Q4 2019 Earnings Call

Good morning, and welcome to the C. N age discussion topics 2019 fourth quarter financial results.

See these fourth quarter earnings release presentation and financial supplements were released this morning.

Both.

Its website www dot see any dot com.

Speaking today will be Cds, Chairman and Chief Executive Officer, Mr. Dino Robusto I'm seeing these chief financial Officer Mr. James Anderson.

Following their prepared remarks, we would open the lines for questions.

Today's call May include forward looking statements references to non G P financial measures.

Any forward looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the cold.

Information concerning those risks is contained in the earnings release and in CNH. Most recent it's easy filings.

In addition, the forward looking statements speak only as of today Monday February 10 2020.

See any expressly disclaims any obligation to update or revise any forward looking statements made during this call.

Regarding non G. P measures reconciliations to the most comparable G P measures.

Further information has been provided in the financial supplement.

This call is being recorded webcast.

The next week, the cold maybe assessed on Cnis website.

If you are reading a transcript on this call. Please note that the trends may not be reviewed for accuracy, they'll make hometeam transcription errors that could materially alter the intent or meaning the statements.

Oh Gosh I will now turn the call over to Cnis, Chairman and CEO Dino Robusto.

Thank you Marguerite good morning, everyone.

This year, our fourth quarter and full year results with you today, which reflects continued strong underwriting performance.

Celebrated price increases.

Robust growth.

I'll start U.S. operations.

Core income for the fourth quarter 265 million or 97 cents per share inclusive of a 48 million or 18 cents per share after tax non economic charge related to our annual assessed as an environmental pollution Reserve review.

I'll provide more context to the border in a moment.

First I'll make a few comments on the full year results.

B and C underlying underwriting profit for the full year was up 15% to 362 million.

The underlying combined ratio came down more than half a point to 94.8%.

This is the threerd consecutive year of improvement in the underlying combined ratio.

We achieved 7% gross written premium growth its captives.

Which strengthen that the your progress as we leverage to the improving market conditions.

Rate increases for the full year were two and a half times higher than 2008 gene and increase each quarter.

New business was up 8% as rate increases and overall improved terms and conditions led to more high quality opportunities.

Now back to the fourth quarter results.

The PNC underlying combined ratio was 94.9% a significant improvement over last year's fourth quarter results.

And in line with the full year 2019 result.

Strong underlying performance in both commercial and specialty combined with improved international performance drove the strong result.

The PNC all in combined ratio for the fourth quarter was 95.6%.

Which wasn't nearly 10 points better than the fourth quarter of 2018.

Now it is fair to point out that I had categorized as 2018 fourth quarter result, as an outlier.

And improvement into subsequent quarters prove that out.

Nevertheless, the 2019 fourth quarter result is also a full point better than the full year results.

Catastrophes in the quarter were 2.9 points or 40 million after tax and.

And our 2019 full year cat in fact, it's 2.6 points.

Was well below the prior two years aided by the re underwriting executed in the international property book.

Prior period development into quarter.

Favorable 2.2 points.

Our expense ratio in the quarter was 33.7% about a half point higher than our current run rate driven by some year end true ups.

As usual James will provide more detail what our prior period development and expense management.

Gross written premiums third party captives grew 8% in the quarter well net written premium growth was 5% in the quarter.

This growth came primarily from our U.S. segments, which grew 9% on a gross basis.

6% on a net basis.

International gross written premium was up 3%.

As growth in Canada, and Europe Wolf fueled by strong rate increases offset the re underwriting actions in our Lloyd's syndicate.

In the fourth quarter, we continue to achieve higher rate increases.

Our B and C. Overall was plus 7%.

One point from the third quarter, then it got better as the border progress.

For December rate overall was 8%.

Commercial rate into quarter with Wells Fargo.

One point from the third quarter.

Specialty was plus 8% up two points from the last quarter and international rate was plus 13% up three points.

In addition to reiterate achievement, we are effectively leveraging the market environment.

The strength in terms and conditions and raised attachment points where needed.

For example in our aging services book, we have continued to introduce large deductibles on medical malpractice coverage a process that began two years ago and is starting to have a positive impact on frequency trends.

In umbrella, we have meaningfully increase their average attachment point and we continue to reduce our limits exposure, which indicates of umbrella were in response to the severity trends, we began to see in 2018 and I discussed in detail.

During our last earnings call.

We believe these underwriting changes not only improve our loss exposure similar to the effective rate increases.

But also result in a longer term positive impact as it usually takes years before market pressure reemerges to expand policy terms and conditions.

New business in the border grew 27% and we are right, where we want to be.

In the submissions are up as the transitioning PNC environment pushes more opportunities into the market.

As well, we're benefiting from stronger new business pricing.

Which has been increasing at the same rate as our renewal pricing.

But our goal in buying ratios are down so likely in the quarter, which is appropriate.

As we only reach for high quality opportunities within our target segments.

We will continue to be similarly opportunistic throughout 2020.

Last quarter I commented in detail on rate and lost cost trends then describe the actions we took.

Over the last several years, both in terms of our actuarial picks and our underwriting actions in the two areas experiencing meaningful loss pressure, namely.

Aging services medical malpractice and portions of our umbrella bulk specifically, where there are auto exposures.

Based on the reserve reviews, we completed in the fourth quarter, we remain comfortable that our current accident year loss ratios and long were lost cost trends assumption.

Can you do appropriately account for the last patterns in our portfolio.

And since I remain confident that rate increases will continue running above our loss cost trends throughout 2020.

I expect that all else equal we will see some margin improvement in the latter part of 2020.

And we started off this year in good shape with respect to pricing momentum.

As we achieved an additional point of overall rate increase for though.

Once the January compared with the fourth quarter and with that I'll now turn it over to James.

You know and good morning, everyone.

Our property and casualty operations produced core income of 337 million in the fourth quarter and 1.2 billion for the full year.

Pretax underlying underwriting profit for the fourth quarter was 87 million.

For the full year pre tax underlying underwriting profit was 362 million a 15% increase over 2018.

Our PNC expense ratio was 33.7 in the fourth quarter and 33.5% for the full year.

It's worth noting that our U.S. expense ratio for the full year 2019 was 32.8.

As we head into the new year, we expect our 2020, you see expense ratio to be at or below 33%.

The benefit of premium growth becomes more significant earned basis, particularly in the latter half of the year.

Prior period loss development was favorable to point to point in the quarter, which reflects the outcomes of the reserve studies completed in the fourth quarter.

For the full year prior period development, that's favorable 0.7 point.

And we remain confident the strength of our reserve position.

Moving to each of our individual PC business.

Specialties underlying combined ratio in the fourth quarter was 93.3%.

An improvement of one point compared with the fourth quarter 2018.

Specialties overall combined ratio for the quarter was 88.2%.

Including 4.9 points a favorable prior period development.

This favorable development was primarily an accident years 2017 in prior driven by professional liability within our affinity segment.

For the year specialties underlying combined ratio was 93%.

The overall combined.

Was 90.2%, including 3.3 points of favorable prior period development.

Specialties gross written premium excluding third party captives and 7% in the quarter with strong rate and new business rose more than offsetting a lower retention level, which was driven by underwriting actions within healthcare.

Our commercial segments underlying combined ratio was 95.4% in the quarter, which includes an underlying loss ratio of 61.4%.

Full substantially better than the fourth quarter of 2018.

The fourth quarter overall combined ratio for commercial was 100.6%, including 6.5 points of catastrophe losses.

Primarily driven by isolated tornado events in Texas in the southeast.

And 1.3 points of favorable prior period development, driven by workers compensation as well as property.

Commercial hold your underwriting.

Give me underlying combined ratio was 95.2.

The overall combined ratio for the year has 100.8, a three cents improvement to 2018.

Commercial gross written premium excluding third party captives.

Grew 11% in the quarter.

Driven by strong new business growth.

Increasing rates and stable retention.

The underlying combined ratio for international segment was 97.7% in the fourth quarter, a significant improvement in the fourth quarter of 2018.

Approximately a point better than the first three quarters of 2019.

In the fourth quarter, the underlying loss ratio was 59.7%.

As we have noted in previous calls.

Improvement in international will take time, but we're encouraged by the progress made in 2019.

The expense ratio in the quarter deteriorated by two points year over year.

Due to the reduction of earned premium from our re underwriting efforts.

International is all in combined ratio in the fourth quarter was 100.3.

Including 2.6 points of adverse prior period development.

Catastrophe losses were negligible.

As we've mentioned previously we've significantly reduced our international catastrophe exposure over the past 18 months.

And therefore, we're not exposed to the international catastrophe events that occurred in the fourth quarter.

For the full year internationals underwriting underlying combined ratio was 98.6 [laughter] and the all in combined ratio was 101.8, nearly five point improvement in each compared with 2018.

International gross written premium grew 3% in the quarter driven by 13 points of rates.

Our license group segment produced a core loss of 4 million in the quarter.

Coming out of the unlocking and in the third quarter, we'd expect close to breakeven results going forward with some natural variability from quarter to quarter.

Our corporate segment produced a core loss of 68 million in the fourth quarter.

This loss was driven by our annual as best as an environmental Reserve review.

The result of the review with a non economic charge after tax of 48 million.

Following this review we have incurred losses of 3.2 billion within the 4 billion dollar limit that we purchased in 2010.

Well paid losses are now at 1.9 billion.

Pre tax net investment income was 545 million in the quarter, a significant improvement to the prior year quarter.

Our limited partnership in common equity portfolios produced pretax income of 69 million.

3.7% return.

For the full year the LP in common equity portfolio generated an 11.7% return.

Pre tax income from a fixed income portfolio was 464 million.

The pre tax effective yield on the fixed income portfolio was 4.7%.

For the full year, the fixed income portfolio generated 4.8% pre tax effective yield.

Lately better than 2018.

However, given the current interest rate environment, we expect the level of performance to be difficult to maintain going forward.

Fixed income assets that support our PNC liabilities at an effective duration of 4.1 years at quarter end in line with portfolio targets.

The effective duration of the fixed income assets to support our life and group liabilities was 8.9 years at quarter end.

Our balance sheet continues to be extremely strong at quarter end shareholders' equity was 12.2 billion EUR 40 $445 per share.

Our unrealized gain position decreased slightly to 4.1 billion.

Shareholders' equity excluding accumulated other comprehensive income was also a 12.2 billion or $44, an 81 cents per share.

An increase of 8% from year end 2018, when adjusted for the $3 in 40 cents per share dividends paid during the course of the year.

In the fourth quarter operating cash flow was 160 million.

We continue to maintain a very conservative capital structure, all of our capital adequacy credit metrics are well above our internal targets and current ratings.

And I'd be remiss, if I didnt mention that DNA was upgraded by standard <unk> Poor's.

Financial strength rating of eight plus during the fourth quarter.

Finally, our capital management philosophy continues to be that we will look for opportunities to invest capital back into the business.

We believe we can achieve appropriate returns otherwise, we will return to capital to shareholders.

In 2019 returned 946 million of capital or 95% of net income to shareholders, primarily in the form of dividends.

And as we begin 2020, we're pleased to announce a special dividend of $2 per share.

In addition, we're raising our quarterly dividends of 37 cents per share.

With that I'll turn it back to Dino Thanks James.

Before we move through the question and answer portion of the call. Let me leave you with some overarching thoughts in our performance.

The full year underlying combined ratio of 94.8% improved for the third straight year.

And it is the best in a decade.

Our underlying PNC loss ratio was 60.9% for the quarter and 61% for the year.

You asked gross written premium ex captives grew 9% while net written premium grew 6% for the year.

We achieved seven points of rate in the fourth quarter, one point higher than the third quarter.

And encouraged by our pricing trajectory in recent quarters and based on what we've seen in January.

Optimistic that we can continue to drive rate above our long run lost cost trends at through 2020.

Increases our regular quarterly dividends at 37 cents per share and we once again declared a special dividend of $2 per share with that we'll be glad to take your questions.

Thank you if he would like to ask a question on today's call piece signal know by pressing star one on your telephone keypad, That's star one to ask a question.

We have a pause for one moment hello, everyone to signal.

We cannot take our first question from Jeff Smith.

Please go ahead.

Hi, good morning, everyone.

Good morning, looking looking at the International book, Obviously had a had a pretty good quarter, but could you give us an update on where that sort of property bookstands is that largely repaired or is there additional work that needs to be done there.

Adjusted see no.

What I see is look we're doing the right thing.

In international and it gets showing up in the results.

The underlying combined ratio.

Negated was down five points and we also had lower cap losses.

Which we had expected because the Lloyds book or the syndicate was down.

17% even with.

The strong rate increases so clearly.

We've done a lot of work on that portfolio, but there's still some work that continues and you know there could be some volatility quarter for quarter I think what I would say.

You know if you think about it in terms of the premium base.

I think we you should expect the re underwriting to probably affect our premium base for a few more quarters.

And.

So theres a little bit more work to do what a lot of it has already been done and we expect.

To go into 2021, what it really great really great portfolio.

Okay.

And then thinking about the commercial book.

You had mentioned a number of times loss cost or rates in excess of loss cost trends.

No you plan on on keeping that.

Through 2020, and I guess what rate accelerating it suggests.

Loss cost trends are accelerating so do you as you look ahead and you think about rate I mean are you expecting that.

Loss cost trends continue accelerating and.

If you're going to stay out ahead of that our rate. I mean are you are you for seeing a potential impact on retention if that's the case.

Sure just as soon as good question, obviously look I think our long run loss cost trend assumptions incorporate all that we know and we see now so as that evolves, we'll continue to incorporate the new information.

What I'd highlight.

Is that we have a conservative by it. So now we set those loss picks and we tend to jump on a bad news rather quickly I think our track record of bears that out if you look at our historical record of favorable development.

We also we work really hard to react early on our underwriting actions.

And then depending on the overall the overall market environment to your point, we either get what we need.

Are we let retention drop which is evidenced clearly in our aging services book and we've been detailing that for you over the course.

The last year as I said based on the quarters.

Reserve reviews, we feel.

Our fix our longer run trimmed assumptions.

Incorporate our our loss patterns and we feel comfortable with the physician and we'll just keep reacting both internally actuarially externally and underwriting actions.

Quarter over quarter.

I was just add one thing for that Jeff I think.

Just because rate is going up does not mean that loss cost trends are going up rate is going to be a factor of what we think we need and it's also going to be a factor of what the market bears.

And so we're going to do exactly what do you know said with loss cost trends and we're going to continue to push hard for rate.

Okay. Thank you for the answers.

Thank you and we can now take our next question from Gary Ransom from Dowling <unk> partners. Please go ahead.

Okay. That's good morning, I wanted to zero in on that health care retention of 66, I think for the lowest levels.

In there for a long time.

Yeah, and I know it yeah, you're pushing rate, you're losing customers, but it just seems like that's if a lot more significant this quarter can you comment on that.

Yeah, I mean it.

You know it has been double digit rate on rate Theres no question, Gary and that.

When you start to compound double digit rate increases, it's a little bit more difficult were also being.

Very aggressive and what it is that we need and we have been increasing in the fourth quarter rate.

Was 25% and.

What we do is we put out the terms and conditions and we don't get it's been a message to all the underwriters and they do know it is you let it go and I think.

It always depends on a mix for mix.

And you will see if you were to go back there was some other quarters, where the retention was in the low 60, then at rebound a little bit Oh and.

Depends a little bit on that mix, but we continue to push this very aggressively and that of course, you compounded with the terms and conditions, we're putting a larger.

Deductible on medical malpractice.

We pretty well doubles actually.

The amount of qualities that now have 25000.

Dollar medical Mal deductible I mean, a few years back and medical now you know had virtually no deductibles are very very low. So you put all of that together and.

We try to get those terms and conditions. If we don't you know will lose it and it's going to fluctuate quarter for quarter, but what isn't going to fluctuate is our pattern of rate increases and terms and conditions were going to keep pushing not hard.

What's surprising to me is just how what it says about the industry that is there's a problem with seems well established and yet.

Others are taking is a lower price.

I don't know if that's surprising I may smart yeah.

As always Gary you know you look at it across the industry and I understand that for US I mean, I can only time, we've been rep.

So quite transparent on.

Our health care not only actions our loss picks are lost cost trends.

And so.

We do what we think is the right thing we think we're doing the right thing you get it right on every deal.

Of course not.

And it's difficult to say.

How some others may.

May view it in particular, when they take what we lifestyle.

All right. Thank you I, just flipping to the other excluding where there's a small business where rates are still down can you remind us how how much is workers comp, but what the mix is there that's causing that.

Yeah, Yeah, Gary that the when you look at rate X work comp it's up about two points. So work is the largest single line in that in that segment.

Okay, great. Thank you, but it continues to grow and we got good policy retention and.

So we're happy with the and the profitability. So you know we're happy with the small business.

Right all right.

On a any I wanted to just ask if there was something that.

I know, it's economically not you know nothing to you, but you are seeing some trends.

The need for surface and I just wondered if you gave us a little more detail about what what it was you saw that caused the adverse development there.

Sure Yeah, what we saw in the in the quarter really for the year was an increase in defense costs, primarily but also some indemnity costs all on known accounts for asbestos and environmental so that was really that in combination with reviewing our expectation for real.

Insurance Recoverables were the two pieces that drove the change there.

Okay.

Well I couldn't JV, maybe want to add one thing to just add one thing that I guess, what we're not seeing.

Increase in mesothelioma claims so that trend other actually on its way down.

Okay.

[music].

Just one last question or broader question on the whole social inflation issue I mean, I see your numbers, you've actually improved for the full year year over year on an underlying basis and.

Yeah, that's it.

Everyone's been talking about the social inflation, and yet you're sort of keeping up with whatever it is I just wonder if you have any comments on anything new you're seeing in that area.

Gary it's.

Clearly been up a big topic for four for every one I think.

It depends when you start to see the trends, how you react and how conservative you are and.

We don't get it right all the time, but I do think you know the conservative bias has played out I mean, Oh, you know I guess, one comment theres a lot of.

Using as a benchmark sort of attorney involvement on cases.

So I I can just tell you from our portfolio.

Actually has not been a significant change and we track kids.

You know by all the lines of business, we've actually seen slightly lower level of attorney involvement in primary auto a little slight uptick in primary general liability and it's actually been flat now for several years in aging services and when yet it's sort of put it all.

Together a on the third party line.

It really hasn't changed so I don't know if that helps at all but it's it's sometimes commented on so I just thought I share with you what we have in our claim patterns.

Thank you for that that's very helpful. That's all I have.

Thank you and just as a reminder, if he would like to ask questions. Please press star one.

I want cannot take the next question from Mayor Shields from KBW.

Great. Thanks, two quick questions, but I can first.

Consumer that affinity growth should accelerate in 2020, given what the beat up I'll call. It lost trends you are still being.

Meyer I don't think we heard that full question could you repeat it.

Oh, sorry, it sounds based on deals last comments like overall lock trends remain under control.

Assuming that that's true in the affinity book as well given the concerns that we're hearing from other companies. There is a fair to expect topline growth.

To pick up and I couldn't be because of that.

Well on the affinity as we've talked about Meyer is you know these are programs. They are multiyear their long term now we happened to.

Right a large program we added one large program in 2019.

But 18 actually which played out throughout the quarters up 19, all four of the quarters actually.

Which means some of the growth comparison on specialty.

Seem a lot because it is of this program, but you know right. Those every quarter right. There there as we go after them, we clearly have an expertise over the last several decades, we're always looking for them, but it's got a fit it's got to be the right type of program with the right profitability and all of its.

Component parts. So there they are harder to come by.

But clearly we have a team that's always focus.

On it and Oh, well keep our eyes open but continue to grow it because it is a very profitable for us.

Okay. Thank you.

Second question I, just want make sure I understood your response to Jeff.

It sounds like there's still some works coming in the international segment, but.

The fourth quarter I guess, it looks like the upside of great outpaced the exposure reduction is that fair expectation for 25.

Right I think what do you know it's common for primarily around the Lloyds portfolio remember, we also have a Canadian business, which.

It is not undergoing the kind of re underwriting that's happening in London, and thats growing quite nicely as well as the continental business is actually growing as well based on significant races. They're getting there. So you have really two of the three components of the international business are growing more organically and offsetting what's happening.

In the Lloyds portfolio.

Okay understood. Thanks, so much.

Again, if he would like to ask a question. Please press star one.

Finally, I am I'm just ask a question. Please press star one.

[noise] there no further questions on the line at this time I would now like turn the call it back to the host for any additional or closing remarks.

Well, that's great. Thank you and rollout shot next quarter.

Right.

Thank you that concludes today's conference. Thank you for your participation ladies and gentlemen, you may now disconnect.

Uh huh.

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