Q3 2019 Earnings Call
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We ask that you hold all questions until the completion of formal remarks at which time you will be given instructions for the question and answer session. As a reminder, this conference is being recorded on October 20 seconds 2019.
At this time I would like to turn the conference over to MS. Abbe Goldstein Senior Vice President of Investor Relations Ms. Goldstein you may begin.
Thank you good morning, and welcome to travelers discussion over a third quarter 2019 result, hopefully all of you have seen our press release financial supplement and webcast presentation released earlier. This morning. All of these materials can be found on our website at travelers dotcom under the investors section.
Today will be Alan Schnitzer, Chairman and CEO , Dan Fright, Chief Financial Officer, and our three segments President Greg Toczydlowski, a business insurance, Tom Kunkle, a bond and specialty insurance and Michael Klein personal insurance.
We'll discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take question.
Sure I turn the call over to Alan I would like to draw your attention to the explanatory note included at the end of the webcast.
<unk> presentation today includes forward looking statements.
Company cautions investors that any forward looking statements involve risks and uncertainties and if not a guarantee of future performance actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors.
Factors are described under the forward looking statements in our earnings press release and on our most recent 10-Q and 10-K filed with the FCC, we do not undertake any obligation to update forward looking statements.
Also in a remarkable responses to questions. We may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release financial supplement and other materials available in the Investor section on our website and now I'd like to turn the call over to Alan Schnitzer.
Thank you Bobby good morning, everyone and thank you for joining us today.
This morning to reported third quarter net income of $396 million for $1.50 per diluted share.
Core income was $378 million per dollar 43 per diluted share.
Well results this quarter were impacted by net and favorable prior year reserve development business insurance.
Continued favorable development in the workers comp line was more than offset by strengthening of as best as related reserves in reserves the G. Allen commercial auto launch.
As I shared an industry conference last month G. Allen commercial auto were impacted again this quarter by tort environment that has deteriorated beyond our elevated expectation.
That's all explained in a minute we remain confident because this is an industry wide issue and that we're responding appropriately to recently emerging data.
What do I didn't come in the quarter benefited from the record five net earned premium of $7.2 billion, driven by higher pricing and strong retention over the last four quarters.
Also contributing with a continued execution of our strategy to invest in the capabilities. We believe is acquired for success given the forces of change we've previously identified its impacting or industry.
In addition to investments in talent technology and workflow. This includes progress in terms of our strategic focus on productivity and efficiency.
As reflected in our sub 30 expense ratio for both the quarter and year to date.
As you've heard us say improved operating leverage gives us flexibility to invest further and our strategic priorities, what's the benefit fall to the bottom line and or be more competitive on pricing without compromising our return objectives.
Turning to the underlying underwriting margin as you can see on page four of our earnings presentation. The underlying combined ratio was solid at 94.1%, but up 1.1 points over the prior year quarter.
Favorable items impacting the underlying results included improvement in a workers comp loss ratio and as I mentioned continued excellent work improving operating leverage.
More than offsetting those items were higher non catastrophe weather related losses and headwinds from a more challenging tort environment.
Dan will provide more detail on the pieces, but I'll spend a minute on the tort environment.
The aggregate impact of the adjustments we made this quarter to reflect our lead dispute the tort environment together with those from the second quarter of this year in the fourth quarter last year.
Added about two thirds of a point to the underlying combined ratio on a year to date basis.
[noise] give you some perspective on the loss environment on page 21 of the earnings presentation. We've included a chart of ISO data showing a measure of commercial auto bodily injury severity for the industry over the past four years.
The full year 2018 data just recently became available.
As you can see during 2018, the observed average paid claim cost shifted significantly compared to the prior years as well as throughout the year.
Dispute industry data for other commercial liability coverages is not yet available for 2018, but we believe that the more aggressive tort environment is to one degree or another impacting those as well.
Well the chart reflects industry data and is not traveler specific shaded area of the graph illustrates the challenge weve been addressing as part of our current and prior year reserving process over the past four quarters.
Developing a stable view of ultimate losses in this case, it made difficult, but the magnitude of the shift in the data.
Combined with the fact that it is so recent.
The long tail nature of the exposure in a lengthening of the claim development pattern, which is difficult to assess as it emerges.
At the heart of the issue is a hiring more aggressive level of attorney involvement on claims.
Taking a step back we'll manage through this but the bigger issue for all of US is that the broken tort system imposes a toward tax across society.
According to a recent study by the Institute for legal reform <unk> costs amount to approximately 2.3% of U.S. GDP or more than $3300 per your U.S. household and considerably more than that in some states.
There's also evidenced that some claimants can be disadvantage. According to a study by the insurance Research Council private passenger claimants with attorneys received less one averaging settlement from insurers.
After deducting legal and other related costs as compared to claimants without attorneys.
On average it also takes claimants was attorneys longer to receive payment.
Tort reform has been a public policy focus for us and we're stepping up our efforts.
Turning to the topline our production results were again excellent in the quarter.
Grew net written premiums by 7% to $7.6 billion, a record increase of more than $500 million with each of our business segments contributing.
Our premium growth reflects high levels of retention and improving annual premium change broadly across the portfolio. That's what was a higher level of new business.
We're growing our business with confidence in terms of the count geographies and industries that we know well.
In business insurance net written premiums increased 7% as we achieved renewal premium change of 7.4%.
Quitting renewal rate change or 4.3% in both cases, the highest levels at more than five years.
At the same time, we maintain strong retention and grew new business.
As you'll hear from Greg New business, and our national property business benefited from a level of disruption in the market as we picked up some accounts on our terms.
New business in middle market benefited from success with our business Center strategy, which you've heard us discuss.
And across the board new business levels benefited from stronger new business pricing.
In bond and specialty insurance net written premiums increased by 13% with strong production across from management liability and surety businesses, including historically high domestic management liability retention with improving renewal premium change in record new business.
In personal insurance net written premiums increased by 7% with agency auto up 3% and agency homeowners up 11% both benefiting from strong production.
Given the headwinds that the industry is facing from continued low interest rates, a challenging level of social inflation and ongoing uncertainty surrounding weather related losses, we will continue to seek higher prices and improved terms and conditions.
We'll hear more shortly from Greg common Michael about our segment results.
To sum it up we feel terrific that the strategy. We laid out in 2017 is contributing to top one success in each of our segment.
Terms or the bottom line you would've hoped at the tort environment would not have deteriorated further.
In a business where from time to time loss costs are going to vary from our expectations.
As we've explained whats important is recognizing it quickly and taking action.
We have long track record of successfully managing are diversified businesses do challenging circumstances with insight from meeting data and analytics driving our execution.
Best talents in the industry and deep relationships with our agents and brokers will continue to leverage the power of our franchise to deliver industry, leading results over time and with that I'll turn it over to Dan.
Thank you Alan.
Core income for the third quarter was $378 million down $309 million from the prior year quarter and core Aro He was 6.5% down from 12%.
Both measures reflect the elevated levels of general liability and commercial auto losses that Alan described.
Which impacted both prior year reserve development and the current accident year as well as an elevated level of non cat weather losses.
Our third quarter results include $241 million, a pre tax cat losses.
Compared to $264 million in the prior year quarter.
Prior year Reserve development, which I will discuss further in a few minutes added 4.1 points to the combined ratio compared to favorable 0.2 points in last year's third quarter.
The consolidated underlying combined ratio of 94.1%.
Which excludes the impacts of cats NPU I'd increased by 1.1 points driven by elevated general liability commercial auto and non cat weather losses, partially offset by favorable experience in workers' compensation.
The adjustments we made this quarter to reflect our latest fueled the toward environment added about half a point to the underlying combined ratio, including a catch up related to the first and second quarters.
In terms of weather non catastrophe weather related losses added about two thirds of a point to the quarter over quarter change and the consolidated underlying combined ratio for.
For context total weather losses in the aggregate cat and non cat were somewhat worse in the quarter than what we plan for but year to date total weather losses were well within the range of what we would consider normal.
The third quarter expense ratio of 29.5% was in line with recent periods and brings the year to date expense ratio to 29.8%.
Reflecting the terrific progress we've made in recent years.
So for third quarter and year to date expense ratios are about two points below where they were at this point in 2016.
Our third quarter pretax underlying underwriting gain of $386 million declined by 14% as the elevated losses NGL commercial auto and non cat weather were partially offset by the benefits of higher levels of earned premium and favorable experience and the workers compensation line.
After tax net investment income decreased by $19 million from the prior year quarter to $528 million.
After tax fixed income and <unk> increased by $17 million as expected and our non fixed income and I are high while strong was below last year's results.
Just income and I benefited from an increase in average invested assets, resulting from continued growth in net written premiums and slightly higher yields compared to a year ago.
We expect after tax fixed income then I on the fourth quarter to be about flat when compared to the fourth quarter 2018 has the benefit from higher levels of invested assets will be largely offset by lower reinvestment rates.
As we look ahead to 2020, we currently expect quarterly after tax fixed income and I tried to be about $10 million to $15 million lower than our results for each of the first three quarters of 2019.
As the impact of lower interest rates is expected to more than offset the benefit from higher levels of invested assets.
Net unfavorable prior year reserve development was $294 million pretax compared to $14 million of net favorable people I'd in the prior year quarter.
Bond and specialty insurance had net favorable people idea of $3 million.
Personal insurance favorable people idea of $19 million resulted from improvements in both domestic property and auto.
[noise] business insurance experienced net unfavorable people I'd, a $316 million pretax, including a $220 million increased two as best as reserves, a 134 million dollar strengthening to general liability reserves and the $114 million strengthening to commercial auto reserves driven by.
Similar factors to those we experienced in the second quarter.
You May also notice that we have a small charge for environmental this quarter.
As the number of claims and related reserves have decreased overtime. We've now moved to a quarterly evaluation rather than the annual evaluation. We had historically completed during the second quarter.
These reserve developments were partially offset by favorability in the workers compensation and property lines.
Yes, Bestest reserve strengthening resulted from the completion of our annual asbestos review during the third quarter.
As has been the case in recent years, while there was some slight improvement in several of our asbestos indicators, including a decrease in depth from mutual Sealy OMA as a percentage of the population over time, our expectation had been for more of an improvement.
This phenomenon has continued to drive periodic reserve strengthening for us and for others any industry.
As we've discussed before we added a new catastrophe reinsurance treaty for 2019.
Providing coverage for PC us designated events for which we incur a $5 million or more in losses above an aggregate retention of $1.3 billion.
Through September Thirtyth, we've accumulated $1.2 billion towards the 1.3 billion dollar retention.
Should we reach $1.3 billion, 86% of the next $500 million of qualifying losses will be covered by the treaty.
Remember that for purposes of the treaty Hurricane and earthquake events have a cap of $250 million per occurrence.
Let me take a minute to address the topic of our subjugation claims against PG any for the California wildfires of 2017 in 2018.
On September 22nd PG, any Andy AD hoc subjugation group of which travelers as a member agreed to a proposed $11 billion settlement for substation claims against PG anyway.
Because of the uncertainties that remain regarding our ultimate realization of celebration benefits from PG any we have not reflected any benefit in our financials as of September thirtyth.
If PGT ultimately emerges from bankruptcy pursuant to a plan of reorganization, which includes the proposed settlement.
We estimate the travelers would recover between 400 and $450 million pretax, which is net of expenses and none of amounts that within your to the benefit of our reinsurance.
Turning to capital management operating cash flows for the quarter of $2 billion, where again very strong all our capital ratios were at or better than target levels.
And we ended the quarter with holding company liquidity of approximately $1.5 billion.
Recent decreases in interest rates have increased our net realized unrealized investment gains as of September Thirtyth, we had a net unrealized investment gain of $2.4 billion after tax.
Adjusted book value per share, which excludes unrealized investment gains and losses is now $90, a nine cents, 3% higher than at the beginning of the year.
Consistent with our historical capital management strategy, our first objective for the capital we generate from earnings is to invested back into the business, where we think we can do so at attractive returns.
Beyond that we'll continue to return excess capital to shareholders.
Accordingly, this quarter, we returned nearly $600 million to our shareholders.
Comprising share repurchases of $375 million and dividends of $215 million.
On a year to date basis, we have returned $1.8 billion of capital through dividends and share repurchases.
As we grow premium volumes with all else being equal we'll need to retain more capital.
So to the extent, we continue to grow we would expect that overtime the amount of capital return to shareholders relative to earnings will be somewhat less than it otherwise would have been and with that I'll turn the microphone over to Greg.
Thanks, Dan.
Insurance produced segment income of $179 million combined ratio of 107% both impacted by net unfavorable prior year reserve development of $316 million pre tax as Dan mentioned.
The underlying combined ratio of 95.9% was a half a point higher than the prior year quarter. There are several moving pieces underneath that Barry and so we've included information on slide nine of the earnings presentation to breakdown the components of the change I'll start with the notable items the increase the underlying combined ratio year over year.
The first three or items that we've discussed with you previously with the first of those being the half point impact from the lower earned premium due to the net new cat Treaty.
The remaining two items relate to actions, we took last quarter and then the fourth quarter of last year related to the challenging trends in the tort environment.
The last of the unfavorable items relates to adjustments to our loss estimates, resulting from an even even further deterioration in the tort environment as Alan and Dan have discussed.
The impact of these latest adjustment was about a point.
With about a third of that relating to the current quarter and the remaining two thirds of that being re estimation of the first and second quarters of the year.
Similar to last quarter. This quarter's adjustment included both commercial auto and general liability.
I'll note that unlike commercial auto where returns are clearly inadequate returns in the general liability line, both primary and excess are much healthier for us.
Turning to the favorable year over year items first there's about a point of favorability relating to adjusting our workers compensation losses.
Half of that impact relates to re estimating the first two quarters of 2090.
Second our expense ratio benefited by about a half a point due to the continued successful execution of our strategy to improve productivity and efficiency.
Importantly, we continue to achieve this expense leverage while investing in strategic initiatives that position us for the future.
In addition to these individual favorable items there was about a half a point of favorable impact from other items the cause normal variability from period to period.
Before turning to the topline I'll make a comment on weather related losses.
While non cat weather losses in the quarter were elevated relative to our expectations.
It was not highlighted in the quarter over quarter underlying combined ratio comparison as they were similarly elevated in the prior year quarter.
Catastrophes for the quarter were below the long term average in business insurance and so all in weather losses for the segment were favorable to what we would consider a normal level.
As for the top line net written premiums for the quarter were up 7% over the prior year driven by strong underlying production results with renewal premium change being the biggest driver.
In terms of domestic production, we continued to execute on our strategy to improve the margins in the book, while retaining our high quality portfolio.
We achieved strong renewal premium change of 7.4% in the quarter, including renewal rate change of 4.3%.
The renewal rate change was up seven tenths of a point from the second quarter and more than two and a half points from the third quarter of last year.
Constraining continued momentum in our execution, even after the continued downward pressure in workers' comp pricing.
The higher rate levels are being achieved broadly across the book.
Three quarters of or middle market accounts getting positive rate increases this quarter, which is up from about two thirds in the third quarter of last year.
Also while the commercial auto and property lines continue to lead the way.
Our general liability, both primary and excess as well as commercial multi peril lines also saw meaningful increases.
Importantly, it at the same time as we achieved these price increases we maintain strong retention.
New business of $568 million was up 21% from the prior year quarter, driven by strong results in our national property business, which I'll touch on in a moment as well as higher new business pricing and deliberate execution across the other markets.
As for the individual businesses.
In select renewal premium change in renewal rate change both ticked up from the second quarter end year over year, while retention remains strong at 82%.
New business was up 5% over the prior year quarter, reflecting strategic investments in product development and ease of doing business.
To that end, we're excited to have launched a completely redesigned small business owners policy product in three states during the quarter that includes industry, leading segmentation in a fast easy quoting experience. The full rollout this product will take some time, but we're encouraged with the early returns.
In middle market renewal premium change was 6.3% with renewal rate change of 3.8% up more than two points from the third quarter last year, while retention remained high at 86%.
New business premiums of $308 million were up 15% from the prior year quarter, driven by higher new business pricing as well as success in writing larger accounts during the quarter.
Well impacts from large accounts will be lumpy from time to time, we're pleased to see the results. This quarter as further evidence that the business center strategy that we've discussed with you is paying off by freeing up our local underwriters to spend more time on larger accounts.
Finally, I will touch on our national property business, which has had two consecutive quarters with subsea substantially year over year increases in new business.
As I mentioned last quarter in this space, we are seeing more opportunities given the level of disruption in the marketplace and we're selectively writing attractive accounts and our prices in our terms and conditions.
Case in point for the new accounts of size that we wrote in the second and third quarters, we'd previously written or quoted 80% of them and let them go when we couldn't write them at prices and on terms and conditions that met our disciplined standards.
To close well, we're managing through its changing environment, we couldn't be more pleased with our insight in execution.
As Alan said, given the low interest rate environment continued uncertainty around weather related losses in an upward pressure from the tort environment will continue to see great news all other available leavers to meet our return objectives with that I'll turn the call over to Tom.
Thanks, Greg.
Bond and specialty delivered another quarter of strong returns and growth segment income was $139 million a decrease of $57 million from the prior year quarter, primarily due to a lower level of net favorable prior year reserve development and to a lesser extent.
Modestly higher management liability loss estimates for the current year.
The underlying combined ratio increased 5.3 points from the prior year quarter.
As you can see on slide 14 about three points of that is a third quarter adjustment for management liability coverages about two points of which reflects a re estimation of losses from the first two quarters of 2019.
The increase the combined in underlying combined ratios remained strong at 83.3% and 83.6% respectively.
Net written premiums for the quarter were up 13% with strong growth across all businesses.
Domestic management liability. We are pleased that retention remained at historically high 90% with a renewal premium change higher at 4.8% new business for the quarter was a record $67 million.
Domestic surety growth reflected higher bond bonded contract sizes, and our international growth was primarily in our UK management liability businesses, including from new product offerings.
Our production results, we felt reflect the profitability of our high quality portfolio strong field execution, and our strategic long term investments in our suite of products and services together with our commitment to thoughtful and disciplined underwriting and risk selection.
As reflected in our improving renewal premium change we are pursuing price increases for coverages, where we are experiencing elevated levels of loss activity and we will continue to do so.
So bond and specialty remained strong results remained strong and we feel terrific about our ability to continue to deliver excellent results over time.
And now I'll turn it over to Michael to discuss personal insurance.
Thanks, Tom and good morning, everyone.
In personal insurance this quarter, we're pleased with our continued execution in the marketplace as we grew premium and policies in force in both our agency automobile and homeowners and other product lines continue to achieve excellent profitability in agency automobile and reported good results in agency homeowners and other particularly considering a high level of non catastrophe weather related.
Office.
The combined ratio for the quarter was 98% slightly higher than the prior year quarter of 97.2%.
For the segment catastrophes and net favorable prior year reserve development were comparable to the prior year quarter, while the underlying combined ratio was higher by 1.1 points, primarily driven by higher non catastrophe weather related losses, and the impact from the new catastrophe reinsurance treaty, partially offset by lower other loss activity.
Net written premiums for the quarter grew 7% with strong retention renewal premium change and new business.
Agency automobile delivered another strong quarterly performance with a combined ratio of 93%.
This is our seventh consecutive quarterly combined ratio under 96.
The underlying combined ratio for the quarter of 92.7% was comparable to the prior year quarter and consistent with an excellent year to date result of 92.8% two points lower than the prior year.
In agency homeowners and other the third quarter combined ratio of 100 point, 100.2% increased 1.7 points from the prior year quarter, driven primarily by a higher underlying combined ratio, partially offset by lower catastrophe losses, and a favorable change in prior reserve development.
The underlying combined ratio for the quarter of 93.5% was five points higher than the prior year quarter as approximately four point of higher non catastrophe weather related losses, and one and a half point impact from the new catastrophe reinsurance treaty were partially offset by lower other loss activity.
The higher non catastrophe weather related losses this quarter on top of an elevated level in the prior year quarter and are reflective of an increased number of events compared to historical experience.
As a point of reference data from Noah the National Oceanic and atmospheric administration reflects approximately 8500 severe weather events in the us for the third quarter of 2019.
It's a 28% increase when compared to the average third quarter for the period 2013 to 2018.
As we've mentioned in the past we've increased our loss expectations to reflect higher levels of loss activity in property and that's reflected in the pricing gains were achieving and our plans to further improve pricing and property going going forward.
Before I shifted discussing production I'll remind you that looking ahead to the fourth quarter there tends to be a good amount of seasonality in our combined ratio results.
On a relative basis fourth quarter losses are typically higher than the full year average for automobile and lower for homeowners and other.
Shifting to quarterly production agency automobile premiums were 3% with modest growth in new business and policies in force, while retention remains strong, 84% and renewal premium change was 3.6.
We remain focused on actions to grow our auto business at returns that are continued to meet our objectives and are encouraged by the increase in policies in force this quarter.
Agency homeowners and other delivered another strong production quarter with retention of 86%, even as renewal premium change rose to 6.9% up more than three points from the prior year quarter.
This marks the seventh consecutive quarter, where renewal premium change is higher than the corresponding prior year quarter.
Consistent with our objective new business for agency homeowners and other was up over the prior year quarter with increases in both issued policies and average new business premium largely driven by our ongoing successful rollout of quantum home 2.0.
We remain pleased with the quality of the new business. We're writing the profile of the business is consistent with our expectations and most of the increase in issued policies results from higher quote volume at a consistent close rate.
As we intended sales and marketing activities associated with the rollout of quantum home 2.0, along with its granular pricing segmentation customizable coverages and use of quoting our leading to cook, leading contributors to hire new business volumes.
Wrapping up while profitability for the quarter was down slightly from the third quarter of 2018, we're pleased with our year to date results segment income of $497 million and the combined ratio of 96.2% are both significantly improved relative to the prior year.
Given our pricing actions in property and early signs of policy growth in auto we remain confident in our ability to generate profitable growth going forward.
A competitive advantage of a balanced and diversified portfolio and our focus on being a complete property and casualty solution for our agents and customers continues to position us well in the marketplace now I'll turn the call back over to Abbey.
Thank you very much and we're ready to take your question.
At this time I'd like to advise everyone in order to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad. If you wish to withdraw your question you May press the pound key.
Our first question comes from the line of J Gala with Barclays. Your line is open.
Thanks, Good morning.
Wanted to touch base on the liability claims inflation issue Cross GL commercial auto and do you know I realize that.
This topic was discussed and essentially warned about at the Barclays Conference last month, and what I'm trying to get a perspective on his weather.
The company can say, we have the all clear on reserve issues going forward or there's still a risk of more reserve strengthening going forward. Given this has been issue in three of the past four quarters.
Hey, good morning, its Alan Thanks for the question.
I don't think that we are any company could could ever give that kind of assurance, we we take our AR.
Best people are best processes, we look at the data that we have and we come up with our best estimate every quarter.
When we look back over the last four quarters that at the decisions that we've made in the estimates that we published.
We look at it and say Gee based on the information we added the time, we think we made the right call we weren't.
We weren't.
Too aggressive in any of our assumptions we in fact picked.
Close to the top end of the range in many of those cases and and again this quarter. We look at the data and we think we've done the right thing so.
And Thats one of the reasons why we wanted to provide slide 21, I mean, you can see this is an industry wide phenomenon and you can see the extent of the shift at least from an industry perspective. This is in our data but.
It's illustrative and relevant and thinking about our data.
It's it's quite a significant shift and and one of the associated factors is lengthening of the claim development pattern and that's a difficult thing to assess as it emerges and so with every quarter, we get a new data point with every new data point, we get a different trend line and we put our best estimate behind it and we continue to think running to.
Business by the numbers being very disciplined about that is the right way to do it so.
Okay. The answer is.
We've got a long track record of managing that way over time, we think we're running at the right way and we think you've got the right estimate now, but but I don't think where anybody could could give you a guarantee.
Right, although essentially you're saying you're as confident as you can be that this issue is addressed right.
I'm I'm as confident as I can be that it's our best estimate.
Right, Okay, and then separate topic with regard to capital return of I believe there was.
Commentary in prepared remarks around potentially less capital being returned as a percentage of earnings as the Companys growth rate continues to accelerate.
Would you be able to give us some parameters around that I mean, historically it's been.
Right around 100% of earnings we turn annually in the form of dividends and share buybacks would that number be something closer to 75% or where should we thinking about another number.
Jed I don't think it's Dan I don't think we would target a number and I don't think you should think about it as a target per se that that's going to be an outcome of.
The things that we always talk about which is.
How much capital do we have how much capital do we think we need to adequately support the business that we're writing and that we expect to add on a go forward basis. What are all the investments we will make in the business that we think can generate an adequate return in that we'll look at what's left in mind return it.
Comment was intended to.
To raise awareness as you say.
From this point forward as we continue to grow premium to support a business. That's got a bigger premium base youre going to need a break a bigger capital base and if you perpetually returned 100% of earnings your capital base wouldn't change. So it's simply to give you an indication that.
As we continue to grow if all else remained equal you should expect something lower than it otherwise wouldn't bet, but we're actually not going to target a particular percentage of earnings that were looking to return and Jay I just had two things of that one there's no change at all in our thought process or approach toward capital management. This is on ordinary course, and just a function of of.
What we've been able to achieve in terms of.
During the premium base.
Into one of the reasons why we can't give you numbers, it's going to depend on what lines, we're growing in and what the geography is and it's it's just not it's just not linear math behind it. So so we couldn't we couldn't actually give you that target.
I appreciate that thanks very much.
Thank you.
Your next question comes from the line of Elite Greenspan with Wells Fargo. Your line is open.
Hi, Good morning on my first question on.
It goes to your outlook for business insurance on.
Broadly really unchanged from you guys, they're looking for margin improvement, which given the commentary in the queue seems to be a function of.
Price exceeding trend in some improvement in your international business, So what I'm trying to get a sense of is on.
What's the forward view you guys had for price and then also for trend can you give us a sense and I know its compilation of all your different businesses, where we're trying to sits today and then the outlook for that as we think about keno improvement coming into your margins from here in the business insurance segment.
Yes at least in terms of of the outlook for for price when you see the price that weve written and that's going to earn in.
And we give you an outlook for RPC and so it's those two components that are going to earn in overtime.
In terms of of loss trend, we always talk about that in VI from a segment perspective, and we should last quarter that we hit increased our view of loss trend to to 4.5% and.
And that's obviously on top of the the current picks which have been adjusted throughout the course of the year. So.
It really is that the math from from those pieces.
Okay self trend was four and a half last quarter. So it's somewhere within that the 75 right now.
No no the four and a half was was up a half a point from what we had historically talked about at four also leased I'll caution that the four and a half is our our long term our long term outlook on loss trend and so.
In any in any given period theres going to be some volatility in actual losses.
But but that's that's sort of the math and the way we think about it over time.
Okay and then my second question on you know within business insurance you guys.
Lisa reserves within workers comp you also lowered your loss picks there this quarter I guess I'm, just trying to get a little bit more color given.
The weaker pricing in comp combined with the issue the higher loss trend you're now seeing in other businesses within that segment. What gave you guys like the conviction to change your picks there and then if you could also let us know the prior year development on comp in the quarter. Thank you.
At least it's Dan so so ill start systematically.
What gives us the the conviction to move on workers comp is as we see results come in again Theres, a long term assumption around.
What's going to happen to the costs.
Due to settle workers comp claims a lot of that's driven by medical cost inflation and we see in our data and there has been discussion in the industry that medical cost inflation has continued to be pretty benign.
Relative to.
Relative to our expectation so that that drives.
The prior year release as another period of data comes by where again the cost of loss settlement comes in favorable to what our expectation was.
And this quarter in round numbers order of magnitude is around $100 million pre tax a little less than that.
That flows through into what we're seeing in the current in the current period as well.
Obviously in the current period you are reacting to both what are you seeing in terms of the number of claims coming in and those the settlement trends. So workers' comp has been a pretty steady level of good news relative to our expectations and Thats why we adjusted both numbers.
At least I'd just add this is just ordinary course, we treated workers comp this period like we've treated it every other period and we didnt, we didnt actually make a change to either our.
Frequency trend or severity trend. It's it's it's the impact of adjustments to prior year reserve. This rolling through the current year.
Okay. Thank you very much.
Your next question comes from the line of Mike Zaremski with Credit Suisse. Your line is open.
Hey, Good morning first question is on the catastrophe reinsurance treaty save a feeling it's going to trip us up.
And our model. So I believe you said, it's up to a 1.2 billion. So it's very close to the 1.3 retention.
And you've reported $800 million of of catastrophes, which is a separate definition. So if we trips the 1.3, which it seems likely from a profitability standpoint does that start.
Benefiting the underlying loss ratio in both the commercial and homeowners segments or just you can help us.
How about that.
So Mike It stand again, I think as we.
Discuss the treaty from when we first talked about it going back to the first quarter. It will depend on what weather actually comes in over the remainder of the year. If we have a treaty benefit how the treaty benefit will be allocated back between what we would call major cats versus minor cats. So if.
All the losses that come in from this point forward, our major cat, that's what causes us to trip the treaty and then.
Those are the recoveries most of the benefit would be attributable to major cats, if on the other and most of the whether that comes in is.
10 to 15 million dollar Pcs events that don't meet our major CAD threshold, that's where the money will go. So it really is too early to tell and it will depend on what actual weather we experienced in the fourth quarter.
Okay. So.
Good.
Benefit the underlying loss ratio as well.
Thats correct.
Okay.
And lastly is so if I, if I think about the past.
The two to three years and what sticks out topline growth clearly has improved for the company.
But it's also coincided during a period of time of of increasing non cat weather losses, you guys have said catastrophe levels or are you changed your view on that being a little higher and you now we're seeing kind of higher liability loss trends in the last year or so so is this all telling us that topline growth and maybe retention rates need to.
Maybe fall little and in the coming here and take a take a step off the gas little bit.
No Mike I don't think Thats the way, we think about it at all it's not we don't we don't ring, a bell and say grow or ring, a bell and say don't grow we as we execute one account when a class of business said time, and we do that with the return focus and so we're out there executing on our accounts trying to retain the ones. We won on the prices in terms and conditions that we were.
And we're out there often on new business that we find attractive in that meets our return objectives and when when the some of those things adds up to growth will grow in when it doesn't we won't so.
It's there's nothing about the growth that's contributed to the loss environment.
And we are.
Pretty good about reflecting the loss environment into our our pricing models and so.
The answer is that I don't think so I think I would say is the growth that we've seen is and I don't want to diminish the strategic efforts. That's led to new business I think thats important and it's been successful, but but a very big component of the growth that we've reported has come from.
Very strong foundation of retention and price on top of that so that's important keep in mind as well.
Thank you.
Thank you.
Your next question comes from the line of Larry Greenberg with Janney Montgomery. Your line is open.
Good morning, and thank you so on commercial auto I'm, just trying to compare what you're experiencing with with the issues that you had a while back in.
Personal auto and I think than you talked about taking a higher loss pick or adjusting your loss picks for severe today.
But then the actual plan really get in hadn't changed in your view. So if if I'm hearing correctly in this situation, we're talking about higher kind of loss picks foundations, and then and accelerate accelerating.
And on top of that is that fair.
Well, we definitely increased the base year and we also last quarters. We told you increased the loss trend from there. So we have increased both in in commercial auto.
That is that responsive Larry I'm trying to make sure yes, yes, yes, okay. That's great.
And then.
And I think Greg cost about.
Terms and conditions pricing and and terms and conditions can can you talk about how terms and conditions might be changing in response to what's going on.
Sure Larry Good morning. This is Greg yes, most of the terms and conditions activity are happening in the national property space and that certainly is leaking down into property across middle market and I think our underwriters start with the first thing as they look at the total insured value, making sure that we've got the right values on on the on the proper.
Ladies from there it will get into discussions with both distribution and the customer around co insurance and that includes a bolt deductibles and sub limits you can think of sub limits on both flood and earthquake, but those are some of the items that are in the marketplace right now in our underwriters are very involved in pulling those labors.
Let me turn your spaces.
Yes, I was I was thinking more in terms of of commercial auto.
Yes, Larry in response to that given given the environmental nature of that.
Most of the fixed so that is going to is going to come from price.
Just some lesser degree it'll come from some risk selection and.
That's a factor as well and then we will calibrate our litigation strategy and those would be the primarily the three leverage we used to address it.
Thank you.
Your next question comes from the line of Paul Newsome with Sandler O'neill. Your line is open.
Good morning, Thanks for the call I was hoping we could revisit sort of the view in commercial insurance between the relationship between pricing and retention.
I guess I'm, a little surprised at the strength of the retention given you are raising prices and.
Just wondering if that means that.
You are not stepping on the pricing as hard as you could or if there's some other.
Dynamic going on there.
Yes.
Paul again, we were executing one account in time and so we're making the right decisions on on price and retention, we think but I.
I think one takeaway that we take from the retention is it theres Theres certainly more room to go I mean, the markets not pushing back on its which I think is evidenced that these really our environmental issues. So.
We think the executions terrific and we think theres more more room to go I think also in terms of our customers in our distribution relationships doing this.
Thoughtfully slowly steadily I think there's a lot of benefit to that and so that's that's part of our execution strategy.
Well one thing I would add this is Greg is those are both headline numbers both both the rate in the retention or our underwriters are equipped with very granular segmentation and so we spent more time watching the mix distribution of some of the distressed accounts in the healthy accounts than we do in the aggregate numbers are not we're pleased with that execution when we look at that.
Segmentation.
And then separately I was wondering is we look at the expense ratio if there's any impact this quarter from.
Changing contingent commissions.
That would affect the either this quarter, maybe next year the.
Level the expense ratio.
Paul It's Dan I'd say across the place generally not it's it's been it's been pretty consistent and contingent commission is a relatively small component of the overall content Commission mix to begin with.
Great. Thank you very much.
Our next question comes from the line of David Martin Madden with Evercore ISI. Your line is open.
Hi, Thanks for taking the question.
Just.
Just a follow up on on the changes that were made in general liability.
Are you still are the changes really still commercial auto related excess or.
As it spread to other parts of GL.
And if you could talk a bit about the changes you made each portion of that.
Yes.
David It continues to be both when again I think the right way to look at this is broadly over the last year as we've been addressing this issue and if you look at it in that context commercial auto and the the excess NGL, where the underlying event is auto related continues to be the majority of it.
But but GL has been.
I would not insignificant factoring in fact in this quarter was a bigger factor than commercial audit.
Got it okay and just.
Just in terms of just putting numbers around it.
Appear had come out and said they were seeing.
Severity on the GE all side up in the high single digits.
Just wondering is that sort of what you guys are seeing and is that what you guys are assuming now going forward in your and your loss picks.
And we just we just never given the severity of that granular level I don't I don't think we're inclined to do that we stop at the segment level, where we've given you that the 4.5% and.
I also think.
There can be some confusion when we're talking quickly about loss trend because ultimately we are trying to get to a loss pick and there is two things that contribute to that one is base year changes in in two is the change in loss trend and.
As I as I said earlier over the course of this year as it relates to liability lines we've raised.
Both the initial loss pick, which we refer to as base year end the loss trend. So those those are both up.
Got it okay and I'm just a follow up.
The slide in the back I mean that would imply that what you guys are seeing is more severity related but I mean are you also seeing just a spike in frequency from higher attorney involvement as well.
No. It's it's it's definitely motors severity issue than a frequency issue.
Great. Thank you.
Thank you.
Your next question comes from the line of Josh Shanker with Deutsche Bank. Your line is open.
Yes. Good morning, everyone. Thank you for taking my call.
So I wonder if there's any way of getting to a little more granularity on the towards issues as Youve acknowledged you're experiencing you do look your competitors numbers and they're not is there some garment.
Thats different between large middle market and small account on the towards various side that might make travelers book look different than some others.
Josh I mean.
I don't I don't maintaining does know and that's one of the reasons, we shared the industry data as we don't we don't think that we believe this is environmental we don't think theres anything about about our book of business that makes us more susceptible to these types of claims and.
Turn on the TV you see attorney advertising that the rate of attorney involvement and aggressive behavior is often and I think thats going to impact anybody writing liability coverages. So we don't we don't think is any reason to think that our book of business is more susceptible than any anybody else.
And do you have any anything you can add to the granularity where you're you're seeing the biggest towards severity issues from your own experience.
You know, Josh it's broadly across geographies business and accounts I mean, I guess if you're.
Again, it's always it's always hard to generalize broadly in the sentence or two because this is a complex issue and just I mean, we've spent hundreds of hours on this internally. So it's always.
It's always difficult to try to summarizing the sentence or two but.
Abrupt broadly speaking it's probably.
Groups of homogeneous type claims were a potential plaintive can be reached by television commercial and so whether that's you know commercial auto accidents or slips and falls or things like that.
Once you get into the bigger stuff you tend to have cases that are in always have been.
Associated with you.
Claimants being represented and.
Aggressive litigation.
But again thats very high level.
In summary of a complex issue.
And then kind of asked it but just want to.
The workers comp reserve release for the entry or reserve is third quarter typically a quarter, where you do a comprehensive workers' comp reserve analysis should we expect to revisit that in the third quarter, we could see resets of picks typically.
Josh It's Dan not really comp is something that we have enough I don't know data and enough information that's in the regular flow that we're assessing work comp.
Reserve levels every quarter and I've commented on work comp NPU I'd in earlier quarters. This year.
Okay. Thank you for me answers.
Thank you.
Your next question comes from the line of Brian Meredith with.
Your line is open.
Yes. Thanks, a couple of quick ones here first one if I kind of strip out some of the noise in the quarter on business.
Insurance it looks like the underlying loss ratio.
Prove caused by 40 to 50 basis points is that kind of care representation of what kind of earned rate right now is coming through in excess of trends.
I I don't if that's a business in terms question, yes business insurance sorry, yeah.
Just making all the adjustments that you put in the slide it looks like it's about 40 to 50 basis points of improvement on a year over year basis.
And Brian we're looking at we're looking at the math.
It's.
Yes, I don't I don't think it's quite I don't think is quite so easy to look at it that way I mean that you're getting to a very narrow view of rate versus loss trend and I understand why that's so appealing to look at that.
The fact is there's a lot of things that go into margin and whether it's mix or reinsurance or claims handling or.
With me, there's all sorts of things that go into that and so I think if you really hard to look at rate versus loss trend I think you've captured it.
Gotcha and then just one other quick one here as I look at your outlook for.
RPC for the business insurance here over the next 12 months what is your assumption with respect to exposure in that.
That figure or do you expect it to kind of moderate here be the same.
Yeah, we just don't break that out Theres theres a lot of estimation that goes into that number and we havent view on the pieces, but but to imply that we've got that level of granularity out a year.
That would be up a false impression.
Great. Thanks.
Thank you.
Your next question comes from the line of Michael Phillips with Morgan Stanley . Your line is open.
Thank you and thanks for the time here I.
I guess, if like I'll take the pressure off one business insurance guys switch over to personal and specifically personal auto.
Your outlook says for margins at a relatively in line with last year. So I guess could you talk about what you're seeing there in pricing.
And loss trends, we're certainly hearing loss trends on the rise in some some some segments from competitors kind of want to see what you're thinking there and why we'd expected to be flat next next year.
Sure. Michael. This is this is Michael Klein I would say, we see the same industry data, you're referring to and certainly our keeping an eye on severity trends both in physical damage and in bodily injury.
As we've talked about this year, we've tended to see.
Frequency going the other way and offsetting some of those severity increases our view of of loss trend heading into the outlook is fairly consistent with the trends we've been seeing.
The outlook includes an assumption that you know pricing will continue to moderate in auto.
And thats consistent with our strategy to continue to work to return to growing policies in force. So.
The broadly consistent outlook has a little bit less earned price in it than we've been running.
And again, a consistent view a loss trend and then lastly, I would just remind you that they'll sort of rolling four quarters, we do expect a higher combined ratio in the fourth quarter.
Then we saw in the fourth quarter of 2018, partly driven by normal seasonality and driven by the fact that we had an unusually good quarter in the fourth quarter of 18 as well as some prior quarter. Good guide catch up in that quarter. So if the tough comparison fourth quarter to fourth quarter.
Okay, Great no. Thank you for that detail and then I guess second question.
On bond and specialty can kind of what are you seeing and the management liability and kind of maybe some more granular details of kind of what's driving that increase there.
Sure.
Thanks for the question Michael So if you if you look back at where we started reserving at the beginning of 2019, you know there were definitely some elements of normal loss trend versus rate that impacted how we were reserving there, but when you look at that third quarter.
Re estimation, we did that was largely driven by an increase in frequency having to do with things like hashtag me to sexual Harris meant and to a lesser degree securities class action suit.
So that's really what we've seen driving any movement that we've had and management liability there.
By the way I should point out that.
Where we're having elevated loss trending we're definitely pursuing price in the marketplace. I think you can see that would publicly traded companies and you can see it and various other parts of the marketplace that are impacted by the scenarios I discussed.
Okay, great. Thank you very much for the color.
Thank you.
Your next question comes from Ryan Tunis with Autumn Autonomous Research your line is open.
Hey, Thanks, just had a couple of quick technical ones and then a broader one trial in the first of all just trying to size. This.
We didn't multi peril what percentage of the claims dollars are usually for liability type of stuff versus property.
Yeah, I don't I don't know that we have that at our fingertips in.
Or that we've added that number Ryan I.
Gotcha and.
And then that's fine.
The other one I had was just it seems like part of this is auto claims and access umbrella those type of things.
Is there.
I get a sense for maybe like what percentage of overall casualty claims outside of workers comp or something like that can be tied back to something auto related I mean is there's somewhere that you think about that just trying to think about the auto exposure outside of.
What do you explicitly call commercial auto.
Yes.
We definitely don't have that break out at our fingertips here right. We can we can look for that and and try to figure out whether we can share that outside of this call, but we definitely don't have that in a in embedded way that I think we'd be comfortable sharing okay. No such fair enough and then a again I'm Alan I guess is sort of a broad one bought but yes. This is I guess this third quarter.
For the last four where we've had a I guess an increase in the last six.
What would you point us to this quarter that would that would give us more more confidence that that's unlikely to happen going forward like what are you looking at that gives you more confidence and should give us more confidence.
Yes, Ryan that you know that I think was the first the first question on the call I wish I could stand up in guarantee that we got it and this will never happen again, obviously I can't do that on the anyone can do it.
And I point to the magnitude of the shift. This is very recent information in the long tail line to the lengthening of the claim development pattern really does complicate our ability to assess it. So it's a complicated process and it's taken US a couple of quarters to get to where we are.
We're going to get another quarter's worth of data in a couple of months here and we'll see where that comes in.
Yes, there is it an incremental level of confidence it comes from the fact that we've now got a couple of quarters strung together in a view on what a new trend line might be so that gives us a little bit more confident but I can't tell you now where the next dot was going to come in on on the chart or what thats going to due to the trend line.
I just.
Data, we haven't seen yet I can tell you that.
We now have.
Fourth quarters in data into new trend line, we certainly reacted to that.
And we're confident that we're on.
Taken right swing at it but I don't know what I can tell you beyond that.
But but you'd say that the 19 picks are now relatively reflective of some of the more seasoned accident years at this point.
Yeah.
Yes, I mean for sure it would be more reflective of the more seasoned accident years and you've got you've got the.
17, and 18 accident years, which I I think the 17 accident year is on commercial auto lessened, 50% paid and so the g. I would be even less than that in 18 accident year would be less than that on both so so we've got a couple of recent accident years that are still developing.
But but the older accident years, yes, as they as they season, we certainly feel much better about those and as I said you know we now have.
Four quarters, where we it's it's not just another data point, it's another line and we've we've reflected that in a way that we feel is very responsible in terms of coming up with our best estimate, but but I I can't and nobody could tell you what the next data points can look like.
Okay. Thanks, I'll leave it there.
Thank you.
Our last question comes from the line of Shine right and Sean right in Buck with KBW. Your line is open.
Hello.
For PGM, you would that would any benefit from their come through operating income.
Yeah, Ryan and stand it would it would it would come through the same the same way we would record any prior year reserve development. So it will be in.
Core income it won't affect the underlying combined ratio because it relates to prior accident years.
Okay, and although still very strong the retention rate slipped by point Threeq you would you expect any further.
That the ticked down any further as a result of either and kind of non renewing any business that you've had trouble with or pushing for more rate losing.
In there.
Oh, I would say the retention rates remain very very strong by historical standards, particularly an environment, where we're getting rate at the level that we're getting it. So we feel terrific about the retention, we we don't project, where thats going so I don't I don't have a comment on that but but I will say that we like our book of business and our objective would be to tick.
Keep a lot of it.
Alright, Thank you very much.
Thank you.
There are no further questions at this time I now turn the call back to MS Abbe Goldstein.
Thank you very much for joining us this morning, and as always if theres any follow up please feel free to reach out to Investor Relations.
Have a good thanks.
[laughter] Conference call. Thank you for your participation you may now disconnect.
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