Q2 2020 ProSight Global Inc Earnings Call
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I would now like to Hana conference over to your Speaker today Mr. Joe Hathaway. Please go ahead.
Thank you Amy good morning, everyone. Welcome to the second quarter 2020, <unk> earnings conference call for products like link.
With me on the call today, our CEO and President Liberty, Henan, Chief Financial Officer body puzzle.
And chief underwriting and risk Officer, Bob Bailey.
Following our prepared remarks, Tom will be open for questions.
Yesterday afternoon, we issued our second quarter 2020 earnings release, which is available on our website at investors that 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 and financial condition.
Please see the cautionary language regarding forward looking statements in yesterday's earnings release, and the risk factor section of our most recent reports and filings made with the SEC.
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 measures can be found in our earnings release.
With that I'd like to turn the presentation over to our CEO and President Larry Henan.
Thank you Joe and good morning, everyone Procyte had a very strong second quarter and a profitable first half of the year during a very difficult period.
Please truly done an excellent job I am grateful for their outstanding efforts and appreciate the loyalty of our customers and distribution partners.
Our execution around underwriting rate expense discipline talent acquisition and risk management has never been stronger even before limited number of states required adjustments, we chose to readjust exposures for our customers that were most severely impacted by covert and return those subject premiums.
While doing so negatively impacted our growth in the second quarter. It was the right thing to do for our Insureds and is now behind US we're positioned to grow from here and are using our niche focused approach to identify opportunities that align with our underwriting appetite.
As a reminder, at Procyte, we do not right.
Publicly traded DNL medical malpractice mortgage insurance accident, and health travel insurance event cancellation, opioid manufacturers and distributors or hospitals and nursing homes.
Our second quarter underwriting profit marked the 10th consecutive quarter of us doing so affirming that our niche approach and limits management can pretty strong results. As a reminder, excluding our work comp book, 84% of our policies have gross limits of $2 million or less.
Next I will update the could impact the guidance for 2020 that we provided on our first quarter call for gross written premium for our customer segments. Instead of the 10% to 20% decline that I communicated at the end of the first quarter. We now believe that we will be in the 5% to 10% range.
This excludes the decline from the previously announced exit from our excess where compensation book.
For net loss ratio, we now believe that we have the potential for up to one and a half point increase from cobot 19 related claims and expenses in the current accident year loss ratio versus the up to three point increase we communicated at the end of the first quarter.
With regards to the expense ratio, while we will have a potentially higher cost from bad debt provision and given state mandated deferrals of collections and the impact of lower written premiums I'm still confident in the 200 basis point reduction by year end 22 that I had provided previously.
And finally for net investment income, we expect our core fixed income portfolio, excluding limited partnerships to yield approximately 3% for 2020 consistent with the 3% we communicated at the end of the first quarter.
While there are a number of uncertainties that we are still dealing with I am confident in the guidance that I just provided.
Expect our underwriting first culture and approach to risk selection to give us a tailwind for the remainder of this year and in the years ahead.
Ill now turn the call over to Bob who will highlight our rate execution and provide a couple of examples of how our agility and niche approach allows us to stay very close to the marketplace and optimize our exposure to certain classes of business in a timely fashion.
After Bobs remarks body will review our financials highlight our strong expense discipline and update you on our investment performance and capital position.
Bob.
Thank you Larry.
Morning, everyone.
I'll Echo.
Some larry's comments and say how pleased on him as well.
With that how our team has executed in second quarter manage tremendous change in their own lives.
More importantly intensified our connection to our customer base well you will see lie on these more optimistic about our momentum through the balance of the year.
A reminder, we execute late at this level as opposed to generically byline and as such what I'm, giving these aggregated by line primarily more for your consumption has its not really how we think about overall rate adequacy at the niche level or is in line with at lunch.
The second quarter, we achieved total half percent rate increase excluding workers comp on 8.8, including workers comp. This is an acceleration of all of over three and half points.
First quarter 2020.
This brings us to 8.7, excluding work comp and 7.4, including where comp for the year to date total.
Absolute level.
39 of our 41 niches are not workers comp centric.
We achieved a positive rate of 38.
Upon the rate in 30 of 39 inches and have achieved great on rate.
Year over year in 36 of those 38, I'm pleased with the rate adequacy building our portfolio and it's an expected to continue through the balance of the year.
The only line that hasn't seen improvement in terms of recent quarters, including this one is work comp, which did deteriorate by about 2%.
As you know we have done well with that line over the years, but just as knowing the difference between just enough slightly too much mix, what a great dinner guest it's also important in monitoring worker rate adequacy.
As ray levels have declined in some cases compounded decreases year on year, we have been very disciplined about willing to let that pre who leads the book when we no longer believe at the rate is commensurate with the risks presented by the account or even the niche.
For the past two years, we have driven this line business down from approximately 250 million.
Including excess workers' comp.
Likely around 75 million by year end to reflect our estimate of the shrinking pool of adequately priced accounts in this line due to the highly regulated nature of the line in terms of coverage and rate level, there's very little anyone can actually do to differentiate ones offering in this space, except very deliberate when saying, yes or no added.
Given rate level.
Now regarding code.
Larry noted, we still see the potential for up to one and half point to loss ratio in the current accident year.
However, as time passes and we work through our inventory.
That tone of uncertainty continues to narrow based on what we're seeing it may be the case and the additional cobot impact can be absorbed in the current accident year loss ratio pick up 62, we do still see trickle of work comp.
Owner Tooley.
Simply need more time for the claims team to continue their efforts working through the inventory before we feel more confident.
Hey with call.
We continue to monitor the impact to and wisdom I suppose of our early decisions to aggressively right size the ongoing exposure base for heavily impacted customers rather than just defer collections or other sort of techniques.
We still believe that this approach while moving most of the topline impact into the current quarter results in less credit risk less of a negative impact from future I premiums and ultimately appreciative customers.
Body will discuss this in more detail as well, but we continue to believe that our actions very early days of the cold the crisis, where not only humane.
Frankly will also proved to be a good economic call.
And on that note I will hand costs, the body puzzle, who will discuss our financial results in greater detail.
Thanks, Bob.
Net income for the quarter was $17.6 million at adjusted operating income was $16.9 million both records for Procyte adjusted operating ROE was 12.6%.
I will focus my comments on three key drivers of this quarter's performance topline production strong net investment income and rigorous expense management and then discuss it important accomplishment successfully closing our new credit facility.
In the second quarter, our gross written premium for our customer segments declined 20% from last year's quarter. This is in line with our expectations as we proactively reduced exposures for our customers who were impacted by cold.
The bulk of the impact came from two of our customer segments transportation and media, we're insured activity combined plummeted, 70%.
We are confident that we accomplished substantially all the exposure adjustments in to Q.
And that we believe third and fourth quarter will not be has negatively impacted.
Also as the economy recovers and taxis and buses go back on the road and entertainers resume entertaining these premiums should snapped back.
The rest of our customer segments were resilient and were flat for the quarter and they were up 7.6% year to date.
Net investment income was $23.8 million for the quarter up 37% over last year's quarter.
Our portfolio continued the trend of double digit growth up 12.7% from last year's quarter.
Offsetting that growth was yield compression from LIBOR resets and lower reinvestment rates.
The core portfolio yields was 3% in the quarter inline with our guidance.
Our limited partnerships had excellent performance generating $8.1 million of net investment income I think capitalized on the market dislocations in this turbulent quarter.
23.8 million of a total investment income is again, a high watermark for the portfolio.
At quarter's end the portfolio had an unrealized gain a $59 million, which you name, which is an improvement of $97 million from Q1, a really strong recovery.
In the quarter, we maintained our credit discipline and further reduced our floating exposure and overall, we continue to feel confident and comfortable with our portfolio positioning.
Next up expense management, our DNA expenses in the quarter were $26.4 million essentially flat with last year's quarter.
Our rigorous expense management allowed us to overcome one and a half million dollars of additional bad debt expense as well as $2.3 million of new public company costs compared to last year's quarter.
The expense ratio in the quarter was 37.7% that's up 2.4 points from last year's quarter.
That increases all driven by coal this reduction on earned premium.
And the absence of earned premium from the exit of the excess comp.
We pride ourselves on our expense management and continue to believe we can achieve the two points of expense <unk> expense ratio improvement by 2022 from the 36.6% starting point at the end of 2019.
Let me close on capital and liquidity in a very challenging quarter for borrowers we were able to close on a new credit facility with a new group a bank lenders that will re Fi our senior notes at maturity in November.
The new facility has better terms and a 4.6% expected interest rate compared to our current rate of 7.3%.
We also expanded our revolver from 50 million to 65 million on favorable terms.
We're pleased that the market strongly supported our debt raise as we added five new lenders into our credit facility.
After quarter's end, we drew 35 million on the revolver at injected those funds into the insurance company to support growth as we expect a rebound in our top line in the coming quarters.
Pro forma fourth a revolver draw our debt to capital is a manageable 27.7%.
[noise] stat surplus ended the quarter at a record $661 million, an increase of $89 million over Q1.
Organic surplus growth was the highest ever and our insurance company capital is better positioned than ever for potential uncertainty or to capitalize on growth opportunities.
Book value stood at 586 million at the ended the quarter, an increase of almost $100 million over Q1.
Fully diluted book value per share was $12, an 84 cents an increase of 6.9% year to date had a record high for the company.
All in all a really strong quarter for pro site and with that I'll hand, it back to Larry.
Thanks body the operator, if we could open the line for questions.
At this time, ladies and gentlemen, if he would like to ask a question. Please go ahead and press Star then the number one on your telephone.
To the dry your question you May press the pound key.
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Your first question today comes from the line of Meyer Shields with TV brunette.
Your line is open.
Great. Thanks, good morning, everyone.
One of our model.
So a couple of basic questions. One I was hoping for little bit more color on sort of the monthly progression.
Economic activity or premium volumes within transportation within media.
Sure. So I'll get started on that and then maybe Bob you can sharpen as well so on the transportation side, you saw month to month progress right. So the quarter, where as you saw what we reported as negative premium quarter. The vast majority that was in April because that's when most of the return premiums hit right.
Again, we went back reassessed what the exposure is truly were re rated those accounts because we thought that was in the best interests of our insureds and issues that Bob laid out.
And then you saw most of that impact in April that let a little bit into May and then we actually started the decent prob positive development in June.
I think that that will be the lions share of what really happens from a transportation perspective was in the second quarter predominantly in April and May.
On the entertainment side, we saw the same thing right you had the biggest reaction early and then we had growth month versus month on and we adjust that a little bit right in a couple of different ways Meyer because you've got things that are affecting the media business right are we extending policies in certain cases insureds request are we trying to readjust exposure.
There's what it actually is going on from production perspective, how does that compare month to month progress. So the size of the premiums are going to fluctuate obviously month to month as well, what we saw more progress month to month and in each of those months and in the immediate space as well Bob would you add anything else to that.
Im not not really Larry I mean, I guess fundamentals of the question is are we seeing.
People sort of rebound a little bit sort of navigate as to how to perhaps redeploy or.
Deploying a different way and I think the answer is suddenly yes, we are.
We are seeing slight tick ups and some different kinds in media behavior in things like that rental houses are finding different things to do and whatnot, but I I think the vast majority of this does.
It's.
It's not much different than it was its improved slightly.
It's just we've taken we've taken the penalty and now its headset for Nova a rightsize basis going forward.
No thats very helpful. Just trying to sort of translate what we're seeing broadly into premium trajectory. So that's really helpful.
Two questions on the expense ratio if I can the first does any estimate of maybe.
Temporarily reduce expenses in response to the shutdowns that we should start adding back in as we get back toward normal.
So.
Meyer, it's Larry and I think the we were constantly assessing that right because what we're trying to bridge and what we're trying to do from an expense perspective is to do what we believe is in the best interest the business in the mid term in the long term right short term, we didnt overreacted sit there and say we don't have these needs anymore, and we're therefore going to reduce headcount.
So we're going to be salaries or anything along those that we think that was the right thing to do and now as we're watching this write those resources as you are starting to kick in and we see a more robust pipeline, which is as robust as it's ever been from us from a new niche opportunity perspective, we're starting to see obviously most many of our to just bounce back I think it was a prudent choice on our.
Part to have those resources ready to actually respond in that way. So I think when they were in a in a pretty good spot from that perspective, what you're seeing obviously is we're being very smart hiring perspective, we're trying to do obviously as much in cost weekend.
On the DNA side that would reflect what that future expense will look like and that would be.
A reevaluation of what real estate looks like in the future a reevaluation of what our remote all employee staff looks like in the future and those are things that we're looking at now we have real information to share on those will definitely do that on a quarterly update but right now those are in progress as opposed to something to report on now.
Yes, my are the only thing that I would add as you know clearly we're benefiting from lower take any because in this environment nobody's traveling anywhere, but we also took a million and a half a bad debt expense that long term I don't see us continuing once we get past this uncertainty related to cultivate so if anything I think we've got a little dry powder.
In the way our expenses are so I would not expect a big increase once things go back to normal.
Okay Thats it thats good to hear and I'm asking that left us in recognizing fully that it's way too early.
But with the bank rate increases that we're hearing from you from other companies.
When we're one of the prospects for expense ratio group under loss ratio improvement on the longer term relative to the current.
You do at 32% outline.
So.
I'll start and then I think Bob and body, please join as well.
I think for long term prospects are good on what that would look like and how that would translate based on things that we understand today rightmire. So the real kind of uncertainty that's associated with your question of course as we just don't know what's next right do we have a significant recurrence from coated.
We obviously have to make sure we understand and see how long this rate environment really.
Kind of is sustained.
Theres a number of pieces that go into that over the long term, but we would expect that.
It should be a positive impact in future years, I think there's going to be enough uncertainty, where we don't think that would affect the 2020 result, I think where we've kind of peg to 62 is the right number for 2020.
But assuming we get some more clarity as we get through the remainder of the year on what kind of the economic impact really as of Cove, and what that looks like going forward specific to our niches.
I would believe that that will have positive impacts on both.
Body or Bob would you add anything to that.
Yes, I would just say.
That's it I wouldn't change anything you said really but.
I mean, it's clear that were.
Pacing.
Loss trends and expense trends as we knew them to be Thats certainly clear.
Then obviously is good news.
The key is as we knew them to be.
To Larry's comments co bid and.
The behavior of economy right now.
Theres Theres some some unknown dynamics that I think it's still too early to really understand in outlet, what impact favorable or negative or otherwise.
Even no impact at all has really had on these losses and so I think 2020 would be too early to make that call but.
Hi, I too would share Larry's optimism.
Definitely Patrick Thank you so much.
Sure.
Regarding that this question either but mired in yet asked this question if I think it's interesting right in the virtual environment. We're in today and you think about what we're dealing with from a cobot perspective, you have got three people that are speaking on this call ones in California ones in Florida and ones in New Jersey.
So if you think about what the personal experiences are for that and how that translates to employees and what that means you can imagine that the uncertainty at each of those locations.
Kind of fuel some of the things that Bob and I just talked about.
And again, ladies and gentlemen to ask a question. Please press Star then the number one on your telephone.
And there are no further questions on the phone at this time I turn the call back to the presenters.
Hi.
Thank you Amy I appreciate everyone for joining today. Thank you for listening into the second quarter 2020, Procyte Global earnings call have a great rest of the day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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