Edited Transcript of NGHC earnings conference call or presentation 30-Apr-20 1:00pm GMT

Q1 2020 National General Holdings Corp Earnings Call New York Jun 17, 2020 (Thomson StreetEvents) -- Edited Transcript of National General Holdings Corp earnings conference call or presentation Thursday, April 30, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Barry Samuel Karfunkel National General Holdings Corp. - CEO & Co-Chairman * Jeffrey Allan Weissmann National General Holdings Corp. - Executive VP, General Counsel & Secretary * Michael Hal Weiner National General Holdings Corp. - Executive VP, CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Jeffrey Paul Schmitt William Blair & Company L.L.C., Research Division - Associate * Matthew John Carletti JMP Securities LLC, Research Division - MD and Senior Analyst * Randolph Binner B. Riley FBR, Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the 1Q Quarterly Earnings Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Jeff Weissmann. Sir, the floor is yours. -------------------------------------------------------------------------------- Jeffrey Allan Weissmann, National General Holdings Corp. - Executive VP, General Counsel & Secretary [2] -------------------------------------------------------------------------------- Thank you. Good morning and welcome to the National General Holdings Corp. First Quarter 2020 Earnings Conference Call. My name is Jeff Weissmann, General Counsel, and I'm filling in for Paul Anderson, the Director of Investor Relations. With me this morning are Barry Karfunkel, Chief Executive Officer; and Mike Weiner, Chief Financial Officer. Before Mr. Karfunkel and Mr. Weiner review our results, please note the following with respect to forward-looking statements. Members of our management team may include statements other than historical facts in their remarks. Such statements may include the plans, objectives and expectations of management for future operations, including those relating to future changes in the company's business activities and earnings results or potential. These statements are based on current expectations and involve assumptions that are difficult or impossible to predict accurately, many of which are beyond our control. There can be no assurance that actual developments will be consistent with these assumptions. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including the factors set forth in our filings with the Securities and Exchange Commission. The projections and statements in this presentation speak only as of the date of this presentation, and we undertake no obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise, except as may be required by law. Finally, our management will refer to financial measures that are not derived from generally accepted accounting principles or GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information is provided in the press release for our first quarter 2020 earnings, which is available in the Investor Relations section of our website at www.nationalgeneral.com. It is now my pleasure to turn the call over to our CEO, Mr. Barry Karfunkel. -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [3] -------------------------------------------------------------------------------- Thank you. Good morning and thank you for joining our Q1 earnings conference call. Before I begin, I'd like to mention that our thoughts are with all those that were impacted by COVID-19 and we are wishing them a speedy recovery. On today's call, I'd like to take some time to review our various lines of business on a pre-COVID basis and then provide you with some insight in how we see COVID impacting our business, most of which happened after Q1. Our personal auto line continued to perform well. Top line results include the headwinds of exiting certain MGA relationships. Our direct-to-consumer channel continues to perform extremely well, realizing year-over-year gross written premium growth of 8% despite the impacts of the last half of March, which we'll get into in a bit. Our direct-to-consumer platform enhancements are starting to pay dividends. As a reminder, we set out to rebrand our direct auto brands while taking a much more data-centric approach to marketing and revamping our online experience for direct auto. The results are as follows: much higher brand recognition leading to increased quote counts within the brand's markets and target audience; we're now able to target customers based on projected lifetime underwriting income, which has the desired impact of allowing us to actually decrease our marketing cost per application while still growing; and lastly, a much higher online quote completion rate as a result of a much improved mobile user experience. The recent launch of our latest version products is performing extremely well, and we look forward to launching them in additional states, along with launching our new monoline mid-market product later on this year. Our homeowners line, which experienced some growth when including the Farmers Union Insurance premium, which we didn't have last Q1, is showing the benefit of many of the rate and underwriting actions we took last year. We've taken considerable rate action, most importantly 41.7% in California, which represents roughly 15% of our homeowners book, which began to earn in as of January while we completed re-underwriting our brush exposure by Q3. We see this line being a key contributor to the P&C segment's year-over-year earnings growth for 2020. Small business auto experienced a decline in gross written premium of 15% due to underwriting and pricing actions on policy fees in some lines, territories and policy limits, which drove the losses that we experienced in the past. While we did still experience unfavorable loss development stemming from small business auto, it was lower than in prior quarters and trending in the right direction. Our lender-placed line continues to perform well. Our gross written premium growth was due to some new clients, which were onboarded, which increased the amount of mortgages that we tracked in line with our premium growth. Turning to Accident & Health. Our group stop-loss and individual products continued to perform extremely well while benefiting from recent product enhancements, enabling us to be extremely segmented with our pricing. Later on this year, we look forward to launching a new group supplemental line, along with adding to our medical network options and launching additional product enhancements, which should contribute to our top line growth. Our Medicare agency experienced top line growth of over 60%. We're extremely excited about its prospects as we aim to launch a new online customer experience, which should be a leading platform in the industry while leveraging our carrier relationships, owned online marketing assets and an A&H and P&C agency force to continue to experience solid growth numbers. Now I'd like to take some time to provide you with an understanding about how the COVID-19 pandemic is impacting the various lines of business at National General based on what we're currently seeing. While our auto new business applications did decrease from mid-March to mid-April, it has rebounded nicely since. While auto frequency has decreased, it was partially offset by increasing severity, increased bad debt expense due to state moratoriums on canceling policies for nonpayment and the unknown elements of bodily injury claims that could open up when policyholders feel more comfortable about seeking medical care again. The bulk of any remaining net benefit is being returned to our policyholders via a discount for the month of April, pending regulatory approval, and charitable donations assisting with COVID relief efforts. With regards to lender-placed insurance, over the medium to long term, as unemployment rates increase, we would expect to see a modest increase to mortgage delinquency rates, thereby impacting penetration rates. As a reminder, the way this line works, we track loans for large financial institutions to make sure that customers are protecting the lender's interest in the property with required property insurance. If a customer allows their homeowners policy to lapse, a lender-placed policy is placed. During a strong economy, the penetration rates of policies to loans tracked is low at about 1%. As mortgage delinquency rates rise during recessionary periods, that penetration rate rises and premiums grow without incurring a significant amount of additional operating expense. Turning to Accident & Health. We don't currently expect a material loss ratio impact. While there is an impact from covering COVID treatment, it's generally offset by a lower frequency of elective medical care. Turning to the top line impact. At the onset of COVID, we saw strong demand for our individual products from uninsured individuals, which has shifted to demand from unemployed individuals that need affordable short-term health insurance. On the group side, sales growth has slowed slightly, and we have seen lower employee counts with existing clients in the restaurants, entertainment, travel and hospitality industries, but those industries comprise under 10% of our total insured groups. To give you a sense of what we're seeing, our total insured members on the group side is down 2.5% since mid-March but still up 20% year-over-year. On a net basis, I would expect to see growth in the mid-teens range. Our balance sheet remains solid, and I'm extremely pleased with our strategy to focus our investment portfolio on highly rated investments in solid industries with minimal exposure to travel, hospitality and oil sectors. In summary, we do not currently expect a material earnings impact as a result of COVID. I'm extremely pleased with our Q1 results, and we have an even greater appreciation for the earnings strength of our diversified lines of business, which enables us to thrive during these times with a strong auto block, very nice countercyclical, lender-placed and individual health lines and an underwritten niche health business. Everything is made possible by our fantastic team members who are able to work tirelessly to execute on our work-from-home strategy and come together as a single unit to make sure that the company continued to execute on serving our policyholders and delivering on our strategic initiatives. At the onset of COVID, our priority was to ensure a safe work environment for our employees, and I'd like to publicly thank all those that were involved in making our work-from-home transition successful. Given our strong results and outlook, we're pleased to be able to announce that our Board of Directors has authorized a $50 million share repurchase program, which given where we're trading relative to book value and earnings, should be accretive in the best form of returning excess capital to shareholders. With that, it is my pleasure to turn the call over to Mike Weiner for a review of our financial results. -------------------------------------------------------------------------------- Michael Hal Weiner, National General Holdings Corp. - Executive VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Barry. Let me go through the financial results of the company, and then we'll take questions after. First quarter 2020 net income was $92.9 million, which compared to net income of $83.9 million in the first quarter of 2019. Operating earnings were $105.8 million versus $89.7 million in last year's quarter. Diluted operating EPS was $0.91, which compares to $0.77 in the prior year quarter. Our results in the quarter were impacted by $8.1 million of weather losses, which compared favorably to $12.1 million of losses in the prior year quarter. First quarter 2020 P&C segment included $4.5 million of unfavorable prior year development, primarily driven by the small business auto, versus $5.5 million of favorable development in the prior year quarter. The Accident & Health segment reported $4.8 million of favorable prior year development versus $10.9 million of favorable development in the prior year quarter. Total development for the company was $0.3 million favorable for the quarter. That's versus $16.4 million favorable in the prior year quarter. Trailing 12-month operating return on equity was 16.1% as of March 31, 2020. Our fully diluted book value per share grew 1.8% from December 31, 2019, to $19.41. Excluding accumulated other comprehensive income, fully diluted book value per share was $19.03 as of March 31, 2020, a growth of 3.3% from December 31, 2019, excluding AOCI. As of March 31, 2020, our AOCI balance was $43.8 million. As spreads, notably in our investment grade bonds, normalized somewhat since the end of the quarter, our current AOCI balance as of April 28 is approximately $121 million. Updating for that, our current AOCI balance, our adjusted fully diluted book value per share is $20.08. National General's balance sheet remains very well positioned with healthy capital ratios, strong liquidity and a conservative asset profile. Our investments, which are primarily managed by our third party asset manager, BlackRock, focuses first, on capital appreciation, followed by investment income. Our highly diversified fixed income portfolio performed extremely well when the market hit its peak stress. Now I'd like to give some additional details on our 2 operating segments. Within Property & Casualty, gross written premium grew 4.5% to $1.02 billion for the quarter, including $49 million of additional premium from the acquisition of Farmers Union Insurance in August 2019. Personal auto grew 3.6%, reflecting continued investment in our direct-to-consumer distribution. Service and fee income decreased 7.3% and to $110.6 million for the quarter, reflecting mix shift and a decreased commission revenue as we shifted to first-party sales in the quarter, supporting our continued growth in direct-to-consumer. The P&C combined ratio was 89.9% versus 90.1%, excluding amortization of intangible assets. The loss ratio was 66.6% compared to 69.4% in the prior year quarter. The reduction was driven by pretax catastrophic losses of $8.1 million in the quarter versus $12.1 million in the prior year quarter. Strong broad-based accident year losses throughout the whole quarter, unfavorable loss development of $4.5 million compared to favorable loss development of $5.5 million in the first quarter of 2019. The expense ratio was 23.3%, which compared to 20.7% in the prior year quarter, which is primarily driven due to the change in our auto quota share. Effective January 1, 2020, we have ceded 5% of our net liabilities under the quota share reinsurance agreement. That is down from 10% at year-end and 7% in the year-ago quarter. Overall, our monoline auto insurance net trend, which is defined as loss trend divided by premium trend, is moderately favorable, thereby helping our year-over-year accident results. We attribute this to continued favorable frequency trends, reflecting pricing segmentation and better risk selection from our RAD 5.0 product and our newest RAD 6.0 product as well as continued mix shifts. Severity trends are moderately better than the industry, which we attribute to mix shift and continued claims initiatives. As noted previously, the last few weeks of March, reported frequency was lower due to COVID-19 stay-at-home orders. Within our Accident & Health segment, domestic A&H gross written premium grew 25.4% to $187 million in the first quarter of 2020. That is versus $149 million in 1Q '19, which benefited from strong growth in both our domestic group and individual products. We sold our EuroAccident A&H business on December 2, 2019, and will only have a domestic A&H operation going forward. Service and fee income grew 32% to $80.5 million versus $61 million in the prior year quarter. The growth was driven primarily by administration fees on our group insurance products as well as third-party agency distribution and technology fees. The Accident & Health combined ratio was 77.1% (sic) [77.3%], that's versus 84.2% in the prior year quarter, excluding noncash amortization of intangible assets. The loss ratio was 49.5%, that's versus 52.5% in the prior year quarter. The loss ratio reflects continued improvement in the current accident year loss ratio for both our small group self-funded and individual products. We also had continued favorable prior year development of $4.8 million, that's versus favorable prior year development of $10.9 million in the prior year quarter, reflecting strong growth in the most recent accident years in both individual and group. The expense ratio was 27.8%, that's versus 31.7% in the prior year quarter, mainly driven by growth in our service and fee income from group administration fees, third-party technology fees along with the sale of EuroAccident in 4Q '19. The effective tax rate for the quarter was 21.9%, that compares to an effective tax rate of 20.9% in the prior year quarter. The lower rate in the prior year was driven by lower state and foreign taxes. Investment income was $29.7 million for the quarter, a decrease of $4.6 million over the prior year quarter. The decrease reflects lower income in all alternative investments and lower market yields. On behalf of the Board of Directors, the leadership team, I'd like to echo Barry's comments and thank the 9,000 associates of National General for their professionalism and outstanding efforts to seamlessly meet the needs of our policyholders in these unprecedented times. I would now like to turn the call over to the moderator for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question is coming from Randy Binner. -------------------------------------------------------------------------------- Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- B. Riley FBR. I have just a few kind of numbers questions. But actually, first on the penetration rate in the lender place book. I think, conventionally, that goes up in a recession. But a number of mortgages in the United States are going to be under forbearance plans, either through the GSEs or FHA. And so I was wondering if you kind of solved for that or thought through that and how that might affect penetration rate for lender-placed home. -------------------------------------------------------------------------------- Michael Hal Weiner, National General Holdings Corp. - Executive VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Yes. Randy, it's Mike Weiner. Thanks for the question. With regards to lender-placed business, you are correct. So when we're talking about the broad-based tailwind that, that's going to provide for us, with all of the forbearance and all of the regulatory relief that's being provided to that, right, our hope is that everyone does become current on the mortgages, and we don't have it when the general economy recovers. But if you look at the correlation between unemployment rate and mortgage delinquencies and penetration rates, there certainly is a correlation, right? And I think it's probably fair to expect that late this year and through most of next year, unemployment rate will be above the historical average, which has manifested itself in historically low penetration rates. So I think it will manifest itself just at a slower pace either late this year and through next year. So I wouldn't expect a massive increase in that. In addition to it, I just want to also draw a correlation between this and what happened in 2008, which is a dramatically different situation in terms of that. There's a lot more equity in homes that there were up in 2008. So I wouldn't be modeling out any massive, massive increases, but I do think it will be a nice increase. -------------------------------------------------------------------------------- Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [4] -------------------------------------------------------------------------------- Okay. And then, on -- and apologies if I missed this, but I think you talked about continuing to increase the growth of online quote activity through mobile devices. Can you -- do you have updated figures there? The last I had was that 75% of quote activity is on mobile, I think in the -- in your direct-to-consumer book, and that 20% of your overall book was direct-to-consumer. Are those still the right figures? Or have those numbers gotten higher? -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [5] -------------------------------------------------------------------------------- That would be the right figures. A lot of that is quote start rates. So many policies -- we've got an omni-channel marketing approach where many customers will start a quote online and then finish it in the store, if that's of greater convenience to them. But that's definitely -- we see a high percentage of online quote activity happening on mobile devices. -------------------------------------------------------------------------------- Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [6] -------------------------------------------------------------------------------- Great. And then in Accident & Health, on the individual side, I think you touched on this a little bit, but looking for maybe a little bit more color. In -- kind of in March, late March, and then in what we've seen from April, have you seen increased demand for individuals looking for supplemental and stop gap type health products? And also, have you seen any change in demand for Medicare supplement-type products? -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [7] -------------------------------------------------------------------------------- Sure. So the Medicare, we haven't seen much change in demand. Obviously, the year-over-year growth has been robust. It really follows the individuals as they're aging into Medicare over the course of the entire year. And then, you've got some individuals that are already Medicare eligible, switching plans, et cetera. That happens during the annual -- the enrollment period later in the year. On the individual health side of things, we have seen strong demand more on the short-term medical product. Obviously, coming into this year, I believe we had a greater amount of uninsured Americans have been in recent years, and they are looking for a coverage option, especially in light of the COVID-19 pandemic, and that's the product line that also benefits from higher unemployment rates as well as more individuals are tasked with getting their own health insurance coverage as opposed to getting it from their employer. So we've seen both of those elements be a tailwind for that product line. -------------------------------------------------------------------------------- Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [8] -------------------------------------------------------------------------------- I guess one more as long as we're on the topic with -- back to Medicare. Do you perceive this post-COVID environment as creating more demand when we get to open enrollment period, when most of the sales happen, as you said? And is there any shift in how you might try to market ahead of open enrollment period this year in light of what's happened? -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [9] -------------------------------------------------------------------------------- No. It's not having a dramatic impact one way or another on the way we approach Medicare marketing. We've obviously got a very -- a robust amount of online marketing assets. We're able to leverage referrals from our Property & Casualty and Accident & Health agents who are able to -- where we've got a project where we hope to launch a new online experience for individuals that are looking to get educated or purchase Medicare, which is launching in the coming months. But I won't -- we're not banking on a higher amount of demand as a result of COVID. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- And the next question is coming from Matt Carletti. -------------------------------------------------------------------------------- Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [11] -------------------------------------------------------------------------------- Matt Carletti at JMP. Randy covered a little bit of ground there, but I had a couple of other questions. Mike, maybe following on, on the LPI book and appreciating your comment that this time around, it's a very different situation than the last recession. But just curious, historically, in that book, whether it's -- as you guys have run it or under prior ownership, where have those penetration rates gone? Where do they peak in the last recession? Kind of, again, keeping in mind that, that's an outside number that might not be likely this time around. -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [12] -------------------------------------------------------------------------------- Sure. What we're currently thinking is that for each point increase in mortgage delinquency rate, we would expect to see, call it, a 15 basis point increase in penetration rate. That's the way we're thinking about it. -------------------------------------------------------------------------------- Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [13] -------------------------------------------------------------------------------- Okay. Very helpful. And then just one follow-up on the net investment income in the quarter. Mike, you talked about alternative investments. You're driving that down. Can you just talk a little bit about any timing issues there, lags or otherwise in terms of how that gets reported, so we can think about how the bounce back and the recovery might look in future quarters? -------------------------------------------------------------------------------- Michael Hal Weiner, National General Holdings Corp. - Executive VP, CFO & Treasurer [14] -------------------------------------------------------------------------------- Yes. We got -- we received additional information. This is really on our Life Settlement portfolio, which got updated with some mortality tables on that. So I think that reflects the newest mortality tables on our Life Settlement portfolio. There's really not much more than that. I don't anticipate that continuing. We update on -- as we get more information, we continue to do our evaluation of it. But I don't think there's much more in that. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- And the next question is coming from Jeff Schmitt. -------------------------------------------------------------------------------- Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [16] -------------------------------------------------------------------------------- Jeff Schmitt with William Blair. Question in the A&H segment, the losses there, obviously down quite a bit. How much of that is driven by frequency? And then I guess, how much -- is there a benefit from a mix shift there with the stop-loss business growing at such a high rate? -------------------------------------------------------------------------------- Michael Hal Weiner, National General Holdings Corp. - Executive VP, CFO & Treasurer [17] -------------------------------------------------------------------------------- Yes. So I think what you're alluding to is maybe building off of some of Barry's comments with regard to frequency trends in the industry as a whole as people not seeking or not getting out and getting the medical attention that they would. So there is some benefit of that. But again, I caution that because there's going to be pent-up demand, right, that will ultimately unwind out through the remaining part of the year. So I want just to extrapolate on that. However, that was only there for a small piece of the quarter, right? The business continues to perform well with the underwriting that we're doing as well as our continued mix shift. -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [18] -------------------------------------------------------------------------------- Yes. Just to add to that. During the quarter, we've seen a lower frequency of large losses on our group stop-loss business, which either could be due to chance or better upfront underwriting. And our approach is really to have within our underwritten health lines of business a sophisticated segmentation. So we definitely look to grow those lines of business and reinvest our savings from the segmentation into lower base rates for all of our customers, which should further widen the gap between us and our competitors and enable us to continue to grow within the segments that we are -- that are most attractive to us within the health lines that we're in. -------------------------------------------------------------------------------- Jeffrey Paul Schmitt, William Blair & Company L.L.C., Research Division - Associate [19] -------------------------------------------------------------------------------- Okay, great. And then on the service and fee income and A&H, I think you said the Medicare piece was up 60%. What is -- how much of the book is that? And I guess, could you maybe discuss the other drivers of that? It sounds like there's a couple of components that drove that. -------------------------------------------------------------------------------- Barry Samuel Karfunkel, National General Holdings Corp. - CEO & Co-Chairman [20] -------------------------------------------------------------------------------- Sure. I believe that the Medicare Agency revenue for the quarter was roughly $11 million, $12 million in that range. Correct me if I'm wrong, Mike. And then we obviously have our various technology offerings that are seeing some nice growth as well. We have our lead cloud and quoted businesses, which are -- continue to gain traction in being able to sign up more data providers, more IoT providers, more carriers that's been able -- all the various parties to integrate with one another seamlessly once they're on that platform. So those are the 2 drivers of our fee income that we're seeing on the A&H side. Of course, along with the related fee income -- revenue that we would see from the short term from the group business, which charges fees for accessing -- TPA fees for accessing the medical network, et cetera. -------------------------------------------------------------------------------- Michael Hal Weiner, National General Holdings Corp. - Executive VP, CFO & Treasurer [21] -------------------------------------------------------------------------------- Yes. So just to add to that. If you look, Jeff, Page 11 of our earnings release, we bifurcate the fee income. So very symbiotic to what Barry said, our third-party fees are up about 32.7%, which includes the Medicare, that technology. And then 33.3% is the group business, which is a little bit larger than that. So in total, our service and fee income is up 32%, which is -- we feel very good about. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Thank you. And there were no more questions in the queue at this time. -------------------------------------------------------------------------------- Jeffrey Allan Weissmann, National General Holdings Corp. - Executive VP, General Counsel & Secretary [23] -------------------------------------------------------------------------------- Great. Thank you all for joining, and we look forward to seeing you next quarter. Take care. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.