Q4 2019 Earnings Call
The line it will be right back with you.
[music].
Good morning, ladies and gentlemen, and welcome to the Fourq 2019 quarterly earnings call. At this time, all participants are them based on listen only mode and we will open the floor for your questions and comments after his presentation and it's not my pleasure to turn so over to your host Paul Anderson, Sir the floor is yours.
Thank you good morning, and welcome to the National General holding school fourth quarter 2019 earnings Conference call. My name is pull Anderson director of Investor Relations with me. This morning, a Barry Karfunkel, Chief Executive Officer, Mike, We not Chief Financial Officer.
Mr Karfunkel and Mr. whenever you Aurizona. Please note the following with respect to forward looking statements.
Members of our management team May include statements other than historical facts and.
Such statements May include the plans and objectives of management, the future operations, including those related to future changes in the company's business activities and earnings results for potential.
These statements are based on current expectations and involve assumptions that difficult or impossible accurately many of which well beyond our control.
It can be no assurance that actual developments will be consistent with these assumptions actual results may differ materially from those expressed or implied any statement as a result of significant risks and uncertainties, including the fact is set forth in our filings with the Securities and Exchange Commission.
The projections and statements in this presentation speak only as of the date of this presentation as we undertake no obligation to update or revise any forward looking statement, whether as the result of new information future developments or otherwise, except as may be required by law.
Management will refer to financial measures that are not derived from generally accepted accounting principles Olga.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information is provided in the press release from fourth quarter 2019 earnings which is available in the Investor Relations section of website National General Dot Com.
Now my pleasure to technical ever try CEO Mr. Barry Karfunkel.
Thank you. Good morning, Thank you for joining our yearend earnings call I'm pleased to announce record earnings for 2018 and look forward to continued earnings growth in the years to come or.
But our team has been able to accomplish is nothing short of spectacular. Despite some opportunities for improvement we've been able to produce another year of strong returns. We have achieved this by leveraging our diversified businesses, which are powered by our integrated in proprietary technology platform.
In turn this provides us with excellent they didn't cite that enables our analytic efforts across all lines of business and its operations.
They sometimes providing some additional color across our various lines of business.
Our personal auto continues to produce solid results.
Gross written premium increased 3% for the quarter.
Applying for 2019 was dampened by actions to reduce our business in New York.
Hitting certain unprofitable m. GE relationships and not having the one time that nationwide renewal rights transaction that benefited us in 2018.
Our approach to growth has always been that we will take a counter cyclical approach our peers why most peers ramp up commission rate decreased three below last spring and relax underwriting rule during softer market conditions, we tend to take rate equal to trend when markets in evidently Harding and ARPU.
Sure I tried to catch up with double digit rate increases, we're benefiting from winning new business that comes to US as result of our rate adequacy.
We believe this threat as he gives us a strong counter cyclical advantage another way we win it's by constantly enhancing our product.
In Q3, we released our first read six product in Florida early results are really favorable.
With our past rent five product rollout.
We enhanced our credit modeling and introducing him segmentation based on new D. sorry.
The result was an increase conversion rate with new business lost metric looking favorable.
Fourth releasing the product in additional states with an added benefit of having to side by side, Midmarket, CRADA, which will enable us to target a much wider customer base.
I address consumer progress continues to be very exciting threats consumer channel experience premium growth of approximately 11%. This channel now comprises roughly 19% of our total personal auto business.
Our small business thought about can declined slightly in Q4 as result of underwriting and pricing action taken last year.
We have strengthened reserves in the PNC segment by 27 million, primarily due to our experience in small business auto.
We are confident that we will experience stronger contributions from this line in 2020.
Well, our packaged homeowner results weren't to meet weren't a meaningful contributor in 2019 I'm extremely pleased by how we're currently position.
The driver of our suboptimal results with California, which makes up roughly 25% of our homeowners business.
During Q4, we were approved for 41.7% homeowners rate increase in California, which went into effect during January.
We believe that after this rate increase right a position of strength in California relative to our competitors.
Additionally, our project regions right our exposure to wildfire in certain areas was completed in 2018, we saw immediate benefits from this as we avoided immaterial concentration of wildfire claims that occurred last year.
Another win was launching our next generation homeowners product in Texas, we launched our product, which introduced enhanced segmentation leveraging many third party data feeds.
The product seems to be performing as plans with our conversion rates up in attractive segments in conversion rates nonexistent in poor performing segments.
We look forward to having garden, new product replace existing products in other states over the course of this year.
Give me the many actions taken in 2019, we don't expect to see growth in 2020 for homeowners. However, our rate per policy should increase materially.
Accidents, and health continues to impress and its ability to deliver against that strategy, we set out to acquire select distribution assets lead generation and technology businesses.
Along with product expertise, we leveraged our in house analytic capabilities to improve the product and now all the various instruments that we've acquired are coming together to play a beautiful symphony.
Absent your accident, which was sold to mid quarter, we experienced growth of 17.6 person within all in combined ratio of 78.2.
I stop loss business continues its strong growth by being an industry leader in the small group space with its unique in highly analytical approach to pricing and underwriting.
This topline growth is expected to continue for the coming years as we reinvested the loss ratio savings from our segmentation Bakken Thethree decreases for our target segments further creating distance between us and our competitors.
I visual like 15% growth rate was driven by the release of our new segments and short term medical product.
Which drove significant growth within our target segments.
Looking forward to this year, we look forward to release and get another version of our short term medical product with even more segmentation, which will further distance us from our competitors as well as releasing an updated supplemental product offering.
Our own agencies bolstered our growth with our own lead generation platform, while other agencies, which hurts hinted on external lead generation platforms are experiencing increasing lease costs.
How's compare our Medicare agency had a strong apc's in more than doubling its business year over year.
Well I classify our technology businesses as being an incubator mode I'm excited about the progress that these businesses are making and expect them to begin maturing considerably over the next two years.
While in the past I've guided 10 accident and health combined ratio into low ninetys, given the sale of Euroaccident and the growth of our Medicare business I'd expect that combined ratios to be in the mid eighties.
With the growth rate of our Medicare and technology business is expected to exceed the carrier growth rate over the coming years I'd expect our combined ratio to continue to improve overtime.
In summary, 2019 success had many contributors which should continue to contribute in the coming periods at the same time, we've accomplished a series of improvement initiatives, which should result in additional meaningful contributors in twentytwenty.
With that it's my pleasure to turn call over at our CFO make winner for a review of our financial results. Thank you Barry We had net income in 2019 of 314.5 million or $2 and 73.
Cents per diluted share or 2019 operating earnings were 319.2 million or $2.75 per diluted share.
Fourth quarter 2019, net income was 98.4 million, which compares to net income of 17.3 million in the fourth quarter of 2018 operating earnings were 83.1 million versus 33.6 million in last year's quarter.
Operating diluted EPS was 72 cents, which compares to 30 cents in the prior year quarter. Our results in the quarter were impacted by $9.2 million of weather losses, which compare favorably to $59 million of losses in the prior years quarter.
While catastrophic losses were lower than prior years, we did see higher non catastrophic weather related losses.
Fourth quarter 2019, PNC segment included $26.8 million of unfavorable prior year development, primarily driven by our small business auto that's versus 8.6 million of unfavorable development in the prior year quarter. The accident health segment reported $7.6 million of favorable prior year.
Our development versus 6.4 million of favorable development in the prior year quarter for the full year. The prior period development for the combined company was $1.3 million adverse.
Trailing 12 month operating return on equity was 16.1 million as of December 30, Onest 2019.
Our fully diluted book value per share grew 25% from December 30, Onest 2018 to $19 in six cents.
Now I'd like to give some additional color on or two operating segments first within our property and casualty segment gross written premium grew 3.3% to 1 billion for the quarter, which included $47.4 million of additional premium from the acquisition of forms you need insurance personal personal auto.
Grew 3%, reflecting continued investments in our direct consumer distribution.
Servicing fee income decreased 3% to 107.5 million for the quarter, reflecting continued changes in the mix of our business, including the addition of National farmers Union.
The PNC combined ratio was 94.2 million present, excuse me versus 100, and when 5% excluding amortization of intangible assets.
The loss ratio was 73.6% compared to 90 set to 79.6 present in the prior year quarter.
This year pre this year's pre pre tax catastrophic losses were 9.2 million, reflecting favorably compared to the 59 million related to hurricane Michael on the California, wildfires a year ago.
The expense ratio was 20.6%, which compares to 20.9% in the prior year quarter, which is primarily attributable to changes in the quota share and lower ceding Commission income.
Overall, our model line auto book net trend as we define as loss trend divided by premium trend is moderately favorable, thereby helping the year over year accident year results. We attribute this continue as favorable frequency trends, reflecting pricing segmentation better risk selection from Iraq, five old product and a new.
Brad six so product as well as continuing mix shift severity trends or moderately better than industry, which we attribute to mix shifts.
Claims initiatives effective January Onest 2020, we will now seed 5% of are not liabilities under auto quota share. This reduction is driven by the increase in self generated capital from the year.
With that within our accident and health segment gross written premium grew 275.8 million for fourth quarter versus 163.5 million in the fourth quarter of 2018, which benefited from strong growth in both our domestic.
The visual and group products servicing fee income grew 39.7% to 71.8 million versus 51.4 million in the prior year quarter. The growth was driven by administration fees on our group insurance products as well as third party agency distribution and technology fees.
The accident and health combined ratio was 77.1 versus 73.6 in the prior year quarter, excluding noncash amortization of intangible assets.
Loss ratio was 41.4 versus 45.7 in the prior year quarter loss ratio reflects continued improvement in the current accident year loss ratios for both the small group self funded and individual products. We also had continued favorable development of 7.6 million versus 6.4 million in the prior.
Our year quarter, reflecting continued strong trends in the most current.
Current recent accident year of 2018.
Thats in both are individual and group businesses.
The expense ratio was 35.7, that's versus 27.9 in the prior year quarter reflect continued investment in our businesses.
We sold the Euroaccident business on December 2nd 2019, the proceeds from the sale were $139 million and we realize a pre tax gain of 26.4 million on the transaction.
The tax rate for the year was 19.8% this is lower than our previously projected 21.5% the lower rate was driven by lower state and foreign taxes and return to provision adjustments, we anticipate our annual rate of approximately 21% to be a reasonable expectation for attach rate.
On a go forward basis.
Investment income was 38.5 million this increased 0.9 million over the prior year quarter investment income increased due to positive cash flow and increasing.
Increasing arm and the size of our investment portfolio.
Chris in our portfolio was offset by driven by lower market yields.
I'd like to Echo Barry's comments and excitement about the strong results and our continued though we continue to demonstrate in our diverse diverse earnings power of National General.
I would also like to thank the National General team members for delivering an outstanding year in 2019.
Now, let's turn the call over the moderator for questions.
Certainly ladies and gentlemen, the stores now open for questions. If you have any questions or comments. Please press star one on your phone at this time. We also opposing your question you. Please keep your handset listing on speakerphone to provide optimum sound quality.
Probably pull for questions.
And your first question is coming from Randy Binner around your line of slides. Please announce your affiliation and pose your question.
Hi, I'm with B. Riley FBR.
Good morning, Ive, a few questions I guess the first one is.
Can you talk a little bit about.
Kind of non standard versus standard market.
Competition.
That's been an issue recently in the market it sounds like youre pricing versus loss costs is.
Maybe a little bit better and fourth quarter and currently than it was earlier in 2019.
You have a book that is.
Focuses on non standard but has stand or two so I'm just I'm. Just curious if you think the pricing dynamic and end market competition dynamic is better or worse and nonstandard versus standard.
Sure.
Good morning, so our our product focus for the standard business is primarily leading with homeowners.
A product and getting the auto as as the Tagalong products that we don't really as of today.
Focused heavily on the mine on line.
Standard preferred.
Automobile product, whereas.
On the nonstandard side, it's really driven by various markets there are certain markets, where we're seeing.
Some.
And softness.
Whereas the other markets that we're seeing.
Lexmark, let softness than than in others.
No I'd also ran its Mike I don't think to add to that when we talk about the nonstandard and looking at this obviously no perfect definition of non standard right, but I think underlying everything that we talked about in our and our auto business right and very alluded to this in his comments earlier is that we're seeing consume.
The prices of insurance in auto being relatively flat to actually slightly down in the in the quarter right loss trends in the mid to high threes, and we're taking rate in accordance with that right.
And it's really some similar to the same old story, you've seen this decreasing or declining frequency and increasing severity. So our pricing discipline is going to continue and we think it's going to manifest itself into I would say higher than average growth rates when that market does inevitably harden, but were underwriters at heart of that's we're going to focus on everyday and defending that margin.
Great and then on commercial auto can you characterize.
What drove the adverse development.
Sure sure, it's really what seems to be plaguing industry at large at this.
Points in time.
With higher.
Attorney representation rates with seven higher.
A jury award.
Try things driving severity, so we definitely taken.
Taken action seven.
Updated.
A certain pricing factors.
To be below as well as the enhanced certainly a claims practices can be able to.
Adjusts for those for those items and we really feel confident.
With with actions.
Taking.
As we see.
In new business being.
Being.
Produced.
All right.
I would suggest that it's just it's not a it's not a it is a piece of our business as a whole, but if you look at the actual size of that did small business auto.
In the quarter gross written premium to $68 million business and for the year last year was a little over 300 million. So you'll see build probably should that number decrease as we go forward interest not a meaningful number in our toll in total company.
But I do ACO Barry's comments in the sense I think we have taking meaningful actions in the business I think we've reacted very effectively in terms of taking up the development, where we see fit probably being a little on the conservative side of that and I think we're hopeful that we'll be able to put this behind us in 2020.
Sorry cut you off Randy.
Yeah I'm good thank you.
Thank you and the next question is coming from Jeff Schmidt, Jeff. Your line is life. Please announce your affiliation and pose your question.
Hi, Yes, Schmidt with William Blair.
A question on the servicing fee income and a obviously up quite a bit in the quarter for the year and I think you'd mentioned that do not the Medicare business was growing quite a bit but.
Could you touch on maybe the buckets there the different buckets, there and what type of growth you're seeing in them.
Sure.
So we've got.
Out where one bucket is at TPG any health network access fee that goes along with higher.
Stop loss with our stop loss.
Premium and that should mimic growth of our stop loss business as that grows so well who is a fees grove and intend to them with that.
We're obviously.
Being.
The fee business from our technology and Medicare businesses.
Mike Today Weve anything go no. So you actually perfect. So if you think about it as a whole our group business from a GWP perspective grew a little over 20%. The group servicing fee income grew 21% completely in line with that and then the other large driver of its about a 55% increase in third party fees with the vast majority of that really driven by.
Medicare business, which are quite bullish about as we move forward.
Okay.
Great and then the.
The margins in a in a sense. Thank you.
Mentioned, the Euroaccident business was sort of a lower margin business, but you still expected combined ratio kind of mid eightys going forward and just looking at kind of talk to combine in 18 or 19, averaging closer to 80%.
Could you help me think about that why why that May go up.
Yes, well listen it's been we had to agree to great years in terms of the vintage performance of the business that you're right generated on it on an adjusted basis versus had about 5% better than than we anticipated, but we're pricing in our expectations are going to be in the mid eighties for that business. In addition to it as there was some in its never perfect way to do this because the timing.
Of annual policies, there was some favorable development in both of those accident years. So if you adjust for that you'll get a slightly higher number up and close that gap on that 5% I was alluding to but I think at the end of the day, It's fair to say, we'll hopefully we'll be in the mid eighties on a go forward basis, thats or indications are telling us.
Okay, great. Thank you.
Thank you.
Thank you and the next question is coming from you are on Kinner you're on your line is life. Please announce your affiliation and pose your question.
Hi, Good morning, now your own Kent with Goldman Sachs.
I guess just just one question on my end.
Andrew lowering your guidance for the combined ratio under in each segment.
Should we then proportionately lower our expectations for the consolidated combined ratio, which I think in the past you had guided to 92 to 94.
I'll, let Mike speak about said.
About.
The consolidated combined ratio however, we're actually increasing our guidance on on the H. combined ratio our prior guidance was for us to be into.
Low nineties.
Lastly results significantly outperformed that now we are.
Yeah, and increasing our guidance for our combined ratio to actually go from that low ninetys prior guidance to be incurring.
In mid eighties.
Right now.
We would we would expect.
The total combined ratio.
The company not to really.
Move that dramatically because there are puts and takes on both sides. We as we mentioned in the prepared remarks, we expect our homeowners commercial vehicle business to.
Be more meaningful contributors.
Our overall.
Business on a go forward basis, So we would expect that combined ratio.
The total business to to really be inline with what we've been experiencing thats far yes, the only thing I'd add to that Barry and Europe is that we delivered a little over 93 combined ratio this year and the PNC segment right and that took into account the two headwinds at Barry alluded to with the sizable development, where we had on the small business.
And as well as just the difficult market. It was on our package business. So in total I wouldn't I wouldnt offset that but I do think at the end of the day will be writing that dead Center range that 90 to 94 again the biggest variable for us is not going to be this small business, it's really just going to be.
Really what happens with cats right.
And on the Attritional homeowners ratio loss ratio, which we think we're well positioned on both those things, particularly with the rate we have earning in on the homeowners side. So.
We're looking forward to a good here.
Great. Thank you very much.
Thank you and there were no more questions from the queue at this time.
Is there no questions and I'd like to the opportunity to think you will focus on this morning, we look forward to speaking with you again soon thank you and goodbye.
Okay.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.