Aspira Women's Health Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good day, and welcome to the Allied World Assurance Company Fourth Quarter 2014 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Sarah Doran, Senior Vice President and Investor Relations. Please go ahead.

[Sarah Doran:]

Thank you. Good morning, everyone. Our press release, financial and investment supplements were issued last night after the market closed. If you'd like copies of these documents, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available through February 20 as of -- on our website as a replay. The dial-in information for this replay is included in our earnings press release as issued last night. Our speakers this morning are Scott Carmilani, Allied World's President and Chief Executive Officer; Tom Bradley, our Chief Financial Officer; Marshall Grossack, our Chief Actuary; and John Gauthier, our Chief Investment Officer. Before I begin, I note that statements made during the call may include forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements are subject to a number of uncertainties and risks that could significantly affect the company's current plans, anticipated actions and its future financial condition and results. These uncertainties and risks include, but are not limited to, those disclosed in the company's filings with the SEC. Forward-looking statements speak only as of the date on which they are made, and the company assumes no obligation to update or revise any forward-looking statements in light of new information, future results or otherwise. Additionally, during the call, management will discuss certain non-GAAP measures within the meaning of U.S. federal securities laws. For more information and a reconciliation of these measures to their most directly comparable GAAP financial measures, please refer to our earnings press release. With that, let me turn the call over to Scott.

[Scott A. Carmilani:]

Thank you, Sarah, and good morning. Thanks for joining our call this morning. This quarter, Allied World earned a combined ratio of 79.3%, our lowest quarterly combined ratio in 4 years. The company's had an excellent year in a competitive market as we grew book value per share by 12% and generated a 13% net income ROE. For the full year, the company achieved a combined ratio of 85% as compared to 86% the year before. Our 5-year average combined ratio is under 90%, a steady performance considering the impact of cat events over the same period, successfully navigating both the property and casualty markets. In the first quarter -- this is the first quarter we're going to be reporting across our newly reformed insurance segments, which are now the North American Insurance and Global Markets Insurance segments. Of course, our third segment, Reinsurance, has not changed. We grew our top line over 7% this year and approached a $3 billion of gross written premiums. The North American and Global Market segments drove the growth while Reinsurance segment was essentially flat year-over-year. On average, the rates across our insurance portfolio were up modestly about 1% for the quarter with overall casualty rates up more at around 3% and property rates down almost 9%. In the North American Insurance segment, our top line grew by 7% for the quarter and 9% for the full year. For the quarter, much of the growth came from our casualty lines, including excess casualty, environmental and programs. This is partially offset by a year-over-year decrease in our healthcare insurance book at almost 20% as we have been continuing with our ongoing corrective action to the components of that portfolio that are underperforming. We are starting to see some improvements in the healthcare and are optimistic about our impact of our work. Overall, the rates in our U.S. book were up in excess of 5%, and casualty rates were up 6%. Notably, this is now the 10th consecutive quarter that we've achieved rate increases exceeding 5% in our U.S. casualty books as the market continues to be among the strongest in the world. For the quarter, our overall retention ratio was 73%. The Global Markets segment had an 8% increase in gross written premiums for the quarter and a 21% increase for the full year of 2014. Much of the growth in the quarter was driven by new lines in our European markets, including general casualty, onshore construction and submarine business. We continue to see attractive opportunities for growth in this segment and are building out our product set and selectively hiring teams. Overall, the rate changes in our Global Markets segment were down 2% for the quarter with casualty rates largely flat and the property rate down 10%, like they are in the rest of the world. Our retention rate for the Global Markets Insurance segment was also around 73% for the quarter, and the prospects for profitability are beginning to show. Finally, gross premiums in the Reinsurance segment for the quarter decreased by 35%, but then ended up flat for the year. The decrease in the quarter, which is typically the segment's smallest, was primarily the result of nonrenewals on accounts that did not meet pricing thresholds and some negative contract adjustments from cedents that did not meet their expected targets. Reinsurance has been a solid contributor to our bottom line, earning over $200 million of pretax income in 2014. And although we continue to be cautious about how we're deploying capital in this segment, I'm very pleased with our overall performance this year. Lastly, before I turn over the call to Tom, I wanted to provide you an update on the RSA Singapore and Hong Kong acquisitions. The integration process continues to go smoothly. We are on track to close the transaction early in the second quarter. This business will report, of course, through our Global Markets direct insurance segment going forward from here. Now let me turn over the call to Tom, our CFO, to discuss the financial aspects of the call. Tom?

[Thomas A. Bradley:]

Thanks, Scott, and good morning, everybody. For the full year 2014, Allied World generated net income of $490 million, operating income of $415 million and underwriting income of $323 million. We benefited from favorable reserve development of $213 million during the year as compared to $180 million released in 2013. While Marshall will get into additional details in a few moments, recall that during the fourth quarter of last year, we added $22 million of IBNR reserves through our managed care E&O and healthcare D&O antitrust claims. We continue to feel that we were quick to get in front of those developments in the -- in those areas. And while it's still early days, our actions were prudent and have not warranted further adjustment. This quarter, we are reporting $22 million of cat losses related to the hailstorm in Brisbane, Australia and Typhoon Rammasun, both of which impacted the Reinsurance segment. Note that while Typhoon Rammasun occurred during the third quarter, information received during the fourth quarter pushed the event above our $10 million per event cat reporting threshold. This $22 million of cat losses in the quarter compares to $13.5 million of cat losses in the fourth quarter of last year. Those were related to hurricane -- to Typhoon Fitow. For the full year, we incurred $65 million of cat losses compared to $13.5 million in 2013. For the year, the company's expense ratio was essentially flat at 30.3% compared to 30.2% for 2013, even as we increased headcount by 103 employees to support our growth. We continue to view our expense management capabilities as a competitive advantage. Operating cash flow was $417 million in 2014 compared to $114 million in 2013. This increase was driven by the receipt of funds from prior underwriting years related to our participation in the ILS collateralized property catastrophe reinsurance program. Already, during the first month of this quarter, we've received distributions from ILS of over $285 million from prior underwriting years as we continue to benefit from their outstanding operating results. Given the recent actions of the Swiss National Bank, I did want to express -- to address our exposure to the Swiss franc. While we are domiciled in Switzerland, our business and net assets in the currency are relatively small and we don't expect that the recent strengthening will have a material impact on Allied World. Turning to capital management. For the quarter, we repurchased 290,000 common shares in the open market at an average price of $37.36 per share, and a total cost of $10.8 million. As of last night, we also repurchased 250,000 shares since the beginning of the quarter for $9.3 million, leaving our remaining current authorization at $410 million. We restarted our repurchase program late in the fourth quarter at a modest level. Going forward, I would expect to repurchase shares at a rate comparable to the first half of 2014. We ended the quarter with diluted book value per share of $38.27, which is up 11.9% from 2013 and up 3.1% from September. We ended the fourth quarter with shareholders' equity of $3.8 billion, up $258 million from year-end '13. Our total capital is $4.6 billion with financial leverage of 17.8% and net premium leverage of 0.6x for the year. With that, I'll turn the call over to our Chief Actuary, Marshall Grossack.

[Marshall J. Grossack:]

Thanks, Tom. Our reported loss ratio for the fourth quarter of 2014 was 47.6%. This includes 12.5 points or $71.7 million net benefit from reserve releases for the quarter. The accident year loss ratio, excluding prior year adjustments, was 60.1% for the quarter which compares to 65.2% in the prior year quarter. For the full year, net reserve releases were $212.6 million with an accident year loss ratio excluding prior year developments of 64.6%. This compares to 65% in 2013. Drilling down by segment, in the fourth quarter of 2014, reserve releases were driven by net favorable development of $41.7 million in the North American Insurance segment, $4.2 million in the Global Markets Insurance segment and $25.9 million in the Reinsurance segment. For the Reinsurance segment, it is notable that $21 million of the releases was from our property line for the 2013 accident year. As of the end of the year, our reserve position sits at 4% over the midpoint of our actual range. This is largely consistent with that position in the prior year quarter. Let me now turn the call over to John Gauthier, our Chief Investment Officer, to discuss our investment highlights for the quarter. John?

[John J. Gauthier:]

Thank you, Marshall. Good morning, everyone. Allied World investment portfolio had a modest gain for the quarter, returning 40 basis points or $34 million compared to 1.4% or $115 million for the fourth quarter of 2013. For the full year, our investment portfolio returned 3.1% or $266 million compared to 2.6% or $217 million for all of 2013. The portfolio generated net investment income of $49 million during the quarter. This is up 4% from the prior year quarter and up 13% from the third quarter of '14. Full year net investment income was up 12% at $177 million, which compares favorably to the full year 2013 net investment income of $158 million. Much of this was due to the mix changes within our fixed income portfolio. The global equity markets were mixed during the quarter and volatility increased for a host of reasons, ranging from broken merger transactions to Ebola, but now seem like a distant memory. While the S&P, after 2 sharp drawdowns, finished the quarter up almost 5%, there was considerable volatility in Europe driven by the anticipation of the Greek election and uncertainties surrounding the ECB quantitative easing efforts. In addition, we had the fallout from continued oil price declines. On the last point, it is important to note that our total exposure to the oil and energy sector is quite small at less than 3% of assets with more than half of that in investment-grade bonds. Turning to Allied World Financial Services, we finished the quarter with approximately $143 million of minority stake interest in our partners. This includes the purchase in October of our minority stake in Blue Vista Capital Management, a real estate private equity manager. AWFS generated $6 million of income for the quarter and $13.3 million of investment income for the full year. Remember that we report the AWFS equity pickup on a quarter lag so the $13.3 million consists of our share of the income of our partners from the fourth quarter of '13 through the third quarter of '14. We remain very constructive on the outlook for our partners. And with that, I'll turn the call back to Scott.

[Scott A. Carmilani:]

Thanks, John. I'm very pleased with our results for 2014. We've made great progress in our goals and initiatives, and have ended the year with really great results. I believe that the planned buildout of our global operations as well as our prudent underwriting philosophy will continue to drive results in 2015 and beyond. Let me go through some of the highlights

[Operator:]

[Operator Instructions] The first question comes from Amit Kumar of Macquarie.

[Amit Kumar:]

Maybe just 2 quick questions. The first question is on the discussion on Reinsurance premiums. I was wondering if you could share your view on the 1/1 renewals and how the PMLs might look differently after your 1/1 renewals.

[Scott A. Carmilani:]

I think the rate decreases in the challenging market that presented itself in the second half of '14 continue into '15, and as you -- as we articulated in our last quarter, that portfolio is starting to come down some. I would say that January 1 was more of the same with both the premium and the PML slightly down.

[Amit Kumar:]

Was it in double-digit range? Or -- I mean, low single digit, I guess that's what I'm going to figure out, because your book value has gone down.

[Scott A. Carmilani:]

Yes, very low double digits.

[Amit Kumar:]

Got it, that's helpful. I guess the only other question and then I'll stop is going back to the discussion on the healthcare book. It seems -- what I was trying to figure out in your comments was -- we had discussed the industry in detail last quarter. Do you get the sense -- is it more of a macro trend regarding the improvement? Or is it more related to the actions you've taken but the macro trend still remains adverse?

[Scott A. Carmilani:]

I think the macro trend has come close to the bottom, and the -- and our actions have been what's driving the results.

[Amit Kumar:]

Got it. And there was a modest adjustment in 2011 in the healthcare book. Was there anything beyond that? Or is that just truing up some numbers?

[Scott A. Carmilani:]

Truing up.

[Operator:]

The next question comes from Michael Nannizzi from Goldman Sachs.

[Michael Steven Nannizzi:]

I guess just -- I'm looking at the now North American Insurance, the year-over-year improvement and the underlying -- if I remember right, the -- in the old format of reporting, we had a lift up in the underlying loss ratio in the fourth quarter of last year. Can you just talk a little bit about kind of what -- what happened there? Just trying to reconciling that -- reconcile that to kind of some of the other commentary.

[Scott A. Carmilani:]

Two things happened there. I think that's -- a lot of that's in the supplement. There was less noise in the North America business, and the Bermuda portfolio had takedowns.

[Michael Steven Nannizzi:]

On an accident year basis?

[Thomas A. Bradley:]

Sorry, could you repeat the question, please? I'm...

[Michael Steven Nannizzi:]

I was looking at the underlying -- so your -- in your supplement, you have the current accident year loss ratio in North American Insurance was down like 8 or 9 points, so not development. I think that's what it said. So I was just trying to understand sort of what happened there. And I was looking at our old model, in the old reporting format, where it looked like the fourth quarter of last year saw a year-over-year increase in that same current accident year. And so I was just wondering if that was a factor. In other words, that this is a more normalized quarter or -- and that last year fourth quarter was a blip or if there was something else happening there.

[Thomas A. Bradley:]

Okay, I got your point. Last year was definitely a blip. This is definitely more normal.

[Michael Steven Nannizzi:]

Okay, got it. And would it be possible to provide the last 4, 8 quarters in the new format, just so we can have some history in terms of cats and underlying -- and development in the new format?

[Scott A. Carmilani:]

I don't think we're doing -- we have some information in the supplement. That restates the whole year, right?

[Sarah Doran:]

Yes. Mike, we -- this is Sarah. We plan to, obviously, do that over the course of the year, so as we get our Qs and eventually the K out. But for now, the disclosure that we provided a couple weeks ago on the historical top line is what we've -- what we're going to provide.

[Michael Steven Nannizzi:]

Got it, okay. And then as far as the Reinsurance segment is concerned, I know there's some conversation about writing some more business on ILS in 2015. And now just given the pullback here, how should we think about top line in the Reinsurance segment? Is that -- is it whatever it was in the base business plus ILS? Or are there going to be some offsets where you don't expect a lot of increase there at this point?

[Scott A. Carmilani:]

I would think the latter. It would more likely to be offsets whereas not much of has increased so -- flat to decrease.

[Operator:]

The next question comes from Dan Farrell of Sterne Agee.

[Dan Farrell:]

Just a question for you on the Global Markets G&A ratio. I mean, now that you guys have this new disclosure, clearly, it's more evident that you're running pretty high on G&A ratio there and probably are in need of some scale. I'm wondering how much benefit the acquisitions in Singapore and Hong Kong will have to that. And where would you like to ultimately get that G&A ratio down to? Where could we think of that trending over time?

[Scott A. Carmilani:]

Well, a couple of comments there. A lot of the hiring we did in 2015 -- '14, sorry, affected that area. So there's been a major increase in overhead or fixed expense from those folks as well as we moved into a newer facility, had taken more space in London, considerably more, and we also took space in Switzerland. So some of that increase in the expense is the -- is front running the -- being able to handle the people we have now. And some of it is just as you described, that -- we have to get a little more scale there. The RSA acquisition will add over $300 million in premium and 300 people as well in that office. But the overhead in the Asia facilities is slightly lower, so it should have a positive impact in the overall numbers.

[Dan Farrell:]

Okay, great. And then just a couple of numbers questions. Can you remind us what the size of the investment portfolio is that's coming over from the RSA acquisition? And then also, if you have the number handy, would you be able to tell us what the cost basis is for your total fixed income portfolio? I think we can get it from the Q. But if you have it, that would be great.

[Thomas A. Bradley:]

I'll start with RSA. It's actually -- the assets coming over are very small. Remember, this is a -- basically, a renewal rights in -- from their branch onto our branch. So we'll be putting capital into our branches, but that business is mostly then reinsured into Bermuda. So we're not pulling a lot of assets over from them. On the second part, John?

[John J. Gauthier:]

Yes. Fixed income's about $7.5 billion across the -- both investment grade and non-investment grade.

[Dan Farrell:]

On a cost. Okay, great.

[Operator:]

[Operator Instructions] The next question comes from Charles Sebaski from BMO Capital Markets.

[Charles J. Sebaski:]

First question, I guess, on the North America segment and the property book. I was wondering if you could give some color on the rate adequacy or what's going on. I guess the commentary you had that pricing is down kind of 10%, but the move in premium, at least on a gross basis, didn't really adjust that much. And so I'm wondering if it's new writings or other -- what's going on there? And what the rate adequacy looks like in the current prices?

[Scott A. Carmilani:]

In this market, from our perspective, we're shifting around as to what we do and in the property market quite a bit, from cat exposed to middle of the country stuff to -- from habitational to industrial. So there's always a lot of movement where we can -- where we try to get optimal rate for exposure on individual accounts. So some of them are broad accounts where we have multiple lines of business, and property is one of them. Others are specific to mining or one of the other classes. We've been derisking some of our habitational portfolio, and so some of it -- the mix of it's been moving around a bit.

[Charles J. Sebaski:]

Okay. And then I guess on the North America overall, I guess it's kind of a follow-up to what Mike Nannizzi was asking is -- I guess I'm curious about the attritional losses for the book this quarter. And you said this was kind of a run rate, I think you said. As I've got a calculator, I see that accident year x cat loss ratio is around 68%. And so were you saying that that's kind of a run rate for this book is a sub-70 accident year x cat ratio?

[Thomas A. Bradley:]

Yes. I mean, I think that that's reasonable. I mean, you have to remember, last year, in the fourth quarter, we did have some strengthening for the 2013 accident year that was a little bit abnormal with the healthcare D&O and then some lawyer's book and some other lines. So this is definitely a more typical run rate.

[Operator:]

[Operator Instructions] The next question comes from Mike Zaremski of BAM Funds.

[Michael Zaremski:]

A couple of questions and I might have missed this one when the operator took my name during the call. Reinsurance accident year x cat loss ratio looks like it's up 40. If you could provide some color. And are there any true-ups or releases from current years in that number?

[Thomas A. Bradley:]

Yes. I mean, we...

[Scott A. Carmilani:]

I believe you said that in your comments.

[Thomas A. Bradley:]

I did talk in my comments about the 2013 year. Yes, we did recognize that 2014 was a very good year for our property book across-the-board for our Reinsurance and the ILS deals. So we did have some reductions that was offset, to some extent, by the Brisbane hailstorm and by the typhoon that hit China.

[Michael Zaremski:]

Okay. And for North American, the releases were very high. Any color there? And did it come from the U.S. or business move over from Bermuda and the reporting format change?

[Thomas A. Bradley:]

I mean, it's a mixture of both. More was from Bermuda, but this was the best quarter we've had in a while for, what you would call the old U.S. segment as well.

[Marshall J. Grossack:]

And mostly out of the '09 and '10 accident years for that segment.

[Scott A. Carmilani:]

Yes. For the Bermuda, definitely [ph].

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Carmilani, CEO, for any closing remarks.

[Scott A. Carmilani:]

Thanks for joining the call, and have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.