Q3 2019 Earnings Call
Good day and welcome to the Hartford Financial Services Group Inc. third quarter financial results Conference call Im webcast.
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I'll now turn the conference call birds, Susan Spivak of Investor Relations, Sir the floor is yours Matt.
Thank you and good morning forget and thank you for joining us today for a call and webcast on third quarter 2019 earnings we reported results yesterday afternoon and posted all the earnings related materials, including the 10-Q on our website.
For the call today, our speakers are Chris <unk>, Chairman and CEO apart, the Hartford, Doug Elliott, President and baskets, Stella Chief Financial Officer.
Following their prepared remarks, we will have a Q in a period just a final few comments before Christmas again.
Today's call includes forward looking statements as defined under the private Securities Litigation Reform Act at 1995. These statements are not guarantees of future performance and actual results could be materially different we do not assume any obligation to update information.
Forward looking statements provided on this call investors should also consider the risks and uncertainties that could cause actual results to differ from these statements a detailed description of those risks and uncertainty it can be found in our SEC filings.
Our commentary today include non-GAAP financial measures explanations and Rick Reconciliations of these measures to comparable GAAP measure are included in our FCC filing as well as in the news release and financial supplement.
Finally, please note that no portion of this conference call, maybe reproduced or rebroadcast in any form without the Hartford prior written consent.
Replays of this webcast and an official transcript will be available on the Hartford website for one year I'll now turn the call over to crash.
Good morning, and thank you for joining us today.
Hartford had an excellent quarter with strong financial results across all our business lines.
Third quarter core earnings rose, 31% over prior year to 548 million or dollar 50 per diluted share with lower catastrophe losses.
Continued solid investment results.
Our businesses are performing very well.
Book value per diluted share, excluding AOCI I was up 8% to $42.55 from your rent.
Consolidated 12 month core earnings are are we was 12.3% an impressive result in the current market environment.
The strong execution of our strategy is demonstrated by.
Our consistent operating performance quarter to quarter.
Deliberately not key integration milestones.
And continuing to invest in our business to enhance customer experience inefficiency.
Talking about what cover results in more detail, but I wonder touch briefly on a few items.
Commercial lines highlights in the third quarter include.
Core earnings of 303 million.
14% over prior year.
Solid topline growth with and without navigators.
And our renewal pricing rate acceleration compared to the first half of the year.
[noise], when we announced the acquisition of navigators more than a year ago, an important part of our strategy was to broaden our underwriting in product capability capabilities as a global specialty player.
An added benefit was the expansion of our distribution relationships into the wholesale channel to serve more risk needs of customers.
Nearly six months of passed since we closed the navigators transaction.
The progress to date is on track I'm very pleased with a collaboration amongst the teams.
And a positive reception from distribution partners.
Our book is benefiting from the strong pricing tailwinds in the market, providing the opportunity to restore certain product lines within global specialty to targeted financial returns.
[noise] personal lines core earnings were 87 million up 85% benefiting from lower catastrophe losses in favorable prior year development.
Well up slightly from prior year, the underlying combined ratio of 92.3 for personal lines was a strong result.
Our primary focus in this business has been returning to growth.
New business up 34% in the quarter.
Overall net favorable reserve development for property and casualty was 47 million in the quarter.
There were both favorable and on favorable development and various lines.
Our experienced actuarial and claims teams have demonstrated the ability to identify emerging trends within our data.
Which is used to update our estimates each quarter.
Overall, I am confident in our loss reserve estimates.
Group benefits delivered another excellent quarter.
Core earnings of 141 million up 38%.
The increase versus prior year was driven by favorable loss ratio.
Higher net investment income and lower amortization of intangibles.
This was partially offset by increased investments in technology claims management and higher commissions related to our voluntary products.
The total loss ratio improved 4.4 points driven by favorable disability results.
Partially offset by a deterioration in the life loss ratio.
The improvement in the disability continues to come from favorable incidence trends.
Results also benefited from updates to our claim recovery assumptions.
And the recognition of an experienced refund related to New York paid family leave product for accident year 2018.
In group light.
Severity was elevated in the quarter.
However, we don't see any consistent trend other than normal volatility.
On the topline fully insured ongoing premiums were just off slightly versus prior year.
Persistency is running slightly below historical trends as we adjust pricing on targeted segments of the at notebook.
Importantly.
Earned premium on the <unk> in a book of business is in line with our deal assumptions and conversions of cases continues to go very well from both a platform and pricing perspective.
Overall, we're very pleased with the operational execution and financial performance of group benefits.
Before I turn the call over to Doug I wanted to make a few comments on the macro environment.
The property and casualty industry is facing a number of challenges that had been well documented.
Net investment income is under pressure and what is likely a prolonged period of low interest rates affecting new money in overall portfolio yields.
The frequency of severe weather related storms as well as other catastrophic events such as wild fires are elevated.
Pressuring rates to keep up with cat trends.
[noise] social inflation related to larger claim settlement continue to put pressure on loss cost trends.
However, social inflation is not a new phenomenon.
We've been monitoring these trends for years, taking the appropriate actions to ensure our pricing models in underwriting reflect these realities.
To conclude with one quarter left in the year.
Our experience through the first nine months is generally consistent with the outlook we provided.
With no major surprises.
The successful integration execution of our two recent transactions.
Among financial results and capital management.
Demonstrate our strategy is working.
It is an exciting time at the Hartford for all our stakeholders customers employees distribution partners and shareholders.
I am confident in our ability to produce consistent results contributing to shareholder value creation.
Now I'll turn the call over to Doug.
Thank you, Chris and good morning, everyone.
The Hartford's property and casualty results for the quarter were strong topline growth was fueled by the navigators acquisition.
Underlying organic growth in commercial lines was a solid 4%.
In personal lines, new business growth is up significantly from third quarter 2018, but as moderated from earlier in the year.
We're pleased with the underlying returns across all of our property casualty businesses as each continues to execute effectively.
It was a relatively benign quarter for catastrophes as losses were well below third quarter 2018.
Current your cat losses in the quarter totaled 106 million 63 million less than a year ago.
In aggregate property and casualty reported favorable prior year development, a 47 million this quarter.
Improving severity trends across workers compensation small commercials package business and personal lines auto all drove favorable reserve releases.
Partially offsetting these releases was reserve strengthening in commercial auto liability and general liability driven by some large loss activity.
As Chris has already mentioned, there's been a fair amount of commentary during the quarter regarding social inflation and we're certainly not immune to these unfavorable tort trends.
However, keep in mind, our Hartford book is made up primarily of smaller customers with lower limit profiles.
In addition, the adverse development cover we purchased on the Navigators loss development provides another layer of protection.
Over the past few years, while we've observed higher loss trends. We've also adjusted general liability and commercial auto reserves accordingly.
At the same time, we've made underwriting and pricing adjustments to our book in response to these trends.
We actively monitor these trends and we'll continue to take appropriate actions as necessary.
Let me now shift into the results for our business segments.
The underlying combined ratio for commercial lines, which excludes catastrophes and prior year development was 93.9 deteriorating two tenths of a point from last year, but a strong performance Nonetheless.
As expected the navigators book generated approximately one point of increase on the combined ratio.
This was partially offset by favorable non cat property results.
I'm encouraged by the pricing environment in the quarter, our renewal written pricing and standard commercial lines was 2.8% up 40 basis points sequentially from second quarter and up 90 basis points from prior year.
This positive pricing change remain somewhat depressed by the current workers compensation pricing environment.
Middle market pricing, excluding workers' compensation was 5.6% in the quarter up 130 basis points from second quarter and up 180 basis points from the prior year.
The strong improvement reflects the rate actions, we're taking across our core lines.
Given industry loss trends and operating performance in these non workers compensation lines I expect this pricing trend to persist.
Let's now take a look inside our commercial line business units small commercial continued its excellent performance with an underlying combined ratio of 87.9.
The margin improvement versus last year was driven primarily by lower non cat property losses, and lower underwriting expenses.
Written premium was flat to prior year due to renewal written pricing decreases in workers' compensation and the completion of the new business rollover from the foremost renewal rights transaction.
Excluding foremost new business premium growth was up a very strong 13% for the quarter driven by workers' compensation and package business.
We expect continued new business growth to come from the launch of our next generation package offering we call spectrum.
This is much more than just a new product release with this modular policy and the ENHANZE platform that supports that we've taken our industry, leading capabilities to a new level, making buying small business insurance easier than ever.
A consumer buying small business insurance from the Hartford now receives tailored recommendations for their coverage or the ability to customize their own.
The region is able to view real time pricing much the same way an online retail shopper can see are running total of the cost of products placed in their cart.
As of today, we're alive and 32 states and we'll be in 45 by year end.
We are already seeing increases in quotes and additional optional covered selections.
This game changing product launch only adds to our excitement about our long term prospects for growth in this segment.
And middle and large commercial the underlying combined ratio of 99.6 improved 1.6 points from 2018, driven primarily by lower non cat property losses.
Notably inland marine losses, which were elevated in the second quarter have moderated.
Written premium was up 12% over last year due in part to the addition of certain legacy navigator businesses within middle and large commercial.
X navigators written premium was up 7% with strong production and national accounts large property and programs as well as in verticals such as construction and energy.
We are achieving rate increases across middle and large commercial our property and auto rate increases are up sequentially in the quarter over 100 basis points with liability not far behind.
In global, especially the underlying combined ratio of 96.2 deteriorate, a 6.4 points, primarily the result of including the Navigators book this quarter.
Since the acquisition, we've been aggressively re underwriting and repricing portions of the navigators book.
In the third quarter, we achieved double digit rate increases on both the navigators U.S. and international business.
With significant rate acceleration during the quarter and since the first quarter this year.
In the U.S., we achieve strong underwriting results in our management and professional liability and surety lines. We're also pleased with both renewal pricing and new business generation from our wholesale distribution channel in the us.
And international we've taken significant actions to address two plus years of subpar returns in our Lloyd's Syndicate and London market portfolio.
In addition to the aggressive pricing actions, we're taking on this but we've exited certain underperforming lines and reduced significantly the number of binders EMG days and line slips across the portfolio.
We've also materially reduce the overall limits deployed in several lines, including DNA, though you know and casualty.
Our global specialty team is off to a terrific start they're actively addressing opportunities in the book as well as taking advantage of favorable market conditions where appropriate.
Integration efforts continue including expertise sharing and data science technology product design claim and many other areas executing across core risk functions will play an important role and improving the financial performance of this business.
We fully expect global specially to be a significant contributor to commercials premium growth as profit returns to target return levels.
Moving to personal lines, the underlying combined ratio of 92.3 deteriorated 50 basis points from third quarter of 2018, but still a very good overall result.
Expense ratio increased nearly one point due to the impact of lower earned premium while the loss ratio improved 40 basis points.
The loss ratio improvement as reflected in both our auto and homeowners results driven by earned pricing increases and non cat homeowners experience.
New business growth was up 34% compared to prior year.
This was another positive new business quarter, as marketing spend and product adjustments continued to gain traction.
In a RP direct auto are critical product production levers, including flow close ratios and new sales all improved compared to prior year.
Importantly, we're pleased with the underlying profile of this growth and encouraged by the improving trends.
Despite continued strong improvement indirect new business growth total written premium was down 4%.
We've made progress to improve the profitability of our ERP book more work is needed on retention and new business to return to positive gross.
In summary, this was a very strong quarter across our property and casualty businesses, we're executing effectively against our plans, while responding to loss cost trends and competitive market dynamics.
Taken appropriate pricing actions and making disciplined underwriting decisions. This is driving clear progress in lines and accounts that need to improve overall profitability.
Meanwhile, we remain extremely encouraged by the product breadth and depth of the underwriting talent that the navigators acquisition is contributing and we're already seeing the impact of these additions in our businesses and with our distribution partners.
The positive progress on key milestones drive my bullish outlook on our future.
Look forward to updating you all in another 90 days.
Let me now turn the call over to Beth.
Thank you Doug today, I'm going to cover third quarter results for the investment portfolio, Hartford Fund and corporate and provide an update on capital management.
Our investment portfolio continues to perform very well with strong limited partnership returns and generally stable investment yield.
Net investment income was 490 million for the quarter, a 46 million or 10% on the prior year.
Excluding navigators net investment income was 462 million or 4% higher than the prior year.
The annualized limited partnership returns with 15.3% in the quarter due to higher valuations on underlying fires.
Lower interest rates and tighter credit spreads increased net unrealized gains on fixed maturities after tax to 1.8 billion at September Thirtyth up from 1.4 billion at June Thirtyth.
Unrealized and realized gains on equity securities classified unrealized capital gains on the income statement were 19 million before tax in the quarter and $181 million before tax through September thirtyth.
The credit performance of the investment portfolio remains very strong net impairments in the quarter totaled 1 million flat with third quarter 2018.
Given the increasing likelihood of sustained low interest rate I wanted to touch on how we manage the portfolio in this environment and the impact to the portfolio yield due to lower rates.
We have a broad range of investment capabilities, and a well diversified portfolio. Our strategy does not pursue lower credit quality for the purpose of making up for lower yields and we will continue to invest in a diversified manner.
For the quarter, our current yield before tax excluding limited partnerships was 3.6% equating to 425 million.
Taking into consideration potential lower reinvestment rate projected using the forward curve, we could see the portfolio yield excluding limited partnerships decline by close to 10 basis points in 2020, reducing the quarterly run rate of net investment income by approximately $10 million before tax.
Turning to Hurford funds core earnings of 39 million were down 5% from last year, but up 1 million sequentially Daily average AUM rose, 2% from second quarter 2019, reflecting strong market performance, partially offset by net outflows.
Investment performance remains very strong.
As of September Thirtyth about 70% of hurford fines outperformed peers on a one three and five year basis.
Corporate core losses of 37 million improved by 8 million from third quarter 2018.
The principal driver of the improvement this quarter was 11 million of income after tax my retained equity interest in talcott compared to 1 million in third quarter 2018.
During the quarter, we continue to repurchase shares.
Year to date to November 1st we have repurchased 2.2 million shares for $126 million.
As John capital generation and financial flexibility, we're pleased to be able to both invest in our businesses and return capital to shareholders.
During the third quarter, we issued 1.4 billion of debt comprised of 600 million 10 year, 2.8% senior notes and 800 million 30 year, 3.6% senior notes.
We used the proceeds to redeem approximately one point 65 billion of debt with a weighted average coupon of 5.3%.
The redemption resulted in a loss on extinguishment of debt of $90 million before tax we continue to plan to repay our 500 million, 5.5% senior notes maturing in March 2020, which will put us in line with our leverage targets.
Book value per diluted share, excluding AOCI I was $42.55 up 8% year to date and 9% since September Thirtyth 2018.
Core earnings Arlie over the last 12 months was 12.3% well in excess of our cost of equity capital.
A few other items to comment on before I close.
We have included disclosure in the 10-Q about the potential for separation recoveries MTG any related to losses incurred on certain 2017, and 2018, California wildfires.
Given uncertainties with respect to approval of the PG any bankruptcy plan, we have not recognize any segregation recoveries to date.
Based on fabrication claims submitted by all insurers to PG any and the terms of the proposed settlement, which is contingent upon approval of the bankruptcy plan. We would expect gross segregation recoveries to be approximately 325 million, although the actual amount we collect is subject to uncertainty.
The first hundred 16 million of any such segregation recoveries would reduce reinsurance recoverables, we have recorded under our cat reinsurance treaties.
Accordingly, any benefit to income would be for separation recoveries in excess of 116 million.
Turning to fourth quarter has already been an active quarter for catastrophe related events.
Our budget for cats in the fourth quarter is approximately 80 million pretax.
Before considering any losses from the current California wildfires, we are approaching 80 million of catastrophe losses in the month of October including losses from tornadoes in the Dallas area and other wind event.
While it is still still too early to make an estimate of losses, we may incur from the current California wildfires, we're monitoring the fires closely in the area as we havent shared properties and businesses at risk.
As a reminder, in the fourth in the fourth quarter, we will complete our annual study of USCIS and environmental reserves.
Under the adverse development. However, we purchased in 2016, we have 977 million remaining coverage available for increases in these reserves.
Also we did not see any additional net loss reserves in the third quarter two our adverse development cover for navigators. So we continue to have 209 million of coverage available on that book of business.
To summarize the execution of our strategy is generating strong results across our business lines. The integration of navigators is on track and we look forward to continuing to update you on our progress.
I'll now turn the call over to Susan So we can begin the Q and a session.
You bet, we have about 30 minutes fair question.
Operator can you please repeat the instructions for asking a question yes.
We will now begin the question answer session.
Yes. Good question you May Press Star then one on the Touchtone phone.
And then speakerphone, please pick or perhaps it before president of the keys.
If at any time request and has been adjusted you like to withdraw your question. Please press Star then too.
Again as this star then one to asking question at this time, we'll just pause momentarily to assemble roster.
And the first question, we have will come from at least greenspan.
Wells Fargo. Please go ahead.
Good morning.
First off on that they do.
I would appreciate that new kind of streamlined disclosure within the press release that was helpful. This quarter.
First question for you is on capital just following up on some of your prepared remarks.
It seems like you guys got the majority of that tax attributes you are expecting this year as at the end of the third quarter, just looking at the 10-Q disclosure.
So I just wanted to walk through that and get a sense of.
Share repurchases for that fourth quarter, and then for next year on the capital side.
Could you just give us a status of the dividends you could upstream kind of PNC subs in 2020 and also if there's any change and the tax attributes you expect as well.
Sure. So first of all thank you for the comment on the press release.
That you like the new format on see us as it relates to holding company cash I would say overall, we're on track with what we expected at the beginning of the year, yes, the timing of the tax benefit we received from our AMC, we funded comment a little bit earlier than we anticipated we're anticipating that this.
Here. So we took all of that into consideration on as we have projected sort of our view of share repurchases over the course of this year and into next year and we continue to target for this year about a total of 200 million in share repurchases and then the remainder of our billion dollar authorization would be.
Ooh is in.
2020.
As it relates to then dividends streams as we go into 2020 again as a reminder, we did not take any dividends from PMC in 2019, but we do anticipate going back to our normal cadence in 2020.
We've talked about in the past, we see dividend sort of in that $850 million to $900 million range.
Obviously will depend on actual result from our group benefits business.
Typically in the.
Three to 350 range, obviously result, synchrony benefits have been very strong.
So we've seen some increases in those dividends.
Through the years, and then mutual funds, usually isn't that hundred 125 million.
And then we do still have some remaining tax benefits that we'd expect to receive in 2020. So when we look at 2019, we're probably a little bit over $700 million and tax benefits that will will come through as we look to.
2020, we'd be just slightly under 600 million. So again very much in line with what we have laid out previously and then again I'll just remind you as I said in my prepared remarks, we do still anticipate.
In our maturing debt a 500 million on in March of 2020.
Thanks, That's very helpful. And then my second question on if we want to kind of keep track of how navigator is trending you guys highlighted some earnings projections for that business.
Following a couple hearing out so just trying to get a sense can you kind of set the stage job I give us a sense how much earnings came through in the quarter.
Or is the best way for US just really look at global specialty margins get a sense of how navigator is tracking.
At least that thank you for your question I would say what we've commented upon the past as far as.
Our goals related to the financial performance of Navigators are really unchanged I think we did say that the the slope of it might be slightly different.
Components might be slightly different, but we still see a path.
Earning 200 million of core earnings prior to amortization of intangibles in that four to five year period of time and.
Still still excited obviously theres a lot of rate being taken in in the specialty space broadly defined but.
Doug Thats, what I would say over the long term, but what would you say in the near term.
Just add that this quarter, we made very few adjustments to the prior navigators loss ratios across their lines either prior year or in the current accident, we tweaked auto liability slightly in the quarter, but other than that.
As a pretty quiet quarter relative to actuarial assumptions.
Okay, and then can you give us a sense of the rate that you're getting chess within their book of business.
Yes, I mentioned in my commentary at least said it was double digits and in the quarter essentially the U.S. book was right on top of 10.
Internationally, they were getting closer to 16 and when you put to two together we're talking.
12 ish 11 to 12 points of price I also said that it was accelerating in the quarter. So we're quite pleased about that as you think about the run rate July through September and an early peak of October keeps me optimistic October looks a lot like September so I think we're off to a really good start.
Very pleased with progress and I'll, Vince as team working hard to change the outcomes here.
Okay. Thank you very much I appreciate the color.
Next we have Paul Newsome of Sandler O'neill.
Good morning, Thanks for the call.
I was hoping you could weigh in a little bit more on some of the.
Auto trends that we've seen it other companies.
The commercial auto trend in severity and frequency seems to be a little bit different by company and kind of how you Barry that.
Hey, you what are your experiences have and so what you things behind it and then.
Second question flip over the private passenger and and that's kind of the same questions about frequency and severity.
All Steve.
With that of the spike in their frequency for.
Physical damage.
In the same thing.
Thanks, those are my essentially my two questions.
And Paul Let me just clarify personal and commercial both do you want me to okay.
Let's start with personal.
We continue to be pleased by the trends, we see in our personal lines Auto book frequency has been in good shape for several quarters now and severity, we're mindful of collision severity, but essentially our loss trends are within our expectations and feel good about progress and overall performance of the personal lines auto line.
In commercial.
Bit of a different story in the sense that are small commercial book much smaller vehicle, we've been working right now for.
Five to six years, we have transform that book were essentially not a mono line player except in certain circumstances.
Improvement, there, but more improvement necessary in the commercial auto small commercial space.
In the Middle again, this is not especially auto sector. This essentially commercial auto fleets attached to our middle market accounts slightly heavier than small commercial.
We also have been chasing rate here over the last six to seven years, we've made progress, but not at all except full relative to our operating performance in the line today. So.
We continue to make underwriting adjustments.
We'll continue to work hard on rate very pleased that our rate was up over 10 points in Q3 and auto we'll continue to work at that in Q4 and into 2020, when I think about loss trend.
They look to us like during the mid single digits, maybe plus a little bit in that five to six six and a half range commercial auto.
We're mindful that which means our pricing needs to be on top of that plus some to make appreciable progress and combined ratio.
Chris or best anything.
You have any particularly theory about the.
Commercial business it might be different from other folks about why.
Why we're seeing the severity trend and whether or not its current.
I would just offer that our book of business on the commercial side X NAV is largely primary auto so we're not a significant player in the excess space I do think the excess layers of had some pressure over the past three four years.
Navigators has especially auto book, we're very mindful that we're working closely with them sharing our trends working actuarial assumptions et cetera.
And taking quite a bit of right. There so our rate change in the in the navigator Auto book is substantial.
But I don't have any greater insight because I don't have insight into other competitor books like I do our own.
Thanks, congratulations to quarter. Thank you.
Thanks, Paul.
Next we have Brian Meredith.
Yes.
Yes. Thanks, a couple of quick ones here first I'm just curious in the commercial line segment.
The expense ratio declined year over year.
Only around 17% growth gene expenses.
I can give you a little bit higher than that was there anything unusual there is at a decent run rate with respect to kind of Gina expense growth.
We are seeing with the expense ratio.
Yes, good question, Brian and there are some things happening in both Q2 and Q3 that make that compare a little bit challenging. So let me do my best on packet.
In Q3 quarter, we actually had some credits that ran through from taxes licenses and fees and also some bad debt credits and when you kind of laser them and you basically get a quarterly expense ratio more like 34 and a half.
In Q2, we had some one timers that put some upward pressure on the expense and I'd also point out to you you know as the navigators book comes into our expense ratios as a typical specialty company, sometimes has theyve got slightly higher expense base. So between the U.S. and certainly the international there's a little bit of inflation on.
The expense coming in from NAV that we work our way through over the next couple of years as we we earn our way toward those profit targets. We've talked about so I look at the run rate Q3, more in the 34 and a half range I think thats kind of where we'll be Q4 as I look out.
Great. Thanks, and then my second question.
In the small commercial area you talked about how it's a little bit more insulated from the social inflation environment, given the kind of limits profile that business I'm curious I have you seen any increasing competition.
David area as a result of what's going on and the loss cost inflation environment.
Thank you Brian as Doug.
Yes, we respond to I. I would say again across.
Many of our businesses.
There is always competitive pressure theres, new entrants theres fin tech related or insured tech related activities, but I wouldnt say its.
Rapidly changing in a more competitive environment, where everyone piling in.
I would say and you've heard us talk about this before we have a 30 year history here with a lot of data a lot of capabilities.
A lot of.
Deep trusted agent relationships that does provide an element of the advantage to us, but we're really tuned in on the emerging trends and our own mindset of.
What do we need to to continue to get better every day, what do we need to continue to differentiate ourselves as one of the top go to go to market. So that's our mindset and Doug.
If you would add anything yeah.
So maybe just a couple of comments about our new spectrum and then comments on what we've been working on the last couple of your so very excited Brian about this launch of next Gen spectrum, we have been.
And the design and building stage for a couple of years now and I think it's going to be a terrific product in the market much in the way the digital experiences that we're all used to on our personalized.
Because of that launch Weve been laser focus. These last couple of years to get our rate adequacy is on our spectrum product, where they need to be because it's very difficult. If your profit challenge in the current line and then go to launch new product.
So as we think about loss trends over these last couple of years, we've continue to.
Make sure we're on top of those trends with pricing, we see liability trends.
And that spectrum area still in the mid single digits and our pricing has been matching that overtime and we feel good about our balance sheet in terms of the the reserves that are that are recorded on our on our ledger. So.
Yes, we've been very focused on loss trends here.
I think good progress and now exciting that we launch our new effort into the latter half of 2019 into 2020.
Great. Thank you.
Next we have Jimmy Bhullar of JB JP Morgan.
Hi, Good morning, other couple of questions for Doug and first on commercial line, how do you think about your ability to.
Take advantage of improving pricing in the overall market, especially given that you've got a big exposure to workers comp.
They are prices are actually obviously under pressure.
Well, we're optimistic that are non workers compensation pricing continues to improve as I suggested that certainly was the case in Q3 and I expect that to consider continue into Q4, yes. We recognize we have some headwinds on the workers comp environment I would again point out the profitability as book.
This is excellent, particularly small commercial.
So we're mindful of those headwinds and navigating in the middle account by account and being thoughtful about class selection and state and geography in small commercial so yes. It is a a tale of two where we're working hard to improve our core pricing. While we understand is a very competitive workers comp dynamic that.
Matters greatly to us.
And then on personal lines.
Thank you would hope that at some point over the next few quarters, you'll start to see stabilizing premiums.
Maybe an improvement in premium.
But it seems like mode and more companies are sort of shifting their focus from.
Evolving margins to accelerating growth.
Comments on competition, whether it's still rational and your expectation.
When you can sort of get to flat to positive premium growth in that market.
Jimmy.
Obviously, we're not going to give any guidance or specific drivers, but the overall focus as both Doug and I've comments upon the has been.
Growth orientation, but you are right I mean, it's a dynamic marketplace, just because we want to grow and there is lot of alert.
Competitors that are shifting to that same.
Mindset, so the trick in that environment at least my judgment is got to remain disciplined.
You got to again segment.
Appropriately your new business by States are territories that makes sense for you compared to where your your pricing is and the team is executing very well it just.
Yes, we're getting the response is just not.
Converting as many new business opportunities as feasible, but Doug Thats, what I would say, yes, great Chris and.
I think we lay out in the supplement you can say we've made very good progress on the retention front I still think there's a little more work to be done there I think there's a little bit more left and then absolutely we are.
Focused on adjusting and thinking carefully about what we do on the new business front, because we want to raise those levels new business successes.
Okay. Thank you.
Next we have Ryan Tunis Autonomous research.
Hey, Thanks, good morning.
First question for Doug on I guess keep is your commercial auto.
And just thinking about it seems like over the past caught half decade, we've been talking about commercial auto reserve development and it feels like we've been talking about probably more at hard for done a lot of competitors, maybe not so much over the past year, but.
I would just be curious to maybe your thoughts on the extent to would you don't maybe you feel like you've got ahead of some of these trends maybe in in 15 16 and 17.
And then extend that you're seeing something new.
What is new and this 2019 environment and you potentially add reserved for contemplated prior to this.
Brian Thanks, let's just start on the quarter and that I do want to comment because I think your onto something relative to the prior trends. So in this quarter, we made an adjustment to our prior year development based on some large losses, we had seen in our national account book. So it's largely national accounts I would say almost all national accounts, 80% of the changes national accounts and.
It's something that we had not adjusted in the serve last several years so.
Really exclusively our national book.
If you go back over five to six years.
Correctly stated, we havent adjusting auto I would say back in the 12 13 time period, we had a broader.
Specialty auto book transportation vehicles that cost some of the adjustment and actually raised our attention to this commercial auto dynamic that we've been working hard on for five or six year. So I would agree with you if you've looked at what we've done in the commercial auto space on our reserves and our our current accident year underwriting and pricing. This has been an ongoing.
Work in process for us.
Did some tuning in the quarter for more importantly, we continue to.
Levers the findings in our book of business to do the best job, we can add underwriting of profitability book going forward and we're sharing them with navigators as we come together.
Perfect and then then maybe for Chris just sort of group benefits.
Finally, seeing some very favorable trends, there and I guess, what surprises of PNC analyst is how well pricing seems to hold up so I'm curious.
And your view, how does the pricing cycle kind of work for group benefits is are you seeing more competition there.
In Italy.
Good benefits from seeing I guess some of the same trends we've seen on workers comp over the next couple of years.
Sure Ryan I would.
I would say yet we are performing very well as I said in my commentary I think I think we've provided a enough.
Data to say that there were a couple of onetimers in this quarter. So I'd look at it ended the quarter was roughly more in line with at 120 million.
Earnings and at an 8% margin, but clearly above our long term views that we've guided two which is still six to seven I think the thing that you just have to keep in mind is a lot of the results at our emerging time today are based on pricing and commitments. We've made two three years ago.
That are just outperforming so unlike PNC, we generally make three year rate guarantees.
We're very.
Thoughtful and disciplined when making those three year rate guarantees because.
Yes, that's the commitment so we're just outperforming the expectations both on.
Incidences and recoveries that is contributing to that current outperformance. So hopefully that helps you.
That does thanks.
Okay.
Next we have David Muddy Mason of Evercore.
Hi, Thanks, good morning.
Just a question for Doug just wanted to get a bit more detail on the changes that you guys made to reserves NGL and also.
Just talk about what you're assuming on severity going forward and your loss picks and what sort of rate you're seeking in the market right now.
And that was a multiple component question. So let me do my best to work our way through.
In other liability general liability, we made some tweaks really across years across businesses I would say a series of small tweaks Cup on the product area, a couple umbrellas et cetera, nothing significant in any one pocket, but largely across our middle market book of business construction included a little bit of our specialty generalize.
The book, So that really is the basis for the tweaking we did in the quarter.
For general liability.
In a broader sense, we think about.
Loss trends.
Overall, our loss trends are somewhere in that mid single digit range. When you combine all airlines and I'm thinking primarily about auto liability NGL, which are the two lines that really form the basis for most of your question. So you know.
They may move a bit between small and middle and some of our specialty lines with with the specialty global specialty book, but we're talking about trying to be on top of mid single digit trends.
Now our pricing across various lines is either on top of slightly advancing on or appreciably on top of in the cases of our specialty excess area. So.
I share with you were really pleased about some of these specialty areas that.
We've had substantial movement and pricing double digit moves and pricing, where I feel like we're going to see the benefits of that kind of work into our book in 2020 and beyond.
Got it great. Thanks, and then a question.
For.
Just for for Chris on the group business and topline specifically sales were down.
Decent amount year over year.
Just sort of wondering what what you're seeing competitively and also more specifically what your outlook would be for topline earned premium growth here over the next few years.
That now is more fully integrated.
Sure David I would say I was trying to explain that I mean, it is still a competitive environment out there, but there's still an element of rationality.
That I see most of our competitors.
Exhibiting you might have.
Counter to or new business opportunity were where someone does.
Something more aggressive, but generally competitive but a balanced.
I would say the year over year numbers that you're looking at.
It does look down but really when you adjust for.
New York.
Family paid leave.
Product that launched in 18.
You really have sort of a $40 million delta between year to date.
19 compared to year to date 18. So you really you can consider it slightly down to the flattish.
So again I think we're still performing at a at a high level from from our sales side.
We do still.
Some contribution to sales in that $40 million to $50 million range from Atanas medical staff that is still.
Referring business and jointly selling so we feel we feel good about the overall.
Sales performance. So I said in my opening comments premiums are slightly down 1% on a.
On a earn basis, primarily due to just hired lapses.
Lower persistency on.
No book as we are taking targeted actions.
To to reprice those those books. So everything is according to his to plan.
But as we look forward.
I I still see modest growth in topline for group benefits really supported by some of our ancillary lines anchored and age and voluntary.
Great. Thanks for the answers.
Next we have Mike Zaremski of credit Suisse.
Hey, good morning.
I wouldn't mind.
Maybe trying to get more color on next Gen spectrum in terms of maybe you could just isolate what the major changes are is it.
From the commentary is it is it.
Is it easier for your business owners to self service.
Im just curious is there a direct selling component to potentially for small businesses and then also is there.
Ultimately to measure the success, you expect sales to accelerate or better profitability I'm, just any more color would be great. Since it seems like it's a big deal.
Good question, Mike and thank you for asking if I'd start by saying, yes. This is a sales tool that essentially will sit on the desktop of our csrs customer service reps around the country and all the agents and brokers, we do business with its a tool that will allow them to be faster more insightful and helps our customers make choices I would say inside the tool you should.
Think about good better best type dynamics.
All the coverages very tuned to what a certain customer or ESI C class would require what types of optional coverages are there et cetera. So yeah, I think it's a best in class selling tool with advice that either.
Comes out of the blocks with a terrific offer for a customer or offers additional coverages that a CSR will work with a potential customer to purchase.
So that is.
At the basis of this exciting innovation for US and then secondly, yes, we do expect overtime, our new sales and spectrum to lift it's hard to predict but our expectations over the next couple of years, we'll see some change in our new business sales and we'll watch said carefully and report on that as we go through time.
Okay. That's helpful.
And lastly, if.
If we step back and kind of talk about in a broader sense about commercial pricing versus loss cost trend it.
What is it fair to say that the.
There is that if there is a gap, it's it's not it hasn't changed much quarter over quarter, taking into account workers comp any so it sounds like there hasn't been any meaningful nodal full notable changes over the last.
Quarter.
And as your question mourn the loss trend area or the pricing area, just so I will.
Kind of both it seems like pricing is moving north and trend might be moving a little bit north so net net.
Kind of similar to last quarter.
Yes, I would agree with your statement in the aggregate and then I think we'd have to parse it apart by specialty by excess by primary financial lines spectrum et cetera. So in the aggregate, yes, we see lifting and pricing across middle.
Non workers comp.
As we've examined our loss trends I would say largely in the primary space.
Pretty consistent with Q2, yeah, maybe we are low careful to make sure we're catching some uptick in the social inflation dynamic, but I don't think material in any given way and then in the specialty book out we're spending a lot of time inside our excess and umbrella our specialty areas and we're mindful of.
Where trends are expecting a little bit of upward lift in those trends and therefore, our pricing has been pretty aggressive there. So pleased with progress on both fronts, but I think you havent about right.
Thank you very much.
Next with Amit Kumar of Buckingham Research.
Thanks, and good morning, two quick follow up so maybe going back to.
Mike's question on rate versus last translate fuel blend I guess, all the moving parts and look at.
All commercial.
As we head into 2020 is youre, saying that the loss trend will end up running hotter than what could be expected, hence the rate horses loss trend metric does not expand or is it more a function of the book.
So let me start and death and Chris can you can go over the top we're not prepared today to take into 2020, yet what I am very pleased about as if you look at our metrics on our Xx combines across commercial and you see him for our segments I think we've done a nice job at at dealing with loss trend getting improving rate performance.
And across both our most profitable segment, which is small commercial kind of holding in margins that are terrific.
And we're mindful that we need to make more meaningful change in the middle and large commercial area. So I look at an all in Q3 number on top of Q2, I feel pretty good about it and as I mentioned in my earlier commentary. We know there was a little bit upward pressure from the NAV book coming in.
We'll work our way through that and at some point that'll be a a positive because we'll start turning the tide on that number as we move into 2020.
And then let Chris or.
Anyone it has to add something to that.
All right. The again I think Doug is accurate as a as always I think the.
The tricks going to be here everything sort of more granular right. These days, whether it be states products accounts.
So when you add it all up.
I think what Doug says makes perfect sense.
Particular point of view is that this could be a dynamic environment for the next couple years for sure.
Because I don't think it's your realistic at least my expectation that 15 points of rate in the specialty.
Book in aggregate is going to get back to targeted returns as I said.
Particularly as it relates to navigators. This we're taking a multiple year journey.
To get to targeted earnings and returns and I think a lot of others are going to be in that same position, where just one year of feeling good about high single digit or low double digit rates in certain lines, primarily specialty isn't going to cut it.
It's going to require a multiyear approach.
Got it the only other question is on the last call.
I guess, we had fine tuned navigators a bit and Chris on that called you had said 110 ish was settled the number 420 20 are we still in the ballpark or based on what does the walls are we.
During the middle or not.
Yes, obviously I'm not going to give you any.
Really.
Specific details, but yes, the ranges that we put out I still think are valid as I said anchored in the low end of that range and I'm not I'm not changing our views right now at this point in time.
Thanks for the answers and the congrats on the print.
Next we have Gary ransom of Dowling and partners.
Good morning, most of my questions have been answered, but I did want to follow up on the new spectrum policy.
I wondered specifically, whether the there's a little bit of leap frogging going on with other competitors and their old system can you actually detect when someone else has something.
A new strong offering and see a little bit of lowering of your quote volume than you put something out you see a little bit of higher and if you do does that does that last for a while it does have some duration.
Trying to get a sense of the growth.
Opponents and how this might play out.
Thanks, Gary.
We do watch all those statistics carefully so we're able to watch quote volume, we're able to watch yield so the number of hits or successful quotes against total quotes.
I would say relative to competitors rollout, we watch what they put out publicly and normally there is a little bit of a buzz or discussion about enhancements are innovations in the marketplace I am sure very similar to what's happening with our.
Next generation spectrum offering right now I think thats the easier way to find out about things, but we study the numbers were mindful of.
Even the statistics I quoted in my script bright we're watching optional purchase optional coverage purchases right now we're watching number of quotes and we havent expected trajectory that we expect to see over the next three or four quarters and so we'll be right on top of that.
Is this something that will roll out all the renewals or is it just something for new business.
Yeah, we're quoting new business right now.
I've said, we're you know in mid Thirtys states and by yearend, we expect to be essentially 45, and then we'll we'll deal with the last couple of states next year, but new business. Thank Gary today.
Okay.
Alright, Thank you very much thank you.
The next question web will come from yarn synar.
Goldman Sachs.
Hi, good morning, everybody.
To start with one on the reserve development and.
In commercial lines and sneak another one on group benefits So with reserve development.
I think in recent years, we've seen have initial loss picks in both general liability and commercial auto come in a bit below most recent picks for prior years.
Can you maybe talk about that dynamic and how comfortable you are with what's your picks for a more recent years.
During the fact that you have been increasing.
The the initial auspex there.
And is it just pricing that youve achieved thats offset some of the.
Weaker picks and prior years.
Let me start and then Beth can.
Work over the top I would say over the past six plus years, we've been working both pricing and underwriting so we've been adjusting.
Our offerings across the marketplace in classes Mana line group with other accounts et cetera, so multiple different options that we've been working in general I would agree with you that we have been light on our axiom picks at 12 months, which is the reason that if you look at our trend line we've made up.
Just wants to those prior year picks over the last six seven years and Nick we do a nice job disclosing that in our and our supplement so.
The disappointment is that loss trend, obviously has been higher than we expected and we didn't get the punch that we expected on the underwriting side and so we're doubling down now I think we continue to make progress again I'd separate some of this discussion by class a vehicle, whether we're talking small commercial with primarily private passenger and light vans or middle market with some heavier or the specialty area.
And I think that our success or lack thereof is not very different than the overall marketplace, but what we've tried to do is when we see something in the Buck we've addressed it both in our reserve levels and also on the underwriting and Thats why I don't think Theres anything new here. It's just we just need to dive even harder.
Beth.
I think that summarizes it very well Doug.
Okay. Thanks.
And then on the group benefits side.
This is the the experience and claims recoveries that you've seen.
For for recent vintages, you expect that to kind of continued is that baked into your estimates today or do you expect some reversion back to me.
Yeah, I would say yarn that.
Obviously, we update our statistics and views periodically thats, what we did this quarter.
So that reflects our best views of trends going forward.
Matt in essence, we price product on and book reserves on so it is our best thinking from here no. We've always talked about it changes in incidents that window recoveries is somewhat employment centric related so as long as we don't have any big shocks into the system.
I would expect our.
Estimates here to hold but it is as I said, it's a dynamic world out there and.
When things change, we just have to reevaluate our.
Our assumptions and we would change accordingly.
Got it thanks, so much and thanks for us so thank you ma'am.
Well that is all the time, we have for today's question and answer session. I would now like to turn the conference call back over to Susan's feedback for any closing remarks.
We appreciate all of you joining us as well as your question. Please do not hesitate to reach out if you have any follow up and if we didnt get to your question within the time period I'm available on the Phase just give me a call. Thank you.
The conference call is now concluded. Thank you all for attending today's presentation at the Sammy may disconnect. Your lines. Thank you again everyone.
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