NAVG
#Okay.
Thank you very much.
This is <UNK>.
I'd like to welcome you to the first-quarter earnings conference call for the Navigators Group Inc.
We are pleased to report another solid quarter, with net income of $22.9 million for the first quarter of 2016, and operating earnings of $20.2 million.
The combined ratio for the quarter was 95.1%, marking our 13th consecutive quarter of underwriting profit, with profitable underwriting results in each of our three operating segments ---+ US insurance, international insurance and global reinsurance.
Despite challenging market conditions and the non-renewal of a significant treaty in Navigators Re, we were able to grow our business, with gross written premium up 4.4% over first-quarter 2015, and net written premium up 10.7%.
The first-quarter net written premium of $319.8 million is an all-time high for us.
Our investment portfolio continued to perform well, with pretax net investment income up 20.6% over the first quarter of 2015.
This contributed to an increase in book value per share of 3.6% during the quarter to $78.72.
Our US insurance business had an excellent quarter, with a combined ratio of 94.2%, 1.6 percentage points better than first-quarter 2015, with gross written premium growth of 5.7%, and net written premium growth of nearly 20%.
Our US property/casualty business continued to produce both profit and growth.
Within property/casualty, Navigators' specialty, our E&S unit had another very solid quarter.
From a top-line perspective, we experienced solid growth in our primary casualty unit, while gross written premium was down for specialty excess casualty.
The largest industry segment within Navigators Specialty is construction, and that's a business that we've specialized in since 1995.
About three-quarters of our specialty excess book is construction business and of that, about one-third of the premium comes from construction wrap-up or project policies.
And those are policies that are generally issued once at the start of the construction project, cover the life of the project, and by definition, are not renewable.
New business for project risk was slightly below our expectations for the quarter in excess casualty, which was more reflective of the timing of construction projects than it is a commentary on either the strength of the US construction activity or about market conditions.
Conversely, our primary casualty business experienced significant growth in new construction wrap-ups during the quarter.
Renewal rates were down an average of 1.5% for specialty excess during the quarter, and our renewal retention was 78%.
Renewal rates for primary casualty were down 1% for the quarter.
Overall, acceptable results.
One of the few hard markets in property/casualty in the US is commercial automobile.
We have a very focused appetite for transportation, particularly trucking risks, and a unit that specializes in this niche.
We were able to capitalize on market disruption to write about $3 million of new business during the new quarter that we feel is well-priced and well-underwritten.
Our commercial unit, which is focused on environmental, life science and excess casualty business produced by retail brokers, had another solid quarter, with profitable underwriting results and double-digit net written premium growth.
The environmental underwriting team is another unit benefiting from market disruption, and had strong growth in the contractors pollution product line.
Gross written premium for US marine business was up 5.7% over first-quarter 2015, and generated a healthy combined ratio of 79.8% for the quarter.
Underwriting profit was particularly strong in the marine liability, bluewater hull and craft product lines.
Within the professional liability product lines, gross written premium was up 7.2%, and net written premium up 11.4% for US D&O.
With double-digit growth in the private company and non-for-profit portfolio offsetting reduced premium writings in US public company D&O, which remains highly competitive, despite increased levels of security class-action activity hitting the D&O industry on the hills of reduced levels of such litigation in 2014.
We continue to take a cautious view of loss trends in US D&O, and book-to business at about breakeven for the quarter.
We are encouraged about the improved performance of our US [aires] intermissions business, which continued to demonstrate favorable loss emergence versus expected.
While gross written premium was up 9% over first-quarter 2015, net written premium more than doubled for E&O as we restructured the reinsurance treaty supporting this product, which should significantly improve the expense performance of that portfolio.
During the quarter, we experienced double-digit growth in the architects and engineers real estate E&O, and a competency in [O] product lines.
It was a good and very exciting quarter for our international insurance segment.
During the quarter, we announced that Michael Casella, a highly regarded international insurance executive, would join Navigators on April 1 to lead this segment of our business.
Mike is now onboard, and in is in what we hope will be the homestretch of working with the UK regulators to obtain authorization from Navigators' international insurance Company, which we anticipate will complement our existing Lloyd's capabilities to enhance the growth of our business outside of London, and particularly in continental Europe.
For the first quarter, our international insurance segment generated gross written premium growth of 17.7%, driven by double-digit growth in the property/casualty and international professional liability product lines, and 23.8 % growth in net written premium.
The combined ratio for the quarter was 99.4%, with profitable underwriting results in marine and professional liability.
Marine represented about half of our gross written premium within the international insurance segment for the first quarter.
And premium volume was up 6.7% over first-quarter 2015.
Cargo was the largest marine product line in our international marine book for the quarter, and achieved 15% growth over first-quarter 2015, with meaningful contribution from our European regional offices.
Similarly, our transport book grew 37% for the quarter, with strong production in London and the regional offices.
The marine and energy liability portfolios were down for the quarter, reflective of market competition, along with general economic conditions.
Also contributing to the growth were two relatively new product lines ---+ property, and political violence and terrorism, which collectively represented a little over 10% of the gross written premium of the international insurance segment for the quarter.
Turning to NavTech, our energy and engineering unit, the offshore energy business was down 30% from first-quarter 2015, due to a combination of reduced exposures resulting from depressed oil prices, rate competition and limited new business opportunity.
Conversely, our onshore energy and engineering product lines each experienced double-digit growth during the quarter.
Navigators Pro, our international management and professional liability unit, also had an excellent quarter, with a combined ratio of 94.2% and double-digit growth.
The international D&O team had good new business success in London across several niches, including commercial D&O, financial institutions and warranties in indemnities.
The errors and omissions product line also experienced strong growth, particularly in London, Copenhagen and Milan.
Despite challenging market conditions, particularly in the London market, we're well-positioned for growth, given the number of relatively new product lines we've introduced over the last three years, along with our investments in the regional offices in Europe.
Our global reinsurance segment produced solidly profitable underwriting results, with a combined ratio of 89.5% for the quarter.
Gross written premium was down 21% compared to first-quarter 2015, almost entirely due to our decision to non-renew two significant accident and health reinsurance treaties during the quarter, based upon market competition.
While premium volume was down in the A&H account, underwriting profit was sound, with a healthy combined ratio of 93.8%.
Our Latin American treaty and international property product lines experienced double-digit premium growth and profitable underwriting results for the quarter.
And the professional liability and marine treaty business of Navigators Re was about flat with first-quarter 2015.
Navigators Re's underwriters continue to be highly selective.
Non-renewing programs failed to meet our pricing requirements, while sourcing attractive new business that does.
Market conditions, in general, were challenging, and are expected to remain so for the foreseeable future.
While price is always an important factor to commercial insurance buyers, we work hard to earn and retain our business, while providing exceptional service, not only in the settlement of claims, but by providing value-added solutions promptly and efficiently by a team of first-class specialists.
During the first quarter, we introduced our three-year strategic plan to our employees, titled Opus.
The Opus strategy is focused on complementing our well-established underwriting culture with one that consistently emphasizes exceptional customer experiences.
This is very much a bottom-up strategy at Navigators, as we aim to engage every single employee in our organization in driving excellent customer experiences.
We believe this strategy will further differentiate the value of trading with Navigators from a marketplace that is increasingly being viewed as a commodity.
We are very excited and optimistic about the road ahead.
With that, <UNK> <UNK> will take you through our financial performance.
Great, thanks, Dan.
Good morning, everyone.
Thanks for joining us.
First-quarter net income of $22.9 million or $1.54 per share reported yesterday includes net operating earnings of $20.2 million or $1.36, net realized gains after-tax of $1 million or $0.07 per share, and after-tax foreign exchange transaction gains of $1.7 million or $0.11 per share.
Before we combine ratios, 95-1 includes a reported loss in LAE ratio of 57.9%, and an all-in expense ratio of 37.2%, comprised of net commission expenses of 14.2% and other operating expenses of 23%.
Overall, the all-in expense ratio was flat compared to prior year, with a slight uptick of 3/10% in commission expense, offset by an equal downtick in operating expenses.
It is noteworthy that the noncommissioned operating expense dollars are in line with the fourth-quarter 2015 expenses, reflecting our expected leveling in these other operating expenses.
The quarterly consolidated results include $13 million of underwriting profit, with $8.6 million of that profit coming from the US insurance segment, $4 million of profit coming from the global insurance segment, and $500,000 of profit from the international insurance segment.
Net investment income of $19.6 million increased $3.3 million or 20.6% in the same period last year.
The increase in investment income is primarily due to the continuing solid underwriting results contributing to growth in the overall investment portfolio, coupled with an increased allocation to higher-yielding preferred stocks.
The net realized gains of $1.6 million or $1 million after-tax was a result of normal active portfolio management.
Our overall investment portfolio's unrealized gain position snapped back and increased in the quarter by $35.6 million pretax, or $23.1 million after-tax, due to a decrease in interest rates and a rally in the equity market late in the first quarter.
The investment portfolio value at March 31 increased by $67.1 million to $3.04 billion, with a book yield of 2.66%, up 12 basis points from 2.54% in the fourth quarter ---+ an updated 30 basis points from 2.36% for the same period last year.
On a total return basis on the trailing 12 months, it was 2.47%, up 104 basis points from 1.43% in the fourth quarter, and down 119 basis points from 3.6% for the same period last year.
Our investment portfolio has maintained its AA minus average credit-quality rating, with a duration of 3.7 years.
Stock shareholders' equity at March 31 was $1.144 billion, up from $1.096 billion at December 31, 2015, or 4.4%.
The book value per share was $78.72, which compares to $75.96 at year-end 2015, decreasing by $2.76.
Annualized ROE was 8.4%, and operating ROE was 7.4%.
And lastly, net cash flow from operations was a positive $38.5 million in the quarter.
And with that, we'll open up the call for questions.
Operator.
Are you with us.
Hi, <UNK>.
Thanks for the question, <UNK>.
Really there's no change in the strategy.
We deploy the classic [wild dale] strategy that most P&C insurers practice, and that is very liquid high-quality on the front end, the middle plot of our timeline comprised of structured securities and corporates, and then the far end with tax preference securities, like tax-exempt securities.
What you see is, I would say ---+ I would caution in the description of much higher amount equity security.
I believe our allocation is only 7% all-in.
But what we have done is deployed approximately $250 million of our portfolio allocated to preferred stocks.
And I would say the majority of which are dividend-received, deductible-eligible, that pay book yields of north of 5.5% to close to 6%, and north of 7% on a tax equivalent basis.
And we have the added benefit that, that particular allocation, along with the tax-exempt securities in our portfolio, have contributed to a decrease in our effective tax rate, which is approximately 30%, as we move forward through the year.
So to sum up, the strategy remains the same.
It's just a reorientation of our allocation to equity.
So I guess on a zero-sum basis, we do allocate more to equity than we have over the last, let's say, five years.
But over the last year and a half, we have been probably in that 7% range.
Yes, the business is doing great, thanks for the question.
You know, just maybe a little further clarification on that.
We write construction business both on a primary casualty basis and on an excess casualty basis.
And unlike, you know, the standard lines companies, as an E&S specialty underwriter, a lot of our excess book is [mono-lined].
It's freestanding over other carriers' primaries.
It's not necessarily written over our own primary.
So, reflective of the type of projects that are coming to market and where ground is being broke, so to speak, there's just going to be timing differences on when a project starts.
So for the quarter, on production standpoint, our new business was down on an excess basis, up on a primary basis.
But I guess the general comment we would have is, we continue to be very bullish on the opportunities within the US construction segment.
And it's a nation that were are well-recognized as experts on, both on a primary and excess basis.
Thanks, <UNK>.
Sure.
From a capital management perspective, we are well-capitalized.
On a risk-based capital adequacy view that the rating agencies look at, we're clearly a AAA S&P capital adequacy property, and A++ in Best's Capital Adequacy metric.
But if we look at it internally, how we plan our strategies, we have plans for some of those dollars, if you will, to deploy them.
[Ken] mentioned the formation of Navigators' international insurance company.
So part of the capital will support that particular initiative, which we expect to be approved later this month.
And then certainly, as we do every quarter ---+ and I know in our annual reviews with some of the analysts, we share with you our long-term view.
And that is, we look at capital management strategies, be it cash dividends, stock dividends, stock buybacks.
We look at all options and discuss it thoroughly every quarter with the Finance Committee and the Board.
But today, we're pretty happy with the way we are positioned, but we would not rule out any cash dividends or share repurchases in the coming year ---+ or the coming years, I should say.
So we are open to everything.
But today, we feel like we are well-capitalized and able to execute on our strategy.
Okay, well, thank you very much.
If we have no further business, we will adjourn the call.
Thank you very much for your time and for your interest in Navigators.
Have a good day.
