Q2 2019 Earnings Call
The Conference Center. Please hold for the next available conference specialist.
The tenant may have a name please.
Hi, that's Rachel R.A.H.O. Smith, and I P H.
Hallmark.
Yes.
Leasehold.
In Q.
So Neil.
After the telephone please clearly state and spell your company name and then press the pound key to continue.
[noise].
<unk> <unk> <unk> <unk> our age.
Thank you.
Okay and other filings made with the SEC for additional details on some of the risk factors that may materially affect our results.
We may also reference certain non-GAAP financial measures in the call today.
A couple a copy of the press release containing a reconciliation of GAAP to these measures and an updated quarterly investor presentation is available on the company's website at www Dot Hallmark GRP Dot com.
I will now turn the call over to novena, non president and Chief Executive Officer of Hallmark financial.
Thank you David and good morning, everyone I'll begin the call today with some background on the company's transformation over the last past four years.
Focusing on how these changes have driven meaningful improvements in our results I will then provide a few a view of our results considering the current market environment next Jeff will provide some additional details on our results for the quarter and then we'll open the call up for questions.
After several years of operating as a public company Weve decided to initiate quarterly conference calls we felt the timing was appropriate given the progress we have made to reshape our culture and transform the company into a diversified specialty insurance company.
Two places in historical perspective, when I joined the company in late 2014, Hallmark financial was predominantly a regional auto writer with substantial concentration of business in commercial auto and the nonstandard auto lines. However, we saw an opportunity to derive significant benefit from developing new specialty products, particularly in the small medium enterprise space investing in talent and technology and modern modernizing our infrastructure and processes. Our business units today are now organized by product and distribution channel led by experienced underwriting teams and supported by Actuaries are data scientist a claims function is managed in house comprised of experts in their areas of specialty and structure to close queens quickly and effectively.
We target niche products and niche markets, where there are typically fewer competitors and the need for specialized market knowledge. It creates a barrier for successful entry in the specialty markets, we drive value by identifying.
And evaluating and pricing and limiting risk and by the quality of service, we provide our clients.
Through our diversified product offering we achieved scale and importance to our distribution partners and as a result, we believe we can achieve results that drive double digit are always.
Now, it's a time to implement our strategy without major disruption to our agency partners. However, we are now beginning to see the positive impact from our efforts as seen in the favorable operating results for 2018 and continuing through the first half of 2019 in 2018, our combined ratio was 97.1, and we continue to see improvement in the over the first half of 2019 with year to date combined ratio of 95.4, and a second quarter 2019 combined ratio of 94.5.
Ultimately, we believe that our long term strategy is beginning to materialize in the form of consistent underwriting performance.
We continued to manage our products as a portfolio allocating our capital to those areas, where we view the best opportunity for return and having the ability to increase or decrease production in any one area or segment.
As each of our niche product markets are influenced by unique set of market dynamics, our ability to be flexible and scale. Our business. Accordingly is an advantage for hallmark financial.
While there have been improved market conditions, many of our lines, we've seen greater dislocation in our specialty commercial products, which represent about 79% of our gross premiums written.
Almost all of those businesses producer wholesale brokers, but the majority of it being written on SNS basis.
The market dislocations in some of the greatest lines that have experienced more industry wide losses, such as catastrophe exposed property lines. This market segment in particular has experienced losses over the last couple of years driven by the Hurricanes of course of 2017 and 2018 as well as the wildfires in the west.
As a result capacity for these type of us have been reduced as companies have retreated from certain classes of business or reduce the amount of coverage that will provide in some instances we are seeing new submissions appear in the market. So previously run by a single carrier, but are now being syndicated with rates that are up significantly.
In our shared and layered property book, we are well positioned to take advantage of this dislocation.
Not only does it provide us the opportunity to really push rate at the same time, we can diversify our portfolio be more selective and compressed limits.
We are seeing very similar opportunities on the casualty side in our SNS casualty portfolio as well as in our professional lines product lines.
In total our specialty businesses are seeing 25% to 30% increases in new submissions.
Rate increases overall in the double digits.
In personal lines, we produced a solid 91 and a half combined ratio those of you that have tracked hallmark now that our results in this portfolio have been challenged in the past as part of our strategic transformation, we retooled everything in this business from the technology platform through our pricing as well as our approach to claims management now we are positioned to manage this portfolio more effectively and grow or shrink the business based on profit opportunities.
We reallocate the capital for growth in this business starting in the third quarter of 2018, and we saw an overall favorable rate environment. This quarter its continuation of that for profitable growth trajectory.
However, we are seeing this easing as the year progresses.
Competitors are now generally filing for rate decreases in most states.
Our focus is on preserving our bottom line results, which we have worked hard to achieve so the pricing opportunity does indeed become limited we will reduce our writings accordingly in this portfolio.
Our standard commercial business was flat for the quarter and a combined ratio was good result at 94.2, which includes four points of catastrophe losses.
Net premiums in this segment were down 22% driven by a change in the reinsurance structure.
That we made last year, which Jeff will provide more details on in a few minutes overall rate increases were modest but starting to head in the right direction in this portfolio as well.
I believe overall, we're well positioned to take advantage of the current market opportunities, particularly in our specialty commercial products, which now comprise nearly 80% of our portfolio. We have the expertise in place to better underwrite risks and to push for additional rate, we enjoy strong relationships with agents and brokers to drive access to the business, we want to write and overall I'm very pleased with how we balanced our growth, while still maintaining and driving pricing discipline.
I'd like to take the opportunity here to congratulate Jeff pass more on his promotion to Chief Financial Officer earlier, this year with that I'll turn the call over to Jeff for a review of our financial results in more detail.
Thank you Mary Jane and good morning, everyone. We continue to be very pleased with our quarterly results, which continues to reflect the improvements we have made in our businesses for the second quarter of 2019, we reported net income of 13 million, a 156% increase as compared to $5.1 million in the same quarter last year.
Removing the impact of unrealized changes in the market value of equity Securities. Our operating earnings for the second quarter of 2019 were 7.6 million, a 64% increase as compared to 4.7 million in the same quarter last year.
Gross premium written increased 26% to $218.2 million during the quarter compared to 173.2 million in the same quarter last year. This improvement relative to last year is attributable to multiple factors, including growth, particularly in our specialty businesses as we continue to gain scale and as we've been effective at taking advantage of the current market opportunities and the achievement of significant additional rate and many of our lines of business.
Overall, we see continued runway for new policy growth and rate increases in many of our product lines.
On a gross basis, our specialty commercial segment represented 76% of our portfolio and our standard commercial and personal segments. Each represented 12% of our total portfolio for year to date 2019.
Net premium written increased 38% to $123.8 million for the second quarter 2019, compared to $89.8 million for the second quarter of 2018.
While much of this is related to the growth in gross premiums the higher rate of increase is being driven by the changes in our reinsurance program with the consolidation of our casualty business into a single treaty structure that began on October Onest 2018.
For certain of our specialty lines.
Cession rate in previous treaties were higher which has resulted in a larger portion of the business being retained by the company.
Translating to a larger growth rate and net premiums business will continue to transition to the new treaty structure through the third quarter 2019, after which this impact should begin to normalize.
Cash flow from operations was a positive 8.6 million inflow for the second quarter of 2019, and 6.7 million inflow for the first half of 19, a 6.6 million increase over the first half of 2018.
The net cash outflows that the company has seen over the past few quarters was a direct and deliberate result of the improvements made in the claims organization seeking to lower overall claim cost and reduce the possibility of unfavorable development. We implemented various measures with a focus on closing claims quickly and the near term. This resulted in a change in the claims payment pattern accelerating the payment of reserves and increasing cash outflows. We're now beginning to see this pattern settle after bringing this claim strategy to both new claims and older accident years and anticipate cash flows normalizing.
However, due to these changes the claim reserve and payment patterns for the current accident years will not be comparable to prior accident years.
Moving to underwriting our combined ratio for the second quarter of 2019 was 94.5% compared to 97% the same period the prior year.
The company reported a loss ratio of 68.8 for the second quarter of 2019 compared to 70 in the prior period.
Prior year development was minimal at 1.4% or one and a half million dollars for the second quarter of 2019 and is only 0.7% of net premiums on a year to date basis. We also avoided much of the cat activity for the quarter with our cat ratio for the second quarter of 2019 coming in at 1.9%.
The expense ratio was 25.7% for the second quarter of 2019.
We continue to emphasize our expense ratio as a competitive advantage relative to our peers, which we believe is achieved by our careful management of expenses intelligent uses of technology and external resources and our mix of business. We generally target an expense ratio that is 28% or lower.
Net investment income increased 23% to $5.4 million during the second quarter compared to $4.4 million in the same period the prior year.
We continue to maintain significant liquidity in our budget and our investment portfolio with 26.9% of our portfolio or $188.4 million in cash cash equivalents or securities maturing in one year or less.
In the second quarter of 2019, the market value of equity securities increased by 6% or $5.4 million on a year to date basis for 19, the market value of equity securities increased by 16.2% or $13.1 million.
The impact of the unrealized changes in the market value are excluded in our calculation of operating earnings.
Our book value per share with $15.98 at the end of the second quarter. This is an increase of 5.8% over the first quarter of 19 book value per share of $15.10 and a 12.8% increase over the book value per share of $14.17 at year end 18.
These percentages are not annualize and reflect the actual change in book value per share over the three month and six month timeframe respectively.
Additionally, annualized operating return on beginning tangible equity was 12.6% for the first half of 19 compared to 8.9% during the similar period the prior year.
And with that I'd like to turn it back over to intervene for closing remarks.
Thank you Jeff.
I'd like to acknowledge.
This this result in happen by accident. It's been the result of a lot of hard work load by every member of hallmarks team and as we continue to see the impact of our execution of our strategy and we expect that these results will continue as we move forward. We are pleased with the positive trend in our quarterly earnings results and are working to deliver consistent operating results have been disciplined in how we manage and grow the business and with that let's open it up for questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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Our first question comes from Greg Peters with Raymond James Please state your question.
Good morning.
Couple of questions for you.
On.
Your comments regarding the strong.
Price increases you're seeing in some of your specialty lines of business.
I'm curious how you feel about your accident year loss picks for the more recent years if the markets.
Giving.
Right.
[laughter] to you does that suggest that maybe or accident year loss picks are.
Too low or maybe you can just provide some perspective around that.
Sure Greg This is Nick and good morning.
Overall, we think our accident year loss ratios are appropriate we think the market dislocation is obviously.
Going on and we're taking advantage of the market dislocation, which would kind of view with the perspective that.
We're earning good rate into the portfolio and overall, we think our accident years have been relatively flat and relatively conservative from an accident or selection. If you kind of look at the trend of accident year results at 67 for this quarter.
Again in line with where we've been.
And rate overall has exceeded plan, which was obviously going to be helpful. In terms of improving loss ratios as we move forward as we earned that rate.
So what's the dislocation you are saying.
[noise] overseeing it and in a in a lot of different areas right. So a combination of changes that at Lloyds and the business that Lloyds has made with the syndicates syndicate changes.
Changes that have been made with certain carriers in terms of the large limits there were putting up against large swaths of limits in some cases 10 25 million.
Have limits on individual accounts and now those that those companies are tending to compress those limits syndicate those limits and so what was being done by one carrier before is now available for four to five carriers to participate on.
And overall, we are seeing in certain markets leaves the market out for certain some of our product lines.
Particularly in you know in property and its property somebody units casualty lines.
And when you kind of look at all it's not just one one areas. It's really a combination of all those things that are going its going on that's resulting in the overall dislocation, particularly in its markets.
It's so it's going forward.
Property is clearly under pressure from what's going on in the reinsurance market should we presume that because of the changes in some aspects of the market that you might have more earnings volatility going forward due to increased property exposures and can you also dovetail that with the comment around what kind of limits are you guys out there offering in these lines of business that you're talking about.
Sure.
So in terms of you know, we we are still relatively conservative in terms of our approach to our reinsurance program and so that does mitigate some of the volatility from from that standpoint.
And just as a reminder to everyone. We had a $5 million retention on our our corporate catastrophe program today and Thats something Weve maintained for the last few years.
We also on our property business have a quota share we received about 70% of that portfolio.
Today overall, so again.
Relatively conservative from an overall approach perspective.
In terms of limits offered.
Our maximum critical cat capacity that we offer is 5 million on a gross basis.
Again that ceded out to about 70% of it.
And then and then obviously we have the corporate catastrophe program that sits on top of it.
But that's the maximum capacity we offer but generally are working capacity is a lot lower than that and are working capacity tends to be in the 1 million to 2 million range.
Cat capacity standpoint.
Great. Thank you Hey.
Just last question can you pivot to I think it's slide 20 of your investor deck that I got last night.
And Jeff I know you commented a little bit about this in your prepared remarks, and there was a lot to digest in that.
So I'm looking forward to reading the transcript.
[noise].
But I was struck by the operating cash flow column or you run through the Companys operating cash flow since 2004.
And specifically you know this this negative operating cash flow last year.
Any I think you cited changing claim payment patterns, but I I don't think the paid loss numbers materially change. So maybe you can help.
Bridge the gap there for me or just.
Help me to understand what's going on.
Sure Greg.
Our paid loss a pattern has significantly changed particularly on on a gross basis.
The past several quarters since the end of 2017, and that's really what you're seeing happening and the negative operating cash flow in 2018 is the shift and as we cleared out the older inventory of our claims as our claim for.
Really working those claims again I'm off off our inventory as well as just a shift in the mix to get.
Out of the the development in the tail.
To to avoid any future negative development to to really position our reserves are from that standpoint.
And that's what we're seeing and this year with that kind of getting behind us that we're kind of starting to see the normalization of our cash flow.
But isn't that right.
Go ahead.
Oh, I'm, sorry, I interrupted you Jeff finished for your insight.
No I was just going to repeat I mean that.
I was just going to say that we did see significant increase in our paid losses.
So how should it <unk> you said you execute a word or the phrase Colorado the inventory of old claims.
Is there some sort of percentage of all claims that have been.
Then closed out that you can cite or some metric that we can use to sort of gauge.
The inventory of claims.
Yes, Greg it's also in the presentation that you have on.
[noise], we talk specifically about the commercial auto.
Yeah, what we've done in the expansion of the commercial auto that's on slide 12.
Okay, well, we implemented the fast track claims process.
We closed out from 2000 accident year 2016 and prior.
At the end of 18, roughly 69% of those claims and then today we closed out.
85% of those claims.
Excellent those are no longer or yeah.
Great. Thank you for the answers.
You're welcome.
Just a reminder to ask a question press the star key followed by the one key on your telephone keypad.
Once again to ask a question press star one on your telephone keypad.
Our next question comes from Bob Farnam, with vending and Scattergood. Please state your question.
Yeah, Hi, there and good morning.
I guess, along those lines, Jeff <unk>. So you had a little bit of adverse development in the specialty commercial lines was that what was that attributed to.
Uh huh.
Large losses predominantly.
In any in particular line or.
We are now.
Not any particular line I mean, we've seen some and.
On our casualty book and the mineral property.
[noise].
Okay.
In terms of the digital transformation Niveen I know.
You've talked about that for a number of years now it's kind of remarkable that your expense ratio was as low as it is like how much how much has the digital transformation cost.
Is it how much how much how far through the process are you.
Im just trying to figure out when it kind of expense ratio impact the transformation has had.
Well so.
For the most part our costs, but isn't is within our expense ratio. So it's already built into what we what you see from an expense ratio standpoint.
Our major expenditures around the platform changes are behind us. So we made the three major platform investments over 15, 16, and 17 and those are for the most part complete at this point and we are transitioning our most of our lines to one of those three platforms, which is what's helping us to commission some of those legacy legacy.
Platforms that we have had over 25, plus legacy platforms and the company back in 2014.
So from a capex perspective, it's already in that and that sort of baked into our expense ratio at this point in terms of our run rate.
All right. So I guess my question was the fact that sounds like you things that the process is mostly through so you're not going to get much of a.
A benefit to the expense ratio going forward is that those expenses have already have already occurred that that's kind of what I was trying to get that that's correct, yes that future expense ratio benefit will come through a combination of scale continued scale.
The business as we continue to scale, our business and expand the platform is now allow us to scale our business at a much lower variable cost and.
Before.
Before we put those platforms in place right okay.
So it sounds like you could be poised for a pretty good about of growth. The beginning a lot of the submissions and stuff. So how do you how do you guys.
Ensure that the the risk that you're taking our our profitable I mean im sure that might be very tempting to have 20, 530% increase in submissions, but you still have to be careful what you're what you're writing.
Yeah I mean.
Bob and that's a great question at the end of the day. That's the most important part of our business right is to make sure that we're putting on the books as appropriate.
We have a lot of checks and balances and controls within the organization one of the controls that I think we've spoken about before cited as when I got here, we had a handful of people in our actuarial group today, we have pricing actuaries embedded in each of our business units. They sit with each of our business units and provide sort of constant feedback loop evaluate accounts. It provides a check and balance in terms of how we're pricing against our technical models Weve put technical models with hurdle rates in place with each of our business units in terms of allocating capital and what the capital impact is that business and what hurdle rate we need to achieve.
And that affects our pricing approach from that standpoint, and so we're continually monitoring those type of issues and then on top of that looking at the quality of underwriting that's taking place in the portfolios.
To make sure that the business, we're writing is appropriate and in line with our in line with our overall mix and desire from an underwriting standpoint. In addition to that the one other thing that I think is that that's benefiting us from this marketplaces as it allows us to continue to compress limits.
So we're actually seeing our average limits exposed come down and most of our lines businesses and DNS lines.
So, we're actually putting out less limit and getting more price per million.
On on the limit that we are putting out at this point.
Great and I guess, one last question for me in terms of share repurchases now I guess two parts. One did you repurchased any shares during the quarter and two would the potential growth ahead of you are you less likely to do share repurchases, just because you're you're more concerned with keeping leverage in check.
Yes, I mean, we have not purchased any shares this quarter really havent purchase any shares since January of this year Bob.
No we're going to have to be mindful of our capital position and the opportunities we see in the marketplace and that will just be part of our normal capital allocation decision, whether we continue to go in the marketplace. The the valuation of our stock and it just take advantage opportunistically from that standpoint.
Okay great.
That's it for me Thanks, again for a for having a color.
Sure.
Thank you and once again to ask a question at this time press Star one on your telephone keypad, we'll pause for a couple of moments to see if there any questions.
Ladies and gentlemen, there are no further questions at this time I will turn it back to management for closing remarks. Thank you.
Thank you. Thank you. Thank you again for all your participation. This morning, we appreciate your time and your interest in Hallmark and we look forward to speaking with you next quarter. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference all parties may disconnect have a great day.