Q4 2019 Earnings Call
We ask that you hold all questions until the completion of formal remarks, and with how you want given instructions for queuing they session.
As a reminder, this conference is being recorded on January 23rd 2020.
At this time I would like to turn the conference over to Miss Abbey Coasting Senior Vice President Investor Relations Viscose thing you may begin.
Thank you good morning, and welcome to travelers discussion of our fourth quarter 2019 result, hopefully all of you have seen our press release financial supplement and webcast presentation are released earlier. This morning. All of these materials can be found on our website at travelers dot com under the Investor section.
Speaking today will be Alan Schnitzer, Chairman and CEO , Dan Fry, Chief Financial Officer, and our three segments President Greg Kids Love give business insurance, Tom Kunkle, a bond and specialty insurance and Michael kind of personal insurance. They will discuss the financial results of our business and the current market environment. They will.
Referred to the webcast earnings presentation as they go through prepared remarks, and then we will take your question.
Before I turn the call over to Alan I would like to draw your attention to the explanatory node included at the end of the earnings presentation. Our presentation. Today includes forward looking statements. The company cautions investors that any forward looking statements involve risks and uncertainties and it's not a guarantee of future performing actual results may differ.
Were materially.
Or implied in the forward looking statements due to a variety of factors. These factors are described under forward looking statements in our earnings press release in it in our most recent 10-Q and 10-K filed with the FCC, we do not undertake any obligation to update forward looking statement.
Also in our remarks or responses to questions. We made mention of 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.
Good morning to reported record quarterly core income per diluted share of three dollarsthirty two cents.
Return on equity was 14.8%.
As you've heard us say before the primary measure we used to manage our business is core return on equity overtime.
Any strategy to deliver industry, leading returns requires a strategy to grow also over time.
For the full year 2019, we're very pleased that the continued successful execution of our strategy to grow the top line at attractive returns resulted in record net written premiums at more than $29 billion.
Looking back over the last three years, our cumulative topline growth and its impact on our results are significant.
Earned premiums were more than $3.5 billion higher in 2019 compared to 2016.
Representing a compound annual growth rate of nearly 5%.
That volume is maybe meaningful contribution to underwriting income.
We have a very high quality book of business and we're pleased that Retentions have remained high across the board in recent years.
Premium growth in 2019 and over the past three years has been driven by higher pricing with the pure rate and exposure growth contributing.
The new business Weve added has been in products industries and geographies that we know well so we're growing with confidence.
Improvements in productivity and efficiency complement the benefit of volume.
This quarter, our expense ratio improved to 29.1%, bringing or for your expense ratio to 29.6%.
That marks a steady and substantial improvement over the past three years from an expense ratio, which prior to that had averaged around 32%.
This was driven by our efforts to leverage technology investments and worked pull enhancements.
Importantly at the same time, we also continued to make strategic investments in our business grew our investment portfolio and returned substantial excess capital to our shareholders.
Achieving further productivity and efficiency gains continues to be a strategic priority for us as you've heard us say improved operating leverage gives us the flexibility to invest further in our strategic priorities.
The benefit fall to the bottom line and or be more competitive on pricing without compromising our return objectives.
Over the course of this past year. Our results were also impacted my headwinds from a challenging tort environment.
Greg will comment on the impact in the current quarter, but all know that we continue to believe that social inflation isn't environmental issue driven primarily by more aggressive plenty to spark.
For the for your core income exceeded $2.5 billion generating core return on equity of 10.9%.
Considering the challenging tort environment and persistent low interest rates that level of profit in return speaks to the strength and resilience of our diversified business and our investment expertise.
Our results together with our strong balance sheet enable us to grow adjusted book value per share by 6% during the year to $92.76. After returning $2.4 billion of excess capital to shareholders consistent with our long standing capital management strategy.
Turning to production our marketplace execution was excellent and fourth quarter net written premiums increased by 6% $70.1 billion, marking the twelveth consecutive quarter in which we generated premium growth in all three business segments.
Net written premiums in business insurance increased 5%.
Domestic renewal premium change was 7.8%, including renewal rate change of 5.1% in both cases, the highest level since 2013, while retention remained very strong.
In bond and specialty insurance net written premiums increased by 9% with strong growth in both our management liability and surety businesses.
No premium changing our domestic management liability business was 6.6% up about two points over the prior year quarter and the highest it has been since 2014 or retention remains historically high at 89%.
In personal insurance net written premiums increased by 6% reflecting growth in both agency auto and agency homeowners.
Our agency homeowners business renewal premium change increased to 7.4% its highest level since 2014.
You'll hear more shortly from Greg common Michael about our segment results.
To sum it up our performer transformed call to action served us well this past year.
In a challenging environment, we generated a nearly 11% core return on equity.
We also made important investments broadly across or value chain advancing our ambitious innovation agenda.
We did your Tei sales and service capabilities improve workflows to increase speed responsiveness rolled out new products implemented new analytic capabilities and put claims related digital tools in the hands of our customers and claims professionals just to name a few.
All of these and other important initiatives are part of our coordinated efforts to deliver on three priorities aimed at positioning travelers for continued success well into the future.
Namely extending or lead and risk expertise, providing great experiences to our customers agents brokers and employees and optimizing productivity and efficiency.
With our relentless focus on execution deep and talented team sophisticated analytical approach to underwriting and high degree of respect for our shareholders capital. We are well positioned to continue to deliver meaningful shareholder value over time and with that I'll turn the call over to Dan [laughter].
Thank you Alan.
Core income for the fourth quarter was $867 million up from $571 million and the prior year quarter.
And core OE was 14.8% up from 10%.
The improvement in both measures from last year's fourth quarter resulted primarily from a lower level of catastrophe losses.
Our fourth quarter results include $85 million of pre tax cat losses.
Which consists of $186 million of cat events, partially offset by $101 million of cat recoveries under the new Treaty.
Recall that under that Treaty, we were reinsured for 86% of losses above a 1.3 billion dollar retention and that through the third quarter, we had accumulated $1.2 billion towards that retention.
Few idea in the current quarter for which I will provide more detail shortly was net favorable $60 million pre tax.
The underlying combined ratio of 92.1%, which excludes the impacts of cats and P. why D increased by one point from the prior year quarter.
Our pretax underlying underwriting gain of $538 million was down modestly from $578 million in the prior year quarter, reflecting the higher loss level associated with ongoing challenges related to the more aggressive toward environment, partially offset by the volume benefit from higher levels of premium.
The fourth quarter expense ratio of 29.1% brings a full year expense ratio to 29.6%.
These results reflect the progress we've made in our strategic focus on productivity and efficiency in recent years and this is our lowest full year expense ratio since 2005.
After tax net investment income decreased slightly from the prior year quarter to $525 million as increases in fixed income were more than offset.
By lower returns in our non fixed income portfolio in 2020, we expect that fixed income and I will decrease by approximately $5 million to $10 million after tax per quarter compared to the corresponding periods of 2019 as we projected the benefit of higher average levels of invested assets will be more than offset by a lower ad.
Bridge yield on the portfolio given the lower interest rate environment.
All three segments reported modest net favorable prior year reserve development in the fourth quarter.
In personal insurance, both auto in property performed better than expected for multiple accident years, and bond and specialty we experienced better than expected loss development and the fidelity and surety line.
And business insurance net favorable P. why de included about $140 million of better than expected loss experience in workers' comp.
And unfavorable development in the general liability in commercial multi peril lives.
And our combined 2019 schedule P is filed early in the second quarter, we expect the results to be consistent with our commentary throughout the year with strengthening in the commercial liability lines and favorability in workers' comp fidelity in surety and the personal lines coverages.
Page 22 of the earnings presentation provides information about our January 1st Cat Treaty renewal.
Our long standing corporate Cat Xol Treaty renewed on terms in line with the expiring Treaty and continues to provide coverage for both single cat events any aggregation of losses from multiple cat events.
As you know for 2019, we added a new property aggregate catastrophe extra well treaty.
First let me take a moment to summarize the impact of that treaty on our 2019 results for the full year as expected the treaty increase our underlying combined ratio by about a half a point.
The Treaty had essentially no impact on the full years total combined ratio as the impact on the underlying combined ratio was virtually offset by the benefit of cat recoveries under the Treaty also very much in line with our assumptions.
Because we didnt not surpass our retention level until the fourth quarter. That's when we began to recognize recoveries under the treaty. So the impact on the fourth quarter, specifically was a benefit to the total combined ratio of more than a point and it was virtually no impact on the underlying combined ratio.
As renewed for 2020. This treaty will continue to address from dollar one qualifying PCL designated events in North America for which we incur losses of $5 million are more.
Providing aggregate coverage of $280 million part of $500 million of losses above an aggregate retention of $1.55 billion.
The aggregate retention for 2020 increased from last year's $1.3 billion, largely reflecting recent years and anticipated growth in our property book.
Hurricane and earthquake events once again have a $250 million per occurrence cap.
Since we placed a lower percentage of the treaty than last year. The cost of the treaty will be proportionally lower in 2020, so incorporating our assumptions about cat and non cat weather for 2020, we would expect to full year impact on our underlying combined ratio to be slightly less than the roughly half a point we experienced in 2000.
Hi team.
And we would once again anticipate only a minimal impact on the total combined ratio.
Turning to capital management operating cash flows for the quarter of $1.4 billion, where again very strong although capital ratios were at or better than target levels and we ended the quarter with holding company liquidity of approximately $1.4 billion.
For the full year operating cash flow exceeded $5 billion, our highest level since 2007, which wasn't unusually light cat year loss.
Interest rates increased modestly during the fourth quarter and accordingly, our net unrealized investment gains decreased from $2.4 billion. After tax as of September Thirtyth $2.2 billion after tax at year end.
Adjusted book value per share, which excludes unrealized investment gains and losses was $92 from 76 cents at year end, 6% higher than at the beginning of the year.
We returned $588 million of capital to our shareholders this quarter.
Comprising share repurchases of $376 million dividends of $212 million for the year, we returned $2.4 billion of capital to shareholders through dividends and share repurchases.
Finally on a financial modeling note, let me turn your attention to slide 23 of the earnings presentation.
As we enter 2020, we thought it would be helpful to point out the seasonality of our cat losses over the prior decade.
As you can see the second quarter has regularly and noticeably been our largest cat quarter.
Cat losses in the second quarter has been about twice as much as any other quarter on average and the second quarter has been our largest cat quarter in six of the past 10 years and now I'll turn the microphone over to Greg for a discussion of business insurance.
Thanks, Dan.
The fourth quarter business insurance produced $448 million of segment income.
10% increase over the fourth quarter of 2018.
Full year total per segment income to almost $1.4 billion.
Earnings for both the quarter end the year benefited from strong profitability in workers' compensation, our largest product line as well as higher overall business volumes and a lower expense ratio as we continued to execute on our strategy of growing the top line at attractive returns and improving our operating leverage.
Underlying combined ratio for the quarter was 96.4%.
Point higher than the fourth quarter of 2018.
We've included information on slide nine of the earnings presentation. The details the components of the change.
As you can see on the slide there was about one third of a point of net unfavorable impact from items that roll forward from prior quarters.
There's also about a point of net unfavorable impact from items that are new in the fourth quarter, including about a half a point associated with additional changes in our general liability in commercial auto loss estimates.
Along with that the current quarter includes about a point in a half related to the re estimation of the first three quarters of the year.
For the full year, the underlying combined ratio, 96.2%, what's the point higher than the full year 2018 slide 10 of the earnings presentation provides a detailed view of the various items impacting the year over year results.
Before turning to the topline in production I'll provide a little more context on the tort environment in our international loss activity.
Regarding the tort environment to get our best view will the escalating loss costs, we've leveraged our leading data and analytics and importantly, the tight feedback loop among our business leaders underwriters plain professionals and actuaries.
We carefully underwritten book of business was largely a main street orientation, which we've targeted grown and optimized for years.
More than 90% of our domestic policies have limits of $2 million or less excluding workers compensation were limits don't apply.
Well, we will continue to pursue claim strategies in underwriting actions to mitigate the impact from the worsening tort environment. Our primary action will be to seek more rate.
During the quarter, we were once again successful and achieving meaningful improvement in renewal rate change, while maintaining very high levels of retention, which is evidenced that were not alone and driving rate.
All of that is consistent with our view that what we're experiencing is environmental.
As for international we've been experiencing elevated losses in the property lines.
We are pursuing in achieving significant renewal rate increases to address these trends.
As you can see within the international production statistics on page 20 of the earnings presentation.
In addition to that we're executing a variety of profit improvement initiatives, including tightened terms and conditions and paring back exposures in certain lines and accounts.
More work needs to be done, we're making good progress with all of these efforts.
Turning to the topline net written premiums were up 5% in the quarter and 4% for the full year driven by strong production results.
While renewal premium change continues to be the largest contributor we also grow our customer base for the year through strong retention in new business.
We're pleased with the continued progress we're making on our strategic initiatives remain encouraged by the feedback from our agent and broker partners.
In terms of domestic production, we achieved strong renewal premium change of 7.8%.
With renewal rate change of 5.1%, while retention remained high at 84% a reflection of the quality of our book.
The renewal rate change of 5.1% was the highest result since the fourth quarter of 2013 and was up seven tenths of a point from the third quarter and more than three and a half points from the fourth quarter of last year.
This demonstrates our continued momentum notwithstanding the downward pressure in workers' compensation pricing.
We are achieving higher rate levels broadly across our book with about three quarters or middle market account getting positive rate increases this quarter, which is up from about two thirds in the fourth quarter of last year.
Further illustration of the broad nature of our progress is on slide 14 of the earnings presentation.
Our core commercial accounts business. The slide reflects the percentage of renewed accountant three rate bands for the fourth quarter 2017 2018 in 2019.
As you can see from the graph the percentage of accounts renewing flat.
The rate decrease has declined while the percentage of accounts renewing with the rate increase is up with the level of rate increase skewed higher.
In other words, a higher proportion of our accounts are getting a rate increase and a higher proportion of our accounts are getting a more significant rate increase and this progress has been achieved while retention has remained at historically high levels.
From a line of business perspective outside of workers compensation, we achieved higher rate increases in all lines as compared to both the third quarter of this year in the fourth quarter of last year.
For the segment new business, a $488 million was strong and consistent with the prior year quarter.
As for the individual businesses in select renewal premium change of 7.2% and renewal rate change, 1.9% were both up from the third quarter and from the fourth quarter of last year, while retention remains strong at 83%.
New business of $105 million was consistent with the strong prior year quarter, we continue to advance our investments related to product development and ease of doing business and are encouraged with the progress and results to date.
In middle market renewal premium change was 7.1% with renewal rate change of 5% up more than one point from the third quarter and more than three and a half points from the fourth quarter of last year, while retention remained high at 86%.
New business of $284 million was up slightly from the prior year quarter, bringing the full year total to just over $1.2 billion, reflecting higher new business pricing as well as benefits from our ongoing strategic initiatives.
To sum up the fourth quarter wrapped up a year in which a lot of things went well and we faced some challenges most notably the continued pressure from the tort environment.
We're confident that we have the insights and capabilities to a chain seeing environment that will position us well in the market in 2020 and beyond.
We couldn't be more pleased with our local execution will continue to see great news all other available leavers to meet our return objectives.
Before I turn the call over to Tom to talk about bond and specialty results I want to comment on our outlook for renewal premium change and underlying underwriting results. Since we will not be filing our 10-K for a few weeks for business insurance, we expect RPC in 2020 will be higher than 2019.
We expect the underlying combined ratio for the full year 2020 will be lower than in 2019. This assumes the anticipated impacts of earned pricing in excess of loss cost trends and improved results in our international business.
Underneath that full year outlook, we expect the improvements and the underlying combined ratio come in the second through fourth quarters of the year as the first quarter of 2020 will include the roll forward impacts of the actions. We took in the second third fourth quarters of 2019 for the general liability in commercial auto product lines.
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 $167 million, a decrease of $53 million from the prior year quarter, primarily due to a lower level of net favorable prior year Reserve development.
The combined and the underlying combined underlying combined ratios remained strong at 78.6% and 81.3% respectively.
The underlying combined ratio increased 3.2 points from the prior year quarter, largely reflecting the impact of the roll forward of higher loss estimates for management liability coverages that we discussed with you last quarter.
The underlying underwriting gain was slightly lower than the prior year quarter as the earned impact of higher business volumes, largely offset the higher underlying combined ratio.
Turning to topline net written premiums were up 9% for the quarter, reflecting growth across all our businesses.
Our domestic management liability business. We are pleased that the retention remained at a very strong 89% with renewal premium change higher at 6.6%.
These production results are consistent with our strategy to maintain strong retention of our high quality portfolio, while executing targeted pricing actions. We will continue to prove we will continue to pursue price increases where warranted.
Domestic management liability new business for the quarter increased 17% to $62 million and domestic surety and our international business, both posted solid growth in the quarter.
We remain pleased with our strong field execution, and our strategic long term investments and market, leading products and services together with our commitment to thoughtful and disciplined underwriting and risk selection.
So bond and specialty results remained strong and we feel terrific about our ability to continue to deliver topline growth was strong returns overtime.
In terms of our 2020 outlook, we expect our PC for our domestic management liability business will be higher and the underlying combined ratio will be slightly higher in each case as compared to 2019.
Additionally for 2020, we expect that the underlying underwriting margin will be broadly consistent with 2019 as the impact of higher business volumes will offset slightly higher underwriting underlying combined ratio and now.
I will turn it over to Michael to discuss personal insurance.
Thanks, Tom and good morning, everyone.
In personal insurance were very pleased with our fourth quarter and full year results.
For the fourth quarter segment income was $327 million and our combined ratio at 88 and half percent.
For the full year segment income was $824 million and improvement of $527 million from the prior year and the combined ratio was 94.2%.
The results for both periods reflect solid improvements from the prior year driven by significantly lower catastrophes.
Underwriting income also benefited from higher levels of earned premium.
Net written premium growth for the fourth quarter and full year was 6% and 5% respectively with continued strong retention renewal premium change and new business.
Agency automobile delivered solid results in the quarter, where the combined ratio of 99.2% in what is typically our highest combined ratio quarter for the line.
The 3.9 point increase relative to the prior period is largely reflective of the unusually low level of losses in the fourth quarter of 2018.
The full year combined ratio was an outstanding 94%, which was comparable to the prior year.
The underlying combined ratio of 94.6% improved 0.7 points benefiting from earned premium pricing that exceeded loss trends in the first half of the year as well as favorable frequency throughout 2019.
In agency homeowners and other the fourth quarter combined ratio of 75.8% improved by 34 points in comparison to the prior year quarter, which was significantly impacted by catastrophes, specifically, the California wildfires and Hurricane Michael.
On an underlying basis, the combined ratio was 73.6% or 1.1 points higher than the prior year quarter, driven by higher non weather loss activity.
The full year 2019, combined ratio was an excellent 92.5%.
As lower catastrophe losses drove a 13.1 point improvement from the prior year.
The underlying combined ratio was up four points to 85.6% for the year due primarily to higher non catastrophe weather related losses, and the impact of the new catastrophe reinsurance treaty.
As we've discussed with you previously we continue to take pricing and underwriting actions to address higher levels of underlying loss activity.
Shifting the quarterly production agency automobile net written premiums grew 2% with modest growth in new business and policies in force, while retention remains strong at 84% and renewal premium change with 2.9%.
We continue to make progress in our efforts to grow this profitable line.
Agency homeowners and other delivered another strong quarter with net written premium growth of 13% driven by higher new business levels retention at 86% and renewal premium change rising to 7.4% double the level from the prior year quarter.
We remain pleased with the rollout of our quantum home 2.0 product, which is now available on 34th based on the district of Columbia.
Quantum home 2.0, as granular pricing segmentation customizable coverages and ease of quoting combined combined to form a solution that is both sophisticated and simple and our increased quote volume and higher average premiums suggested hitting the mark with both agents and customers.
Turning to our outlook, we expect that for 2020 and compared to 2019.
Agency homeowners and other renewal premium changes will be higher while agency automobile renewal premium changes will remain positive but be lower.
The underlying combined ratio is for both agency homeowners and other and for the person one segment as personal insurance segment as a whole will be lower.
This improvement is expected in the second through fourth quarters of the year, assuming lower levels of non catastrophe weather related losses.
Our agency automobile the outlook is for the underlying combined ratio to be broadly consistent.
All in it was a very good year for personal insurance for the second consecutive year of strong profitability in auto and strong and significantly improved homeowners profitability.
In addition, we achieved record levels of domestic net written premium new business and policies in force.
We have strong momentum going into 2020 and are well positioned to deliver profitable growth, while investing and capabilities that will continue to enhance the value of our franchise with that I'll turn the call back over to abbey, Thanks, Michael and ready to take your questions.
As a reminder to ask a question you would need to press star one of your telephone.
And your question press, the pound or Heskey.
And by welcome topic, you had a roster.
Your first question is from Michael Philips with Morgan Stanley .
Good.
Hi, Thank you good morning, everybody.
My first question I'm thinking about slide nine and especially the bottom of slide nine I know you guys talk about kind of longer term trends, so 4% to 4.5% of use of 4.5% last time I know you focus on long term trends.
But you move that up a bit in the last couple of quarters more on kind of the catch up which again refer to here on slide nine. So I'm wondering if you still think that foreign to have something you're comfortable with where how you're thinking about that going forward now.
Hey, Michael It's Dan Fry.
So ill draw the distinction between sort of the long term trend assumption and what's going to roll through any particular quarter any year. So in that slide were reconciling for you. The difference between last years combined ratio initiatives combined ratio and clearly for the year as a whole when we look at the change in the loss environment overall, it was more than 4.5%.
We did remember raise our view of the long term trend I think we talked about that back in the second quarter, but we haven't changed it. Since then so these are more reactions to data that we're seeing in the current environment.
Raising the level of losses, but not the trajectory.
From this point forward.
Okay, I mean, I guess I also want to get into is that tug of war between pricing and loss trends are going to who wins and took a war right now and obviously this quarter. The tug of war went to want to loss trends because margins were down.
All other commentary talks about the outlook being better for the underlying certainly I think you said sorted in second quarter. So you're still thinking that pricing earned pricing will get better than loss trends as we get into the back half of this year. It sounds like is that what you're saying.
Yes that that's full year. So so remember the outlook is really a 12 month broad view of what we think the environment's going to be as opposed to a quarter by quarter reconciliation.
Comment Greg made is that when we compare Q1 in particular of 22 Q1 of 19.
The strengthening that we've done for 2019 came in Q2 Q3 in Q4, primarily so that comparison in of itself is going to be a little different than the year more broadly.
Well, Michael and I would.
I would also just things courage to to make sure you're looking at slide 10 to because there's a lot of moving pieces in slide nine that when you look at it on a full year basis. It's just it's a little bit of a of an easier Buda.
To taken.
Yes, Okay no. Thank you.
Second question I guess I appreciate the color you guys gave on that on the be business insurance few I'd.
The $140 million you talked about for comp and that was helpful. I guess on the CMP piece I assume that the adverse there was on the liability side as you see MPS I guess wanted to confirm that and then if so.
I guess, what's driving that are you seeing kind of is that more of kind of the tort environment. We came down from geo into a smaller accounts of.
MP liability or kind of what's driving that.
Yeah, Michael It's Dan again, so so I'd say broadly yes.
And I'd remind you if you go back and look at the results we've disclosed.
Throughout the year, even going back to Q1 of this year, we did talk about CMP as being an unfavorable contributor to prior year Reserve development.
And be even going back to Q1, and clearly as you're alluding to CMP has got both the property and a liability component. It is the liability component.
But as we've made comments over the second third and fourth quarters of this year, when we talk about the liability environment.
In business insurance that for US is meant to include the liability component of CMP as opposed to this being something new and different.
Okay awesome. Thank you very much.
Yes.
Your next question is from Larry Greenberg Janney Montgomery.
Good morning, and thank you I guess im just asking a qualitative question.
Where you sit today or feel today versus where things stood coming out of the third quarter.
So you're pushing price as this is all about business insurance, obviously, you're pushing price.
To some extent year, you're shooting at a moving target with with with loss trend and all the issues surrounding that.
Is there you've got you've now got another quarter, just looking back to from the third.
Is there is there any way to say.
Say that youre more comfortable with where you sit today, and what you're seeing and and how the relationship with pricing and loss trend is moving.
Just just looking for some.
Some qualitative thoughts on that.
Yes, Larry its I'll, let me, let me take a stab at that so first I would say we are definitely.
Pleased with the trajectory of rate versus loss trend that continues to be a good story in and importantly, you got to look at retention in that regard that's that's hanging in there which.
Suggests we think this is an environmental thing and we would say that the pricing actions have have room to go here in terms of our overall sense of the balance sheet.
We are closer to the end of this and we were a year ago Thats for sure and what we're very confident in is we're confident in the talent. We've got looking at at this we're confident in our processes, we're confident in our data and analytics.
And we're confident that that we understand the environment out there so.
Very confident in our best estimate Ken can we tell you. This is the end of it of course, not we couldn't and nobody could.
With that I don't need to imply any lack of confidence in again data analytics people process here.
This is an environmental issue and we think we're on top.
Thank you and then just as a follow up you talk about the other levers that you might have in addition to two pricing are you willing to share any of those other levers to go at the this environmental issue.
Well certainly because it is environmental just the Playbooks as you go to rate. That's just the way. It you solve those issues now anytime you have the circumstances like this and frankly any time in any book of business, where we're always looking to optimize we're always pulling books of business apart and understanding where there are opportunities to improve and that's true in our best performing businesses and our worst performing business.
So you go through that process and there are always things that we can do better and we will do those things.
When we look at this environment in particular relative to.
Our overall book of business there there are around the edges.
Accounts or segments of the business that we think in the current environment don't make sense and and we'll either get the right rate or or will get off on and then and then probably to the question you really asking is what we're doing from a claim perspective and and clearly the planes as far as getting more sophisticated more more clever more aggressive.
And I guess in response to that I would say so are we I'm not I'm not anxious to detail, our our tactics or strategies I think that would probably be unwise for us to do that but we've got a very large and very sophisticated.
That claim operation.
Lawyers litigation strategy and and so we will.
Hi, all those levers as well.
Thank you.
Thank you.
Your next question is from Jamie Bueller with JP Morgan.
Hi, Good morning, I had a couple of questions first just on that Gordon environment overall, you've been more vocal than most other companies.
Just trying to understand our is the environment stabilizing or has it gotten worse view.
2019, and then the other question I just had is on your expense ratio, which was very good for the year.
For the quarter to what extent is it sustainable.
It is sort of being an aberration.
Yeah. Thanks for the question I'll start with the tort environment, then I'll ask Dan to talk about the expense ratio.
Uh huh.
Clearly I think if you look at our results throughout the year, we would say I didn't know if the environment is gotten worse, but clearly the losses have come in worse than our expectations and.
And one thing you got to remember is is we are setting reserves for years in very long tail lines of business, where there is a very high percentage of IB and ours. So.
That the patent cases, a relatively small percentage of this and so we're squaring triangles. We're looking at the data as it comes in every quarter comparing to our expectations and that's what has gotten worse and and I will say quarter on quarter out we have not responded gingerly. We have responded assertively to this.
And yet it's continued to come in a little bit worsening expectations, but but as I said before we are we're pipe five quarters closer to the end of this than we were a year ago.
And again, we think we understand the market dynamics, we think we understand what's what's causing this and we feel very good about our analytics and our process.
And you want to talk about the expense ratio sure. So so.
Focusing on the full year, because there's going to be a little bit of variability from quarter to quarter. So at 29.6% for the full year. That's a range we're comfortable with now.
Certainly.
Noticeably better than it was several years ago and steady progress over the last three years.
I think everything comes back to the way.
We talk about the business consistently which is we're trying to optimize returns overtime theres not really a specific targeted expense ratio. Although in the current environment. The level that we're at now is the level that plus or minus where we're pretty comfortable within this and this environment.
We've been able to get productivity and efficiency gains and at the same time, we've been able to make the investments in the business that we think to make we need to make for our success going forward.
Always balance those things. The fact that has come on at 29.6 for the year feels good.
This is a level that we're pretty comfortable with in this environment.
Okay, and if I could ask for one more just on personal auto I think you mentioned you expect margins to be stable and 2020, but if you look over the past couple of years the base of price hikes is actually steadily slowed.
And it seems like for the industry, that's worse than this loss cost inflation. So what gives you the confidence.
Argenta and personal auto auto won't get worse and 2020.
Sure. Jimmy This is Michael Klein I would say I would say a couple of things one.
Most of the rhetoric in the industry about loss trend.
Your your Asian focuses on severity, which is which is a piece of the puzzle and we certainly are observing some of the same dynamics in terms of collision and physical damage severity.
That you're seeing folks talk about as well as bodily injury severity.
On the good news front has been frequency and as I mentioned, we continued to see favourable frequency better than our expectation sort of throughout 2019.
And we put those frequency and severity results together with our longer term view of loss trend.
And view loss trend as actually in aggregate relatively consistent going into 2020.
And then the lower renewal premium change outlook is again on the margin and again lower but continued positive.
And so that's where we land on on broadly consistent.
And again, I think much like Gregs commentary and personal insurance rate versus loss trend is one dynamic that drive you to your outlook for our combined ratio, but the other levers that used to manage the business, including underwriting terms conditions claim process claim efficiencies come into that view of the.
Outlook as well so it's not just a linear roll forward of rate versus loss trend getting into that answer.
Okay. Thank you.
Your next question is from Mike and Salinsky with credit Suisse.
Hey, good morning, sticking with the toward environment first.
You know is is it more pronounced any geographies or maybe by employer size and the probably the number one question I get as you know.
This could we still be in the early innings of this upwards trend I didn't know if there's a way to frame historically, how high year over year toward inflation has has gotten in the and the past. Thanks.
Yes, thanks for the question Mike So.
You can look at any any one quarter and there may be a pocket of heat in terms of geography or business or line, but but I think the right way to answer that question to take a step back and look at the last year and when we take a step back and look at the last year, we would say it's been broadly across our casualty coverages geographically.
A line of business and so on and so forth.
I would point out that eight the vast majority of the business. We write has 500 or fewer employees and as Greg mentioned more than 90% of our.
Policies have haven limit of $2 million less so.
I would I would say this is.
Relatively broad based phenomenon as a way to think about it now you asked about relative to history.
We've had we've had other liability environments I'll say over.
Last decade or too.
But but and there is some people rather than try to compare him I don't I don't know that you really can compare I might just the facts and circumstances are different.
You've got companies had different books of business, we've got all of us have different data and analytics available to us.
But I think most importantly, if you look at prior liability environments I'll call them.
Those have largely been driven by medical inflation. This one is driven by social inflation and I'm not aware in recent history of another environment, where distributed social inflation has been the driver.
Okay got it that's helpful and my last question is.
Regarding slide 23 in the deck that historical catastrophe losses.
Yes.
Would you say that over the last decade, or so hurricane losses in the us have been less than expected I'm basically trying to get that.
Good.
Sure the three Q and maybe for Q cat load look a little differently for thinking about this on a on a forward basis.
Mike as Dan.
Not quite sure how to answer that question, what Youre seeing here is our numbers.
And for sure the point I think we're trying to make here is our experience. In this includes as a result of underwriting actions taken over the previous 10 to 15 years to really sort of move the mix of our book So that it's less coastal than it was a decade or more than that ago.
So there's been a lot of industry commentary around hurricane I don't know that anybody feels that theres any less exposure to hurricanes broadly now than there was two years ago five years ago, or 10 years ago, I think as a percentage of where our risks are we've probably on a relative basis mitigated our hurricane.
In risk compared to the other risks and I think thats really the point, we're trying to make in this slide is that.
Second quarter for us as has been the issue, which is not aligned with the traditional hurricane not not because I think.
On a macro basis, the hurricane environment is more benign I don't really have an opinion on that we're just telling yet and our book based on where we write and the exposures. We have this is what our result looks like over the past 10 years.
Okay, Yeah, I guess I'll follow up is it still feels like four basis. That's since we're not going what theyre, having there has been less hurricane activity I think the street definitely has.
Threeq being a little more pronounced and up and it sounds like you're saying, maybe we should weighted a little differently, but on a follow up thank you for the insights.
Mike I'll just add that's definitely why we provided the slide we look at at models and we scratch our heads a little bit and obviously, we don't know what 2020 is going to look like or 2021 or any other year right. We have no idea, where where the volatility could come from but but certainly when we think about how.
Our assumptions are what our plans are.
Our starting point is the last 10 years, and we think it's it's relevant for thinking about this year in future years.
[laughter].
Your next question is from Meyer Shields KBW.
Great. Thanks, good morning.
I think this is a question for Greg listened to be on segment middle market. The delta between renewal premium and renewal rate change was the smallest has been in some time is this thing going on with exposure units. There that is worth noting or is that just quarterly fluctuation.
Admire the spread I guess, that's just quarterly fluctuation you get you can see the exposure is down a little bit over the last two quarters than we do a lot of unpack. It on that try to understand is that individual accounts are broad economic activity and we think it's more of the ladder. If you compare the economic activity in the back.
After this year to 2018, its linear with what we're seeing on the exposure change.
Okay Fantastic and then for Michael really quickly you talked about.
The combined ratio I want to see for personal lines.
Improving assuming or reflecting a return to normalized non cat weather is that just a regression to the mean or is that reflection of claim actions or underwriting changes.
Sure Mike I appreciate the question I would say.
Two things one.
We do say that it reflects.
Lower and more normalized expectation for a non cat weather that doesn't mean reversion to the mean it means.
Lower expectation than we saw in 2018 and as we've been talking about 2018 was well I'm sorry 2019.
What we've been talking about is non cat weather has been elevated in 2019.
We have an expectation in 2020, that's lower than the 2019 level, but importantly continues to reflect updated estimates that an updated view of non cat weather loss activity, which has been rising so I wouldn't want you to assume that the assumption in that outlook is.
The same assumption, we had two or three or four years ago. It. In fact includes more loss content than it would have two or three or four years ago and so we see margins in the segment in margins in agency homeowners and other improving despite the fact that we have a higher view of the non cat weather loss content in that.
Outlook than we would have had a year ago or two years ago.
Okay. That's very helpful. Thank you so much.
Thanks.
Your next question is from.
Yes.
Hi, Yes, a couple of questions here for your first one curious any update with respect to kind of a fiber statutes given we've seen some other states.
Expand.
Our open the statute limitations.
Hey, Brian Stan.
Yes, so so in the in the quarter again, a modest amount.
Of reserve activity in ARPU I'd number related to revive offers not big enough to have been called out, but we saw California and accuracy viber.
This quarter, I think North Carolina, as well, California is one that gets a lot of attention. It's a bit obviously, a big stayed in a very.
Active legal environment.
But remember or in case, you don't remember, California had once before opened to revive or.
And so that goes into.
Our consideration there so.
There has been activity pretty steadily throughout the year first quarter was was the most notably notable for us and we talked about at the end, but theres been modest activity.
Following that and that did occur again in the fourth quarter.
Great and then.
Second question just quickly on workers comp I mean, you've noted another noted the really favorable loss cost environment. There that is obviously offsetting some of the.
Right.
Does that we're seeing would you expect that to continue going into 2020 is that kind of your expectations given the low unemployment environment.
While the we seem to pickup of medical cost inflation.
Is your question, whether we expect to I'd to continue in Workers' comp no no no im just just to loss trend environment with with respect to workers compensation not so much the few I'd, but just the very favorable trends, we're seeing kind of frequency trends and Tom as well as severity, which is I guess out kind of average.
The trends have been favorable we oh, we generally assume a reversion to a longer term I mean, there. So we don't we don't assume that all the favorability will continue me there has been a very long term improvement in overall workers comp.
Frequency. So we certainly taken into account, but but results have been even better than that and we don't necessarily.
Assume that's going to continue.
Medical inflation the severity side has been.
Pretty benign as well and and similarly, we tend to think that these things revert.
Great. Thank you.
Your next question is from Ryan Thomas Autonomous Research.
Thanks, Good morning.
I just wonder just for sure outlet and going back to the commentary on thinking we're closer to the and then the beginning.
So with that charges in the past few quarters. This one is bigger than when we saw a threeq just.
Just trying to get that maybe some sense.
When you when you took this charge or are these tweaks that you made.
How does that give you more comfort is is there more I'd be an R&D isn't there have been in the past.
Where we add now relative to the third quarter.
That gives you confidence in saying that.
Well, it's it's a it's another quarter, it's another data point it's.
Every every time you get a little bit more data you get a little bit better view on on where the environment is and so from that perspective, we feel better.
I can't I can't look at it and tell you aware the first second and third quarter's end of next year are coming in so from that perspective, there continues to be some uncertainty, but but weren't where another quarter into it and frankly were five quarters into it and so the view we've developed over over five quarters, our view of the environment every quarter we.
Dig into our our book a little bit more in test our hypotheses and.
All that gives us a little bit more confidence I don't I'm not I can't comment about what's going to happen in the first quarter, we just don't know yet right.
So when you when do you think about your I guess your outlook for 2020 in terms.
Hopefully improving business insurance margins do you still think good.
Weren't to achieve that you still think that would be a result of the toward environment or.
Thank you would have more to deal with pricing or execution or something on other fronts.
I.
I mean, obviously any of those things could be a contributor.
Certainly social inflation continues to be a risk factor and some uncertainty for us.
But but any of those things could be contributor we we feel.
As I said, we we've got confidence in our processes we.
Our objective is is always to get this number right, we price and reserve based on one view of loss costs and so lets.
According to us to try to get it right and so we we think we've done that.
Thank you.
Thank you.
Your next question is from Paul Newsome, what Piper Sandler.
Good morning, Thanks for the call.
I want to ask about commission rates we've seen.
Anecdotal.
David Theres, some pretty high commissions being paid for workers comp.
All seeing is changing its personalized.
Ask your auto in personal lines commissions are is travelers doing the broadly too.
There is others are changing.
Commission rates.
I would say broadly are ours.
Commission rates are reasonably stable so.
No.
And then.
On the.
You guys and too thanks.
Do you have the ability.
Really feasible to loan limits and would that in your view.
The industry wide basis be.
Possible.
Fixes for this outside great.
On the lights on Theres more there's more issues on the higher the higher the limit the more than legal involved.
Yeah, I mean, let me just go back and and highlight a comment Greg made his prepared remarks, and I, just referenced 90% or so of our of our policies in.
Liability lines ex workers comp pads have policy limits of $2 million, you're less so I don't I don't I don't think its.
There's been a lot of industry observers that have commented on this relationship between.
The loss environment in limits profile, we just don't think Thats true there's plenty of activity on on the smaller accounts.
We havent and we haven't seen the industry necessarily moved too.
Changing the limits profiles. We you know we think our customers are out there and they need a certain level of protection to to manage their businesses and we intend to help them manage their risk in their businesses, we just kind of charge right price for it and so.
Solving this through.
Broadly changing.
Limits profiles is probably not the answer.
Well I appreciate the al Thank you very much.
Thank you.
Your next question is on M&A Kumar with Buckingham Research.
Thanks, and good morning to follow up questions.
The first question goes back to Brian's question on PVA.
Doug dealer.
This insurance outlook.
Contemplate any potential action from Bob.
Down the road because by the time to get to the back half of a 2020.
Among those Viper windows will start closing.
So I met its Dan.
We were aware the revives that have been enacted and our open in the period through which still close with what we've tried to do in 2019 is book, our best estimate of the ultimate loss costs related to that activity.
Regardless of of the period of time for which the revives open obviously when the Windows close we'll have a more.
Crystallize view of the volume and types of claims that have actually come in to this point, we haven't seen anything in the in the activity that's come in that makes us change our view of.
Of the reserves related to CV, a regarding the 2020 outlook in general.
Our view one our commentary relates to underlying combined ratio, but I'd make the comment that generally speaking and Weve and we've said this consistently we don't anticipate prior year reserve development, either favorable or unfavorable on a go forward basis, we think all the information we have regarding.
The claim environment as it exists today as reflected in our reserves today.
Got it.
The other question I have is and I want to go back.
As an initial question on CMP.
CMT product is towards the small to midsized accounts.
The Geo product is towards the larger customer count.
I'm curious just going back to the broader discussion on hold environment.
Be fair to say that.
The adjustments have.
So starting from the national accounts permitted to middle market, and then moved on to select or how should we think about that.
No definitely not you know it.
Started in commercial auto and I'm looking around the room your I think.
99% of our commercial auto policies have policy limits of $2 million or less I think millions so actually millions. So so in this this isn't something that started margin moved down. This is something that's started on the small lend in spread on the small then.
Got it okay.
I was just trying to understand the directionality of.
The told climate, because you have consistently heard that.
In enrollment has continued to move down and down and down into the smallest claims.
Versus a larger larger claims that's where I was heading with that question.
Yes, and and again, that's that's why we gave you are limits profiling and talked about the fact that you know the vast majority of our commercial lines policies have.
Customers.
Employees, and 500 or fewer units and say we already main street writer, we've got in middle market in small commercial business and we are feeling the heat in in those policies that have limits of $2 million or less.
No. We did observed we did observed a year ago that to a large degree the started in commercial auto and and that make perfect sense to us because there was a lot of homepage in 80 to those claims those are very easy claims for the sites are to bring.
But but it did spread to two g. Allen and again largely on not in the national accounts largely limit size those those larger accounts a big limits those have always had aggressive attorneys on him. What we're seeing now is the attorney attorney participation.
Spreading into across these small.
Got it that's that's very helpful. I'll stop here, thanks for the answers and good luck for the future.
Thanks Summit.
Yes.
Your final question comes from David Maiden Evercore ISI.
Hi, Good morning, just a question for Alan on the tort environment and the losses in VI.
I guess I'm, just trying to get a sense for how how far above expectations did the loss experience come in this quarter compared to last quarter.
Was it was in a smaller amount of deviation versus expectations compared to last quarter has that narrowed over the past five quarters, just just trying to get a sense for.
How weve, where we are in terms of.
Seeing more charges here going forward.
I think it's.
I'm I'm, taking a step back and trying to think about the year, which I think it's sort of they're the right way to think about it I probably the right way to think about it is slide 10 on a on a full year basis I don't I don't really know that the quarter by quarter view really gives you any insight that maybe the answer. Your question is somewhat consistent Dan what would you say, yes, I think that.
And broad magnitude. We've said we saw that news in the second quarter, we saw that news in the third quarter, we saw a bad news in the fourth quarter. They werent noticeably different in terms of the way they felt in terms of magnitude.
If you step back and looked at the the full year overall related to.
The toward environment, or social inflation, those things things being worse than than they had been we say in the in the underlying combined ratio on a full year basis compared to a year ago, It's probably about four point higher than it was in when you think about.
The fact that there has also been an impact NP why do we think about that same thing over the full year basis.
It's hard to attribute you know exactly what drove loss changes, but to the best that we can characterize it in you should not take this to be Theres very specific science, but based on the data and analytics. We have we attribute that's probably to the to the place worth about two points of bad news within this year's full year prior year reserved.
Element.
Got it Okay, and and Alan you had mentioned just higher attorney involvement just on the smaller smaller cases are smaller case sizes.
Yes, I'm just wondering.
I guess just how much has that increase like are you seeing it now on like 30% versus 20%.
Just trying to get a sense for where that is and are you assuming that that continues to increase in your and your loss picks.
Yes, I don't I'm not sure we're going to share that the absolute number, but but I will I will share with you that that the.
Percentage claims on which we're seeing lawyers has increased by about 10 points over seven years over six years with about half of that increase coming in 2019 2018.
So that's sort of gives you a sense of the of the quantum of the increase over recent years and how much of that has come really in just 19 and 18 half of the increase.
One of the reasons.
Why we think it's been such as such a recent insignificant yet.
And and just to Yep abbey's, putting out to me thats It Thats a commercial auto statistic.
Great. Thank you.
Thank you.
At this time there no further questions do you have any closing remarks.
Thank you very much for joining us anecdotally. If you have any follow up please feel free to reach out to Investor relations.
Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
So.
Yes.
Yeah.
Yes.