Aspira Women's Health Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good morning, and welcome to the Allied World Second Quarter of 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sarah Doran. Please go ahead.

[Sarah Doran:]

Thank you, and good morning. Our press release and financial supplements were issued last night after the market closed. If you'd like copies of either, please visit the investor relations section of our website at www.awac.com. Today's call will also be available through August 9 on our website as a teleconference replay. Dial-in information for this replay is included in our earnings press release. Our speakers this morning are Scott Carmilani, Allied World's President and Chief Executive Officer; Tom Bradley, the company's Chief Financial Officer; Marshall Grossack, our Chief Actuary; and John Gautheir, the company's Chief Investment Officer. Before we will begin, I will note that statements made during the call may include forward-looking statements within the meanings of 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 events 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 complete, I can turn the call over to Scott.

[Scott A. Carmilani:]

Thanks, Sarah. Good morning, everyone, and thanks for joining our call. We're pleased to announce another solid quarter of strong growth and underwriting profit. Allied World generated a combined ratio 82.8% for the quarter and operating earnings of $104 million, or $2.95 per diluted share. Each of our 3 operating segments contributed to this result. While there were a number of small cats around the globe, including Oklahoma tornadoes, floods in Europe and Colorado wildfires, we're projecting just $22 million of losses from these headline events, and virtually nothing from the other ones you may have heard about, showing the strength of our niche platforms and our underwriting risk profile. We're halfway through the 2013 year, and our diluted book value per share has grown a healthy 4% from year end and our combined ratio is actually lower year-over-year to 83.9%, down for 85.2%. Our investment portfolio lost 90 basis points for the quarter, but our portfolio return remains positive for the year, gaining 40 basis points. John Gautheir will give you all the details for that in a few minutes. This quarter also benefited from $48 million of favorable loss reserve development, positively impacting our combined ratio by almost 10 points. Let me turn to production. Our company's top line grew by over 18% for the second quarter to $765 million of gross written premium compared $647 million in the second quarter of 2012. Underlying our growth were strong retentions on existing accounts, new business opportunities and a continued improving rate environment. On average, rates in our insurance portfolio were up 3.3% for the quarter, fairly even from both the property and casualty areas but vary depending on which side of the pond you're looking at. In our U.S. insurance segment, gross premiums were up almost 16% for the quarter over the prior year to $307 million. Both the specialty areas and the -- and various casualty lines were leading the increase this quarter. We also continued to gain momentum in newer lines such as inland marine, environmental and primary constructions, as well as our new program businesses. Our mix of business has opportunistically shifted more heavily towards some property and specialty casualty lines given the recent conditions we're experiencing in some of our professional liability lines. Overall, rates were up a healthy 5%, and that's compounded from prior years, in the second quarter for our U.S. segment, with our property rates up 3 to 4 -- 3 or -- 3.4% and the casualty lines averaging more than 5% increases. Our retention rates in the U.S. are about 79%. On the international platform, premiums were up just 5% for the quarter to over $193 million, driven by our European casualty business as well as some growth in our property and SME businesses. We did see some more significant growth in our Lloyd's platform. Overall, the rate changes in our international segment were flat for the second quarter, although our property rates were up slightly at a little over 1%, led by accounts affected by Superstorm Sandy from last year. And our retention rates in our international segment were lower at about 77%, and should be lower if we're not getting the rates that we think we need. Finally, we continue to experience steady growth amid opportunities in our reinsurance segment, including our partnership alongside Aeolus Capital Management. Premiums in this segment increased 34% over the second quarter of last year to $265 million. This growth was achieved by our property cat writings, and we -- that we continue to see from Aeolus, continued growth amongst our crop business as well as some increased business in our general casualty and international booking. Now let me turn the call over to Tom Bradley, our CFO, to discuss the financial aspects for the quarter. Tom?

[Thomas A. Bradley:]

Thanks, Scott. We generated net income of $157 million in the first 6 months of 2013, or $4.45 per diluted share. This compares to $315 million or $8.41 per diluted share for the same period of 2012. Please remember that, in contrast to many of our peers, we account for our investments as a trading portfolio, so the mark-to-market adjustment runs through the income statement, not AOCI. You can see all of that detail in Page 23 of the financial supplement. These mark-to-market losses in the bond portfolio drove a small net loss of $1.9 million in the second quarter, or $0.05 per diluted share. Our strong operating performance in the quarter, and underwriting profitability in particular, nearly offset the investment losses. Total investment return was $35 million for the first half, consisting of $31 million of net investment income and net realized investment losses of $36 million. The quarter's investment loss consisted of $38 million of net investment income and net realized losses of $115 million. John will speak to our investment results in a few minutes. Underwriting income for the first half of 2013 was $156 million, representing an increase of almost 27% over last year. For the quarter, our underwriting income was $87 million, which was an impressive 36% increase over the second quarter of 2012. We are pleased to report that all of our segments recorded quarterly underwriting profits. As Scott mentioned, the company booked $48 million of favorable prior year reserve development in the quarter consisting of $3 million of favorable development in our U.S. insurance segment, $26 million favorable in our international insurance segment and $20 million favorable in our reinsurance segment. As Marshall will discuss in a few minutes, within the U.S. favorable development, we did strengthen reserves by about $23 million for the 2011 and 2012 accident years. This was mainly from healthcare and professional liability lines. The responsible -- with what we have seen in those lines, we continue to take rate as well as underwriting actions to terms and conditions, resulting in flat premium and reduced exposure. We will continue to monitor and manage these areas very closely. We did not record any major catastrophe losses this quarter and reduced our reserves held for Superstorm Sandy by $3.5 million. Our expense ratio was 28.6% in the second quarter, a decrease from the 29.2% we reported in the second quarter last year. The main driver of the lower expense ratio was the increase in earns premium, offset by a small increase in G&A expenses attributed to increased headcount, as we continue to support our organic growth. The year-to-date expense ratio of 29.3% is right in our target range. Operating cash flow was $134 million in the first half of '13 compared to $302 million in the first half last year. The decrease was attributable to a $125 million increase in paid losses driven by Sandy and crop reinsurance losses from 2012. We also increased our cash outflow for net funds held by $45 million largely due to our participation in the collateralized property catastrophe reinsurance program. We ended the quarter with diluted book value per share of $96.18, which is up almost 4% from year end and up 9% from a year ago. During the quarter, we repurchased 508,328 of our common shares via our open-market 10b5-1 plan at an average price of $91.13 per share and a total cost of $46 million. This represents a 5.4% discount to our average diluted book value per share during the quarter. As of last night, we had also repurchased 180,000 shares since the beginning of the quarter for $16.8 million, leaving our remaining authorization at $311 million. We've continued prudent share repurchases as well as have instituted a 33% increase in our dividend paying the first installment at the beginning of this month. We ended the second quarter with shareholders' equity of $3.4 billion, up over $46 million since December, and a total capitalization of $4.2 billion, with a debt-to-cap ratio of 19.1%. I will now turn the call over to our Chief Actuary, Marshall Grossack, to provide some commentary on the loss ratio for the quarter and update us on additional reserve and PML disclosures that we have added to our financial supplement.

[Marshall J. Grossack:]

Thanks, Tom. Our reported loss ratio for the second quarter of 2013 was 54.2%. This includes 9.5 points or $48.4 million net benefit from reserve releases for the quarter. The current accident year loss ratio, excluding these items, was 63.7% for the second quarter of 2013. You will note that we have added new tables to our financial supplement that provide details on reserve changes, net of reinsurance recoverables, by loss year and by line of business. These tables have historically been included in our Forms 10-Q and 10-K. They show that the bulk of our reserve releases were from the 2012, 2008 and 2007 loss years. While we had favorable development from all 3 segments this quarter, the international segment had the greatest favorable development at $25.7 million. As Tom mentioned, we did strengthen our reserves by about $23 million in our U.S. segment -- insurance segment for the 2011 and 2012 loss years, mainly from the healthcare and professional liability lines. The biggest drivers of the strengthening in U.S. healthcare is from a single-full limits claim in 2011. In U.S. professional lines, we continued to see higher-than-expected emergence of losses in the nonpublic D&O and lawyers E&O lines. As of the end of the second quarter, our carried reserves are 4.2 points over the midpoint of our actuarial range. Favorable development during the quarter continues to be a function of prudent underwriting and overall actual losses emerging better than expected. On the catastrophe side, we have released this quarter $1.3 million for 2010 events, $1.7 million for 2011 events and $3.5 million for Superstorm Sandy. During the current quarter, we project that our losses from the European flooding are $11 million, and U.S. tornadoes and wildfires are $10.6 million, and those are all within our reinsurance segment. As we accrue every quarter for a nominal amount of catastrophe losses in our reinsurance segment, these events drove an increase in our loss picks by less than 1/2 of the $21.6 million total. Finally, upon initial review, we do not believe we have material exposure to the recent Québec rail accident, and we expect our losses in the Canadian flooding to be minimal. I'd also like to provide the quarterly update to our PMLs. As of the second quarter, our 1

[John J. Gauthier:]

Thank you, Marshall. And good morning, everyone. Allied World's investment portfolio is down 90 basis points for the quarter, losing $77.5 million on a total return basis. For context the 10-year Treasury bond lost more than 5 points of value in the quarter and the U.S. investment grade bond market, as measured by the Barclays aggregate bond index, posted its third largest loss in over 30 years at minus 2.3%. As you all know, U.S. Treasury rates increased at most points along the yield curve and spreads across most sectors widened during the quarter. While we've seen a tightening of credit spreads and a partial recovery in our portfolio so far in July, we haven't seen, nor do we expect, Treasury rates to go back down to their pre-June levels. While this is a quarter I'd like to focus solely on the net investment income portion of the portfolio, we will, as always, provide complete transparency in all the component pieces of the total return. As Tom mentioned, we generated $38 million of net investment income versus $33.4 million during quarter 1. During the last 2 quarters, we have seen our net investment income stabilize, as new money yields are approximately equal to their run-off yields. Additionally, investment expenses were down again slightly quarter-over-quarter. The $38 million of income was offset by $115 million of realized and unrealized losses during the quarter, $99 million from our fixed maturity investments, $28 million from equity securities. Those are partially offset by $12 million of gains from our hedge funds and private equity portfolio. For the first half of 2013, our investment portfolio remained profitable, with a total return of 40 basis points for $35 million. Breaking that $35 million positive year-to-date return into more detail

[Scott A. Carmilani:]

Thanks, John. Let me end my remarks by saying that, overall, we are very pleased with Allied's first half of the year performance in 2013, especially in the face, as John said, of somewhat volatile investment environment. Our goal has always been to deliver consistent returns and strong growth and book value supported by strong underwriting profitability and gross underwriting income and meaningful investment performance. We're confident that our platform and business mix are well suited for the clients and the market. And we will continue to execute on the exciting prospects for Allied World going forward, generating strong returns for our shareholders. With that, I'm going to open up to questions from the group. Thank you very much. Operator?

[Operator:]

[Operator Instructions] The first question comes from Matt Carletti of JMP Securities.

[Matthew J. Carletti:]

Scott, just a quick one for you, kind of high-level question. There has been a lot of companies that reported this week, and it's been -- it's a very mixed commentary on kind of the trajectory of the pricing cycle, some suggesting maybe we're plateauing a bit, others seem to have a lot of bullishness left. From your seat, what do you see? Is second quarter kind of same as first? Is it getting better, or getting worse?

[Scott A. Carmilani:]

Yes, incrementally better if you're looking at it year-over-year. And that's why I said -- I made the comment that it's compounding. For 2 years now, rates have been up slightly single digits, but when you put them together, it's quite healthy. It's still a mixed bag. And as I mentioned, it really depends on which side of the ocean you're looking at, I mentioned pond in my comments. But the international property rates and some of the reinsurance rates on the casualty side are slightly down from where they were. But a lot of the exciting areas that we're in and the -- in the specialties areas, then we're seeing healthy rate increases. Some of them need healthy rate increases, and we're getting healthy rate increases. So overall, I'm bullish on the rate environment, and I see it as a positive as we look out for the rest of the year, into the future.

[Matthew J. Carletti:]

All right, great. And then just one quick one on a -- just a numbers question. You mentioned the, I think, $22 million kind of aggregate cats, if you will, in the quarter. Is it -- are you able to break that out by segment, or is that not available?

[Scott A. Carmilani:]

Well -- Marshall did mention it. It's mostly in the reinsurance segment. It's..

[Marshall J. Grossack:]

Yes, all. It's all in the reinsurance segment, that's correct.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session -- oh, we do have a question that has come in. It is from -- it's in Fabra [ph] from Sterne Agee.

[Dan Farrell:]

It's actually Dan Farrell. Yes, I thought the enhanced disclosure that you guys put through was -- on the reserves was some great stuff. I guess the question I had I want to try and get a little more detail, I apologize if I maybe missed some of this in your prepared remarks, but the additions -- it looks like you had a little less addition in this quarter in professional liab, a little bit more in healthcare into 2011. Can you talk about the rate that you're putting through in those lines and how quickly you feel that's sort of catching you up to where you need to be there?

[Scott A. Carmilani:]

Yes, let me start, and then I'll have Marshall talk about that. Where we've seen some creep is in the small-account professional liability and small-account lawyers business. And so we've increased our picks a little bit for the more recent years and put up some reserves there. Ironically, on the large account in public professional liability business, that's actually performing better. So we're -- overall, we're in good shape, but we're taking action on the business both from a loss pick and reserve perspective. And we're doing some work to correct that portfolio overall in terms of getting a much higher rate increases and taking down current terms where we can. On the healthcare side, that really reflects the actual single loss hit of a particular account the had a lawsuit that went bad and ended up causing a significant amount of a limit on a particular one-off account. So we booked it all upfront. Marshall, do you have anything to add to that from a specifics on the numbers?

[Marshall J. Grossack:]

Yes. I'll just add a couple of things. I mean, one thing we are seeing is that each year is kind of getting a little bit better. So 2013 definitely looks better than 2012 and 2011 at 6 months, and the same with 2012 at 18 months, it's better than 2011. So there's no doubt that the rate changes and some of the underwriting action that we put through are taking hold. And then just for example, the largest area that we're talking about is private not-for-profit D&O. And for example, for the second quarter, we got 12.6% rate hikes there. So it is a -- fairly significant there.

[Thomas A. Bradley:]

Right. And we -- that's on top of getting something similar in the first quarter. So it's -- could continue to go hard at that line of business.

[Marshall J. Grossack:]

Yes, absolutely.

[Dan Farrell:]

Okay, that's great. And then one other question. Just I was curious about thinking about your own reinsurance purchases within your insurance businesses. Is that going to stay the same to you? Do you see making changes to that, buying more, gaining more? I'm just trying to think about how you're viewing that going forward.

[Scott A. Carmilani:]

Well, that's something we're constantly looking at and evaluating, comparing our gross and our net and the benefit we get both from the cost and the reduction in either volatility or exposure. It's evaluated treaty by treaty and actually holistically as part of our ERM and economic capital modeling exercise. We test it, the reinsurance brokers who may be listening to this call are well aware of it, and the market knows that. We've made tweaks to it here and there. In some cases, it means we buy less, in some cases, it means we buy more. It really depends. It's hard for me to say holistically. I can tell you, on average, we've spent about the same and ceded about the same for the last 2 or 3 years, though there's been minor tweaks within certain treaties. But overall, our prices are down a little bit, but what we're buying holistically in terms of limits and coverage is about the same, a little bit more on the cat side this year. And we bought some retro -- thank you, Marshall -- for the first time this year because our crop book and our cat book went up a little bit on -- for our reinsurance portfolio just to sort of smooth out some of the volatility or at least modeled to smooth out some of the volatility, and hopefully that plays out that way.

[Operator:]

The next question comes from Ron Bobman of Capital Returns.

[Ronald David Bobman:]

Scott, I had a question about the alternative reinsurance space. And I -- Scott, you made a significant investment in a wholly independent major player there, Aeolus. And for the most part, your traditional reinsurance peers have sort of set up, I'll call it, sort of like division -- new divisions and enterprises that sort of sit inside their existing operations. And so you've sort of taken a notably different track in that regard. And I'm wondering if -- I'd like -- curious to get your thoughts on what's the evolution, from your mind, of this line of business, or the alternative reinsurance space, as it relates to the traditional players, external investments akin to Aeolus, what I'm calling sort of like divisional operations that are being set up? I'd be curious to know your thoughts. I'm sure you've sort of thought it through in a great amount, having made the investment.

[Scott A. Carmilani:]

Yes, we've made a significant investment with Aeolus, which stands for the goddess of wind, by the way...

[Ronald David Bobman:]

Correction noted.

[Scott A. Carmilani:]

And I'm sure they're smiling right now because they like to be called Aeolus instead of Aeolus. The -- look, there's no doubt that the capital markets are definitely more interested in that space and what the potential returns it could bring. And track record matters. This is a firm that has a long-standing track record and considerable size, so I think it has both a competitive advantage and a size advantage in that space. And I -- there is no doubt in our minds that having a significant size and track record both translates into higher returns and better fees and makes it worthwhile more so than the sort of the small sidecar, what I would call, alternative space. It's a little frustrating for the traditional market, but I think it's a market that's here to stay for the foreseeable future. I think it's a healthy one. It's a strongly modeled portfolio. And they do get a different type of business and arrangement for the businesses -- for the accounts they do. So it's -- we like it. In fact, I'd say we love it. We love the relationship. We love the people that we're involved with. I think they do a great job and that they're performing as we expect them to perform. And I think they've got a -- not only a competitive edge but a leadership position, as I think you mentioned. So look, I look at the fact that everyone else is trying to come up with some sort of a component part of that in their portfolio as flattery, emulation is flattery. From that standpoint, I think most traditional reinsurers realize that some portion of the cat market is in this -- going towards this vehicle. It's been headed that way for a year or so now. And I think some folks tried to stem up, some folks embraced it, and everyone's going to be affected by it. So we're -- our position is we're out in front of it. And quite frankly, I believe it's got a slightly better mousetrap than the traditional slugging-it-out cat reinsurance model.

[Thomas A. Bradley:]

I'll take the opportunity to add that, when you're looking at our results from the Aeolus investment, the -- our participation in their risk-bearing activities runs through our underwriting results in the reinsurance segment, and our participation in the GP runs to investment income as part of the AWFS investment.

[Operator:]

The next question comes from Michael Nannizzi of Goldman Sachs.

[Michael Nannizzi:]

I guess one question I had was just in terms of the competitive dynamic on -- if we look at your kind of flagship U.S. insurance business where I would assume that you -- a lot of that is whole risks that you're writing versus your international business where -- segment where, I could be wrong, but where I imagine a lot more of the proportion of the business is on an excess basis. Any difference in terms of the competitive dynamic that you're seeing there, whether it's a spillover from some of the capital market stuff or something else? Or if you could just give a little color there, I'd really appreciate it.

[Scott A. Carmilani:]

Let me be clear

[Michael Nannizzi:]

Okay. I guess you'll know it. And I understand, on the alternative capital and kind of where it is. I guess my question was -- and maybe I should have asked this first, is have you seen maybe some folks that were writing more property cat than -- but do also write other types of reinsurance and potentially other types of insurance move capacity from the areas were they're maybe getting crowded out into other places like the E&S market? Or is that something that you envision could be a risk down the road?

[Scott A. Carmilani:]

Is it possible? Yes. I mean, it's already a crowded space. I think I read something this morning that someone was creating a U.S. specialty casualty reinsurer. Lots of luck to them. It's -- there's definitely -- it's definitely a tough market and a competitive market. But look, we grew our top line 18%. I was reminded by our Chief Financial Officer this morning it's the 6th consecutive quarter we've had double-digit increases in our top line. I think we're well positioned and holding our own in that marketplace.

[Michael Nannizzi:]

Got it, great. And then just lastly, if I could, on the reinsurance -- in the reinsurance market. So it looked like a lot of the growth was on the property side. Can you elaborate a little bit in terms of where and what kinds of risks you're seeing attractive opportunities there?

[Scott A. Carmilani:]

What segment were you asking about?

[Michael Nannizzi:]

I -- it's property reinsurance. It looks like premiums were -- that was the biggest driver of premium growth in reinsurance.

[Scott A. Carmilani:]

Yes, some of that comes from the growth in our -- what we call our multiline property book, which is small-account business here in U.S. Some of it comes from increases in our -- in the crop portfolio. We saw some increased opportunities there. And Aeolus also had a pretty good second quarter in what I would call a summer -- deployment capital. And we went alongside them and did some deals with them. So -- and that's -- one of the advantages, I think, we'll have that others may or may not have is they're a collateralized reinsurer, but we could also do deals with our admitted [ph] paper with them.

[Operator:]

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

[Scott A. Carmilani:]

I'll just wrap up by saying, thanks for your time on the call. And have a great rest of the summer. We'll see you soon.

[Operator:]

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