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National General Holdings Corp (NGHC)
Q4Â 2019 Earnings Call
Feb 21, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the 4Q 2019 Quarterly Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Paul Anderson. Sir, the floor is yours.
Paul Anderson -- Director of Investor Relations
Thank you. Good morning and welcome to the National General Holdings Corp. Fourth Quarter 2019 Earnings Conference Call. My name is Paul Anderson, 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 and objectives of management for the future operations, including those related 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 as 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.
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 fourth quarter 2019 earnings, which is available in the Investor Relations section of our website at nationalgeneral.com.
It is now my pleasure to turn the call over to our CEO, Mr. Barry Karfunkel.
Barry Karfunkel -- Chief Executive Officer and Co-Chairman of the Board
Thank you. Good morning and thank you for joining our year-end earnings call. I'm pleased to announce record earnings for 2019 and look forward to continued earnings growth in the years to come. What our team has been able to accomplish is nothing short of spectacular. Despite some opportunities for improvement, we've been able to produce another year of strong returns. We have achieved this by leveraging our diversified businesses, which are powered by our integrated and proprietary technology platform. In turn, this provides us with excellent data insight that enables our analytic efforts across all lines of business and operations.
I'll spend some time providing some additional color across our various lines of business. Our personal auto continues to produce solid results. Our gross written premium increased 3% for the quarter. Top line for 2019 was dampened by actions to reduce our business in New York, exiting certain unprofitable MGA relationships and not having the one-time nationwide renewal rights transaction that benefited us in 2018.
Our approach to growth has always been, that we will take a counter cyclical approach to our peers. While most peers ramp up commission rates, decrease rates below loss trends and relax underwriting rules during soft market conditions, we tend to take rate equal to trend. When markets inevitably harden and our peers are trying to catch up with double-digit rate increases, we're benefiting from winning the new business that comes to us as a result of our rate adequacy. We believe this strategy gives us a strong counter-cyclical advantage.
Another way we win is by constantly enhancing our products. In Q3, we released our first RAD 6.0 product in Florida. Early results are extremely favorable. As with our past RAD 5.0 product rollout, we enhanced our credit modeling and introduced enhanced segmentation based on new data sources. The result was an increased conversion rate with new business loss metrics looking favorable.
We look forward to releasing the product in additional states with the added benefit of having the side by side, mid-market product, which will enable us to target a much wider customer base. Our direct to consumer progress continues to be very exciting. Our direct to consumer channel experienced premium growth of approximately 11%. This channel now comprises roughly 19% of our total personal auto business.
Our small business auto book declined slightly in Q4, as a result of underwriting and pricing actions taken last year. We have strengthened reserves in the P&C segment by $27 million, primarily due to our experience in small business auto. We are confident that we will experience stronger contributions from this line in 2020.
While our packaged homeowner results weren't a meaningful contributor in 2019, I'm extremely pleased by how we're currently positioned. The driver of our sub-optimal results was California, which makes up roughly 25% of our homeowners business. During Q4, we were approved for a 41.7% homeowners rate increase in California, which went into effect during January. We believe that after this rate increase, we're in a position of strength in California relative to our competitors.
Additionally, our project to reunderwrite our exposure to wildfire in certain areas was completed in 2019. We saw immediate benefits from this as we avoided a material concentration of wildfire claims that occurred last year. Another win was launching our next generation homeowners product in Texas.
We launched our product, which introduced enhanced segmentation, leveraging many third-party data feeds. The product seems to be performing as planned with our conversion rates up in attractive segments and conversion rates non-existent in poor-performing segments. We look forward to having our new product replace existing products in other states over the course of this year.
Given the many actions taken in 2019, we don't expect to see growth in 2020 for our homeowners. However, our rate per policy should increase materially. Accidents and health continues to impress in its ability to deliver against our strategy. We set out to acquire select distribution assets, lead generation and technology businesses along with product expertise.
We leveraged our in house analytic capabilities to improve the product, and now all the various instruments that we've acquired are coming together to play a beautiful symphony. Absent Euroaccident, which was sold mid-quarter, we experienced growth of 17.6% with an all-in combined ratio of 78.2%.
Our stop loss business continues its strong growth by being an industry leader in the small group space with its unique and highly analytical approach to pricing and underwriting. This top line growth is expected to continue for the coming years as we reinvest the loss ratio savings from our segmentation back in base rate decreases for our target segments, further creating distance between us and our competitors.
Our individual line's 15% growth rate was driven by the release of our new segmented short-term medical product, which drove significant growth within our target segments. Looking forward to this year, we look forward to releasing yet another version of our short-term medical product with even more segmentation, which will further distance us from our competitors as well as releasing an updated supplemental product offering. Our own agencies bolstered our growth with our own lead generation platform, while other agencies, which are dependent on external lead generation platforms are experiencing increasing lead costs. HealthCompare, our Medicare agency, had a strong AEP season, more than doubling its business year-over-year.
While I'd classify our technology businesses as being in incubate mode, I'm excited about the progress that these businesses are making and expect them to begin maturing considerably over the next two years. While in the past, I've guided to an accident and health combined ratio in the low 90s, given the sale of Euroaccident and the growth of our Medicare business. I would expect our combined ratio to be in the mid 80s. With the growth rate of our Medicare and technology businesses expected to exceed the carrier growth rate over the coming years, I'd expect our combined ratio to continue to improve over time.
In summary, 2019's success had many contributors, which should continue to contribute in the coming periods. At the same time, we've accomplished a series of improvement initiatives, which should result in additional meaningful contributors in 2020.
With that, it is my pleasure to turn the call over to our CFO, Mike Weiner, for a review of our financial results.
Michael Weiner -- Chief Financial Officer
Thank you, Barry. We had net income in 2019 of $314.5 million or $2.73 per diluted share. Our 2019 operating earnings were $319.2 million or $2.75 per diluted share. Fourth quarter 2019 net income was $98.4 million, which compares to net income of $17.3 million in the fourth quarter of 2018. Operating earnings were $83.1 million versus $33.6 million in last year's quarter. Operating diluted EPS was $0.72, which compares to $0.30 in the prior year quarter. Our results in the quarter were impacted by $9.2 million of weather losses, which compare favorably to $59 million of losses in the prior year's quarter. While catastrophic losses were lower than prior years, we did see higher non-catastrophic weather-related losses.
Fourth quarter 2019 P&C segment included $26.8 million of unfavorable prior year development, primarily driven by our small business auto. That's versus $8.6 million of unfavorable development in the prior year quarter. The accident health segment reported $7.6 million of favorable prior year development versus $6.4 million of favorable development in the prior year quarter.
For the full year, the prior period development for the combined Company was $1.3 million adverse. Trailing 12-month operating return on equity was $16.1 million as of December 31st, 2019. Our fully diluted book value per share grew 25% from December 31st 2018 to $19.06.
Now I'd like to give some additional color on our two operating segments, first within our property and casualty segment. Gross written premium grew 3.3% to $1 billion for the quarter, which included $47.4 million of additional premium from the acquisition of Farmers Union Insurance. Personal auto grew 3%, reflecting continued investments in our direct to consumer distribution.
Service and fee income decreased 3% to $107.5 million for the quarter, reflecting continued changes in the mix of our business, including the addition of National Farmers Union. The P&C combined ratio was 94.2 million -- 94.2%, excuse me, versus 100.5% excluding amortization of intangible assets.
The loss ratio was 73.6% compared to 79.6% in the prior year quarter. This year's pre-tax catastrophic losses were $9.2 million, reflecting favorably compared to the $59 million related to Hurricane Michael and the California wildfires a year ago. The expense ratio was 20.6%, which compares to 20.9% in the prior year quarter, which is primarily attributable to changes in the quota share and lower ceding commission income.
Overall, our monoline auto book net trend, as we define as loss trend divided by premium trend, is moderately favorable thereby helping the year-over-year accident year results. We attribute this to continued favorable frequency trends, reflecting pricing segmentation, better risk selection from our RAD 5.0 product, and our new RAD 6.0 product as well as continuing mix shift. Severity trends are moderately better than industry, which we attribute to mix shift and continued claims initiatives. Effective January 1st, 2020, we will now cede 5% of our net liabilities under our auto quota share. This reduction is driven by the increase in self-generated capital from the year.
Within our accident and health segment, gross written premium grew to $175.8 million for fourth quarter versus $163.5 million in the fourth quarter of 2018, which benefited from strong growth in both our domestic, individual and group products. Service and fee income grew 39.7% to $71.8 million versus $51.4 million in the prior year quarter. The growth was driven by administration fees on our group insurance products as well as third-party agency distribution and technology fees.
The accident and health combined ratio was 77.1% versus 73.6% in the prior year quarter, excluding non-cash amortization of intangible assets. The loss ratio was 41.4% versus 45.7% in the prior year quarter. The loss ratio reflects continued improvement in the current accident year loss ratios for both the small group self-funded and individual products. We also had continued favorable development of $7.6 million versus $6.4 million in the prior year quarter, reflecting continued strong trends in the most current recent accident year of 2018. That's in both our individual and group businesses. The expense ratio was 35.7%, that's versus 27.9% in the prior year quarter, reflecting continued investment in our businesses.
We sold the EuroAccident business on December 2nd, 2019. The proceeds from the sale were $139 million, and we realized a pre-tax gain of $26.4 million on the transaction. The tax rate for the year was 19.8%. This is lower than our previously projected 21.5%. The lower rate was driven by lower state and foreign taxes and return to provision adjustments. We anticipate our annual rate of approximately 21% to be a reasonable expectation for our tax rate on a go-forward basis.
Investment income was $38.5 million. This increased $0.9 million over the prior year quarter. Investment income increased due to positive cash flow and increasing the size of our investment portfolio. The increase in our portfolio was offset by lower market yields. I'd like to echo Barry's comments and excitement about the strong results and our continued -- that we continue to demonstrate in our diverse earnings power of National General. I would also like to thank the National General team members for delivering an outstanding year in 2019.
I'd now like to turn the call over to the moderator for questions.
Questions and Answers:
Operator
Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. And your first question is coming from Randy Binner. Randy, your line is live. Please announce your affiliation and pose your question.
Randy Binner -- B. Riley, FBR -- Analyst
Hi, I'm with B. Riley FBR. Good morning. I have a few questions. I guess the first one is, can you talk a little bit about kind of non-standard versus standard market competition? That's been an issue recently in the market, it sounds like your pricing versus the loss cost is maybe a little bit better in the fourth quarter and currently than it was earlier in 2019. You have a book that is -- you know, focuses on non-standard, but has standard too. So I'm just curious, if you think, the pricing dynamic and market competition dynamic is better or worse in non-standard versus standard.
Barry Karfunkel -- Chief Executive Officer and Co-Chairman of the Board
Sure. Good morning. So our product focus for the standard business is primarily leading with the homeowners products and getting the auto as the tag-along product. So we don't really as of today focus heavily on a monoline standard preferred automobile product, whereas on the non-standard side, it's really driven by various markets. There are certain markets where we're seeing some softness whereas there are other markets that we're seeing less softness than in others.
Michael Weiner -- Chief Financial Officer
No, I'd also -- Randy, it's Mike. I'd also like to add to that. When we talk about the non-standard and looking at it, there's obviously no perfect definition of non-standard, right. But I think underlying everything that we talked about in our auto business, right, and Barry alluded to this in his comments earlier, is that we're seeing consumer prices of insurance in auto being relatively flat to actually slightly down in the quarter, right, loss trends in the mid to high 3s, and we're taking rate in accordance with that, right. And it's really similar to the same old story. You've seen this decreasing or declining frequency and increasing severity. So our pricing discipline is going to continue and we think it's going to manifest itself into, I would say, higher than average growth rates when that market does inevitably harden, but we're underwriters at heart and that's why we're going to focus on every day in defending that margin.
Randy Binner -- B. Riley, FBR -- Analyst
Great. And then on commercial auto, can you characterize what drove the adverse development?
Barry Karfunkel -- Chief Executive Officer and Co-Chairman of the Board
Sure. It's really what seems to be plaguing the industry at large at this point in time with higher attorney representation rates with higher jury awards driving severity. So we've definitely taken actions, updated certain pricing factors to be able -- as well as enhanced certain claims practices to be able to adjust for those items. And we really feel confident with actions taken as we see in new business being produced.
Randy Binner -- B. Riley, FBR -- Analyst
All right. [Speech Overlap].
Michael Weiner -- Chief Financial Officer
I'd also like to add that it's not a -- it is a piece of our business as a whole, but if you look at the actual size of that small business auto, in the quarter, gross written premium was -- it's a $68 million business, and for the year last year, it was a little over $300 million. So we'll probably see that number decrease as we go forward. It's just not a meaningful number in the total Company, but I do echo Barry's comments in the sense that I think we have taken meaningful actions in the business. I think we have reacted very effectively in terms of taking up the development where we see fit, probably being a little on the conservative side of that, and I think we're hopeful that we'll be able to put this behind us in 2020. Sorry, I cut you off, Randy.
Randy Binner -- B. Riley, FBR -- Analyst
No. I'm good. Thank you.
Operator
Thank you. And the next question is coming from Jeff Schmitt. Jeff, your line is live. Please announce your affiliation and pose your question.
Jeff Schmitt -- William Blair -- Analyst
Hi. Yeah, Jeff Schmitt with William Blair. Question on the service and fee income in A&H, obviously up quite a bit in the quarter and for the year. And I think you had mentioned that the Medicare business was growing quite a bit, but could you touch on maybe the buckets there, the different buckets there and what type of growth you're seeing in them?
Barry Karfunkel -- Chief Executive Officer and Co-Chairman of the Board
Sure. So we've got our -- one bucket is STPA and health network access fee that goes along with our stop loss, with our stop loss premium and that should mimic growth of our stop loss business as that grows, so well, those fees grow in tandem with that. We're obviously seeing the fee business from our technology and Medicare businesses. Mike, did I leave anything out?
Michael Weiner -- Chief Financial Officer
No. So actually perfect. So if you think about it as a whole, our group business from a GWP perspective grew a little over 20%. The group service and fee income grew 21%, completely in line with that, and then the other large driver of it's about a 55% increase in third-party fees with the vast majority of that really driven by Medicare business, which we're quite bullish about as we move forward.
Jeff Schmitt -- William Blair -- Analyst
Okay, great. And then the margins in A&H, I think you had mentioned the Euroaccident business was sort of a lower margin business, but you still expected combined ratio in kind of the mid 80s going forward. And just looking at that adjusted combined in '18 and '19 averaging closer to 80%, so could you help me think about that why that may go up?
Michael Weiner -- Chief Financial Officer
Yeah. Well, listen, it's been -- we had two great years in terms of the vintage performance of the business that, you're right, generated on an adjusted basis where I said about 5% better than we anticipated, but we're pricing and our expectations are going to be in the mid 80s for that business.
In addition to it is, there was -- I mean, it's never perfect way to do this because the timing of annual policies, there was some favorable development in both of those accident years. So if you adjust for that, you'll get a slightly higher number up and close that gap on that 5% I was alluding to, but I think at the end of the day, it's fair to say we'll hope -- we'll be in the mid 80s on a go-forward basis. That's what our indications are telling us.
Jeff Schmitt -- William Blair -- Analyst
Okay. Great. Thank you.
Michael Weiner -- Chief Financial Officer
Thank you.
Operator
Thank you. And the next question is coming from Yaron Kinar. Yaron, your line is live. Please announce your affiliation and pose your question.
Yaron Kinar -- Goldman Sachs -- Analyst
Hi, good morning. Yaron Kinar with Goldman Sachs. I guess, just one question on my end. As you're lowering your guidance for the combined ratio on the A&H segment, should we then proportionately lower our expectations for the consolidated combined ratio, which I think in the past you had guided to 92% to 94%?
Barry Karfunkel -- Chief Executive Officer and Co-Chairman of the Board
I'll let Mike speak about the consolidated combined ratio. However, we're actually increasing our guidance on the A&H combined ratio. Our prior guidance was for us to be in the low 90s. Obviously results significantly outperformed that. Now we are increasing our guidance for our combined ratio to actually go from that low 90s prior guidance to be in the current mid 80s right now.
We would expect the total combined ratio of the Company not to really move that dramatically because there are puts and takes in both sides. We -- as we mentioned in the prepared remarks, we expect our homeowners commercial vehicle business to be more meaningful contributors to our overall business on a go-forward basis.
So we would expect the combined ratio of the total business to really be in line with what we've been experiencing thus far.
Michael Weiner -- Chief Financial Officer
Yeah, the only thing I'd add to that, Barry and Yaron, is that we delivered a little over 93% combined ratio this year in the P&C segment, right, and that took into account the two headwinds that Barry alluded to with the sizable development we had on the small business and as well as just the difficult market it was on our packaged business.
So in total, I wouldn't offset that, but I do think at the end of the day we'll be right in the dead center range of that 92% to 94%. Again, the biggest variable for us is not going to be the small business. It's really just going to be really what happens with cats and on the traditional homeowners ratio -- loss ratio, which we think we're well positioned on both those things, particularly with the rate we have earning in on the homeowners side.
So we're looking forward to a good year.
Yaron Kinar -- Goldman Sachs -- Analyst
Great, thank you very much.
Operator
Thank you. And there were no more questions from the queue at this time.
Paul Anderson -- Director of Investor Relations
If there are no more questions, then I'd like to take the opportunity to thank you all for your time this morning. We look forward to speaking with you again soon. Thank you and goodbye.
Operator
[Operator Closing Remarks].
Duration: 26 minutes
Call participants:
Paul Anderson -- Director of Investor Relations
Barry Karfunkel -- Chief Executive Officer and Co-Chairman of the Board
Michael Weiner -- Chief Financial Officer
Randy Binner -- B. Riley, FBR -- Analyst
Jeff Schmitt -- William Blair -- Analyst
Yaron Kinar -- Goldman Sachs -- Analyst
