Q1 2020 Earnings Call
Please hold the line and we'll be right back with you.
[music].
Good morning, ladies and gentlemen, and welcome to the one Q 2020 quarterly earnings call. At this time all participants are in place on listen only mode on the floor will be open for your questions and comments after the presentation. It doesn't I my pleasure to turn the floor over to your host Jeff Weisman, Sir the floor is yours.
Thank you good morning, welcome for National General Holdings, Corp. first quarter 2020 earnings Conference call. My name is Jeff Weisman General Counsel and I'm filling in for Paul I understand the director of Investor relation.
With me. This morning are Barry Karfunkel, Chief Executive Officer, and Mike Wiener Chief Financial Officer, before Mr. Garfunkel Mr. when to review our results. Please note the following with respect to forward looking statement.
Members of our management team May include statements other than historical facts in their remarks, such statements may include the plans objectives expectations of management for future operations, including those relating to future changes in the company's business activity than earnings results or potential.
These statements are based on current expectations and involve assumptions that are difficult or impossible to predict accurately and many of which are beyond our control. There can be no assurance that actual developments will be consistent with these assumptions actual results may differ materially from those expressed or implied in these statements are the result of significant risks and uncertainties, including.
Factors set forth in our filings with the Securities and Exchange Commission the projections statements in this presentation speak only as of the data. This presentation and we undertake no obligation to update or revise any forward looking statement, whether as a result of new information future developments or otherwise, except as may be required by law.
Finally, our management will refer to financial measures, they're not derived from generally accepted accounting principles are GAAP reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information is provided in the press release for first quarter 2020, earning which is available in the Investor Relations section of our web site at.
You that national General Dot com.
It is now my pleasure to turn the call over to our CEO Mr. Barry Karfunkel.
Thank you.
Good morning, and thank you for joining our Q1 earnings conference call before I begin I'd like to mention that our thoughts are with all those that were impacted by coordinating and or wishing him a speedy recovery.
On today's call I'd like to take some time to review our various lines of business on a pre covert basis and they provide you with some insight in how we see COFINA impacting our business most of which happened after Q1.
Our personal auto line continued to perform well topline results include the headwinds of exiting certain GE relationships.
And to consumer channel continues to perform extremely well realizing year over year gross written premium growth of each person. Despite the impact of the last half of March which will get incentive it.
I direct to consumer platform enhancements are starting to pay dividends.
Reminder, we set out to rebrand our direct auto brand.
While taking to much more data centric approach to marketing and revamping our online experience for a direct auto.
The results are as follows.
Much higher brand recognition, leading to increased coattails within the brands markets and target audience. We're now able to target customers based on projected a lifetime underwriting income, which had the desired impact of allowing us to actually decreased our marketing cost per application while still growing.
And lastly, a much higher online quote completion rate as a result of a much improved mobile user experience.
The recent launch of our latest version product is performing extremely well and we look forward to launching him in additional states along with launching our new mine online Midmarket product later on this year.
Our homeowners line, which experienced some growth when including the farmers Union insurance premium, which we didn't have last Q1.
Showing the benefit of many of the rate in underwriting actions, we took last year.
He's taken considerable rate action, most importantly, 41.7% in California, which represents roughly 15% of our homeowners book, which began to earning as of January while we completed re underwriting our brush exposure by excuse me.
We see this line being a key contributor to the PNC segments year over year earnings growth for Twentytwenty.
Well business auto experienced a decline in gross written premium a 15% due to underwriting and pricing actions on policies in some lines territories and policy limits, which drove the losses that we experienced in the past, while we didnt still experienced unfavorable.
Last development stemming from small business, though it was lower than in prior quarters and trending into right direction.
Our lender placed line continues to perform well our gross written premium growth was due to some new clients, which were onboarded, which increased the mills of mortgages that we tracked in line with our premium growth.
Turning to accident and health.
Stop loss and individual products continued to perform extremely well, while benefiting from recent product enhancements, enabling us to be extremely segmented with our pricing.
Later on this year, we look forward to launching a new supplemental line, along with adding to our medical at work options and launching additional product enhancements, which should contribute to our top line growth.
Our Medicare agency experienced topline growth of over 60%. We're extremely excited about its prospects as we aim to launch a new online customer experience, which should be a leading platforms industry, while leveraging our carrier relationships old online marketing assets.
HM Teensy agency force to continue to experience solid growth numbers.
Now I'd like to take some time to provide you with an understanding about how the Covidien 18 pandemic is impacting our favorite the various lines of business that National General based on what we're currently seeing.
While our auto business applications did decrease from mid March to mid April it has rebounded nicely since.
While auto frequency has decreased it was partially offset by increased severity.
Bad debt expense due to speak moratoriums on cancellation policies for non payment.
And the unknown elements of bodily injury claims that could open up when policyholders feel more comfortable about seeking medical care again.
Both of any remaining net benefit is being returns to our policyholders via discount for the month of April pending regulatory approval and charitable donations. This system with Coolfit relief efforts.
With regard to lender placed insurance over the medium to long term as unemployment rates increase we would expect to see a modest increase to mortgage delinquency rate, thereby impacting penetration rates.
As a reminder, the way the swine works, we track loans for large financial institutions to make sure that customers are protecting to lenders interest into property with required property insurance, if a customer allows their homeowners policy to laugh a lender placed policies placed.
Joe This falls autonomy to penetrate nationally rates of policies to loans traps is low at about one person as.
As mortgage little currency rates rise during recessionary periods that penetration rate rises and premiums grow without incurring a significant amounts of additional operating expense.
Turning to accident and health, we don't currently expects to be material loss ratio impasse, while there is an impact from covering who visit treatment. It's generally offset by a lower frequency of elective medical care.
Turning to the topline impact at the onset of course, we saw strong demand for our individual products from uninsured individuals, which has shifted to demand from unemployed individuals that need affordable short term health insurance.
The group side sales growth has slowed slightly and we have seen lower employee counts with existing clients in the restaurants entertainment travel and hospitality industries, but those industries comprise under 10% of our total insured groups.
To give you a sense of what we're seeing our total insured members.
On the group side is down two and a half pursing since mid March, but still up 20% year over year on a net basis I would expect to see growth in the mid teens range.
Our balance sheet remains solid and I'm extremely pleased with our strategy to focus on it our investment portfolio and highly rated investments in solid industries with minimal exposure to travel hospitality and oil sectors.
Summary, we do not currently expected material earnings impact as result of Coolfit I'm extremely pleased with our Q1 results.
And we have an even greater appreciation for the earnings strengths of our diversified lines of business, which enables us.
Just thrives during these times with a strong auto block very nice counter cyclical lender placed an individual health lines into an underwritten niche health business.
Everything is made possible by a fantastic team members, who are able to work tirelessly to execute on our work from home strategy and come together as a single unit to make sure that the company continued to execute on serving our policyholders and delivering on our strategic initiatives at the.
Set of Cove it.
I already was to ensure a safe work environment.
For our employees and I'd like to publicly saying all those that were involved in making our work from home transition successful.
Given our strong results and outlook, we're pleased to be able to nail that our board of directors has authorized a 15 million dollar share repurchase program, which given where we're trading relative to book value into earnings should be accretive and the best form of returning excess capital to shareholders.
With that it's my pleasure to turn the call over to Mike winner for review of our financial results. Thank you Barry.
Let me go through the financial results. The company and then we'll take questions. After first quarter 2020, net income was 92.9 million, which compared to net income of 83.9 million in the first quarter of 2019.
Operating earnings were 105.8 million versus 89.7 million in last year's quarter.
Diluted operating EPS was 91 cents, which compares to 77 cents in the prior year quarter.
Our results in the quarter were impacted by 8.1 million of weather losses, which compared favorably to 12.1 million of losses in the prior year quarter.
First quarter 2020, PNC segment included 4.5 million of unfavorable prior year development, primarily driven by the small businesses auto versus 5.5 million of favorable development in the prior year quarter.
The accident and health segment reported 4.8 million a favorable prior year development versus 10.9 million of favorable development in the prior year quarter total developments of the company was 0.3 million favorable for the quarter, that's versus 16.4 million favorable in the prior year quarter.
[noise] trailing 12 month operating return on equity was 16.1% as of March 30, Onest 2020.
Fully diluted book value per share grew 1.8% from December 31st 2019 to $19.41 excluding accumulated other comprehensive income.
Fully diluted book value per share was $19.03 as of March 31st 2020, a growth of 3.3% from December 31st two so 2019, excluding AOCI.
As of as of March 31st 2020 are AOCI balance was $43.8 million as spreads, notably in our investment grade bonds normalize somewhat since the end of quarter. Our current AOCI I balance as of April 20, Eightth is approximately 121 million.
Yeah.
Updating for that our current updating for that our current AOCI a balance our adjusted fully diluted book value per share is $20 an eight cents.
National General's balance sheet remains very well positioned with healthy capital ratios strong liquidity and a conservative asset profile.
Our investments, which are primarily managed by our third party asset manager Blackrock focuses first on capital appreciation followed by investment income are highly diversified fixed income portfolio performed extremely well when the market hit its peak stress.
I would like to give some additional details about our two operating segments.
Within property and casualty gross written premium grew 4.5% to 1.02 billion for the quarter, including 49 million of additional premium from the acquisition of forms Union insurance in August 2019, personal auto grew 3.6%, reflecting continued investment in our direct to consumer distribution.
Servicing fee income decreased 7.3% to 110.6 million for the quarter, reflecting mix shift and decrease commission revenue as we shifted to two first party sales in the quarter supporting our continued growth in direct to consumer.
[noise] the PNC combined ratio was 89.9% versus 90.1%, excluding amortization of intangible assets the loss ratio was 66.6% compared to 69.4% in the prior year quarter.
The reduction was driven by pretax catastrophic losses of 3.1 million in the quarter versus 12.1 million in the prior year quarter.
Strong broad based accident year losses throughout the whole quarter.
On favorable loss development of 4.5 million compared to favorable loss development of 5.5 million in the first quarter 2019.
The expense ratio was 23.3%, which compared to 20.7% in the prior year quarter, which is primarily driven due the change in our auto quota share.
[noise] effective.
January Onest 2020, we exceeded 5% of our net liabilities under the quota share reinsurance agreement that is down from 10% at year end and 7% in the year ago quarter.
Overall, our Mont online auto insurance net trend, which is defined as loss trend divided by premium trend is moderately favorable, thereby helping or year over year accident results. We attribute this to continued favorable frequency trends, reflecting pricing segmentation and better risk selection from Erad, five oh product and our newest Rad.
So product as well as continued mix shifts.
Severity trends were moderately better than industry, which we attribute to mix shift and continue claims initiatives. As noted previously last few weeks of March reported frequency was lower due to the cobot 19 stay at home owners.
Within our accident and health segment.
Domestic domestic NH gross written premium grew 25.4% to 180 87 million in the first quarter of 2020 that is versus 149 in one Q 19, which benefited from strong growth in both our domestic and entered.
Domestic group and into the Internet in individual products.
We sold our Euroaccident H. business on December 2nd 2019, and will only have a domestic gain each operation going forward.
Surface and fee income grew 32% to 80.5 million versus 61 million in the prior year quarter. The growth was driven primarily by administration fees on our group insurance products as well as third party agency distribution and technology fees.
[noise] the accident and health combined ratio was 77.1, that's versus 84.2 in the prior year quarter, excluding noncash amortization of intangible assets. The loss ratio was 49.5, that's versus 52.5 in the prior year quarter.
The loss ratio reflects continued improvement in the current accident year loss ratio for both our small group self funded and individual products. We also had continued favorable prior year development of 4.8 million that's versus favorable prior development of 10.9 million in the prior year quarter, reflecting strong growth in the most.
Recent accident years in both grew in both individual group.
Expense ratio was 27.8, that's versus 31.7 in the prior year quarter, mainly driven by growth in our servicing fee income from group administration fees third party technology fees, along with the sale of Euroaccident for Q 19.
The effective tax rate for the quarter was 21.9% compares to an effective tax rate of 20.9% in the prior year quarter, the lower rate in the prior year was driven by lower state and foreign taxes.
Investment income was 29.7 million for the quarter, a decrease of 4.6 million over the prior year quarter to decrease reflects lower income in alternative investments and lower market deals.
On behalf of the board of directors to leadership team I'd like to Echo Barry's comments and thank the 9000 associates of National General for their professionalism and outstanding efforts to seamlessly meet the needs of our policyholders. These unprecedented times I'd now like to turn the call over to the moderator for questions.
Certainly ladies and gentleman source now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we asked about posing a question you. Please pick up your handset of listening on speaker phone to provide optimum sound quality.
Your first question is coming from Randy Binner around your line is lives. Please announce your situation and pose your question.
Good morning, B. Riley FBR head of a just a few kind of numbers questions and but actually first on the penetration rate and the lender placed book.
Okay, I think conventionally that goes up in a recession, but a number of mortgages in the United States are gonna be under.
Forbearance, a plants either through the G Cesar paycheck.
So I was wondering if if you if you'd kind of solved through that are thought through that and how that might affect penetration rate for for lender placed home.
Yes, Hi, Randy it's Mike Winter and thanks for the question.
With regard to lender placed business you are correct. So when we're talking about the broad based tailwind that that's going to provide for us with all the.
Forbearance and all the.
Regulatory.
Relief Thats being provided to that right. Our hope is that everyone does become current on the mortgages and we we don't happen in the general economy recovers, but if you look at the correlation between unemployment rate and mortgage delinquencies and penetration rates. There certainly is a correlation right.
And I think it's probably fair to to expect that late this year and through.
Most of next year unemployment rate will be above the historical average, which has manifested itself and historically low penetration rates.
So I think it will manifest itself just at a slower pace is a late late this year and through next year.
So I wouldn't expect a massive increase in that in addition to it I just want to also draw a correlation between this and what happened in 2008, which is it dramatically different situation in terms of that Theres a lot more equity in homes at the were up in 2008, so it wouldn't be modeling out any massive massive increases but I do.
You think it would be a nice increase.
Okay, and then and apologies if I missed this but.
I think you talked about.
Continuing to increase the growth of online quote activity.
Quote activity through mobile devices can you give updated figures there. The last I had was that 75% Oh quote activity is on mobile I think can be up.
And your direct to consumer book.
And that 20% of your overall book was direct to consumer are those still the right figures are have those numbers going higher.
That that would be the right figures.
A lot of that is.
Quotes be it start rate. So many policies, we've got to omni channel marketing approach, where many customers will start to quote on line and then finish it or in the store.
If that's a greater convenience to them but.
That's a that's definitely we see a high percentage.
On line.
Quote activity happening cotton mobile devices.
Great and then I'm, an accident and health.
On the individual side I think you touched on this a little bit the looking for maybe a little bit more.
Color you know in kind of in March late March and then.
You know in what we've seen from April have you seen increased demand for for individuals looking for supplemental and stop gap type health products and also have you seen any change in demand for Medicare supplement type products.
So.
The Medicare.
I haven't seen much changed and commence obviously your for year growth has been robust isn't really.
Follows a individuals has their aging into Medicare over the course of entire year and then you've got seven.
Individuals that are ready Medicare eligible switching playing says cetera that happens during annual enrollment period.
Oh later in the year on the individual health.
Side of things, we have seen strong remains more on the short term medical product, obviously coming into this year I believe we had a greater amounts of uninsured.
Americans today than in recent years, if they are looking for a coverage option.
Especially in light of.
Kofi to maintain a pandemic and that's the product lines had also benefits from.
Higher unemployment rates as well.
As more individuals are tasked with getting their own health insurance coverage as opposed to getting it from their employer.
So we've seen.
Most of.
So is elements be a tailwind for that product lines.
I guess, one more is as long as run the topic with with Medicaid Bakken Medicare do you do you perceive dispose coven environment is creating more demand when we get to open enrollment period when most of the sales happen as he said.
Is there any shift.
And how you might.
Try to market ahead to open enrollment period this year in light of what's happened.
No it to it's not happening gains dramatic.
Impact one way or not there on the way we approach a Medicare marketing, we've obviously got a very robust.
Robust a mail to funneling marketing assets.
Are you, both Oh, lefferts referrals from our property casualty and accidents and health.
Actual results to where we've got a project.
Are we hope to launching new.
Online experience for individuals that are looking to get educated or purchase a Medicare which is launched in coming months, but I wont. So we're not banking on.
A higher amounts of demand.
As a result of coffee.
All right I'll leave it there thanks.
Okay.
Thank you and the next question is coming from Matt Carletti match. Your line is life. Please announce your situation I'm pose your question.
Hey, Thanks, Good morning, Matt Carletti JMP.
Randy covered a little bit a ground there, but I had a couple other questions.
Mike maybe following on the LPI book and mom and appreciating your comment that this time around at the very different situation I'd say last recession, but just curious you historically in that book or whether it's as you guys have run it or under prior ownership where have those penetration rates gone where did they peak in the last recession kind of.
Again, keeping in mind that that's up that's an outside number that that might not be likely this time around.
What we're currently at thinking is of that for each raw points increase in mortgage delinquency rate, we would expect to see call. It a 15 basis point increase and penetration rate that's the way.
We're thinking about it.
Okay. Thanks, very very helpful. And then just one follow up on the net investment income in the quarter, Mike you talked about alternative investments dropping that down could just talk a little bit about any timing issues, there lags or otherwise in terms of how that gets reported so we can think about.
So the bounce back the recovery might look in future quarters.
Yeah, We got to review we received additional information is really on our life settlement portfolio.
Which okay got updated with some mortality tables on that so I think that reflects the newest mortality tables on her life settlement portfolio, there's really not much more than that I don't anticipate that a continuing we update on as we get more information. We can do you do evaluation of it but I don't think this.
Much more in that.
Okay, great. Thanks answers and congrats on the quarter. Thanks.
Thank you and the next question is coming from Jeff Schmidt check. Your line is life. Please ask your affiliation and pose your question.
Hi, Jeff Schmidt with William Blair Good morning.
Questioning India in each segment the losses, there, obviously down quite a bit how much that that is driven by frequency and then I guess, how much is their benefit from a mix shifts there with the stop loss business growing at such a high rate.
Yes, so so I think where you're alluding to is maybe building off of some of the Barry's comments with regard to frequency trends in the industry as a whole as people not seeking are not getting out and getting a medical attention.
So that there is some benefit of that but again I I caution that because Ah you know, there's going to be pent up demand right that will ultimately unwind out through through the remaining part of the year. So I went just to extrapolate on that however.
That that was only there for a small small piece of the quarter right. The business continues to perform well with the underwriting that doing as well as our continued mix shift.
Yeah, just said had to that during a quite our we.
Seen a lower frequency of large losses on our group.
Stop loss business.
Which if there could be two to chance or better upfront underwriting and.
Our approach is really to half within our underwritten health lines of business.
Hi, good segmentation.
So we definitely look to and grow those lines of business and Threem fast start savings from the segmentation until lower base rates for all of our customer, which should further widening the gap between us and our competitors and enable us to continue to grow.
Within the segments of half we are at that are most attractive to us within how flights that worry.
Okay.
Great and then.
On the servicing fee income and pain age I think you'd said the Medicare piece was up to 60% what is how much of the book is that I guess could you maybe discuss see the other drivers of that it sounds like there's a couple components that drove that.
Sure.
I believe.
With.
That the Medicare agency revenue for the quarter was roughly.
11 $12 million some are in that range correct me, if I'm wrong, Mike and thing, we obviously have our various technology.
Offerings that are seeing some nice growth as well we.
Have our our lead cloud and quoted.
As a which are I continue to gain traction in being able to sign up more data providers more aiotv providers more a carrier is that enable all the various parties to integrate with done with one another seamlessly once.
Europe on that platform.
So those are the two drivers of our fee.
Income tax we're seeing the h. side of course, along with.
Related fee income.
Income revenues that we would see for from the short term from the group business.
Which charted fees for accessing met met the TP fees for extra things that medical network.
Et cetera.
Yes, so just outside if you look Jeff a page 11 of earnings release, we bifurcate the fee income so very synbiotics, what Barry said or third party fees are up about 32.7%, which includes the Medicare that technology and then 33.3% is the group business, which is a little bit larger than that so in total our search.
Recipient comes up 32%, which is.
We feel good about.
Okay, great. Thank you [laughter].
<unk>.
Thank you and there were no more questions in the queue at this time.
Great. Thank you all for joining and we look forward to seeing you next quarter take care.
[noise]. Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time of have a wonderful thing. Thank you for your participation.
Yes.