Q4 2019 Earnings Call

Thursday

Good day, and welcome to the Hanover Insurance group's fourth quarter 2019 earnings conference call. My name is Gary and I'll be your operator for today's call at this time. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two months. Please note. This event is being recorded. I would now like to turn the conference over to Oksana Liu keshava, please. Go ahead.

Thank you operator. Good morning. And thank you for joining us for our quarterly conference. Call Will begin today's call with prepared remarks from Jack Roche our president and chief executive officer wage in our Chief Financial Officer to have Farber available to answer your questions after our prepared remarks are declared be present at the agency markets and Brian Salvatore presidents of special two lines before I turn the call over to Jack. Let me note that our earnings press release financial supplement and a complete light presentation for today's call are available in the investor section of our website at ww.w. After the presentation. We will answer questions in the Q&A session. Our prepared remarks in responses to your questions today other than statements of historical fact include forward-looking statements, including our guidance for 2020. There are certain factors. Yep.

could cause actual results to differ materially

From those anticipated we caution you with respect to rely on some forward-looking statements. And in this respect refer you to the forward-looking statements section in our press release the presentation DEC page the filings with the SEC today's discussion will also laugh certain non-gaap Financial measures such as operating income and accidents your loss and combined ratios, excluding extra fees among others. Every conciliation of these non-gaap Financial measures to the closest gaap measure on a historical basis can be found in the press release the slide presentation or the financial supplement, which are posted on our website. As I mentioned earlier was those comments. I will turn the call over to jack off. Good morning everyone and thank you for joining our call.

This morning I'll begin with comments on our financial highlights for the year our strategic accomplishments and 2019 and a high-level overview by business line jetpack provide an in-depth review of our financials and our outlook for 2020 and then we'll open the line for your questions.

Are very pleased with our strong performance in 2019. We delivered an operating r o e of 12% and 12.8% after adjusting for the undeployed equity from the sale of a sir. We generated premium growth of four and half percent for the year on the strength of our broad-based profitability across our portfolio and solid execution against our strategic imperatives. We continue to focus on our objective to be the Premier Property and Casualty franchise in the independent agency Channel advancing our proven strategy leveraging our position as an agency care of choice are leading specialized capabilities and our commitment to Innovation. We drive those distinctive elements of our strategy through our extraordinary talent and unique collaborative culture. Sure.

During 2019 the Property and Casualty Insurance industry environment exhibited even more complexity has profit pools lost Trends and rate movements continue to change more dynamically than ever before traditional Market Cycles have clearly given way to more sectoral and Geographic forces that require more sophisticated and Savvy approaches to underwriting loss analysis & portfolio management. We demonstrated that we are developing an industry-leading ability to anticipate the market dynamics and react with agility and expertise in order to deliver strong results that Foster continued momentum. We stayed focused on the ultimate goal delivering profitable growth and allocating capital and resources to our higher in businesses.

Our financial highlights for the year while the PNC industry is clearly experiencing higher overall loss Trends liability Trends in our businesses while certainly elevated perform relatively consistent with our expectations. We believe that we have benefited from prior portfolio mix and pricing actions over the years including reducing our exposure in major metropolitan areas targeted underwriting actions and exiting all unsupported umbrella business. These actions are now helping us limit the impact of some of the industry headwinds including social inflation and wage increase attorney involvement and should be beneficial as we had in 2020 and 2019. We also benefited from catastrophe experience that was more favorable than last year and Below historical averages in addition. We reduced our expense ratio beyond our initial expectations while funding business Investments with deliberate resource, trade-offs and disciplined expense rigor dead.

The year was not without.

It's challenges as we announced in mid-January. We saw elevated non catastrophe property losses in the fourth quarter not inconsistent with some of the activity. We have seen earlier in the year off. This was driven by a combination of non cat weather activity and homeowners as well as higher incidences of property losses in CMP and certain specialty lines. Although the uptick in proper name is over. The past few quarters was consistent with industry Trends. It was disappointing nonetheless. We had performed the appropriate due diligence on these businesses and we maintain a high level of confidence them have a quality portfolio and can make constructive adjustments in the current market to maintain our momentum.

We believe that some of the Lost pressure is likely a function of more extreme weather high employment and a fairly robust economy, which is producing more activity based losses. We are at the point of economic cycle where we need to be especially prudent. We are taking actions in certain areas including using targeted reinsurance tactics changing terms and conditions and increasing rates.

Now update

You want some key strategic accomplishments for the year, which fall into five categories our business and agency mix enhanced capabilities Technology Innovation talent development and capital allocation first our goal for the year was to continue to grow while improving profitability and reducing vulnerability to some of the more pronounced industry liability lost track we strengthen our portfolio by accelerating growth and our most profitable businesses executing pricing actions in areas of need and reducing unprofitable areas, particularly programs and commercial audition at the same time. We achieve profitable growth across key segments such as personal lines small commercial and Middle Market niches as well as certain specialty lines, we continue to enhance and build on our agency penetration transactional new business and personal and small commercial continue to accelerate demonstrating agency followership in the most profitable areas of our birth.

in addition

The number of agents that right over five million in total premium with us grew by a third over the last three years this agent cohort generates nearly sixty percent of our overall premium and delivery meaningfully better underwriting profits at the same time. The number of agents that right more than 5 lines of business with us has increased over 25% since 2015 a testament to a broad product capabilities and the value they bring for our agents and customers. We also continue to appoint new agents in the agency locations in 2019 mostly in are less penetration States over the last three years new and expanded agency relationships generated more than a hundred fifty million dollars in written premium these strong mutually beneficial relationships with our agents enable us navigate the dynamic Market even more successfully together second. We continue to build out some of our newer products last year including the depth and breadth of r e n s e

in financial institution

We also enhance our professional liability platform Hanover miscellaneous professionals Advantage building on a robust Suite of professional liability solutions for our agents and insureds in personal lines. We expanded our Hanover Prestige brand across all of our personal lines markets in 2019 delivering high-value Auto home and condominium coverage to customers in all of our personalized states are Prestige brand generated strong premium growth in 2019. This growth provides further evidence that our whole account philosophy is resonating with our agents and their customer improving our position as our agent Partners carrier of choice for preferred accounts.

Third we continue to invest in our underwriting and quoting platforms while at the same time driving Innovation across our business. We are creating operational efficiencies and enhanced customer experiences across the entire Insurance value chain through specific use-cases third party data integration and process enhancements are targeted initiatives within sure tax and other plug-ins options are delivering more insightful Innovative and efficient tools to our agents are investment in major underwriting and quoting platforms are now getting toward the tail end of the process took example, our tap sales platform has now been deployed to all of our personal line states allowing for more granular pricing and underwriting and providing agents with a seamless quoting experience may also are finalizing the build-out of our small commercial underwriting platform and plan to launch it throughout 2020 and 2021 along with our enhanced product offering we believe both platforms wage.

would be best in class and we'll

Plus two more effectively interact with outside data sources and third-party digital tools for the benefit of our agents and customers additionally, we made important investments in our claims processing capabilities adding photo claims functionality to our adjusting process and various predictive modeling tools this work enables us to enhance our operating efficiencies and take advantage of economies of scale in our claims functions, which will help us drive both loss and expense ratio improvements over time. We think this and other changes will benefit both our agents and customers we get paid for the incremental costs of these projects through prudent expense management, including reductions and savings and less critical areas of our operations. This discipline is essential as digital capabilities are critical and constantly evolving which requires continuous investment rather than large one time Capital expenditures.

Fourth attracting retaining and developing. Our talented team is perhaps the most important ingredient in the success of any company in our industry, so I could not be more proud of the success. We had brought up front in 2019. For example, we expanded our specialty leadership team and made new leadership appointments and Commercial lines to oversee our middle-market businesses as well as projected underwriting. We established new positions, including Chief data and analytics officer and chief digital officer to lead our overall efforts to use data analytics and Technology even more effectively and to create sustained value. Additionally, we strengthen our human resources team to lead our human capital strategy and further develop our culture of inclusiveness agility collaboration and innovation.

finally

2019 we continued to be prudent and accountable stewards of our shareholders Capital upon completion of the Chaucer sale at the end of 2018. We returned an initial $450 million dollars sale proceeds in the form of a $250 million-dollar accelerated share repurchase agreement and a $200 special dividend over the course of 2019 as we continue to generate Capital to fund organic growth opportunities. We distributed the remaining Chaucer proceeds through two additional ASR programs and a second special dividend moving forward. We will follow a normal Capital Management Cadence and framework using internally generated Capital to support profitable growth and return the capital generated in excess of our growth needs to shareholders as warranted.

Before I conclude my remarks, I will provide a high-level overview of our performance by business beginning with commercial lines.

We are very pleased with our commercial lines progress and execution on strategic priorities and 2019 our goal for the year was to grow while adjusting our portfolio to achieve sustainable improved profitability and to further expand our specialized capabilities. We delivered a full year 2019 commercial lines combined ratio of 92.1% excluding catastrophe and we grew almost 4% early indication. Is that commercial Auto one of our critical areas of focus for profit Improvement initiatives last year is performing slightly better than our expectations. We are not out of the woods yet, but we are seeing progress after considerable non-renewals and double-digit rate increases that we achieved in 2019 and earlier.

in our program

Business we still have some additional work to do we discontinued certain programs from the book in 2019. We will continue some of this work this year to ensure profitability in this business off excluding targeted underwriting initiatives and Commercial Auto and programs. We generated overall commercial lines growth of 6.1% with increasing growth momentum throughout the year in our higher profit margin businesses such as small commercial and professional Lines within specialty additionally are newer specialty capabilities such as excess and surplus lines cyber and financial institutions are gaining momentum.

The pricing environment and Commercial lines continues to be dynamic but it did improve as the year progressed industry-wide rate decreases and benign lost friends and workers compensation persisted while double-digit rate increases Commercial Auto continued throughout the year. We are observing firming Trends in certain property and Specialty lines in response to the large property losses and social isolation that many industry participants have been observing our core commercial pricing increased during fourth-quarter to 7.9% the rate component continues to increase in a measured way. Also as we have seen in Prior quarters exposure can and did Drive some of the quarterly variability.

overall we

Enjoy a strong Market position and Commercial lines. We are excited about the market dynamics and we have confidence in our continued performance as we look forward to 2020. We believe we have a strong line of sight to Mid single-digit growth overall and double-digit growth and some of our most distinctive and profitable sectors.

Our personalized business had a very solid year this business delivered a combined ratio of 91.6% excluding catastrophes while we experienced some pressure throughout the year from non catastrophe weather in continuing prior-year bodily injury Trends this business continued to achieve Target returns.

Our current year liability Trends remain in line with our expectations, but we prudently increased our fourth-quarter loss pics to reflect the increase legal environment in medical costs spilling over into age personal autoline, which we have been observing in our prior-year claims. Our personal lines business increased net premiums written by 5.7% for the year driven by new business growth rate increases while the person lines Market remained very competitive throughout 2019. We continue to hold the line on pricing. We achieve 5% rate increases in this office in the fourth quarter and will continue to balance pricing discipline with retention needs to produce optimal results.

today

Account business represents approximately 85% of our portfolio and we believe our new sales platform and account Centric product offerings will further fuel the growth of our whole account business with continued price increases and strong support from our partners. We feel very good about 2020 prospects for personal lines and are targeting mid single-digit growth We Begin the new year with Cathy broad-based profitability a strong book of business and outstanding agency relationships that will enable us to pursue Market opportunities with more Market insights. We are confident in our ability navigate the dynamic loss environment effectively.

As I look ahead I am energized about our prospects. We believe the differentiated consultative relationship with our agent Partners combined with our broad portfolio will continue to play to our advantage as we seek to deliver new highly profitable business together with our partners. We are well positioned to capitalize on emerging opportunities and to continue to successfully build businesses with that. I will turn the call over to Jeff. Thank you Jack. Good morning, everyone for the quarter. We recorded net income of 109.8 million off $276 per diluted share compared with 123.6 million or $288 per diluted share in 2018 after tax operating income for the quarter was 80.2 million or $201 per diluted share compared with 64.9 million or a dollar fifty one per diluted share in the prior-year quarter wage.

so the year net income was

425.1 million or 10:46 per diluted share compared with 391 million or $909 per diluted share in 2018 month operating income for the year was 331.6 million or $816 per diluted share compared with 292.1 million or six $79 a share in 2018.

With a full year results now behind us and some property variability by quarter in certain lines. It is more informative to primarily Focus my comments on our full-year 2019 results and to mention quarterly movements where relevant our full-year earnings reflected a combined ratio of 95.6% and improvement with 96.1% in the prior year due to lower catastrophe losses in 2019 and an improvement in the expense ratio full year catastrophes, total 169.3 million or 3.8% of earned premium, which was below our catastrophe load Assumption of 4.6% during the quarter cup trophies totaled 35.1 million or 3.1% of earned premium fifty basis points below our fourth-quarter assumption the largest driver of catastrophe losses.

Weird Al's tornadoes

in October

excluding catastrophes. We delivered a full year combined ratio of 91.8% toward the higher end of our original guidance of ninety-one to ninety-two percent overall prior-year Reserve development in 2019 was immaterial with puts and takes by line. We tend to react to emerging Trends and other law school activity quickly to avoid large issues down the road. We feel very comfortable with our reserves overall during the quarter. We increased our personal lines prior-year reserves driven mainly by personal Auto this was due to continued pressure from Auto bodily injury severity claims initial indications of 2019 claims favorable as we continue to push rate to overcome anticipated increased losses in this line. However, we are being prudent with our expectations for how these claims will behave.

we also increased our

Your reserves in other commercial lines primarily in the program business which includes certain discontinued programs as Jack mentioned earlier on the positive side, we continue to experience favorable development and workers compensation in which lost costs are still behaving extremely. Well, our portfolio is skewed towards small commercial which is where our workers comp exposure is growing contributing to a more favorable lost profile. We continue to monitor market pricing claims Trends and macroeconomic conditions wage for any indications of a change in Trends. We delivered a 50 basis-point improvement in our expense ratio ahead of our expectations due to our disciplined approach took a lesser extent the timing of some spending versus 2020.

I will now review our two main businesses starting with personal lines, which posted a full-year current accident year combined ratio, excluding catastrophes of 90.1% off up from 89% in 2018. This reflected a 1 and 1/2 Point increase in our current accident. Your loss ratio in homeowners are 2019 X cat current accident. Your loss ratio was 47.9% up 1 and 1/2 points from 2018 primarily due to non cat weather-related losses has noted in our pre-release a few weeks ago in the fourth quarter. We experienced some non catastrophe weather activity in our homeowners unit primarily. Hey Lavelle in both the North East and Upper Midwest elevated not cat weather was a factor in our results throughout 2019 and to some extent in 2018 as well.

We are addressing that.

Trend by continuing to take rate including 4.8% in the fourth quarter. In the meantime, we are assuming the elevated non cat weather pattern will continue in 2020 with the personal Auto X cat current accent. Your loss ratio was 71.6% in 2019 1 and 1/2 points higher than full year 2018 off this primarily reflected an increase in current accident your losses associated with higher cost of repairs and an increase in comprehensive coverage costs from weather and am related to religions in the second half of the Year. Additionally given the trends. We are seeing in Prior years for bodily injury coverage. We are taking rate and proved increasing our loss assumptions Auto bodily injury claims activity for the current year remained well in line with our original expectations.

Our production performance and personal lines with solid net written premiums increased 5.7% in 2019 and 4.4% for the fourth quarter. We continue to be very disciplined achieving rate increases above market levels and we are accepting a slight decrease in retention as a result.

In the commercial lines, we posted a full-year current accident year combined ratio, excluding catastrophes of 93.2% up from 92.1% in 2018 reflecting the increase in our current accent your loss ratio as Jack mentioned our results in commercial lines reflected the property loss variability. We experienced throughout the year, primarily Hanover specialty industrial and Marine which continues to be very profitable in the fourth quarter. We also saw some property activity and see me as well as some property losses in our program business. We are taking corrective actions where necessary but are prudently assuming that a portion of the increase in losses will continue

The loss ratio in our commercial auto book improved two point six points to 69.6% driven by the cumulative impact of our substantial underwriting actions off and rate increases in excess of 10% Looking ahead. We remain cautiously optimistic that the combination of rate and underwriting actions will continue to enhance our results.

commercial

Wines net written premiums grew 6.5% for the fourth quarter and 3.7% for the year reflecting both certain underwriting actions and a rigorous attention to growth in our most profitable businesses. We are committed to improving the profitability of our overall portfolio as we build our new capabilities and grow in our most prosperous segments.

Turning to our investment performance net investment income was 72.7 Million for the quarter and 281.3 million for the year up 4.8% and 5.2% for the quarter and year respectively over 2018. The increase was primarily driven by the temporary investment of equity which is now full speed and higher operational cash flows partially offset by lower prevailing new money yields during the year. We invested the excess Equity created by off the charts our sale in late 2018, which contributed approximately eight million of additional net investment income in 2019 with these amounts now fully returned to investors. We will not have the added lift to net investment income accordingly adjusting for the nii from the Chaucer Capital. We expect our 2020 net investment.

income to remain consistent with two

2019 with higher cash flows offsetting prevailing lower yields cash and invested assets were eight point two billion at the end of the year with fixed income securities and cash representing 84% of the total our fixed maturity Investment Portfolio has a duration of 4.3 years and is 95% investment-grade. Well laddered and diversified portfolio remains high-quality with a weighted average of 8 plus the operating effective tax rate for the quarter was 20.7% off in line with the statutory rate.

Turning now to equity and our Capital position as previously announced we entered into an ASR program with Wells Fargo and December to repurchase $150 off of our common stock as of the settlement date. We had received approximately 900000 shares were eighty percent of the total shares expected to be repurchased under the agreement may expect to receive the final delivery before the end of the first quarter in addition. We return the remaining capital from the sale of Chaucer through the special cash dividend of $2.50 per share at the very end of 2019. We are pleased with the prompt execution of our Capital deployment plan the special dividend and ASR including the timing of share delivery reduced our book value per share in the quarter, which was partially offset by net income as a result our book value per share declined in the quarter by 2.7% off.

27594

We're confident about our overall Capital position as we move forward. We were main good stewards of capital and we will redeploy earnings into profitable business growth or returning Capital to our shareholders. We regularly consider methods to optimize the capital for our shareholders and we are constantly assessing our options with broad-based wage stability and an effective Capital allocation strategy. We continue to Target a return on Equity of 13% and higher over the longer term before opening a line for questions. We want to share with you our guidance for 2020. We anticipate overall net written premium growth in the mid-single digits driven by growth in our most profitable businesses. We expect lower net investment income compared to 2019 to reflect the removal of excess capital from the divestiture of Chaucer with increased Insurance cash phone number.

And reduced interest rates.

Largely offsetting one another our expense ratio should decrease by about ten basis points in 2020 putting us at sixty basis points of improvement over two years are combined ratio, excluding catastrophes should be approximately 91 to 92% We are taking a prudent approach to Los selections given Market uncertainty while at the same time expect property pressure to ease up some in 2020 our cat load for the year is 4.6% We expect an effective tax rate that will approximate the statutory rate of 21% Let me remind you of our seasonality are more Northern footprint tends to show higher non catastrophe weather losses in the first quarter off. Our first quarter cat load is 4.4% slightly below our full gear ratio with that. We will now open the line for questions operator. We will now home

in the question-and-answer

Question to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys back to withdraw your question, please press * then two at this time. We will pause momentarily to assemble the queue.

Our first question comes from Matt car with JMP, please. Go ahead.

Hey, thanks. Good morning. I think first Jeff. Just wanted to Circle back on your guidance. I think I heard it a little differently in your life guidance comments. Um did is what I was supposed to hear that it's once you take out the 8 million of Chaucer. It should be flat year-over-year with cash flow offsetting yields wage. That's correct. Matt. You have it, right? Okay, perfect just wanna clarify that then shifting to the operations. You always give your price. Can you give us a little more granularity there and don't need to nail down numbers be even just kind of rough the pieces. You know, what how much is pure price versus exposure cuz I know both in there. Is it fairly equal weighted? Is it is it shifting now as a market change is that one's driving at more than the other.

Yes, ma'am. This is Jack. I assume you're talking about commercial lines.

Yeah, most focused on that. Yep. Okay. Yeah, so overall I think what we would tell you is that throughout the year. We saw the rate component of lack of commercial lines pricing continue to notch up really incrementally throughout the year consistent with really the trajectory in the prior year or so, and we also offer and I think in the script and and have said in the past that the exposure part of this does move around a bit from quarter-to-quarter. And so I think last quarter it was probably a little below our normal directory in this quarter probably a little bit above our normal trajectory. So, you know, if you look at that net total of that trajectory and you see we haven't really disclosed a great rate component and the component that goes with exposure that we think continues into our pricing. Um, but I think if you think of two thirds of that is a trajectory of birth

That core pricing below the level that will get you close.

Okay.

Very helpful and then just a couple more numbers questions. You talked a little bit about the programs and how you non-renewed a handful of them in nineteen to kind of prove the underwriting results. Can you just help me with the timing of those? I'm just thinking of from a standpoint of when they when they might have went into effect across the course of nineteen and and then when we anniversary them in terms of you know, uh Applegate Apples to Apples in 2020. Sure. I'll see a couple of comments and then turn it over to Brian. I would remind you that we have constantly been kind of pruning and adjusting our program profile for really the last few years, um, increasingly moving the portfolio to be more programmatic business with our broad-based franchise Partners as opposed to kind of, you know, a singular program with an MGA that doesn't have that broader relationship with the company so dead.

um and most recently

Including if you remember at the end of last year, we targeted programs and the auto-centric classes or portion of our middle-market business as particular areas that we were going to prune as we looked at the liability environment, um, you know moving out a little bit. So I'll turn it over to Brian to give you a little bit more specificity, but I want you to see this is kind of a continuation of making sure that the business that we have in the program sector is strategic and increasingly more profitable. Yeah. Thanks. What I'm I'm at what I would add is that, you know important comment Japanese. This is a business that we view as increasingly strategic with our select agents. So we're very careful about how we manage that those exits from those programs, but we're also sort of very committed to doing that where we need to as a result each quarter.

we took action on an increasing amount of the program business it resulted in or

Shrinking that program business by 8 and a half percent and I think you'll see that continue through the first half of 20.

Okay, that's very helpful. Thank you. And then one last Quick numbers question for I guess Jeff, you know, it just send the the few lines that saw the the more they weren't massive but more significant, you know month prior. Movement. So, uh commercial are personal Auto the commercial programs and then on the other side of the workers comp. Can you just give us a little bit of color on which accident years drove the majority of that movement off?

Thanks. Overall. We feel really comfortable with our level of reserves and as we've said, you know, we're going to react to these things when we see them. So we don't have bigger issues going forward over all for the year the favorability offset on favorability, you know for the most part it was you know, relatively spread. Let's say the last three or four accident years. I think we've talked about the bodily injury and auto being sixteen and Seventeen where the primary years. Um, uh workers comp was sort of spread evenly with, you know, a number of years some older and some getting closer to more to more recent. So it really varies by line, but it wasn't other than the bodily injury and burn a lotta wasn't any particular line or either really recent to really Alt

Okay, great. Thanks for the.

Answers congrats on a nice Year and best of luck going forward. Thanks, Matt. Thank you.

The next question is from Kumar with Buckingham research. Please go ahead and good morning six twenty. I think it was a similar level for 2019 maybe starting with the commercial lines when you look at the pricing actions, and then you look at the life and how are we thinking about margin improvement from here? Assuming normalized losses and non cat activity?

So admit, you know overall in terms of our guidance thinking about 2020 relative to nineteen. We do expect some margin Improvement again from nineteen with personal lines largely being flat. So we're seeing some elevated property and some Auto bi that we feel we need to react to them and in the commercial lines were actually seeing Improvement there. So specialty we expect to have somewhat reduced property losses and in court commercial, it's really a combination of the property volatility returning slightly to a normal level and also the commercial Auto improvement taking off hold so the combination of continuing to get double-digit pricing and the earning fully of the underwriting action should give us a little bit of a lift and overall. There's a there's a a mom.

improvement from 19 to 20

Got it. That's helpful. Maybe just staying on the The Lost cost discussion and you know switching back to the PowerPoint slide six, you know, which I think that's a great job in outlining how the fish and fish and trains and your book interacts. The question I had is, you know, you mentioned the limited cetera and yet I think you're highlighting how your limits are, you know, 1 million ninety percent sure book is at or below 1 million limited cetera. There is a debate which is emerging in this phase which is talking about how low limits might not insulate companies from social inflation. And in fact, you know social inflation in some cases has made its way down from the larger limits to the lower limits. Maybe you can talk about the broader Trends and I'm also about your specific experience, you know over the last twelve months or so.

All right. Thank you for that admit. This is Jack. I'm going to kind of talk about it at a high level and then I think dick has some a few thoughts that he wants to share as you look at slide 6 in our presentation. Um, we really thought it was appropriate to remind everybody that the increased severity that's making its way into the liability lines. Obviously first in commercial Auto in a pronounced way. It's something that we've been wrestling with and the industry's been wrestling with for a number of years. But if if people will recall, you know Midway through 2018, we saw some elevated losses coming through Thursday in the auto area that causes us to make some adjustments and in our picks in our pricing in our underwriting. We also want to remind folks that wage.

three or four years ago

We were maybe one of very few companies that was identifying some CMP liability claims patterns that looked challenging to us at that time. If your phone number we talked about losses that were primarily slipped trip and fall type losses in the major metropolitan areas. Although you could see some of it in the in some of the the the more challenging litigation environments. So all of this was a way for us to kind of say, how do we share with folks? What we've already told you about the improvements that we've made in the portfolio page in some contemporary things that we're doing to address the mix of the business both sector, uh, and and geographically the exact point I would make just is is about the issue around the limits profile of a company. I would tell you in aggregate mathematically this problem.

exacerbates itself as you move

About the limits profile. Is there some evidence that you're seeing more and more litigation and an activity at lower levels of the the the home business. I think the answer is yes, and we talked about that a little bit in our personal lines business that we're even seeing some evidence of some change there but mathematically from a loss ratio standpoint gets very much exacerbated. If you are a higher limit player if you have a huge umbrella book of business, um, and so do you want to provide the Dollar on that just add a few Cocker commentary? You're absolutely right lower. Our view is lower limits certainly helps insulate you from uh-uh. This this trend but certainly we're seeing it in in our business but you know just as importantly moving away from certain classes or geographies is going to is going to help us. Well, so what are what we showed you here was that we've taken some action and more importantly the outcomes for the Improvement wage.

We we pushed ourselves on in these areas which we think further insulates us or or mutes the effect of the social inflation into the future.

So what we show you is g l premium in our middle-market book and how we pushed ourselves away from certain classes of business where that was more prevalent. So slim and Falls you would tend to find more in real estate retail Hospitality restaurants. So you can see 25% reduction for us over a three-year period so so class of business is is one way to home plate you geographies is the other so we don't spike out exactly what the which of these cities are, but major metropolitan areas, which were more litigious in nature, you know, we watch them as closely and again, you know pushing r r g l premium, um, in middle-market out of those geographies pretty significantly, you know, 30% in one area and 55% in the other wage. Um, the other question I had was maybe Switching gears to personal Auto. I know you said a brief you responded to the Los Cabos trance the previous month.

maybe can you expand on the on the frequency and severity Trends in d i n p d and how should we inspect them over 20 20

Sure.

Yep, I can take that one. So um so a good question, you know, we we don't have a crystal ball obviously, um, but uh a key question I think remains about the future of the frequency Trends cuz when you talk about this, um, I think we would say the severity is likely to continue in phys damso collision and, you know the cost of repair on that unless it is damn side industry Trend similarly. We see that severity continuing also on the bodily injury, uh with without severity continuing the education costs the medical cost that we've talked about. So I think it's appropriate to expect that to continue. The frequency has been benign, um in in some cases declining birth in that acts as the counterbalance, of course to that that increase in severity. So where does that go? You know, we blend those things together. We see a pretty fairly consistent, um sort of go off.

View of the Lost cost and this is Jack. I think what's critical to and what we've

Highlighted before it is in personal lines. You can react to this. I think more swiftly right through pricing and through some of the deductibles that we're imposing it upon business. So that's why we're comfortable that while we see some of these Trends coming forward and we're paying attention particularly to that frequency number that dick is alluding to we can connect you to make material adjustments particularly with our new platform in personal lines that allows us to adjust pricing more granularly and more quickly and to be prudent and we've planned for those Trends to continue and if we can manage them a little better than them then we'll certainly do our best my last question on the Capital Management, and I'm sure you miss my Capital Management exam questions. Your comment was you'll be good towards of capital you look profitable business growth and then return Capital when you look at the UB.

He's versus Capital versus stock multiple is is a special dividend or an increase in dividend down the road. Is that a maybe a

Better option versus a stock buyback here or how should we think about those sort of the different buckets one over the other certainly we look at all of those things and our first priority would be to deploy it in the business and generate real strong returns. And if there was anything else we could do even a small inorganically we would not do that. We'll figure it out in terms of what's the best for shareholders. But, you know at different price points of of valuation certainly stock buyback becomes more attractive or less attractive. So we're going to continue all the Alternatives I think, you know Having excess capital in a in a short-term nature like Chaucer, you know that dictates a special dividend it sort of feels appropriate the difference between I used to think about ordinary dividend special dividend certainly out of operations one has to think about that a little differently. So stay tuned and we'll keep you posted. Yep.

As best we can. Thanks so much for the answers. Thank you. Thank you.

The next question is from Freddy slicer with KBW, please go ahead.

Hi, good morning. Simply just on workers comp power Rising medical inflation and Rising wages impacting your workers comp lost.

Thank you. This is Jack. Uh, appreciate your question Freddy, you know, listen, we've been around the workers comp line for a few decades now and as I said, my earlier comments, these are really truly unprecedented times. Uh, when you think of lost friends, you know, uh in in in workers comp, they've generally really found the economy and over time seeing kind of Indemnity kind of push back and uh and medical payments really, you know, come to the Forefront and even though they're still medical inflation out there. What is what is getting challenging I think for the industry to understand and and it's happen to be helpful, but not challenging in a negative way is understanding the difference between the cost of medical procedures and if you will medical inflation with the reduction frame,

Glee in an incident in

Types of claims and we have done a lot of analysis inside to determine how much of the reduced lost Trend and frankly negative lost Trend in a couple of years was a function of a robust economy versus changes in jobs changes and risk management or even claims management. So I think it's safe to say that the kind of environmental shift within the businesses are offsetting normal medical inflation that's coming through and like every good company we could do a lot of analysis. Um, but you can get caught up in false Precision because the part that's the hardest to understand is why are there less losses coming through the system than historically has been the case.

That's helpful. And then just following up on that how you incorporating any risk of socialization spreading to workers comp?

I'll have to think about that for a second. I don't know that we have specifically tried to align social inflation wage workers comp line the business. Um, um,

I'd have to kind of defer to some of the folks that are he may be kind of doing some of that more granular analysis, but nothing comes to mind that that jumps out at me off. Okay, and then just moving on to National also. Just wondering if the Intensive intensifying bodily injury severity is specific to any particular region and how you feeling about the overall personal toll pricing in 2020.

Yeah, I wanna make sure I heard that question probably the the the bodily injury severity is not sort of attached to any particular geography I'd say that's a you know, fairly often spread phenomenon. The I think your second question was around pricing and yeah, we would say, you know, the market environment is certainly becoming increasingly competitive. Um, you know, we've seen our competition decelerate their rate increases so still achieving positive increases. Um, as you would expect we track this down closely, we have terrific ugh comparative Raider information by state and so, you know, we've been we've been holding steady on our rate. We are are filed position both auto and home is you know above the industry and you know, we're feeling a little bit of a pinch in the retention there, but we think that's a a wise trade trade off as you prioritize profitability overgrowth. So, yep.

It is a competitive environment.

We're seeing some potential evidence that these competitive pressures may actually not have that persistency over time as we have talked earlier that the severity that's experiencing any industry both on the Fizz damn bodily injury is is putting justifiable at pressure on profits. So we think other carriers likely will respond. So, you know, I think that's a question of how long this competitive invite process. And as we said earlier, we're getting Five Points of rate for personal lines over all but for bodily injury specifically, we're getting meaningfully more than that. That's right.

Okay. Great. Thanks, Neil.

Again, if you have a question, please press * then 1 the next question is from Paul Knutson with Piper Sandler, please go ahead good morning grandson the quarter Thursday morning, you know, most of the details questions that they asked maybe I'll give you towards the end of softball here. Could you talk a little bit about sort of you know, longer-term where you want to build out more particularly. I mean as we not not so much 2020, but as we think about it over a multi-year. I want to see if it's just more of the same or other specific. You'd like to see heavily overweighted with growth over the next several years.

Yeah, thanks for that Paul. This is

Jack again. Listen, it's it's an interesting time for us as a company after you know, spending, uh, quite a bit of time rebuilding this portfolio and creating more diversification driving more specialization into really all of our businesses. So I would start off with um, uh, what we're most proud of is that are off we have really broad-based profitability to our personalized business is generating. Terrific returns a core Commercial Business is generating great returns and most of our specialty businesses are Bots are above hurdle rate or better. So it's kind of a high-class problem to say, where do you want disproportional growth? We also know that we have to continue to work on our our continued diversification. So we have a bias where we can to kind of casualty oriented specialized business that allows

To continue to get the proper.

Ready to casualty mix and to continue with our Geographic expansion and diversification. But as you know, when our business if you don't do that profitably then the diversification doesn't help you that much. So I would say that we we have options down the road and options are to see if at the right time it makes sense for us to expand our personal lines footprint home don't need to but but have that opportunity. We have great momentum in our small Commercial Business that continues and I think you'll see us continue to to Thursday or ties that um the Middle Market business. I think if the environment plays out like We sync our specialized niches that are embedded in that business could have some real upside to them.

But last but not least and Brian can speak to this. We have real momentum in getting our specialty businesses with our franchise retail agents down just to really start thinking about um, you know, building that portfolio more assertively with us. So Brian, maybe you can build on that. Yeah. Sure. So I guess a couple of comments first off. I would I would point out that when I look at the overall specialty portfolio and the growth that we've achieved when I pick out the actions that we're taking in the program business the rest of the specialty business grew by 7% wage in nineteen and we're looking for similar growth like that going forward and you know, I would add that some of our most profitable largely casualty driven areas such as our home based professional lines business r e n s business. They're growing High single digits double digits type growth and that to me is is very powerful additionally birth.

We do think quite a bit.

About you know, what is important what is valued by our agents? And so as we continue to push there and continue to build out right? I think Jack before mentioned some of our newer propositions such as our financial institutions business and the work that we're doing to really expand r e n s business in the retail space for those are areas that we have put a lot of focus on and we expect to see real contribution from them going forward as well.

All right. Thanks. I appreciate it. Thank you. Thank you for calling this concludes our question-and-answer session. I would like to turn the conference back over to our god. Thank you everybody for participating today. We're looking forward to talk to you next quarter.

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

Dead dead dead dead dead.

Yes.