Q1 2020 Earnings Call
Please standby were thought to be.
Good morning, and walking.
Gosh in other 2021st quarter.
[music].
First quarter earnings release presentation and financial supplement.
And our available via its website www dot dot com.
Speaking today will be Dino Robusto yeah.
<unk>, Chief Executive Officer and.
Yeah.
Officer.
Following their prepared remarks, we will be opened up we will open the lines for questions.
Today's call May include forward looking statements and references to non-GAAP financial measures.
Forward looking statements involve involve risks and uncertainties that may cause actual results to differ materially I'm not statements made during the call.
Concerning those rose just container.
And then.
Most recent.
In addition, the forward looking statements speak only as of today Monday May sports 2020.
Yeah, they expressly disclaims any obligation to update or revise any forward looking statements made during this call.
Regarding non-GAAP measures reconciliations to the most comparable GAAP measures and other information has been provided in this financial supplements.
This call is being recorded.
During the next week, the called May be accessed on C. and he's web site.
If you were reading a transcript of this call. Please note that the transcript.
For accuracy, that's it may contain transcription errors that could materially alter the intent or meeting of the statement.
With that I will turn the call ever to see an ace chairman and CEO.
So.
Thank you Jennifer good morning.
Good to be with you today and I Hope you and your families are coping well in this difficult start.
As our nation in the World addressed the challenge is brought like over 19.
I am honored to be a part of an industry that continues to meet its commitment.
Provide certainty and these uncertain gone.
During this crisis or industry will be resilient and remain a strong factor in the recovery of the you worked and world to call them.
On behalf of all of our employees.
You get a acknowledges and things are first responders and healthcare workers.
Well listen courageous efforts the events every day.
And we are grateful for all the central workers, who continue to go to work each day.
Right and key service and thank God, we all depend upon.
I'm Grateful you got a employees who have embraced this your work environment.
And your to manage our business in operation so effectively.
I'd also like to acknowledge our government leaders across the nation, who are working tirelessly.
To keep our citizens date and to respond to this pandemic.
We will now turn to the quarter result, and following that I wanted my early thoughts and all the industry issues surrounding covert 19 late to walk portfolio.
Our first quarter results continue to reflect strong underwriting performance accelerated price increases.
A robust growth in our U.S. operations.
Offsetting the strong underlying underwriting performance were losses in our investment portfolio.
Economic impacts with Golden 19.
Core income for the quarter was 108 million or 40 cents per share.
Looking at the combined ratio for the quarter was 97.5%.
Losses were 75 million Frida, which included 13 million June 19th.
The underlying combined ratio was 93.9%.
Reflects a one point improvement from the first quarter of 2019.
Underlying loss ratio was 60.4%.
In the first quarter, which is a slight improvement from the first quarter of 2019.
<unk> expense ratio was 33.1% into first quarter. This is little more than a half a point lower than both Q4 and the prior year quarter and is largely due to stronger net earned premium.
As we have discussed in prior calls one kind of our strategy has been to hold and greater in the expense ratio flat, even while we investment talent technology and analytics and leverage goals to reduce the ratio.
Strategy has continued to positively impact our results.
While positioning us well for the future.
Well, it's written premium girls acceptance in New York Walkers person for the border.
Net written premium growth was plus 6%.
For PNC over all the growth numbers were swept the simplest three respectively. Both of which were impacted by the re underwriting in international which is we have mentioned before well be largely completed this year.
Gross written premium gold, what's blossom person in our specialty segments breaks down there.
Strong growth in financial institutions, and management liability was largely offset by underwriting actions energy services portfolio.
Commercial gross written premium growth was very strong that's what's working person.
Our international segment gross premiums declined 5%.
Alright, and research and dynamic is exactly as planned.
Achieving the strongest level of rate increased importantly, ballpark portfolio or in most in need of rate in our country their strongest in the most profitable cohorts of our business.
Rate increases, where a person into quarter, one calling from the fourth quarter.
It's continues the pattern of stable both in rate increases over the last two years.
We're very happy to see continuation of larger rate increases in virtually all.
Richard was 82% this quarter two points lower than the fourth quarter, largely due to our international raging services strategy.
Well no business into border grew by 3% year over year.
Right periodically emphasize our success of recruiting top talent and this was particularly during the first for.
In addition to our new CFO morality, who I will introduce shortly.
Well, let you not press releases over the past amongst the we named Bob Hopper to be our next chief Actuary, and then friends ready to be our new Chief claims officer, both our top industry veterans with deep expertise in their respective field.
We're also pleased to highlight that model gone has joined us as our chief information Security Officer.
Brings more than 20 years of experience in cyber security would be cloud application security.
Turning back, though I want to walk him into our analyst calls you will recall that we announced that Elmer Alison moved from being our chief risk officer to being our CFO.
Yes, you do with Euro expertise Oh, it's a strong background and investments in finance and he is also managed or one off long term care business for several years.
Having worked with all since I arrived that DNA I am confident you will probably you interfaces with it and what that I will provide more detail on our segment results as well as are the results.
Okay.
You know and good morning, everyone not to be here today seem to see if the low you name.
No our interesting times can step in Michigan.
Students GE and everything like first role overseeing investment and Treasury, how prepared you always challenging period.
Oh property and casualty operation pretty cool in come along and $22 million in first quarter.
Pretax underlying underwriting profit was honored $7 million.
Fourth.
Quarterly pretax underlying underwriting profit next $90 million.
The team he combined ratio was 97.5%.
Q4, 0.3 points of catastrophe losses.
Bubble Park development.
<unk> seven.
Catastrophe losses.
In fact, it 'cause Nike technology $13 million pretax was Europe, one seven points.
Last thing should we then okay.
Losses.
Underlying combined ratio was 93.9%.
She consecutive quarter underlying combined ratio below 95%.
The underlying loss ratio was 60.4% you century, she was 33.1 person.
In terms of operating segments. The combined ratio for specialty was 91.3 person this quarter.
He's the one point.
Your first quarter 2019.
The combined ratio includes gave a ballpark your development of 1.5 point.
And 1.1 points from catastrophe losses.
Favorable prior period development, largely driven by favorable outcomes and surety.
For accident years 2017 private.
Underlying combined ratio for specialty was 91.7% score.
1.8 points improvement compared to first quarter 2019.
Underlying loss ratio was 59.5% makes sense Ritu, we 32 person.
Venture shoes and pools like your 0.8 point compared to first quarter 2019, largely due to good net earned premium.
The gross written premium growth captain <unk>, 2%, especially for the quarter.
Negative 1% wouldn't bases.
We continue to increase at 9% up from 8% linked quarter.
And she was 84% this quarter, which was down a point compared to last quarter.
<unk> points compared to full year 2019.
This is largely beams often are catching on health care business.
18 18 services.
The good news buying what are largely due to health care.
The combined ratio for commercial was one of 1.9% this quarter.
New York, one six points higher than first quarter 2019.
The combined ratio includes seven points to catastrophe losses.
Negligible prior period development.
The cat, while they're largely due to again.
Nashville tornado in early March drunk caught Arkansas, Missouri, other states and make much.
The underlying results are very strong on multiple sponsor commercial.
Underlying combined ratio was 94.9% this quarter.
1.6 points improvement first quarter 2019.
Yeah underlying loss ratio of 61.1 person I mean entry shows 33.2%.
Then three she was approved by the airplanes excellent compared with first quarter 2019 in the luxury buyer pool.
Gross written premium growth.
This is 14% in commercial.
Quarter in the net was 12%.
Rate change is particularly strong in the quarter at 8%.
Three points from last quarter.
And she was a healthy 85 person.
New business grows it was quite strong again this quarter at 21%.
Broadly distributed across target market segments.
The combined ratio for international was 19, 99.9% this quarter.
This is a 220 improvement compared to first quarter 2019.
The underlying combined ratio for international was 95.7% this quarter.
The underlying loss ratio was 60.3 preparedness and expense ratio was 35.4 person.
Eccentrics your was improved by approximately two points compared to first quarter and full year 2019, largely due to lower acquisition costs.
The gross written premium declined 5% international for the quarter.
Net written premium declined 15% for the quarter.
The lunch differential between gross and net change, but usually the timing of a reinsurance treaty with minimal.
Rate change was strong again this quarter had a person.
You mentioned was 72% this quarter, which is consistent with most of 2019.
Shifting our re underwriting strategy.
Unlike in group segment produced $4 million or in some quarters.
No in underlying drivers were consistent with their breakeven expectations.
Finally, our corporate segment Threed core loss on $18 million in the third quarter.
Pretax net investment income was 320 mile $29 million in first quarter compared to $571 million in the prior year quarter.
Change was driven by our limited partnership and common equity portfolios, which can be pretax losses on it and $25 million.
Pre tax income $96 million during the same period last year.
We can't net investment income from a fixed income portfolio, the $449 million for the quarter.
Compared to $465 million in prior year quarter.
Pre tax effective yield on a fixed income Holden.
On 6% leased portfolio continues to provide stable earnings.
In addition, pretax investment losses for the quarter, which more than $60 million.
<unk> $31 million gain for the prior year quarter.
These losses.
The primary primarily driven by the mark to market.
<unk> preferred stock investment.
In addition to credit impairments of certain fixed income Holden.
Our unrealized gain finishing on our fixed income portfolio stood at $2.1 billion would be ended the quarter.
From $4.1 billion at year end.
The change in unrealized primarily driven by the broad increase you credit spread across the market.
Dominantly impacting the dollar value of our corporate bond homes.
Well, we hold a diversified fixed income portfolio overall credit ratings.
She didn't get deeper deterioration across markets adversely impacted our portfolio value during the month of much.
As these markets and shown signs and keep opening them on April.
The first is broadly decline pretty favorably impacting you guys. Good luck fixed income portfolio.
As of the end of April the unrealized gain on fixed income portfolio increased by approximately $900 million on a pre tax basis.
To nearly $3 billion.
Likewise, we've gotten into broader markets has increased by about one the partnership.
Equity non redeemable preferred stock investments.
16 cannot support our Pinky liability.
Got the duration of 4.1 years at quarter end in line with par portfolio targets.
The effective duration, but fixed income assets that support our lucky loop liability was 8.7 years of Cougar and.
Slide 14, and 15 and earnings person teaching Lucky additional detailed the investment results and the composition of investment portfolio.
Our balance sheet continues to be extremely strong.
At quarter end shareholders' equity was $10.4 billion for $38.18 per share.
What that will go to decrease in the unrealized gain position.
The payment of the special dividend during the quarter.
Shareholders equity excluding accumulated other.
Preempted income was $11.4 billion worth $42 in 12 shares per share 12 cents per share.
A decrease of 1% from year end 2019.
When adjusted for the $2 from 37 cents dividend per share paid during the quarter.
We continue to making it very conservative capital structure, low leverage ratio well balanced debt maturity schedule.
At quarter end, all of our capital adequacy credit metrics remain above target levels supporting our credit ratings.
Like 12 of the earnings presentation provides additional information on our balance sheet metrics.
In the first quarter operating cash flow that you want and $12 million.
In addition to a positive operating cash flow, we continue to maintain liquidity, one with cash and short term investments.
Well, we maintain ample liquidity within our investment portfolio.
Thank you booked a revolving credit facility and if they can all be line of credit.
I will remind you better long term care policy do not have any cash value and that's policy surrenders not constrain our liquidity position.
Overall liquidity position remained strong positive operating cash flow and sufficient liquidity holdings to meet obligation and withstand significant their business variability.
Slide 13 of the earnings presentation provides additional detail with respect to our liquidity profile.
Finally, we're pleased to announce a regular quarterly dividend of 37 cents per share.
I will turn it back you know.
Thanks So.
Before we moved to the question and that's a portion of the call. Let me provide some perspective on the pandemic and our portfolio.
The play notices we have received today are mainly business interruption notice is related to our property for.
So let me start there.
Property policies require direct physical damage to the property from a cover apparel for coverage through attach.
And our property policies, whether it here in the U.S. for international all have exclusions barring coverage for viruses.
There are a very few policies what coverage may exist on small participation in our Lloyd's operation, but the total with exposed to the minimum.
So with respect to business interruption on property policy exclusionary language. It does not provide coverage for covert 19 and that structure, we never collected premiums for it.
Now, let me turn to an area that I have commented on during several of these falls aging services.
And I wanted to first remind you of the composition of our book.
Our aging service is predominantly a medical malpractice professional liability book with some property cover its been a small amount of auto.
Importantly, we write essentially no workers comp coverage is less than one kristen.
Our work on premium volume and it is written over a very large deductibles.
This is also true for our broader health care business beyond dating services, which is also a professional liability portfolio with minimal workers comp exposure. The front line health care providers. Additionally, we don't like coverage her first responders.
Moreover, got aging services. That's all you have said on prior calls we have been working for some time to obtain their rights terms and conditions for the exposure and we have walked away from accounts when we could not a cheap them.
Our current professional liability exposure, it's 26% lower than a year ago, and 40% lower since we started to take significant underwriting actions.
On the policy, we do it today, we have been achieving significant rate raising deductible and tightening other terms and conditions. We expect these actions to mitigate our exposure to covert 19 claims in this portfolio and today, we have received relatively few notices.
From our agent services insured.
But these are early days than we are monitoring the situation closely.
Importantly, a number of these notices are in states that have an accurate immunity for health care professionals and facilities.
Whats your limit unwarranted liability claims.
Against this critical industry.
With regard to other healthcare professional liability segment within our book.
A large component of our premium volume comes from non truck line health care professionals, such as physical therapist.
Councilor.
Pharmacists and other similar classes.
We also have a meaningful dentist programs.
And it's important to know across all other healthcare professional liability segment.
We have seen significant reduction in reported claims due to shelter in place restrictions.
Switching to surety now or do you know.
We are a large successful surety writer, but the balance portfolio.
Both commercial and construction risks.
Our commercial book.
Includes a sizable portion of smaller compliance break surety bonds that have if the work we performed steadily throughout any economic conditions.
Our construction portfolio.
Largely consists of a diversified group of financially sound contractors.
That I've long term relationships with us.
So a great extent most of the contractor accounts in the portfolio participate in parts of the economy that had been beans, or central cooperation separate continued and many of the accounts have expressed having a meaningful backlog.
Work orders.
Given the historical success of our bond theme. We believe we are well positioned to withstand the current environment of course, the length of the recovery is still difficult to predict.
So we should have much more clarity by the time of our second quarter call.
So any longer term potential impacts.
The final coverage area I wanted to highlight a strict credit.
I'm, sorry, I've mentioned on prior calls this it's been a small part of our Lloyd Syndicate portfolio and this book was placed in run off in 2018.
We now have less than 7 million in premium remaining.
Nevertheless.
We expect to see some claim activity from that portion that still remains in our first quarter charge includes some potential trade credit losses.
The first quarter charge also includes the provision for legal and other experts retained body. Our claims department as we work through the pandemic.
A few last comment.
From a rate perspective, although there are a number of unknowns with gold at 19, I do not believe the dynamics that underpin the hardening market over the past 18 months a fundamentally changed.
If anything.
Outlook for the protracted low interest rate environment has deteriorated.
So I think rate movement should continue at the current rates throughout 2020.
And we have seen that in April.
No premiums overall will be impacted from the locked down and economic slowdown.
Which will likely hurt our top line growth like great growth later in the year and this will also put pressure on our expense ratio.
So we will focus on managing every dollar of discretionary expense. However.
We do also expects to continue to make necessary investments in talent technology and analytics has worked through this pandemic.
In addition to updating you on loss reserve impacts at the end of the second quarter, we expect that much more clarity on top line premium impact and expense impact, which we will provide.
With that we'll be glad to take your question.
[noise], yes to ask a question on today's call that as star one on your telephone keypad.
And we'll go first to Jeff Smith with William Blair.
Hi, good morning.
Yeah.
Hey, it's missed it but it did you.
Say to you have to any cancellation policies at all.
No that's not a coverage we have there maybe some small little freebie on some international but we've looked at all or those and those limits are totally de minimis.
Okay.
And then into specialty book about how much of that is.
You know when do you see much risk there for for covert 19th.
Oh, you know a as we've indicated in the past yet we you know it's not a large portfolio do you know for us, but it is an area that we have been focused on and we have been growing your look I mean, it it's clear that there's been a tremendous stock price.
Drops and whatever you see that.
You know, it's a you're going to see some elevated class action activity.
Truthfully I think this is going to end up being much more of a defense calc scenario.
The stock clubs were very very broad based from the pandemic and I think it's difficult to establish.
Director, an officer accountability for the job.
Right Okay.
And then just Werent. She did Smith, how are you seeing a pretty big drop off.
Demand there good is that mainly.
Core teas.
Yeah, Yeah, it's mainly vehicle warranty.
We have as you know we have the large all California cellphone programs, but those are.
Oh cap, yes, we ensured a captive so you're seeing a obviously some drop off or in the warranty along the way. It you know that drop off that you see on on sales and new cars et cetera.
Okay. Thank you.
Thank you.
And once again to ask a question that star one on your telephone keypad.
Well go next to Meyer shields with KBW.
Great. Thanks, Good morning, and thank you very much for that as good or do you know on your book of business did you bring I held the line. That's us [laughter], usually can lines of business school, which the $15 million charge was.
I'm, sorry, so again.
The so the $50 million virus related charge in the first quarters, you put them with lines of business that was more.
Yeah. So the line of business that we put a actual which was for whats trade credit even though you know what is on a run off we still had it takes a 7 million and so what you see there.
We did our reserve reviews of all line.
Yeah, you know the drop in commodity prices, especially on the oil side.
The drop on the oil prices you know that that's going to put a screen on on trade credit until we put up well money for trade credit losses and under what is just the legal experts cost that's the claims department.
Typically do on a catastrophe, but clearly in something of that size and Ah till the estimation for those costs as we play to the pandemic are also in a data now it's not any number of like called submit defense costs.
For the future, we hope to have a much better picture a buyer as we oh I get to that second quarter or to be able to put together a some other up the Jack and therefore, the fence golf.
Okay. That's it that's helpful.
You could sort of wrap up all of your thoughts on workers compensation.
In General I'm wondering if that's what do you expect reinsurance come into play and second of all.
Let's see it makes sense is on states that are expanding presumptions considerably.
Yeah. Okay. So appreciate the question it obviously complicated at so many different let's start with Ah Ah reinsurance if I may and then I'll give you my sense on some of the regulatory.
We do have a work comp a reinsurance protection for large events and ice provides a minor protection for on a follow before fortunes basis by the way. It provides 275 million up protection access all of our 25 million retention.
And we get to determine what constitutes an event and we can get select the consecutive 160 hour time period.
We're combining losses, so some very strong reinsuring a protection I look so let's get to Ah Ah the presumption doctrine.
And do you now or in some states the officials have supported.
The coverage for coverage consumption for both first responders in the healthcare workers and as I said, Oh flunked lying healthcare workers to make up a very small part of our work comp portfolio and I went to that in detail because we do like medical malpractice and.
I want it to be clear that it's not a work comp a portfolio. We also we have no work comp.
For first responded.
Now there are a few other states unfortunately, relatively few where our broader consumption for central workers.
Its been per BOE, then walk it would add in my opinion significant predicted cost through the system overall, because you know those exposure, we're not underwritten or they were not price and Oh, you know ultimately are gonna be sugar GLEI.
Already struggling businesses. So oh, what we are doing its together with many of the other member companies of all Nipisi. I is you know, we're working with policyholder groups and that's very important because the policy older groups themselves are pushing back but the obvious we do not be subsequent Kong consequence in available.
Study.
And they're pushing back on broad extra contractual retroactive and you know so look we're going to need to see how that plays out which is why I suggested we wait for the second quarter.
Obviously I've seen a drop in claim.
It's bound from workers compensation, because all of the lock down.
So then you got a fee that you know for them up but net net basis, you got to factor in a little bit LTV.
The exposure that's gonna come in Kuwait and in the meantime, when a fight tooth and nail.
On a avoiding a very cool off because I'm sure because the yen given cutting walking despite your faith and so we'll see how this all shakes out Ah why we really have to wait to see out which itself.
Okay. Thank you very thorough.
Yeah. Thanks for the question.
And at this time there no further questions.
Okay. Thank you everyone appreciate that you're talking about please be facing be healthy.
Thank you.
This does concludes today's conference we thank you for your participation.
Oh.
HM.
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And.
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