Q4 2019 Earnings Call
Team as long as holdings Inc. earnings Conference call.
At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session and instructions will follow up at the time, if anyone should be quite as he says during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
I would now like to turn the conference over to you don't hold me Laurie Brown General Counsel. Please go ahead Madam.
Thank you Nora good morning, and welcome everyone to the 2019 fourth quarter and yearend earnings call for employers today's call is being recorded webcast from the Investor section of our website, where a replay will be available following the call.
With me today on the call or Doug Dirks, ER, our Chief Executive Officer, Mike The Cat, our Chief Financial Officer, and Steve Festa, Our Chief operating officer.
That's made during this conference call that are not based on historical fact are considered forward looking statements. These statements are made and reliance on the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
Although we believe the expectations expressed in our forward looking statements are reasonable risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.
Oh remarks made during the call our current at the time after the call and will not be updated to reflect subsequent development.
In our earnings press release, and in our remarks or responses to questions. We may use non-GAAP financial metrics reconciliations of these non-GAAP metrics to our GAAP results are included in our financial supplement as an attachment to our earnings press release, our investor presentation and any other.
Materials available in the Investor section of our website.
Now I will turn the call over $2.
Thank you Larry Good morning, everyone and thank you for joining us on our call today.
With me today.
Or my can Steve we will outline our financial results and our operating initiatives.
Also discuss the ongoing evolution of the workers compensation market in general.
And employers place within it.
29 team was a very successful year for employers.
Over the past few years workers compensation as see numerous changes.
Including improving loss cost trends.
Associated pricing declines.
And a shift in the desire transactions speed of both our agents and online focus customers.
We are in a unique spot as a model line workers' compensation writer focused on low risk hazard.
And we see these trends first hand.
We are comfortable but the initiatives we've been putting in place.
Will position us for success now and into the future.
And we believe that we can continue to produce satisfactory results while pursuing this strategic transformation.
Hi, I'm very pleased with the 2019 result.
We delivered an 8.6 return on adjusted Stockholders' equity, while continuing to execute well on our plan for the aggressive development and implementation of new technologies and capabilities.
We are dedicated to making the process of securing workers compensation insurance easy.
And our utilizing technology and data to access quote and bind risks more quickly and efficiently.
We also believe that we have a better read on pricing trends in our market.
Which in a long tail business can be challenging to time exactly right.
We have operated through multiple workers compensation cycles.
And our faith in our ability to properly assess risk changes and rate adequacy.
In today's market, we are addressing an increasingly challenging pricing environment.
With underwriting discipline and operational improvements.
We understand that there is a delicate balance in terms of managing rate adequacy, well attempting to grow market share.
In response, we have recently completed our nationwide platform with the additions of Alaska Hawaii.
And are pleased that California, now represents less than 50% over in force premium and policy count.
This is not a commentary on the current state of the California market, but rather reflects our belief.
The geographic diversity is an important element of our strategy.
Finally in 29 team, we launched our severity brand, which now offers direct to customer workers compensation insurance in 34 States and the district of Columbia.
Today, we have not received the necessary approval from the state of California to launch Saturday.
Recall about California is the largest workers compensation market in the United States.
Although Saturday is very much in its infancy. We believed that the addition of this digital product solution is very important to positioning employers for success in a rapidly changing marketplace.
With that Mike will now provide a further discussion of our financial results. Steve will then discuss our pricing initiatives and changes in the marketplace and then I'll return for few brief closing remarks, Mike.
Thank you, Doug I'll Echo Doug sentiments that like 2019 was a very successful year for employers [noise].
Before I discuss financial highlights I Wanna mention that beginning with this earnings release, we've separated our operations into two distinct reporting segments employers and Saturday and we will continue to do so in our future earnings releases and filings with the FCC.
While 30 currently represents a very small percentage of our topline we believed that presenting its operations separately provides the best means of transparency to allow investors to monitor its progress and development.
Our fourth quarter results contributed nicely to our success throughout 2019.
Our net investment income increased steadily and our accident year results were broadly in line with our expectations.
Renewal premiums remains strong, but our topline was challenged by declines in new business writings in California, where we continue to act as a price leader in achieving rate adequacy.
[noise], our losses in L.A. eat where $98 million for the quarter, an increase of 12% and included $11 million a favorable prior year loss reserve development versus $25 million, a favorable development a year ago.
For the year, our losses in Italy were $366 million, a decrease of 3% and included $78 million a favorable prior year loss reserve development versus $66 million, a favorable development a year ago.
The favorable prior year loss reserve development recognized throughout 2019 related to nearly every accident year, but was more heavily concentrated in accident years 2015 through 2017.
Commission expenses were $20 million for the quarter, a decrease of 4% and were $88 million for the year a decrease of 6%.
The decreases were primarily due to a reduction in agency incentive commissions, which were directly impacted by the decrease in premiums written.
[noise] underwriting in general administrative expenses were $51 million for the quarter, an increase of 26% and $188 million for the year, an increase of 18%.
The increases which were largely consistent with our expectations were the result of our aggressive development and implementation of new digital technologies and capabilities inclusive of Saturday as well as an increase in bad debt expense associated with 2018 policy year final audit premiums.
We continue to believe that these digital initiatives will result in superior performance overtime, even if they have an unfavorable impact on our expense ratio today.
We've always taken the approach that is much easier to correct a high expense ratio than it is to correct a high loss ratio.
From a reporting segment perspective, our employer segment had underwriting income of $8 million for the quarter versus $40 million, a year ago, and its combined ratios were 95.5% and 78.2% respectively.
For the year employers had underwriting income of $76 million versus $111 million, a year ago, and if combined ratios were 89.1% and 84.9% respectively.
Our Saturday segment had an underwriting loss of $4 million for the quarter versus a loss of $2 million a year ago, and an underwriting loss of $16 million for the year versus a loss of $6 million a year ago.
Turning to investments net investment income was $23 million for the quarter up 6% and $88 million for the year up 8%.
The increases in net investment income were primarily a result of an increase in the average yield on and the size of the investment portfolio.
At quarter end, our fixed maturities had a duration of 3.3 and an average credit quality of a plus and our equity securities and other investments represented 10% of the total investment portfolio.
Our current duration is lower than the 4.1, we reported a year ago due to investments, we've made and variable rate bank loans as well as changes in prepayment speed assumptions affecting our mortgage backed securities.
During the year, we benefited from $151 million, a pre tax net unrealized investment gains our portfolio of fixed maturities increased in value by $104 million, which is reflected on our balance sheet and our equities and other investments increased in value by $47 million, which is reflected on our income statement.
These net unrealized investment gains were the primary driver.
Of our 19.1% increase in book value per share, including the deferred gain for the year.
Finally during the quarter, we repurchased $20 million of our common stock at an average price of $42.32 per share and our remaining share repurchase authority currently stands at $28 million.
During 2019, we returned $96 million to shareholders through share repurchases and common stock dividends.
And now I will turn the call over to Steve.
Thank you, Mike and good morning.
Net written premiums for the year of $691 million were down 51 million were 6.9% from the prior year.
This decrease occurred as a result of decreases in year over year final audit pickup as well as decreases in new business written.
With respect to the decrease in final audit pickup we continue to see positive payroll growth, but not to the extent that we did in 2018.
For the year or average net pickup rate was 6.81%.
Which is down from last year's figures. It is premature at this point to forecast how 2020 will trend.
New business premium decreased 6.9% year over year, driven by a decrease in California, which was principally the result of our increased rates, which went into effect as of July one 2019.
Outside of California, our new business growth was $11.6 million. The overall market continues to be very competitive and declining rates in our states continue to be a headwind.
From a policy count production standpoint nationally, our new business submissions grew 20.6% or quotes increased 26% and our new business bound policies increased 9.7%.
Each of these production metrics were historical highs for our organization.
On a year over year basis, our in force policy count increased to 7.8%.
Renewal premium for the year increased $21.2 million or a 4.4% increase over the prior year. Our unit retention also improved our year end unit retention rate of 94.9% was up from 94%.
At year end 2018.
With that I'll turn back to Doug for final remarks.
Thanks, Dave.
Overall, we remain confident that the initiatives we are developing.
As well as those we have recently put in place our positioning employers for success in a changing marketplace for workers comp.
Our aggressive development and implementation of new technologies and capabilities increased our underwriting expenses in 2018 and 29 team.
And we expect that they will continue to moderately increase our underwriting expense in 2020.
However, based on present pricing and loss trends as well as actions, we're taking to improve underwriting profitability.
We expect that the additional underwriting expenses, we incur in 2020 will be offset by a reduction in current accident year losses and delay.
We are now in that part of the cycle, where the temptation is to solve short term problems without consideration for long term consequences.
The landscape is littered with failed workers compensation companies that did just that.
The time to fix the expense ratio by driving topline growth isn't when pricing is the softness.
Inevitably the bad loss experience that follows dwarfs the gains achieved on the expense ratio.
In the current market, we will continue to be a disciplined underwriter carefully monitoring changes in pricing trends and growing only when we believe we can do so profitably.
We will also remain laser focused on enhancing our agent in partner interactions, while continuing to develop and market Saturday. So that we can provide our customers in exceptional experience that allows them to choose the time means and manner in which they interact with us.
Ultimately our objective is to be properly positioned and fully prepared for the cycle change.
Finally, I would like to take the opportunity to thank our employees for their outstanding efforts throughout 2019.
And our agents partners and customers for their business and continue to support.
And with that operator, we'll take questions now.
Ladies and gentlemen, you could have a question at this time. Please press the star and then the number one key on your Touchtone telephone Eva Huston has been answered or use is pretty love yourself from the Q. This press county.
Your first question comes from the line of Mark Hughes of Suntrust.
Ladies and then.
Thank you very much good morning.
Good morning.
Doug.
Could you expand on that I think you would the said the initial underwriting expense would be offset by reduction and current accident year losses.
Is the did I hear that properly is that to say the accident year combined ratio you look to be steady and 2020.
So mark I'll take that so well what Doug said, specifically is that we do expense, we do expect our expenses.
To be up moderately just a small amount in 2020 versus that of 19, not the ratio, but the level of expense and we would expect that our current accident year ratio pick for next sports for this year will offset that amount.
Right, which is to say accident year combined ought to be a fairly steady.
[noise], we'll make that determination in the first quarter, but we right now I think that it will be a reduction which would offset the the additional expense in 2020.
Okay.
And I guess the this works into the the additional expenses you been encouraging for your digital initiative I think it's been you've described roughly four point.
One with the I guess, given what you said expect that to continue maybe a little bit higher in the.
In 2020.
That offset by the losses is that the right way to think about it.
Exactly.
Okay, and then or.
So look a little further into the future.
Would would want to assume that the this is ER.
The.
The last year of the full press so to speak and that the a expense load might paper in subsequent years or is it too soon to Phil.
I don't want to say, it's too soon to tell we've got another full year ahead of us yet next year.
We're still in pursuit of an implementation of a policy administration system is the reason that question is somewhat difficult to answer Mark is because we're talking about things that get expense and capitalize exactly when they hit the income statement can be very difficult to forecast, it's somewhat a function of what the expense is in a function of when things.
They are put into service. So it's really difficult to give guidance on that but we still quite a bit of work that will be doing into 2021.
Yes, the ultimate objective here clearly is to drive growth.
Greater efficiency and scalability and really my comments about positioning us for a change in the cycle is we want all of this done so that when the market turns and we have an opportunity to get the rate that we think is required which is much more challenging today, we're going to be ready for that and then we can scale this business up.
And at that point, if the expenses are flat to down and premium is growing then we get some lift on the expense ratio.
How do you, yes that is good the detail on the expenses and the loss outlook. How do you think about the topline and 2020 I think your enforces actually stable.
Impaired. The this time last year, you renewal premium was up a new business is down.
Steve of what's your Crystal ball through both the 2020.
Mark we're going to continue to see the headwinds in 2020 that we saw the prior year with respect to continued rate declines with the exception of one state of the 2020 filings that we've seen all continue to show rate decreases so thats going to continue to be.
The headwind that we see.
I do want to point out that from a.
New business policy count growth standpoint.
That our new business policies were up 9.7% this year.
The revenue was down because of the continued rate declines, but a big driver for our growth in policy counts, which frankly position us very nicely for when the market does turn but some of the new states. We've gone into is impacting that growth, but also some of the initiatives that we've already done.
Floyd in 2019, especially in the second half of the year, we saw a correlation between those initiatives being launched in the ease of doing business with us in particular on the small business accounts that we right.
We saw a corollary uptick in that new business policy count growth. So my expectation is that we'll continue to see that in 2020, but from a revenue standpoint that will be offset by a these continued rate declines.
Then the final question the.
Your rate positioning in California versus peers, you took the rate increase in July.
As anybody else followed suit.
The.
Subsequent to the.
Loss frequency severity that.
Support your decision to a push up rate in California.
So we're not seeing as we speak today, Mark we're not seeing any actions being taken by our competitors at this point I will tell you, though that we are starting to hear some commentary.
From some of our in particular national a multi line competitors about.
The weather the continued rate decreases in California are sustainable or not.
Including.
Comment made by a senior executive at a conference recently, where they were quote unquote hopeful for a bottoming out of rate declines in California.
There's been a lot of rate declines in the past several years. So I don't know that those commentaries are going to necessarily overnight lead to chat to changes in terms of what they're doing from an action standpoint, but there's definitely more noise being heard out there.
With respect to how sustainable these rate declines are in California, as we said on an earlier call. The average charge rate today in California for the industry is as low as it's been since 1976.
Thank you.
Again, ladies and gentlemen, if you'd like to ask your question. Please press the star and then the number one key on your Touchtone telephone. Your next question comes from the line of Amit Kumar of Buckingham Research. Your line is open a good morning, two questions and maybe I just spell out the two quick.
Since I have.
The first question goes back to the discussion on reserve releases.
Can you maybe expand on that and.
Any reserve additions in the old or a wise, which were more than offset by releases from the recent years. I think you mentioned a few years and the second question.
Going back to the discussion on Saturday.
Longer term.
What size could be how you're thinking about.
The topline that could come from this.
Amid I'm happy to take the first question regarding reserves, but could you repeat your second when you broke up on us a little bit was hard for us to here you had a second question is on Saturday. So when you look at the platform once it's up and running.
What sort of premiums it could generate longer term I'm not looking for guidance I'm just trying to get a better sense. You know now that you've obviously have had held these expenses once everything is up and running new unit.
100 million 200 million 50 million, how should we how to think about that.
All right. So I'll take the first one regarding reserves than what we've seen really over the last eight quarters is a favorable development over nearly every accident year with concentrations in certain accident years, but yes from time to time, we do have a small amount of adverse development in a given.
In calendar year, but generally speaking that is due to a unique circumstance like a light change in life expectancy for somebody that.
It's been seriously hurt.
But really there is theres no. There's no years that we're trying to fill.
And it's virtually all accident years, if that helps you.
Okay, that's what you're saying is when we look at the schedule P that comes out.
And.
A few weeks youre, saying that we will see most of the.
Higher pay would develop favorably and we will not see material additions I think that's what you're saying.
Well schedule P is it's not that straightforward, but it's the schedule P. For this year should be more straightforward than it has been in other years and I'm happy to take that discussion with you offline to explain some of the anomalies there in but I think that you'll find that the schedule P is going to be much more consistent with your expectations in this calendar year.
Got it.
And amid this is Doug as to your second question I know, you're not looking for guidance and I don't plan on giving it but what I will say.
Is that as we look at how this market develops if it develops like other online markets have we would expect the growth to be more of a hockey stick than some linear growth.
Growth in the business, we've seen that with other carriers and other lines and so we don't have any reason to think this will be different.
We think this market eventually does take shape, there certainly much more commentary about it today than there was a year ago when we launched.
We continue to believe that this is a critical component of a long term strategy that the did failure or the absence of this product offering will not positioned the company well for what we think is coming in this market. The change that's occurring is occurring very rapidly and you simply have to have this product.
The offering.
As you can see from our materials. This does add cost to the expense ratio, it's even more burdensome because of the flat to declining topline but.
But we continue to be committed to this investment into the strategy.
I mean, the only follow up to that would be if you look at.
The numbers versus estimates and your stock is down 7%.
Clearly I think investors are struggling to.
Look at those two metrics and figure out the trajectory I mean, what would give investors any confidence.
As an outside or.
As to whats the timeline on the strategy.
So I would say if you if you were to ask US how things were progressing we would say that it's lower than we'd expected, but we didnt have a high degree of confidence in our ability to project timing I mean, it's just you can't launch a new product into a new market and think you're going to get it exactly right and if you do you shouldn't be impressed with your bill.
Ready to get that right.
So again this is this long term commitment to the extent that investors.
I don't see or appreciate the long term value that can be for created from this.
Then then they probably look for another investment we are absolutely convinced that this is an essential part of a workers comp and strict compensation strategy going forward.
The expenses are front loaded they have to be the market that didnt exist when we launch the product.
So that doesn't trouble less at all.
Well, that's a fair point and then final question on.
Opening remarks, you mentioned the approval in California was I think taking longer or it out I mean can you just give more color what exactly is going on on that front and if there's any expectation when we will get that approval.
Or has that been sort of take down the road.
So nothing there's nothing unique about what's happening in California.
The insurance regulatory process can be lengthy even four seasons companies that have multiple insurance companies already writing in the state. It's almost as if you start fresh every time you rollout of new companies. So it's a very cumbersome regulatory process, that's not unique to California frankly.
In California is generally pretty good to work with.
But it takes time.
I would tell you that we expected any day now if you'd asked me a month ago I would have said, we expect it any day now.
Thats just the nature of the Beast Theres nothing here that's concerning it's just as a long process.
Got it that's that's super helpful. I'll stop here, thanks for all the answers.
You have a follow up question from the line of Mark Hughes of Suntrust. Your line is open Sir.
Yes. Thank you I wonder if you might.
They give us any though thoughts you might have around the severity in the marketing approach that you're taking what Peter.
To be effective.
And then the kind of your target market.
Thoughts of opening up.
The number of types of in markets that you're pursuing system to the extent the tier.
And then not giving it away you sensitive information to sort of curious.
A little more detail there.
Sure in terms of the marketing approach.
Theres a lot of testing going on here and we're we're trying different approaches we know that paid search works.
We also know that paid search is not a commercially viable long term strategy.
So you can grow the business you can produce the business, but essentially you're going to give away all of your margin for paid search. So we're looking for other ways to find customers and it's early.
But we're optimistic that there are other ways to do this short of the way. We had initially launched and if you look at what other participants in this market are doing my sense is from what I'm seeing from others is that we're all trying to understand what the best marketing approach is again, it's a market that.
Still taking shape.
It requires some experimentation.
I see very mature companies that are continually experimenting with their marketing approaches. If you think about the the direct writers of auto you know there. It's very evident to me that they are continually refining their marketing approach is trying to to me whatever there.
Growth or profitability objectives are you should think about this no differently in terms of where we might go with the market. We have we have an excellent platform built and at least as we've talked to potential partners I think they've all walked away quite impressed that this is a best in class solution.
Yeah.
So we are exploring.
Other avenues through which we might be able to produce business on this platform.
But again it's early.
These things do take time, but.
But we're optimistic that once we figure out what works and then we were ready to turn it on and go.
Mike on the reserve do you happen to have a the reserves salvage number in front of you I think you talked about that in the past and.
Maybe compare that with.
Your reserve a game so that you recognized so far.
So mark you normally see that in our investment investor presentation, we've been quite gotten to that yet, but if I had to guess based on where weve been and where I think we are the reserve salvage number is probably at about $250 million and.
If memory serves me right the the cumulative reserve releases since that point.
Which are in the new presentation that we just provided you.
Has been about $186 million over that same period.
Thank you very much.
Once again, ladies and gentlemen, if you'd like to ask your question. Please press Star then the number one key on your Touchstone coming from.
All right, we're not seeing any additional questions in the queue. So thank you all for your participation today, we appreciate it.
Much we look forward talking to you in a couple of months with our first quarter 2020 results. Thank you all have a great day.
Ladies and gentlemen. This concludes today's gone today's conference. Thank you for participation and have a wonderful day female disconnect.
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