrophe reinsurance costs.

Couple of things.

The first is that we maintain a 15 million retention for our us group.

Separate $15 million retention for neon.

Obviously neon has delivered some pretty significant catastrophe losses to us in 17 and 18.

I would expect that that would grade down to zero during the course of the year is something that approximates zero.

We will still have exposure during the wind season.

Already though with the exit from property treaty will be buying less reinsurance for any on because we won't have those treaty exposures from one one and forward and in 2020.

Similarly, we have a catastrophe bond it sits on top of both traditional towers.

And that catastrophe bond is priced as a multiple of expected loss and it covers both neon and our U.S. group.

So I think that 2020 will be a transition year.

Mainly because the.

Exposure to catastrophes from neon will still be.

CIBIL, although diminishing and you'll see the real benefit of that in 2021, when will be largely queen of those types of exposures.

But just as a.

As noted in our specialty casualty segment a year ago.

Had a 28 million a cat losses in 23 of those were related to neon.

So taking those exposures that will reduce our cat volatility once we have the runoff completed.

Thanks for the color.

So pivoting.

I thought I'd ask Craig one question.

In your guidance for 2020.

Around your annuity premium it's just there's a risk it could be down here this year.

And.

I know you've provided some.

Color around what's going on the marketplace just give you another bite at the Apple and give us a sense of might distribution channel, where where's, whereas there more competition worse or less competition.

Where do you think the growth is going to come from and where do you think the pressures going to come from.

Yes, Greg.

And what I would say as it is a competitive environment I don't know that it's very different than.

What we generally experience they are always a couple of companies that are.

We think price too aggressively there or some new entrance into the.

The indexed annuity business larger companies that.

Traditionally we're not in the indexed annuity business that have now entered the market.

Our little more cautious guidance I think really is just a result of the very low level of interest rates and.

Frankly lack of opportunities on the investment side, so we're going to price in a.

Prudent way to achieve are targeted returns and so time will tell him yet hopefully we're going to end up having some growth this year, but.

Given the current interest rate environment, and frankly very.

Very tight spreads and got a lack of opportunities on the investment side currently.

We were a little more cautious with our or guidance on premium growth.

Okay. Thank you for fitting me in India call.

Sure.

Thank you.

Sure I last question comes from Kumar from Buckingham Research. Please go ahead.

Last question.

Few questions for you just going back I guess switching gears at the PNC.

That's true.

Segment I noticed on page 23.

The allowable dividends for.

Okay.

Seven.

Seven succeed and I was curious what would be the driver off that reduction.

One driver and that will be that weve paid in greater amount of dividends, you've got a basket over 12 month period.

What you can pay and we had taken a conservative stance on dividends from annuity up to the parent.

Which has been relaxed somewhat.

So that would be one major contributor right there.

Okay.

The second question.

On page.

Seven.

All right now.

Thanks.

3%, 3% to 4% bucket.

The line over.

Yes.

Quarters.

The driver of the decline.

I mean at hygiene Meyer GM higher business has done a lot stickier than we would have expected when we issued the policies.

I mean it it is.

Declining as a percent of the total overtime, but.

I think as the policyholders look good alternatives for their money a hard for them to find.

Yes, good low risk or no risk alternatives that they provide a better yields so.

Business is stuck around quite a bit a lot stickier than we would've expected.

Got it and.

And then one one factor is just the most new policies.

Our issued with a very low GM IR, given the interest rate environment. So as.

The 1% area. So as we have growth an account value with low GM IR and that band of one to 1.99, thats going to dilute everything else.

And so one reason the percentages are going down is just gets our percentage of low GM IR business is increasing.

Got it.

You mean.

Good.

The 119.

Going forward does that mean it comes telecom this 9%.

In the 4% and above.

Hi.

I think what would Craig was observing is if you had a guaranteed interest rate of 4% or higher.

It's going to be pretty attractive to hold that.

So.

Surrenders of that type of business our are less than we would have anticipated when those contracts were issued.

If that.

If that 9% was going to come down over time.

Another major contributor would be the overall growth in the business.

And the dilution of that block of 4% or higher.

From 5 billion, a year and new sales at a much lower GM IR.

It's certainly going to continue to come down as a percent of the total the policies were issuing today as Jeff indicated have a 1% Geo my or so.

Owned whose sales are going to be at a 1% substantially all the new sales you're going to be a 1%. So even though the persistency on the 4% and greater policy uses up in the high Ninetys.

Still going to shrink as we go forward as a percent of the total.

Got it last question switching.

On.

The discussion on Singapore operations I think.

Good morning comment on.

Additional videos.

Something like that.

Our facing.

Can you just talked about.

You know, how we should think about that business 2020.

Some additional steps.

Okay.

I guess, putting that in runoff or something.

In Singapore.

Not a not a big business at this point.

We're not happy with their performance over Singapore business.

We've been taking double digit rate increase we've been re re underwriting the business.

Refocusing.

And.

We're hoping that this year is a year that we see.

We moved the business more towards the returns that we want so.

That's where riyadh.

In Singapore.

Okay.

Thanks.

Good luck for the future.

Thank you ladies and gentlemen, this concludes the Kuni session at this time I'd like to turn the call over to Diane.

Just in Vice President Investor Relations for closing remarks. Please go ahead.

Thank you all for your time this morning, and we look forward to speaking with you all again, if we share our results for the first quarter 2020, I Hope you all have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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