Q1 2020 Earnings Call
Today's discussion will also reference certain non-GAAP financial measures, such as operating income and accident year loss and combined ratios excluding catastrophes among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on the historical basis.
Can be found in the press release this slide presentation or the financial supplement which are posted on our website as I mentioned earlier.
With those comments I will turn the call over to Jack.
Thank you Oksana good morning, everyone and thank you for joining our call.
Before we begin I'd, just like to say on behalf of the Hanover team that we hope each of you your families and friends are safe and healthy and managing through this pulp.
Look health crisis as well as possible.
Our company delivered very strong results in the quarter, while continuing to navigate the unprecedented challenging and very dynamic environment defined by the cobot 19 pandemic.
We are well positioned to navigate this crisis and have the resiliency and resolve to continues to deliver on our commitments to all of our stakeholders.
I will begin with some comments about our business in the context of Cobot 19 in the current environment and then I will provide a high level overview of our first quarter 2020 performance.
Jeff will take you through our operating results by segment and in depth to review of our investment portfolio and provide thoughts on our 2020 financial outlook.
We will then open the line for your questions.
Over the past two months Cobot 19 has created unprecedented changes in the way, we live and work.
Today, most people in the U.S. and more than 2 billion worldwide are under some form of stay in place border.
For the families of over 200000, whose lives have been taken by this disease. This is an especially tragic time.
Thanks to the selfless dedication of our health professionals and first responders with the unique collaboration as scientists and the overwhelming response from the private sector I'm confident our country will meet this challenge had on just as we have so many other times throughout our history.
For the hanover's part if anything has emerged from the Corona virus crisis, it's that our company is resilient nimble and compassionate in the face of this pandemic.
And that we are committed to working together to deliver for our shareholders.
Our business is running at full speed our service levels remained strong and we continue to deliver on our proud tradition of being there for our customers and agents when they need us most.
With the health and safety of our employees being our earliest priority we had to adjust to a virtual work environment in short order and we were ready.
Over 95% of our workforce has seamlessly transition to a remote work environment, while continuing to deliver high quality service to our customers.
The substantial investments, we have made and technology and work flow over the last several years, our business continuity planning and a cultural shift to agile and flexible work practices have prepared us well.
I'm incredibly proud of our outstanding team of 4300 employees across the country, who have shown commitment creativity and resolve thank you for stepping up.
I'm also proud of our robust response to support our policyholders agents and local communities.
Our extensive customer financial relief program includes a 15% personal auto premium return for April and May as well as flexibility on bill payment options to those in need.
It also contemplates expanded personal auto and homeowners terms to cover delivery of essential goods living and rental car expenses, resulting from repair delays and other adverse circumstances.
We have also implemented steps to provide or operational and technological support to our partner agents.
Finally, we have committed $500000 to local community funds and nonprofit organizations to provide pandemic related assistance and donated critical medical supplies to local health professionals.
From a financial perspective, our company remains very strong.
We have a solid balance sheet ample liquidity and a high quality investment portfolio.
Our insurance portfolio was built on thoughtful and conservative underwriting practices and mix management and it continues to generate broad based profitability.
We believe these elements will allow us to successfully manage to the impacts of cobot 19.
We have executed a comprehensive financial scenario modeling process with multiple economic scenarios, incorporating detailed underwriting risk exposure reviews.
Our modeling indicates that even in the most stress scenarios. Our overall operating performance should remain relatively stable in 2020 with some potential puts and takes by business and by quarter as the year progresses.
In personal auto we expect that various stay in place orders to result in a short term frequency benefit.
This reduction in auto frequency will be offset to some degree by premium return higher cost of materials and other exposure impacts depending on the length of the economic downturn.
We do not expect the material impact on our homeowners business, while spending a lot of time at home will likely enable policyholders to mitigate potential losses before they become significant.
This benefit could be offset by an increase in cost of materials due to supply chain disruptions and moral hazard claims.
In our core commercial lines, the economic pause might mean lower claims activity in the short term.
But if the slowdown continues we are mindful of the potential for an increase in vacancy related risks such as fires and possibly elevated social inflation down the road.
By enlarge the effect on our specialty business should be similar to our core commercial business given the retail agency small account focus of our specialty portfolio.
We consider direct Dino and management liability claim potential to be limited based on the small private company focus in this book, we have no exposure to first responders and limited exposure to medical professionals workers compensation.
Now I would like to share some thoughts regarding business interruption. The overwhelming majority of our commercial multi peril policies are ISO based and have an explicit virus exclusion.
We have 538 policies split between our CMP line in core commercial and health care businesses within specialty where we believe coverage could be triggered under specific circumstances.
Consistent with our underwriting intent these policies provide coverage with only $25000 sub limits.
Many of these insureds have not close their facilities.
We have reviewed these exposures in any others and based on our current actuarial and underwriting assessment have earmarked approximately $13 million the reserves to address direct covert 19 related exposures with the B. I exposures, making up the vast majority of the expected liability.
Overall based on our mix of business, we expect the net impact of the Corona virus to our 2020 underwriting results to be very manageable.
40% of our business is personal lines.
In commercial lines, we predominantly use ISO based forms.
We have a low percentage of our premium and workers compensation at roughly 7%.
And zero exposure to event cancellation travel insurance trade credit or similar coverages.
The impact of Cobot 19 on net written premiums is much harder to predict both for our company and the industry overall, considering the many uncertainties related to the longer term scope and impact of the pandemic and how the macroeconomic environment unfolds.
Short term growth will likely slow or even show some temporary premium declines due to premium return in personal lines cancellations midterm endorsements and other effects of a reduction in overall economic activity.
In terms of insurance pricing environment.
We expect that the industry rate trajectory will likely continue as the need for rate in certain lines exists.
As previous downturns have demonstrated rate is typically more dependent on the insurance cycle than the economic cycle.
We were on a steady trajectory of consistent rate increases in core commercial through March and we believe it will continue fueled by continued increases in loss inflation.
We also believe that lower new money yields will serve as an additional catalyst for enhanced pricing.
A number of investors have asked us about the potential for regulatory or legislative changes.
That may adversely affect the industry and how we see that playing out.
Unfortunately, we don't have a crystal ball, so I can only speak from their perspective of history and the fundamental role of contract law and the economy.
It's not unusual during the crisis to see a flurry of regulatory and legislative proposals aimed at the insurance industry and its operations.
We expect and will comply fully with temporary regulatory actions such as moratoriums on cancellations, which a routine in crisis situations.
That said, we expect the courts to continue to uphold the sanctity of contracts as guaranteed by the Constitution in particular, where virus is explicitly excluded as apparel.
We are encouraged by the statements by the NAIC and many state insurance commissioners as wells the efforts of the American property Casualty insurance Association to protect the strength and stability of the insurance sector.
And we're in close contact with regulators and legislators nationwide to ensure the industry continues to work efficiently for our customers and agency partners.
Now turning to our first quarter performance.
We generated net written premium growth of 3.5% inline with our expectations.
Growth was driven by core commercial with a meaningful pickup in small commercial new business and specialty excluding our program business.
Core commercial rate excluding exposure continued on its upward trajectory at 4.6% in the first quarter.
Additionally, we saw continued sequential rate increases in our specialty business as well.
Personal lines growth was tempered by the impact of consistent 5% rate increases on our retention, which was largely anticipated.
We didn't experience a contraction and growth in the first quarter due to cobot 19, as most of our business renews 45 to 60 days in advance.
Our current accident year loss experienced in the quarter was defined by several factors, which on balance resulted in a minor increase in losses relative to our expectations.
First we had one large fire loss in our middle market business, which triggered in annual aggregate deductible under our property per risk reinsurance program.
Second we experienced favorable winter weather this quarter.
As well as a decline in personal auto frequency starting in mid March due to lower miles driven.
Commercial auto frequency hardly changed in the quarter, which we believe is due to some businesses switching to enhance delivery services.
Third we increased reserves to reflect potential covert related claims, which Jeff will touch on.
In terms of prior year Reserve development, we're very comfortable with where we stand from a balance sheet perspective with slight favorability overall driven by workers compensation.
Current and prior year reserve movements in the quarter are consistent with our philosophy of reacting to issues promptly to avoid bigger issues down the road.
Looking at our capital allocation strategy in February we completed the 150 million dollar accelerated share repurchase program, we announced last year.
In addition, we subsequently repurchased approximately 350000 shares of our common stock in the open market.
We stop repurchasing Hanover stock in mid March.
We will continue to follow prudent and disciplined capital allocation strategies as we move forward.
In summary, our first quarter results were in line with our overall expectations.
Based on our strong financial position sound underwriting practices product expertise and our broad well diversified portfolio. We're confident we can continue to successfully navigate the current environment.
We remain committed to maintaining the health and safety of our employees.
Being responsive to the needs of our customers and agents and acting in the best long term interest of our shareholders.
With that I will turn the call over to Jeff.
Thank you Jack good morning, everyone for the first quarter, we reported a net loss of 40 million or one dollar for per basic share compared with net income of 122.4 million or to 97 per fully diluted share in the prior year first quarter.
After tax operating income was 86.8 million or to 23 per diluted share compared with 80.7 million were $1.96 per diluted share in the prior year quarter.
The difference between net loss and operating income in the first quarter of 2020, primarily reflects the decrease in the fair value of equity securities and to a lesser extent fixed income impairments.
These impairments are a subset of the adjustments made to reduce the unrealized appreciation of investment recorded in stockholders' equity.
Our combined ratio was 95.2% compared with 95.8% in the prior year quarter.
Lower expenses and catastrophes contributed to the combined ratio improvement while the current accident year loss ratio was slightly higher by 0.4 points.
Catastrophe losses totaled 37.9 million in the first quarter of 2020 were 3.3% of earned premium.
Below our expectations for the quarter.
Relatively quiet weather in January and February gave way to a more active March with a notable impact from tornadoes that struck Tennessee, which accounted for a large part of the cat losses, we incurred in the quarter.
With respect to prior year Reserve development, we were slightly favorable for the quarter small adjustments and some older legacy voluntary pools business were more than offset by net favorable development in our ongoing PNC business.
We experienced favorability in workers' compensation, and certain specialty lines, which continue to develop better than expectations.
At the same time, we saw unfavorable development and commercial and personal auto.
Due to additional activity in prior accident years on the bodily injury side. However, we remain comfortable with our current accident year 18, and 19 auto picks.
Reflecting our disciplined approach to financial management expenses came in favorable to our expectations in the quarter.
Due to lower discretionary spend and the timing of certain accruals.
Looking at our underwriting results byline personal lines combined ratio, excluding catastrophes with 87% for the first quarter down from 91.6% in the same period last year, driven primarily by the improvement in current accident year losses.
Personal auto loss ratio of 67% improved 3.6 points from the first quarter of 2019.
Primarily reflecting a more favorable winter weather experience in our footprint throughout the quarter as well as the observe decline in physical damage and comprehensive auto property frequency starting in the second half of March due to various stay in place orders.
Although we are expecting a meaningful decline in frequency in the second quarter. We expect the favorable result to be somewhat muted as result of potentially higher severity associated with an increase in the cost of repairs and by the 30 million premium refund, we announced earlier this month.
These unusual and temporary impacts aside underlying trends in personal auto are performing in line with our expectations.
Homeowners loss ratio of 48.4% was stable compared with last year, we have experienced favorability from mild ex cat winter weather similar to auto which was partially offset by an increase in fire losses.
Personal lines net written premiums increased 2.1% in the quarter underscoring our focus on profitability in a competitive market.
We seek to strike a successful balance between rate and retention.
As well as the expansion of our whole account offering with many of the industry's best agents.
Our continued discipline and enhance account proposition will position us well in the coming months has the competitive landscape response to more normal loss trends and continued severity pressures.
Turning now to commercial lines.
Our combined ratio, excluding catastrophes was 94.7% up from 92.6% in the first quarter last year.
The increase primarily reflected a higher current accident year loss ratio, partially offset by favorable development and reduced expenses.
Excluding catastrophes the commercial lines current accident year loss ratio increased 2.4 points to 61.2%, reflecting two major drivers.
One unusually large fire losses and co vid related reserve actions.
The fire loss occurred in the CMP line and hit our property per risk annual aggregate deductible in the 10 million excess of 10 million layer for the full amount of 10 million.
Driving a substantial portion of the increase in the CMP loss ratio in the quarter.
We had determined that an economic benefit existed in maintaining this annual aggregate deductible, but it is always more painful in the quarter that a large loss presents itself.
Our commercial lines loss picks also include an increase in a reserve provision specifically to cover potential covert 19 related losses, primarily in those sub limited policies that we specifically offered limit coverage for virus related exposures.
As Jack mentioned, we conducted a very thorough review of policies and contract language in our commercial lines business.
We identified a total of 538 commercial multiple peril policies in core commercial and Mano line property policies, and our health care business within specialty with B. I endorsements that by our intention do not have an explicit virus exclusion.
Many of these policies could see potential losses due to being shut down for cleaning rather than business closure since many of them are essential businesses.
Each of these policies has a 25000 total sub limit for this coverage.
To put this number of policies in context, we have nearly 400000 commercial policies in total.
Based on these facts, we set aside 13 million of our reserves, including reserve additions in the first quarter.
The majority of our covert exposures and accordingly of these reserves relate to these 538 policies.
Given the population and low sub limits, we believe that the losses will be quite manageable.
Commercial auto current accident year loss ratio, excluding catastrophes improved 3.3 points to 66.5%.
We are seeing the benefit of prior rate increases and targeted underwriting actions that we've talked about in prior calls.
Compared with personal lines auto we didn't see quite the same level of frequency declines in March which most likely reflects the stepped up delivery activity in certain industry sectors and geographies.
Turning to workers comp the ex cat accident year loss ratio increased 3.7 points from the prior year quarter to 63.4%. The increase reflects our prudent lost elections in the face of an industry wide decrease in rate as well as the timing of lost selection adjustment in the first quarter.
Of last year.
We're very comfortable with our overall book of business. However, we are remaining prudent in the current pricing environment.
In other commercial lines, the current accident year loss ratio, excluding catastrophes improved 2.3 points to 55.3%, reflecting a favorable comparison to heavy property losses a year earlier.
The loss ratio in this line is elevated relative to our plan and includes a portion of the increased reserve provision to cover potential covert 19 losses that I mentioned earlier.
Commercial lines net written premiums grew 4.5% in the first quarter. Our team is laser focused on growing in businesses industries and geographies that meet our profitability targets, while continuing to execute on granular underwriting and pricing actions in areas such as non specialized programs.
We saw strong growth in our core commercial businesses led by CMP and workers comp as we continue to push rate in auto lines.
The strong underlying growth momentum through March was partially offset by the planned reduction on our programs portfolio of about 6%.
Moving to investment performance, our net investment income was 69.6 million for the quarter.
The vast majority of our net investment income is very resilient to the current market environment.
Our portfolio duration is 4.2 years, so just less than an eighth of our portfolio is expected to turnover every year.
Short term interest rates have a manageable effect and we continue to prudently navigate the declining interest rates and recent widening of corporate credit spreads.
It is worth noting that included in our investment income in the first quarter was approximately 7 million of partnership income, which included the impact of income end market appreciation through the end of 2019.
We report partnerships on a one quarter lag as the results come in after we have really start earnings.
Our partnership mix has a higher weighting toward credit and mezzanine funds.
Which have historically been less volatile than the broader equity markets, but are still somewhat correlated to the S&P.
Based on valuations at March 31st it is certainly a possibility for us to report a loss on these partnerships in the second quarter.
We are confident in the fund managers and we know that this is a long horizon asset class with strong long term returns for the investor who can tolerate the volatility.
We remain confident and comfortable with the composition of our investment portfolio. It is high quality, well, laddered and well diversified by industry and asset class.
Fixed income and cash represent 85% of our overall 8 billion portfolio with a weighted average quality of eight plus and it is 96% investment grade.
At the end of the first quarter equity Securities represented approximately 6% of our total investment portfolio.
Additionally over the past three years, we've reduced our exposure to triple B issuers from 6% of fixed income to 4% and.
And our exposure to below investment grade issuers from 6% to 4%.
As a result, we're comfortable that our portfolio can absorb potential downward ratings migration associated with the economic fall out of the Corona virus outbreak.
We have also meaningfully reduced our exposure to certain fixed income industry classes that are inherently more volatile energy. For example, now makes up only 2.9% of our overall fixed income portfolio compared with 5.3% three years ago and is 92% investment grade.
More than half of our energy exposure is in the mid stream sub sector, where most of the operations are backed by fixed fee contracts, making them more resilient in times of economic uncertainty.
We have limited exposure to some of the industries that are more sensitive to the economic impact of covert 19, including airlines hospitality and retail, which together make up less than 3% of our portfolio.
Our commercial mortgage backed securities are 95% Triple a rated and well diversified by property type Metro area and vintage year.
Our CMBS holdings also benefit from greater than 30% credit enhancement and we have substantially lower exposure in our CMBS holdings to retail industries than the public conduit universe with very strong loan to value metrics.
Despite the strength of our investment portfolio. It was not immune to the unprecedented volatility in the first quarter, leading to an overall decline in book value per share of 5.1%, even after accounting for the solid operating income.
We are long term capital allocators and are confident that we will effectively manage current financial market risk and volatility in fact based on the market values as of last Friday, we have recovered a substantial portion of the decline in book value underscoring the strength and quality of the portfolio.
Before opening the line for questions. Let me provide some thoughts on our 2020 outlook.
As Jack mentioned, we undertook a very comprehensive financial modeling exercise with strong cross functional participation across the company.
We further stress several assumptions across our entire business portfolio, including prolonged stay in place orders potential related premium cancellations and endorsements as well as pressure from increased risk of vacant properties lawyer activity and recession related losses, such as surety related.
Risks.
We feel really good about the output of this exercise which provides helpful parameters for our updated 2020 outlook. Accordingly, we are reaffirming our original X cat combined ratio guidance of 91% to 92%.
Because of the great uncertainty around the length of the slowdown and the level of premium decline. It is not possible for us to give guidance on premium growth today.
Beyond the premium return measures that we announced earlier this month, we're closely monitoring endorsement new business and cancellation activity, which will depend on the level and speed of the economic recession and ultimate recovery that is now very hard to predict.
Regardless of where premium levels land and the related reduction in loss frequency, we feel confident about our financial discipline and ability to flex or expenses over the course of the year, while balancing short term needs with longer term strategic focus.
Closing out underwriting performance, we still expect catastrophe losses at 4.6% on a full year basis.
Please note given our geographic footprint and seasonality our second quarter catastrophe assumption is set at 5.6%.
In terms of net investment income, putting the partnership component aside we still feel good about the bulk of our income assumptions for various asset classes, incorporating the likely loss from partnerships in the second quarter and assuming a gradual improvement of current market conditions overall.
Time.
Overall, and I outlook now stands at around 255 million for 2020 give or take a little variability on either side.
We believe second quarter will be lower than the quarterly run rate for net investment income in 2020, given the potential for marks on investment partnerships. As a reminder, our investment partnerships represent less than 300 million of the overall 8 billion dollar investment portfolio.
To summarize we are optimistic about our overall expected 2020 results and have confidence in our ability to navigate the economic impact on premiums in future years, we have demonstrated our ability to perform in very challenging times and we will continue to do so.
Our company remains very strong over the years, we have diversified the portfolio by state and mix, while strengthening our earnings stream in each business, we have a solid balance sheet strong liquidity and a high quality investment portfolio.
We believe these elements will allow us to successfully manage through any market challenges and emerge as an even stronger performance in the industry.
With that we will now open the line for questions operator.
Thank you we will now begin the question and answer session. You ask your question. Please press Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the key to.
The withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble the rough.
And our first question today comes from Matt Carletti with Jay and he please go ahead.
Thanks, Good morning.
Yeah.
Just a few questions maybe maybe I'll start you know jacking jeffs.
Is there any insight you can give us into what you've seen in April so far I mean I appreciate your comments that.
We have no idea you kind of how long that's goes or kind of the shape of the downside on the upside but in terms of me, even just qualitatively newbiggin adoption retention endorsements cancellations just any color you could give on on what you've seen so far in April as we've gotten further into the stay at home stuff.
It would be helpful.
And Matt This is Jack thanks for the question.
I would tell you that it it is still very early we we are.
Pleasantly surprised that.
Many of our agents have transition.
Very well to the remote environment I think as an industry I'm impressed frankly that.
The business of property and casualty insurance is I think going well and being responsive to customers needs.
You know the early indications are that there is some new business.
Submission activity that will come down it's early to say that we see anything specific but we also expected that ranges substantially by industry class.
And to some degree geography.
Well were what we are encouraged about is that our work to use our analytical approach with agents and doing more active pipelining will help us through that period, where we have accounts that we've identified that we want to work on with agents and that we're not just responding to.
To the flow that comes out that May may in fact get reduced.
We do expect that Retentions will will escalate I think that you know the early indications are that that will in fact happen and then the wildcard will be over time.
Much do we see in terms of cancellations and mid term.
Adjustments in exposures that will will come into the factor in at least effect.
Topline trajectory, but I would tell you in the early innings, where where we're encouraged that theres a a level of stability at the onset.
And Matt on the claims side clearly, we're seeing reductions in claims.
Across a lot of areas in there and there quite a meaningful.
Yep.
Yeah, let me tying that into your some of the guidance pieces. It really my question centers around you know your suspended the topline guidance, which makes complete sense to me I think that's pretty common and I think anybody can predict the future there.
But yet you affirmed the expense ratio guidance switch.
Some peers have.
Indicated they expect upward pressure on expense ratio not downward can you talk a little bit about that dichotomy, there where you know with the FID your outlook on net written premiums the ability to kind of reaffirm your expected expense ratio improvement is that Jeff did that relate to kind of what you're referencing your comments about.
You can make decisions about where to pull back and not pull back that you're more flex and in the optional spend and then maybe some other people.
Yeah. So if you break the combined ratio into its two components. The expense ratio, we reaffirmed a 10 basis point improvement. So we have the ability to balance the long term in the short term and focus on expenses to be able to deliver on that in the expense scenarios in 2020 that we can.
See.
From a loss ratio perspective.
We're pretty confident that the claims activity will offset the the decline that we were likely to see or seeing and in that premiums.
Okay, all right and last one if I can just Jeff on capital management, maybe just give us an update on your views. There I mean, we saw the f. our close out in Q1, there are some additional open market purchases.
I, either I forget who commented, but you said you kind of halted activity in mid March.
How do you think about capital management looking forward I mean, you reference kind of at least near term likely some downward pressure or at least reduced growth on top line and obviously a stock trading at.
A lower valuation that it did recently how should we think about that.
So Matt Yeah. As you said, we finished the MSR, we did another 40 million or so additional buybacks and then we paused in mid March and I think our view on buybacks at the moment is really take a wait and see approach. So we haven't determined that we're going to jump back in we all seven determined that were done for.
The year it will really depend on how things go and how we feel about it at the moment, we have ample capital and we feel good about operations, but I think we're being prudent to wait and see it may go without saying, but just to be clear, we don't anticipate any changes in the ordinary dividend would would be impacted.
My guess is any view of special dividends would would certainly follow the same view as buybacks.
Great. Thank you very much for the color and that backlog.
Thank you Matt.
And our next question comes from Paul Newsome with Piper Sandler. Please go ahead.
Good morning, I I've got a just two questions well two questions.
<unk> was big picture one is very small so maybe the big picture. When every time, we've seen a major really big event like this we've seen changes in how people underwrite things I'm wondering from your perspective.
Are there areas, where you think you underwriting fundamentally change in how either you or others.
Look at it.
Yes, Paul this is Jack Roche Thanks for that question.
Jeff had.
Talk about some of the financial scenario a work that we've done to look at our existing portfolio and start to contemplate what can happen and how would do we think the financials will respond based on.
The various.
Factors that might coming at us at the same time, Dick and Brian have been actively working and absorbing kind of thoughts around.
If this goes in prolongs in its our hunches right that the way, we do business and frankly, the way a lot of our customers do business.
Are going to change in an accelerated pace.
What would be the implications to the sectors of the business that we would be interested in or that might see some that version.
So the long and short of it is is that when we've done that analysis, we're pretty proud of some of the shifts we've already made.
That Dick maybe you can comment on this that we have we have really reduced our penetration in some of the.
Restaurants, and hospitality in some of the areas and we did that because of some of the liability trends that we observed a couple of years back, but I think those will serve us well.
We we actually scaled back a little bit in the major metropolitan areas as part of that effort I think that will serve us well so as we project into the future I think we see the service economy.
Continuing to prosper, but in a much different way and we're doing a fair amount of Sun scenario work to try to.
We anticipate that and position ourselves for success in the future.
Yes, so just briefly adding some color to that and we do agree that are we think our core core book sort of provides us a bit of resiliency in the downturn not to some of which I've said you know specifically restaurant hospitality you think about those sectors. As a is that was being most affected here that's less than 7% of our book.
Which is a small percentage of the work we did two to move out a major metropolitan areas, that's down about 20% over the last four years and certainly we know that those metro areas or are.
Those that are more substantially impacted by coded maybe just one other color commentary I'd make is as we look at classes and industries.
And how this may affect them certainly our underwriting today looked at their operations, but also their financial strength and that will become an important component you think about schools and things that are happening in that arena, making sure they're financial stability is rock solid. So so you know we think are.
Our current drill will serve as well.
Right. Thank you.
No sort of a narrow because you're getting a couple of questions on the commercial auto environment and you had some maybe you could talk a little bit about what triggered the reserve development there and.
I guess, we all hope that maybe just this year Didier would turn around in general, but you just give us a little sense of what's going on there.
So Matt I would think if you look at our prior year development overall, let's remember it was favorable overall it was favorable personal lines. It was favorable and commercial lines overall, it was favorable and other commercial lines and you're right. It was unfavorable in auto offset by work workers' comp.
Favorability I think we feel very comfortable with our overall reserves in this particular quarter. We saw some you know unique situations with auto, particularly commercial auto on bodily injury, and we felt that we needed to react to those we still feel very good about EUR 18, 19 and 20 picks.
There and all of the rate that we've been getting really over the last six quarters on the re underwriting. So I think were and I think we're in reasonable shape overall.
Well that those are changes through what specific cases user that's trend changes.
Mostly it's a specific a case issues. So you know some unique a issues obviously, we're not immune to litigation trends like as people have seen really over the last few years, but mostly it's specific cases use there.
Great Congratulations nuclear guys.
Thank you Paul.
Oh.
And once again, if you'd like to ask your question. Please press Star then one.
Our next question comes from Meyer Shields KBW. Please go ahead.
Great. Thanks, I think it wasn't for Jeff can you talk about new money rates and whether there's any shift in your investment allocation strategy Gordon money now.
No, we really haven't changed our portfolio mix in any material way the new money rates are down.
Obviously rates have come down and spreads have widened a little bit. So the spreads have covered some of that some of that gap.
And we'll do it with a 4.2 year duration. It you have take sort of about eight years for the portfolio to roll off and because of the timing of cash flows. We generally don't do a lot of new investing in the first four months of the year tends to be later, so now we're about to go out that so the.
New money yields are down a little bit and we've baked those levels into our guidance that we've given for the year.
But no we're not a seeking are chasing a higher yields are reshaping the portfolio mayor.
Okay.
Thanks Second question can you give us a little insight into the expenses that you pulled back on in the first quarter and maybe how that would impact operations over the rest of 2020.
So we really didn't make any specific decisions in the first quarter.
<unk> expenses were down so a year over year, but they were not down as much in terms of our guidance you know the expense ratio was down a little bit relative to guidance. So it was largely just you know the timing of new hires or things that nature or some you know accrual adjustments I think more importantly as.
As we think about the year there will be some expenses that just naturally go down like travel and entertainment conferences things like that and then there'll be other expenses that we have some flexibility around in order to be able to manage the decline in premium to deal with the a and expense ratio.
Okay, and then final question.
It looks as if my very rough math on the fourth quarter is right like the commercial on absolute like the rate change slowed a little bit not we'll be talking about that.
This is Jack your let me make sure I understand the question, you're asking about the trajectory of our commercial lines pricing.
Yes, and specifically rate.
Yes, yes, what we articulated in the script is that the rate trajectory within commercial lines continues to tick up so we're having sequential improvement.
What you saw in fourth quarter was that we had a pretty large pricing result that showed.
Particularly.
Hi swing in the exposure side and I think we tried to.
Speak to that in the fourth quarter call. So people would know that 7.9 or whatever it was in terms of total pricing was a little bit inflated. If you will based on the exposure based that ran through that particular quarter and I would say that there's a similar phenomenon in the first quarter, where the exposure element is at.
Actually a little bit lower than what we normally would see not affected by the economy, but by the normal ebbs and flows of exposure base. So when you look at that core 4.6% rate that's running through the book.
We that is that is actually an improvement over what we've been getting and if you look even further into our specialty portfolio, we're seeing some additional incremental improvement in that portfolio.
Okay. That's it thank you very much.
Humor.
And this will conclude our question and answer session I'd like to turn the call back over to extend the Luca show for any closing remarks.
Thanks, everybody for your participation today, we're looking forward to talking to the next one.
Hey, healthy do well.
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