Q1 2020 Earnings Call
Ladies and gentlemen, thank you for funding by and welcome to the pro side specialty insurance first quarter ending school on webcast at this time.
But I never listen only mode. After the speakers presenting shrunk there would be a question I'm sufficient asking questions. During this session you would need to press star one on your pitiful.
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The conference over to speak actually didn't everybody. Thank you. Please go ahead Sir.
Thank you.
Welcome to the first quarter 2020 earnings conference call for Procyte Global Inc. with me on the call today, our CEO and President Larry Hannon, Chief Financial Officer body Patel.
<unk> underwriting and risk officer, Bob Bailey, and Chief investment Officer negotiation TD.
Following our prepared remarks, the call will be open for questions yesterday afternoon, we issued our first quarter 2020 earnings release, which is available on our website at investors Dot Procyte specialty dotcom.
Let me remind everyone that during this call management may make comments that reflect their intentions beliefs and expectations for the future. We caution that such forward looking statements are not guarantees of future results and that actual results may differ materially from those forward looking statements.
For a discussion of some of the risks and important factors that could affect our future results in financial condition.
Please see the cautionary language regarding forward looking statements in Yesterdays earnings release, and the risk factor section of our reports and filings made with the FCC.
Except as required by law, we undertake no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise. Additionally, during today's call. We will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance a reconciliation of these non-GAAP measures to the most comparable GAAP.
Sure as can be found in our earnings release with that I'd like to turn the presentation over to our CEO and President Mariana.
Uh huh.
Thank you Dean and good morning, everyone.
To start I'd like to take them all the to recognize the amazing efforts of the health care providers first responders and all those you sacrifice brothers everyday in the fight against Scoping 19.
Half of every one of Procyte I, Thank you and wish everyone good health and safety.
With regard to our business I would like to start by welcoming a new board Mommy and three recently hired members to our executive team.
And Molesky, a 25 year veteran of into former CFO at Markel nominated for election to our board at our annual meeting of stockholders in June.
Donna beyond its joined US at the end of 2019, as our Chief claims officer, bringing more than 30 years of claims experience to Procyte and having held senior leadership roles at Maxim specialty coffee specialty and North American rig services.
Santini joins us as our Chief investment Officer, having spent the last 20 plus years at new England to asset management.
And Jeff Eric L. joins us as my Chief of staff and head of capital markets, having worked for nearly the last two decades, Lord Abbott and T. Rowe price I believe each of these individuals are tremendous additions to our already strong board M. leadership teams and excited to have them as part of our company.
As a reminder, retrocyte, we aren't agile profit first underwriting focused property and casualty ensure that specializes in specific industry niches, we offer innovative differentiated products services and third party solutions to our customers often writing multiple coverage lines for particular customer.
We do live our offerings to a selective limited distribution network and finally, we closely manage risks the work at selection strong execution and purpose for women's management.
I've been cobot 19, the economic hardship faced by millions of Americans, social inflation, and an opportunistic plane as far I think it's important to highlight our risk selection and remind our stakeholders, where we do not have exposure.
We do not right publicly traded Dino.
Medical malpractice mortgage insurance accident, and health, we do outright cancellation opioid manufacturers, where distributors war hospitals and nursing homes.
Further to that our workers comp book has minimal exposure to hospitals and first responders.
Our risk management approach also entails managing our gross and net.
Excluding our workers comp book, which represents about 10% to 15% of our premium approximately 85% of our policies have gross limits of $2 million or less.
I'd like shared the past our goals over the long term RT generated double digit our way along with double digit growth in gross written premium and book value per share.
We ended 2019 on the strong, though and that strength continued for the first two months of 2020 prior to cope with 19 dislocations.
Given the ongoing impact of gold with 19, we will not meet these goals and 20 Twond I remain very confident our business and our ability to execute over the long term given our risk selection niche approach an opportunity to deploy capital at favorable terms, while we have no unique insight into what the future holds we do take a very granular bottom up.
Bookstore business I feel the circumstances warrant a sharing our latest forecast for 2020. So you can better evaluate our company during this unusual.
Gross written premium for customer segments could decline, 10% to 20% from 29 team with the most significant koeppen 19 impact expected in the second quarter. Our net loss ratio has the potential for one to three point increase from cold related claims and expenses in the current accident year.
On the expense, Brian potentially higher costs from bad debt provision in giving state mandated deferrals of collections and the impact of lower written premiums could negatively impact the expense ratio.
Finally on net investment income, we expect our core fixed income portfolio, excluding limited partnerships to yield approximately 3% for 20 Twond net investment income volatility for the remainder of 2020 does remain possible from our limited partnership investments that said our longer term objectives of 62% loss ratio.
And 200 basis point expense ratio reduction over the next three years remain appropriate based on what we know today.
Our team continues to execute on all the activity that underpin these metrics evidenced by our Q1 operating results.
We will revisit our objectives accordingly, if we determine that covert 19 is going to have a longer term impact on our top one.
As I look forward I believe our niche strategy exclusive distribution arrangements and careful exposure management will leave us well positioned for profitable growth as we exit 2020 and execute against a favorable backdrop.
I would buy now like to turn the call over to our chief underwriting and risk Officer, Bob Bailey.
Thanks, Larry.
Many of you have heard us talk about how pro site with art maturing patient limited distribution is different.
We recognize that the impact from this approach is hard to see from the outside and can take some time to surface.
Each of our niches is run like a single purpose underwriting organization working to dedicated and limited distribution partnership such that we see market dynamics very clearly in very differently through that lens.
This better enables us to do to do to really important things for an insurance company maintain our underwriting discipline and streamline execution.
We are able to anticipate change respond directly to customer needs and react just a little faster than others. We think there is a significant cumulative effect and advantage from this approach over time.
Today feel like one of those times when our approach is demonstrating advantages in a very tangible way.
I would like to highlight a few of these examples were maintaining our underwriting discipline in our capacity for streamlined execution are resulting in better outcomes. We are among the largest insured of touring entertainers in the world. We have not written and cancellations, which is a significant product line for that niche our team.
As long felt.
10 years or more that the rate for this risk was significantly under priced so our focus and longstanding discipline has helped us to avoid the current crisis, which as you know have affected that line severely.
On the opposite ended the spectrum, we used to be what are the largest excess workers' comp right writers in the United States. We expanded that this business over a 10 year period, combining increasing rate in self insured retentions to deliver great underwriting result.
Market conditions, however started to shift in that niche a couple of years ago pricing was not as strong and more importantly exposure to potentially catastrophic claims were increasing many of our insurance were first responders and we were growing concerned about their safety specifically the anti police sentiment we exited this business in the first.
Quarter, 2019, obviously, not expecting cobot twod to occur, but finding ourselves well positioned in light of it due to maintaining that underwriting discipline in our recent past.
Here's an example, where execution to streamline.
Taxi bus operators were immediately and severely impacted by kopec 19, and the economic shutdown that surrounded within hours literally colors of the bands on international flights, we were hearing directly from our taxi customers.
As the first schools started to close we were hearing from school in charter bus operators long before regulators and I mean long before weeks and so in some cases before regulators, who ordered and premium and and other regulatory actions. We were already working with these operators to just premiums to align with these new reduced exposure.
We did not have to wait through tons, a day to maybe be able to see these problems emerge did not have to contact and work through thousands of agents. We were immediately able to leverage our niche approach to respond to these customers. When they were indeed in need of a very rapid response.
Now, let's talk about business interruption.
We have roughly 7300 property policies, 100% of which required direct damage to trigger business interruption coverage.
99% of these have specific virus exclusions.
The remaining 1% do not contain a virus exclusives, specifically, but do have pollutants and contamination exclusions.
Just 1% or approximately 80 or so policies are entirely apartment buildings, which were not closed or shuttered by any civil authority.
As far as rate and loss trends across our business, we execute rate at the next level alright needs vary by by niche and we've talked about that in the past earnings calls this quarter, we were very satisfied with their rate execution and achieved an overall rate of 6.8% excluding workers comp.
6%, including workers comp in the first quarter. This is an acceleration of more than 100 basis points versus the fourth fourth quarter of 29 Pete.
We continue to see initial loss picks at 62, reflecting the seasoning of newer niches and as Larry pointed out may increase throughout the year based on the ongoing assessment of ultimate loss and claims handling expenses associated with Kohl's at 19.
I'll now hand, the call off to body Purcell, who will discuss our financial results in greater detail.
Thank you Bob I will address underwriting and operating results during the quarter, our capital position provide color on our expense ratio and then hand, the call off to Niko Santini, Our chief investment officer, who will discuss the investment portfolio and its performance.
Gross written premium for customer segment increased $15 million for the quarter or 7.7% over the first quarter of 2019.
Total gross written premium declined $42 million were 16.4% from the first quarter of 2019.
Due to our exit of excess workers' compensation.
As a reminder, our exit of excess comp results in approximately $60 million of nonrecurring premium written from the first quarter of 2019.
Gross written premium increased across all SEC customer segments in the quarter, except for transportation, where we executed a targeted reduction.
[noise], our underwriting results reflect the loss ratio inline with expectations, 62%.
Which was not impacted by cat losses or prior period development.
It also reflects disciplined expense management our expense ratio was 35.8% did include about a half a point benefit from nonrecurring items.
We do expect premium declines and potential bad debt expense from Covidien team to challenge our progress on the expense ratio for the balance of the year.
We had strong underwriting results in the first quarter with underwriting income of $4.5 million and a combined ratio of 97.8% that compares to underwriting income of $3.5 million and <unk> combined ratio of 98.2% in the first quarter of 2019.
Net investment income in the quarter was $8.8 million negatively impacted by an 8.2 million dollar mark to market adjustment on limited partnerships during the month of March.
Excluding this real unrealized loss on a limited partnerships net investment income was flat compared to last year.
I want to note that we do not accounted for a limited partnerships on a lag.
And the effects of the investment portfolio of the economic downturn in March or fully reflected in our first quarter results.
Our investment portfolio.
At the end of March stood at $2.2 billion, an increase of 1.7% from year end.
The duration of the portfolio was 4.1 years up from 3.4 years as for the ended the year.
The tactical repositioning of the portfolio commenced earlier in the fourth quarter of last year continued through the first quarter and resulted in modest realized gains the portfolio was any net unrealized loss position [noise].
A $38 million at quarter end.
A negative change of $79 million during the quarter.
Our net income and adjusted operating income were adversely affected by the reduction in net income.
Which was attributed to the response of the credit markets to the emerging covet 19 crisis.
Our adjusted operating income of $8 million or 18 cents per diluted share representing an adjusted operating RMB of 6.2%.
This compares to adjusted operating income of $13.6 million were 34 cents per diluted share representing adjusted operating or a way of 13.3% for the same quarter last year.
Net income from continuing operations was $6.8 million or 15 cents per diluted share as compared to $13.7 million were 35 cents per diluted share for the same quarter last year.
As a reminder, our adjusted operating income excludes certain nonrecurring costs, specifically $1.4 million of IPO related stock compensation expense.
And the final 300.
$300000 of transition costs.
For our former CEO of an executive chairman.
On a fully diluted book value per share.
At the end of the quarter was $710.73 a decrease of 10.7%.
From yearend.
This decrease in diluted book value per share is largely driven by the net unrealized valuation change that occurred during the quarter.
At the end of March.
Since the ended the first quarter credit markets have improved spreads have tightened liquidity has increased and our pretax unrealized position recovered approximately $47 billion. So as of April Thirtyth, we haven't <unk> and a approximately 10 billion realized gain in the port.
Folio.
I'll close with commentary on overall liquidity and our debt refinery.
First on liquidity, we've stressed our cash flow for lower premium and collection delays from state regulatory actions and feel well positioned for what lies ahead.
We also have not drawn on our 50 million dollar credit facility.
We are actively engage with the credit markets and have a number of options. We are pursuing to refinance our debt prior to its maturity in November of this year expect updates on this topic on this topic by next quarter or sooner.
I'll now hand off to our Chief investment Officer Niko Santini.
As an aside we are thrilled that nickel has chosen to join our management team earlier. This year. We believe is experiencing insights will serve procyte well and his timing is perfect. So nico.
Thank you body.
Early in the fourth quarter, we began selling some of our triple B corporate credits and buying doubling in single a rated taxable municipal bonds and some preferred securities. The net result of the program was an operating court credit quality as our triple B exposure decreased from 30% at the end of Q3, 19% to 26%.
At the end of Q1 20.
Our unrealized position was negative 38 million at the end of the quarter and it is since recovered to approximately 10 million unrealized gain as of April thirtyth.
There was also 8 million of unrealized loss on fixed income limited partnerships and this portion of unrealized gains and losses flow through our income statement of the 8 million unrealized loss that hit our income statement in Q1, approximately 3 million has been recovered through April.
We have a totaled 65 million in fixed income limited partnerships and there could be some continued piano volatility from these investments quarter to quarter.
Please keep in mind that we do not currently hold any common stocks in our portfolio.
We completed a comprehensive analysis of the portfolio in the quarter and want to share some of the highlights with you.
Within our triple B allocation, which represents 26% of the portfolio.
We identified approximately 44 million of securities that may be exposed to rating downgrades Boeing and Marriott represent 40% of these holdings within or below investment grade allocation, which represents 6% of the holdings. We identified approximately 3 million a securities for inclusion in our Q.
One Cecil analysis. This resulted in a 300000 dollar allowance for the quarter.
Within our COO with allocation, which represents 7% of the portfolio.
We hold no securities rated below single way and our average rating is double play.
Within our CMBS allocation, which represents 4% of the portfolio. We hold no securities rated below single way and our average rating is double way.
As a result of analysis, we feel very comfortable with our portfolio positioning.
Turning to our floating rate allocation are floating rate securities were 16% of the portfolio at the end of Q1 down from 21% at the end of 2019.
You may recall that our floating rate allocation was identified is 33% of the portfolio at year end. The difference results from a reclassification securities our new investment accounting provider Numit asset management and better represents the nature of the underlying securities.
For example, some of the reclassified securities are fixed rate securities with a step up in coupon contingent upon call provisions.
We're comfortable with our floating rate holdings.
And our allowing them to naturally mature or be called out of the portfolio. So the Sally <unk> kitchen will likely decline further as the year progresses.
In conclusion, while we had an unrealized loss in the quarter. The portfolio was relatively well positioned to have the market dislocations and has returned to a modest unrealized gain.
Overall, we feel comfortable with our interest rate liquidity in credit positioning thing.
Thanks, and I will now I'll turn it back to Larry.
Thanks Nico.
While we are all dealing with heightened levels of uncertainty and challenges. We did not expect the face I'm extremely proud of our ability to handle them. Thus far beyond the impact of over 19, our first quarter results reflect strong fundamentals of our business and I believe are well positioned to continue delivering value to our stakeholders going forward with that I'll turn it over the operator to open the.
Line up for questions.
I see remind us so I'll ask the question you will need suppressed, though one on your telephone. So we draw. Your question. Please press the pound all husky. Please standby why we completed the coupons you roster.
Your first question comes on the line off year round cannot of Goldman Sachs. Please go ahead. Your line is open.
Thank you and good morning, everybody I.
I thought maybe Mike My first question would focus on on the guidance for the loss ratio for the remainder 2020.
Highlighted several of the lines, where you do not have exposure.
Maybe you can talk about why you would still potentially see a three point and Greece and the loss ratio.
Sure Good morning, you're on its Larry and I'll I'll comment on that and then turn it over to Bob a little bit too we didn't see anything from the first quarter, where we actually you know would automatically assume that we were going to have those losses.
But there's a lot of uncertainty and we thought that was prudent to kind of think about it in the context of being.
Stable going forward and thinking about what that uncertainty could be so for example, presumptive laws as there are evolving on daily basis in various states on the work comp side, we have to kind of watch that monitor that and if you see activity in the kind of an increase basis with presumptive law extending to first responders extending to potentially beyond first response.
Hundreds, we think that that could obviously have a negative impact.
On loss ratio, we feel really good as as Bob indicated on the business interruption side and then the other parts of the become a known where we just don't have an appreciation yet.
What that might lead into either on other lines or other niches and where that could be.
Yes, and impact so it really was from our perspective, you know a prudent.
No.
Preservation of what we think could happen on the comp line, if we were going to pinpoint it anywhere.
Would you add any other color to that.
No sorry, I think you said it well.
The uncertainty is largely around what happens in Scotland.
Who needs to be seen with a lot of moving pieces around regulation and legislations.
Maybe one follow up on that I, just want to make sure I fully understand the so the three points already contemplates potential expansion of our presumptive logs into all essential employees across various states is that correct.
The all part is the only one beyond that is my question market because we obviously don't have.
You know a significant lightings and comp across a lot of state. So it would depend on the state, but when we're seeing the big States think about it obviously, what just happened, California is the perfect example of that.
We do have you know as it relates to our overall comp book.
Significant portion of it in California, So when we're watching that that's our best estimate at this particular point as to what could have all again, we haven't seen it evolved in the book.
So thats why we didn't take you know that in the first quarter.
But it's just our when we're looking at the future and where we're seeing that potentially going and how that affects it that's where we came up with that and please recognize I am saying you know, it's kind of up to three points right. It could not materialize, we don't know, but we just wanted to make sure that as we position that for you is that if we were watching anyone particular, it's on the topline.
Oil focused.
Understood.
And any sense of what the percentage of the workers comp book.
Thats explosive central employees.
It all depends on how they define essential employees.
The state right, so thats, where it comes into play our traditional piece is very small.
So you know right roughly.
So as I shared before 10% to 15% of our premium so let's call it roughly $120 million of comp.
When we think about you know what those numbers look like we thought that less than 20 million of the written is enough what would have been Doug kind of natural first responder.
Bucket.
So not significant but again thats.
I have that conversation today and by Friday, we might have a different definition thats. The concern that we have at this point. There's just so much uncertainty that we are trying to figure out as we go forward.
Okay. Thank you I appreciate the color I'll re queue. Thanks.
Sure.
Your next question comes on the line of Macoutes off some trials.
Please go ahead your line is open.
Yes. Thank you good morning.
Good morning to talk about.
In your guidance your outlook for a down funded 20 more impact into Q.
That is just.
Just lower exposures with existing customers versus the challenges with the new business just a little more on there.
Sure Mark I'll start and then I'll hand, it over to boss tons and really three areas, where you look at this and for US you know you're going to have the new business can be the biggest part right. You guys are familiar with what we do and what our normal growth results are so we think about every year about 25% of our business coming.
From new and.
There are certain niches that are obviously more severely impacted that others, where you can't like that so thats a miss in the quarter, you'll have some businesses that don't make it right from your renewal base. So you will actually have some of that that impacts it as well thats actually the smallest part for US and then particularly in the second quarter. The biggest bucket comes from return premiums due to reduced exposure.
So Bob why don't you elaborate on those three buckets and start with the reduced exposure keys.
Yeah, what we tried to do.
Is bring us much of that.
The delayed impact through this sort of bleeding off a.
Month over month reduced exposures, we tried to bring as much of that forward as we could.
Yeah, and just look at Okay. What do you think the next quarter will be.
And try to deal with it before in terms. So so try to deal with it with Rightsizing those exposures, while they're showing an honor and basis.
And that's what that was my commentary around particularly that transportation segment that was so by far the artist it.
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Just the for the niches that that weren't as hard hit there there will be some shortfall as a renewal renews that used to be 100000 is now about 80000 or something like that.
That will linger as well we as we look ahead in the months, we sort of see the shortfall in new business as about equal to the shortfall and just smaller sort of renewal basis.
After we've sort of right size, we took care of the bulk of the problem brought it up recognized it early however, though those other two two factors. This is not something we could bring into the into into April as quickly as we could so those will linger overtime.
Hi.
Mark the other thing I would add right and this is the unknown that comes into this place right is that the the Rightsizing piece does come back you just don't know when right. That's the elements. So when we look at.
For example, we think that somewhere around 35 or 40% of whatever our second quarter.
This will be.
That could ultimately be something that we would become fact the question does is when do those businesses get going again, that's full rate and that late 2020 is that 2021, we have to do it. After book is that the new business opportunities eventually come back as an opportunity for us so the most significant nonrecurring element upcoming.
Got to Declaiming long term would be those companies that don't make it and obviously that's an unknown at this particular coin and we'll be able to report more out on that if we get successive quarters and see how that evolves.
On the.
Thank you for that on the expense ratio.
Any sizing you can give us you gave us the up to three points on the loss ratio above the expense ratio.
Yeah, we don't have that yet mark so we're going to watch that with the topline I'll be happy to share that future quarters.
But right now we don't have a great deal for that yet.
The only thing I would add the only thing I would add mark is that if the expense ratios going up it's more than likely related to bad debt expense. We have with these deferred premiums we've been very diligent merit managing you know all the levers with the disruption to our head.
<unk> growth has been constrained our t. any is down so theres a lot of things that we're saving it we're advancing.
But we are exposed potentially the bad debt expense. It if it's go if our expense ratio is going up that's primary primarily going to be the reason.
The.
Liquidity you had mentioned you did a liquidity analysis or kind of the stress tests do you feel good about liquidity could you maybe a share some of the specific on that.
Yes, I think we did a fairly draconian stress test, where we took the New York regulations, which basically postponed you couldn't canceled for no pay if there was no non payment you have to wait 60 days, then you could bill on installment basis, and we assumed that a great proportion of the.
Overall book.
Follows that kind of a direction now until we see second quarter play out we really won't know what the take up rate was but we assumed 70% of the premium started the deferred payment were usually most of the book is annual pay.
So it's fairly extreme and even with that we don't see a scenario, where we're having to sell any of the investment portfolio to meet operating cash flow needs. So we stressed that seven waste a Sunday, we feel pretty good about it.
Thank you.
Your next question comes the line of Maria Shields KBW. Please go ahead. Your line is open.
Great. Thank you good morning, though.
I want him a little lumpy was there a return premium in transportation in the quarter or without the actual drop off that you thought.
Are there was not a return premium in the quarter, that's going to affect the second quarter. The big issue that we had in the first quarter was you know a particular association that we Nonrenewed Bob you want to give some of the details on that that we chose the non renewal.
Yeah. It was we made the decision back in in December.
Actually maybe we'll remember December timeframe last year sent notice.
It was it was a subset kind of of our intermodal book.
Think of it just kind of like a master policy that.
It was worth about $8 million.
Premium.
And I believe it or and I believe the expiration date was March 1st So that's that's largely the impact you. So we see there.
There after the quarter.
Obviously, we would have projected at the segment level since we don't usually do things, obviously, you know disclose them at the niche level. The segment level, we would have normalized that over the four quarters pre IPO that but inside the quarter that was the real drop off you know.
Got it okay that makes sense.
So I want I misinterpreted, but it sounds like there aren't any aggressive short term expense reduction plan because liquidity of okay. My brain that probably.
That's correct.
Okay, and then finally can you give us a sense as to how much rates would you derive to become interested anyway cancellation.
[laughter].
I appreciate the laugh that was good I appreciate that very much Bob ill take that one we thought it was all underplay multifold before this so.
Hi, Bob Yeah I.
Honestly in.
Hand on heart I would say that.
Our.
Our touring entertainer guys would tell you that you know.
We're looking at as much as you know double double and a half I mean, it was massively under price in our opinion in our opinion.
Prior to disappear.
No I don't know that that cold would necessarily specifically change sort of the underwriting paradigm I mean, that's part of what you need to price for.
And that's part of why we you know what not specifically, allowing for code, but part of that you know that that.
Price change we were looking for was for this amount of uncertainty and.
I would say at least double if not more.
Okay. That's very helpful. Thank you so much.
Hey game to ask the question you in its a press star one on your telephone.
There are no further questions at this time I turn the call back over to Larry Hanam for closing remarks.
Thank you very much.
Hopefully you are.
You benefited from obviously, both our press release and the expansion of what we've done there.
Because we wanted to make sure that we could be as you know transparent as possible and we appreciate the time and energy that you put into asking the quality of the questions and spend the time with us today. So thank you very much in everybody stay healthy and say.
Good.
[noise], ladies and gentlemen, this concludes todays conference call. Thank you for participating human multis coming.
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Yes.
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