Q2 2020 Travelers Companies Inc Earnings Call
Conference for travelers, we ask that you hold all questions until the completion of formal remarks as much time, you'll be given instructions for the question and answer session.
As a reminder, this conference is being recorded on July 20, certain 2020.
I would like to turn the conference over to Miss Abbe Goldstein Senior Vice President Investor Relations Ms. go see see go ahead.
Thank you good morning, and welcome to travelers discussion over second quarter 2020 results. We released our press release financial statement in webcast presentation earlier. This morning, all of these materials can be found on our website at travelers dotcom under the Investor section.
Speaking today will be Alan Schnitzer, Chairman and CEO, Dan Fright, Chief Financial Officer, and our three segment President Greg Toczydlowski of business insurance, Tom Kunkle, a bond and specialty insurance and Michael Klein of personal insurance. They will discuss the financial results of our business and the current market environment. They will refer to the way.
Webcast presentation, if they go through prepared remarks, and then we will take question.
Before I turn the call over to Alan I'd like to draw your attention to the explanatory note included at the end of the webcast presentation.
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 performance actual results may differ materially from those expressed 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 and in our most recent 10-Q and 10-K filed with the FCC, we do not undertake any obligation to update forward looking statements.
Also in our remarks or responses to questions. We made mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release financial supplement and other materials available in the Investor section on our website and now I'd like to turn the call over to Alan Schnitzer [laughter]. Thank you happy good morning.
Thank you for joining us today.
As we sure going or pre released last week and again. This morning, we reported a small net loss for the quarter due to a high level of catastrophe losses.
And as we expected loss from the non fixed income investment portfolio.
Dan what more to say about them shortly.
Underlying underwriting income of $572 million pretax.
$254 million over the prior year quarter.
Benefiting from solid net earned premium and a 3.5 point improvement in the underlying combined ratio to a strong.
1.4%.
Dependent can related economic conditions had only a modest net impact on our underwriting results.
As I shared my prepared remarks last quarter.
He will be like teen related loss activity, there will be strong offsetting decline in losses due to people across the country shopping in place.
For us in the quarter ordered and $14 million, a direct losses and $63 million an audit premium adjustments.
Offset like initial estimates are favorable loss activity.
Most of which is in short tail lines.
Given the continued uncertainty we've taken a cautious approach to recognizing the net impact it opened 19 related loss activity.
Some industry observers speculated about the aggregate level of insured and investment losses are writing out of the 10 day.
We don't talk losses will be significant but they won't be borne evenly across insurers.
Our manageable couldn't related insurance losses, so far this year, a reflection of our disciplined approach to risk selection as well as terms and conditions.
And that's we shared with you with somebody told last quarter, we manage our investment portfolio with a similar were bark balancing risk in that.
[noise] last quarter I commented on the potential future impacts the pandemic might happen each of our key lines of business.
I would view that again with a quarter's worth of experience.
In personal auto we've seen a meaningful drop off in auto frequency, although that is moderating as economic activity picks up.
The same time, we've taken into consideration potential for some offsetting impact in terms of on severity.
Due to factors such as coalitions occurring at higher speeds and driver distraction.
The workers compensation.
Oh wouldn't related claims most heavily healthcare workers and first responders with do not represent significant part in part because business.
Also the frequency of those claims stabilized during the quarter, which might be attributed to improved supply PPD and health care community, having to benefit more experience with managing koby patients.
[noise] more probably beyond the healthcare sector.
So the state workers comp systems suggest that the coburn related claim rate is low relative to the infection rate.
That's likely partly attributable to the fact the population most seriously affected by could might change accused older and it's not workforce.
Nothing less in developing our loss estimates we've taken into consideration the potential for that the lead reporting of claims and additional claim activity associated with recent spikes and infection rates.
As well as uncertainty related to the longer term implication for the disease.
As anticipated.
Some states was effectively expanded the scope of workers comp coverage by creating presumptions of compatibility.
In most cases states have taken a thoughtful approach protecting workers appropriately, but not unreasonably burdening the workers compensation system.
For state tobacco to extend compatibility we've adjusted our loss estimates accordingly.
In terms of non coded workers comp losses, we've seen the lower volume workers comp claims because workers and stayed home.
This will lumpy as people get back to the workplace.
In addition to taking that into account, we've contemplated that severity could be adversely affected by injured workers doing treatment due to the stay at home work environment.
Having said all that our experience is that there's a low level of workers comp claim activity associated with economic recession.
During periods of elevated unemployment workers tend to be more motivated to stay answer John.
The workforce tends to be more seats.
Okay.
In management liability as we expected you're seeing elevated level of claim activity typically associated with stock market volatility and workforce reductions.
Underlying combined ratio this quarter and honest specialty reflects that is both other loss activity.
And we expect the underlying combined ratio will continue to be elevated at this lafleur somewhat higher over the near term.
This is nothing like the experience we had in the aftermath of the financial crisis, a decade ago.
Nonetheless, we expect the returns from this segment will continue to be healthy.
Turning to the surety business, we've been pleased to see that work is continuing on the vast majority construction project.
However, the depth and duration of stress in the economy continues to be risk factors the surety business.
The one will also be impacted by other factors such as the financial strength from the bonded firms.
As I shared last quarter, our high quality surety book was effectively stress tested in the 2008 financial crisis and performed well.
And our underwriting approach this remains disciplined since that time.
In that regard so far we haven't seen anything that is cautious to change or surety loss estimates.
In terms of business interruption coverages under commercial property policies.
A fair amount of litigation challenging coverage.
As a reminder, or commercial property insurance policies that include business interruption.
I think as a result of civil 40.
Fire losses to be caused by direct just school damage to property from a covered causes loss.
In addition, our standard policy forms specifically excludes loss or damage caused by resulting from a virus.
A few quick decisions, we've seen so far one in New York and one in Michigan have both upheld physical damage requirements in the context of coping Nike.
On the legislative front efforts to retroactively expand coverage for business interruptions seem to be diminishing.
Finally, with respect to liability coverages.
People shelter in place, we are seeing fewer commercial auto accidents and slipping false claims.
Anecdotally, we're also seeing some movement by the prestigious BARDA sort of claims faster.
But it's too soon to know how significant that benefit might be.
We're also encouraged by states that have adopted cobot related liability protection.
Similar efforts that are under when other state and federal luck.
We shouldn't flips frivolous lawsuits undermine the nation's recovery.
Nonetheless, we expect the planes is far to continue to be active.
Turning to the quarter the top line, we're very pleased with our production results.
Excluding the auto premium refunds, we provided more customers net written premiums grew by 2% I see impacted Coogan 19, uninsured exposures was more than offset by strong renewal rate change in all three SEC.
Business insurance, you cheap renewal rate change at some 0.4%.
Hi, its level since 2013 close to the record level, we achieved that year.
Excluding workers comp renewal rate change was double digits.
Importantly retention levels remains strong.
In bond and specialty insurance net written premiums increased by 3%.
Our domestic management liability business achieved record renewal rate change, while maintaining strong retention.
In personal insurance, excluding the audit premium refunds.
Net written premiums increased by 6%.
Driven by strong retention and new business in both agency audio and agency homeowners.
And our agency homeowners business renewal premium change remained strong at 7.7%.
And we hit a record for new business.
Let me take a minute to comment on the commercial rate environment.
Before the pandemic struck there there were a number of industry wide factors, putting upward pressure on prices.
Namely increased volatility wasn't related losses.
Interest rates at historical lows and a growing recognition of higher loss trend in the liability lines.
All of those conditions persist.
And now at another quarter with a very high level of weather related losses.
Interest rates that are likely to be lower for longer.
Well it hasn't been a significant factor for us reinsurance market it is hard.
And on top of that the pandemic unrelated economic fallout habits sense of incremental uncertainty.
Making steel at one of those times not unlike in the week 911, and Hurricane Katrina when the market Recalibrates risk.
With that as the background will continue to see great games manage other levers and profitability to improve the outlook for return.
I'll close by saying that I couldn't be more grateful to my travelers colleagues for their grid and commitment to taking care of our customers our business partners are communities and each other.
Also work they've done in recent years to advance our innovation agenda as equipped with state of the our digital tools and other capabilities that make all the difference in this environment.
Well prepared.
And from here, we're well positioned.
From financial and operational distractions will continue uninterrupted managing her business investing for long term success.
Sure we're confident in our ability to continue to succeed to these uncertain times, it's a benefit from the strength of our franchise as the economy recovers and with that I'll turn the call over to Dan.
Thank you Alan.
Our core loss for the second quarter was $50 million compared to core income.
$537 million in the prior year quarter.
Change resulted primarily from higher level of catastrophe losses, and as expected lower net investment income.
For the quarter.
Net impact related to covert 19 is included in our underlying results not as part of our cats in here and was modest more on that in a minute.
Our second quarter results include $854 million, a pre tax cat losses.
Compared to only $367 million in last year's second quarter.
This quarter's cabs severe storms in several regions of the United States as well as 91 millions of losses related to civil unrest.
Regarding our property aggregate catastrophe extra well treaty for 2020.
As of June Thirtyth, we have accumulated about $1.4 billion qualifying Washington's towards the aggregate retention of $1.55 billion Treaty provides aggregate coverage of $280 million arc $500 million of losses.
That $1.55 billion tension.
The underlying combined ratio was 91.4%, which excludes the impact of cats and few I'd improved by three and a half points compared to 94.9% in last year's second quarter.
The underlying loss ratio improved by more than four points and benefited from a lower level of non cat weather losses.
Favorable frequency and personal auto from the shelter in place environment net related premium refunds.
And the impact of earned pricing in excess of loss trend.
The expense ratio of 31% eight tenths of a point higher than the prior year quarter and above our recent run rate.
This change was as expected due to the reduction in premiums associated with the Pandemics impact on the economy, along with the premium refunds to our personal auto customers.
The net impact to covert 19, and its related effects on the economy were modest in terms of our overall second quarter underwriting.
Our topline was resilient.
Excluding the premium refunds and personal insurance net written premiums increased by 2% driven by strong renewal rate change in all three segments that more than offset lower insured exposures.
Terms of operating expenses results were adversely impacted by modest increases in the allowance for bad debt and the accrual for supplemental commissions.
Those expense increases however, <unk>.
Roughly offset by lower expenses and other categories. For example, travel costs were down as our employees continue to work primarily from home.
Yeah economic impacts related to covert 19 also affected our underlying losses for example.
Well it is directly related to covert 19 totaled $114 million, primarily workers comp and business insurance and management liability losses in our bond and specialty business.
On the other hands, we experienced significant reductions in auto claims as there were fewer cars on the road during the second quarter.
And to a lesser degree recognized benefit reflecting fewer traditional workers comp claims as more people work from home.
As you heard from Alan given the uncertainty in the current environment, we took a cautious approach in estimating the net impact of cold weather related losses.
We have recorded the estimated cost for all losses incurred through June thirtyth, including incurred losses for which claims has not yet been reported.
All losses have been recorded at our estimate of ultimate and the majority of the coated 19 related insurance losses, we have both in the first and second quarters are still sitting in our IP and our reserves.
We have not recognized losses or benefits over 19 related insured events that we anticipate will occur subsequent to the end of the quarter.
Taking a step back on a year to date basis impact on our results. Excluding net investment income from covert lighting and its related effects is a net charge of about $50 million pretax.
Turning to prior year reserve development and personal insurance bought on property losses came in better than expected for multiple accident years and.
And bond and specialty insurance, we saw a larger losses than expected in management liability, resulting in prior year strengthening of $33 million largely offsetting the favorable development in personal insurance.
Business insurance it was known that prior year reserve development, that's better than expected loss experience in workers' comp and commercial property.
I was largely offset by unfavorable results in our other casualty launch.
Each of the movements this quarter was relatively small compared to the reserve base.
As you saw in our July 14th press release, we expect to record subjugation benefits in our third quarter people I'd of approximately $400 million pre tax related to PG any successful emergence from bankruptcy on July onest.
As a reminder, third quarter Pugh I'd will also include the results of our annual as best as review.
After tax net investment income decreased by 54% from the prior year quarter to $251 million somewhat better results than we had previewed in our call last quarter.
The decrease was driven by our non fixed income returns where results for our private equity hedge fund and real estate partnerships are generally reported to us on a one quarter lag.
Accordingly, the impact of the disruption in global financial markets that occurred in the latter half of the first corner impacted our second quarter results.
As the broader markets have recovered in the second quarter that should at least to some extent benefit are not fixed income results in the third quarter.
It's worth mentioning here the recoveries may not be reflected in the private equity and hedge fund results as quickly as the downturns Werner.
Given continued economic uncertainty fund managers will report the results to ultimately take a more measured approach not the as quick to write back up the valuations that just mark down, particularly in light of what may be continued challenging prospects for the earnings and cash flows from the funds underlying investments.
Fixed income returns decreased by $24 million after tax as the benefit from higher levels of invested assets was more than offset by the declining interest rates and the mix change as we chose to maintain a somewhat higher level of liquidity.
And held more short term investments than in prior quarters.
For the remainder of 2020, we expect that fixed income and I will decrease by approximately 35 $40 million after tax per quarter.
Fair to the corresponding period into 2019.
Turning to capital management operating cash flows for the quarter of $1.7 billion, where again very strong all our capital ratios were at or better than target levels, and we ended the quarter with holding company liquidity slightly more than $2 billion well above our target level.
Call than in April we Prefunded as we normally do $500 million debt coming due in November with a new 30 year 500 million dollar debt issuance and 2.55%.
Our holding company liquidity is temporarily elevated by that amount.
Investment yields decreased as part of spreads tightened during the second quarter and accordingly, our net realized investment gains increased from $1.8 billion. After tax as of March $31st billion to $3.6 billion after tax at June Thirtyth.
Adjusted book value per share, which excludes net unrealized investment gains losses, $92 and once at quarter end down less than 1% from year end up 2% year over year.
We returned $218 million of capital to our shareholders. This quarter by a dividends, we did not repurchase any shares during the quarter.
As we indicated in our first quarter earnings call our capital management strategy remains unchanged with the ongoing economic uncertainty and with hurricane season. Upon us still feels to us like holding onto a little more capital is preferable to holding onto a little less.
Until there's more clarity on the state of the economy, we may buy back some shares in the coming quarters or we may continue to choose to buy none.
Let me back to reinsurance for a moment, let me direct your attention slide 19 of the webcast presentation for summary of our July 1st renewals.
The structure of our main cat reinsurance program is generally consistent with the prior year.
We renewed our northeast catch rate effective July onest substantially similar terms.
Pricing that was up only slightly on exposure adjusted basis, our cat bonds long point re three is now in the third year of its full year term and the annual reset for the 2020 Hurricane season, Ashman point was adjusted from $1.79 billion to $1.87 billion.
On the phone calls for the program was flat year over year more complete description of our cat reinsurance coverage, including our general cat aggregate extra well treaty that covers an accumulation of certain property losses arising from multiple occurrences is included in our 10-Q, which we filed earlier today and in our 2019 form 10-K.
Lastly, let me take a minute to address thoughts on our topline going forward.
Looking at premium volume, we expect to experienced the impacts of economic disruption.
Much of an impact we feel and for how long will depend on the extent and duration of the negative economic impacts related to the pandemic.
Because of our premium typically lags written premium we expect to field the effects on the earn basis beyond the ended the year.
As Alan said last quarter, we do not intend to take disrupted option expense actions in response to what may prove to be short term impact on premium volumes accordingly in coming quarters. The expense ratio will likely remain somewhat elevated compared to the corresponding period of 2019 due to the expected impact on our pre.
Yes.
Now I'll turn the call over to Greg for a discussion of business insurance.
Thanks, Dan let me start by expressing my appreciation to all my travels colleagues as well as our agent broker partners for continuing well.
Professional service to our customers during these unprecedented times.
Thats the quarter's results business insurance had a loss for the quarter $58 million due to lower net investment income and higher catastrophe losses as bolt Alan and Dan discussed.
The combined ratio of 107.1% included more than 10 points of catastrophes impacted by weather related losses and civil unrest.
The underlying combined ratio of 97% improved by 0.4 points, reflecting a zero point to point improvement in each of the underlying loss ratio and expense ratio.
Impact of Cobot 19 related economic conditions was modest.
Turning to the topline net written premiums were 3% lower than the prior year quarter due to the impact of the economic disruption uninsured exposures.
Thanks, the excellent execution by our field organization. These impacts were largely offset by strong renewal rate decreases in high retention.
Turning to domestic production, we have tree achieved strong renewal rate change of 7.4% while retention remained high at 83%.
The renewal rate change of 7.4% was up almost four points from the second quarter of last year and more than a point from the first quarter of this year.
Notwithstanding the persistent downward pressure in workers' compensation price.
We continued to achieve higher rate levels broadly across our book as rate increases and all lines other than workers compensation were meaningfully higher during the quarter as compared to the second quarter of last year.
We achieved positive rate on about 80% of our middle market accounts this quarter, which was up from about two thirds in the second quarter last year.
Importantly, we've achieved this progress and highly segmented manner and with retention remaining strong.
But these rate levels our rate change continues to exceed loss trend even after about a half a point increase tort loss trend assumption.
New business, a $473 million was down 10% from the prior year quarter.
New business was down, which we attribute largely to disruption caused by the end Devon.
New business was also impacted by our continued focus on disciplined risk selection underwriting and pricing.
These production results request superior execution by our field organization in a very challenging environment.
As for the individual businesses and select renewal rate change was up to 2.1%, making the six consecutive quarter, where renewal rate was higher than the corresponding prior year quarter, while retention was strong at 82%.
The headwind for workers compensation pricing is most pronounced in the select business.
New business was down significantly driven by the economic disruption caused by the bundling.
While the current environment is challenging we're confident that we're well positioned and investing in the right strategic capabilities.
Rapidly grow this business overtime.
In middle market renewal rate change was up to 7.9% while retention remains strong at 86%.
7.9% was up almost four and a half points from the second quarter of 2019 and wanting to have points from the first quarter of 2020.
New business on $255 million was down from the prior year quarter, driven by both economic disruption in our continued focus on disciplined risk selection underwriting and pricing.
To sum up we believe our meaningful competitive advantages, including our strong distribution relationships and our talent and expertise position us well to navigate through these uncertain times and continue to serve our customers and agent and broker partners.
I'll turn the call over to Tom.
Thanks, Greg Bond and specialty delivered solid returns and growth in the quarter. Despite the impacts of Copel get 19 and related economic conditions.
Segment income was $72 million, a decrease of $102 million from the prior year quarter.
As Dan mentioned, the combined ratio of 93.8% reflects unfavorable prior year reserve development in the quarter as compared to favorable you I'd in the prior year quarter and a higher underlying combined ratio.
The underlying combined ratio of 88.1% increased 7.1 points from the prior year quarter, primarily driven by the impacts of higher loss estimates for management liability coverages about half of which was due to cold good 19 and related economic.
Patients.
Remaining half of the increase is due to a few smaller drivers such as elevated claim activity under employment practices liability coverages and ransomware and losses under silent policies.
Turning to the topline net written premiums grew 3% for the quarter, reflecting strong growth in our management liability and international businesses, partially offset by lower surety production.
In our domestic management liability business, we are pleased that renewal premium change increased to 7.8%.
This marks the seventh consecutive quarter, where RPC is higher than the corresponding prior year core.
As Alan noted renewal rate change was a record for the quarter, while retention remained at historically high 89%.
Similar to business insurance RPC in the quarter was also impacted by lower insured exposures.
These production results demonstrate the effective execution of our strategy to pursue rate where needed while maintaining strong retention of our high quality portfolio.
We will continue to pursue rate increases where war.
Domestic management liability new business for the quarter decreased $13 million, reflecting the disruption to show associated with co. Good night team and our thoughtful underwriting and this elevated risk buyer.
Domestic surety net premium written premium was down $24 million in the quarter.
Reflecting the impact of Copel 19.
Which slowed public project procurement and related bond demand.
International be ESI posted strong growth in the quarter with record rate in our UK management liability business.
So bonded specialty results remain resilient despite the challenges brought on by Kogut 19.
These results reflect the excellent work of our agents brokers and employees, who have adapted to operating in new ways to continue to provide leading products and services to our customers.
We feel confident about our ability to navigate through this challenging environments and continue to deliver strong returns overtime.
And now I'll turn it over to Michael to discuss personal insurance.
Thanks, Tom and good morning, everyone.
Personal insurance segment income for the second quarter, 2020 was $10 million down from $88 million in the prior year quarter.
Driven by a higher level of catastrophe losses, and lower net investment income.
These impacts were partially offset by an improvement in the underlying underwriting gain.
Our combined ratio for the quarter was 101.3%.
An increase of 1.1 points.
As a 12 and a half point increase in catastrophe losses was largely offset by a 10.6 point improvement and the underlying combined ratio.
The underlying combined ratio benefited from lower non catastrophe weather related losses.
And lower automobile losses net of premium refunds.
The increase of 2.6 points on the underwriting expense ratio was primarily driven by the reduction in net earned premiums, resulting from the auto premium refunds.
Turning to the top line, excluding the impact of premium refunds of $216 billion net written premiums grew 6%.
Agency homeowners and other net written premiums were up an impressive 13%.
And agency automobile net written premiums were up 3% excluding premium refunds.
Agency automobile delivered strong results with a combined ratio of 85.7% for the quarter.
The loss ratio improved over 12 points, while the underwriting expense ratio increased by about four points.
The increase in the underwriting expense ratio was primarily driven by the impact of the premium refunds I described earlier.
The underlying combined ratio of 84.2% improved 9.6 points relative to the prior year quarter continuing to reflect improvements in frequency.
Primarily due to fewer miles driven as a result for the pandemic.
Data from our until a drive auto telematics program indicates miles driven were down significantly from pre cobot 19 levels during the second quarter.
Reaching a weekly low point in a in early April and partially rebounding as the economy has started to reopen.
In response to our improved auto loss experience, we implemented a stay at home auto premium credit program for personal automobile customers.
In the US the program provided a 15% premium refund on April may and June premiums.
In agency homeowners and other the second quarter combined ratio was 113.9%.
9.4 points higher than the prior year quarter due primarily to higher catastrophe is partially offset by a lower underlying combined ratio.
Historically, the second quarter is our highest catastrophe quarter.
This quarter, we experienced significant storm activity, resulting in 34 points of catastrophe losses, an increase of 21 points compared to the prior year quarter, where catastrophes were relatively low.
The underlying combined ratio for the quarter was 81.4% down over 11 points from the prior year quarter, driven primarily by lower non catastrophe weather related losses.
The majority of the improvement is due to elevated non cat weather in the prior year quarter.
Non catastrophe weather related losses. This quarter were also a better than our assumptions.
Turning to quarterly production, our domestic agency results were solid.
Despite the challenging environment, resulting from covert 19 and its related economic impacts.
Our retentions remained strong.
New business were up versus the prior year quarter.
And we remain pleased with our policies in force growth.
Agency automobile retention with 85% and new business increased 7% from the prior year quarter.
Renewal premium change was 1.5% as we continue to moderate pricing given the improved informed performance in our book over the past few years.
Agency homeowners and other delivered another very strong quarter with retention of 87% renewal premium change of 7.7% and a 17% increase in new business as we continue to seek to improve returns while growing the business.
Higher new business levels again benefited from the successful rollout of our quantum 2.0 product now available in over 40 markets.
During the quarter, we continued to deliver a new capabilities and products to our customers and distribution partners.
We introduced quantum home 2.0, and four new states, including California.
In addition, we locked in Teledrift 2.0, which adds distracted driving monitoring to our oil telematics product and to deliver significant improvements to the user experience.
And after reaching our goal of planting 1 million trees for customer enrollment in paperless billing, we extended our partnership with American fourth to plant. Another 500000 trees by Earth day 2021.
To recap personal insurance is off to a strong start in the first half of the year, particularly in light of a challenging environment.
I'm proud of our team's efforts to continue to work together to meet the needs of those we're privileged to serve while investing in the business for the future.
Now I'll turn the call back over to average.
Thanks, Michael before it begins today there is one topic that we expect might be on people sign. So we thought we would kick off to M&A by addressing it. So before we open up the line I'd like to turn the call back over to Dan.
Thanks, Andy.
Theres been some discussion by industry observers of off the timing of the recognition of covered related losses.
So let me reiterate that our reserves reflect our best estimate of ultimate losses incurred as of the balance sheet date.
And applying accounting principles, we would not recorder reserve for a loss that has not yet occurred as of the balance sheet.
Using auto claims as an example.
Beginning of the year, we have an assumption as volume of claims we will see over the course of the year and what the average cost of those claims will be.
But when we report our second quarter results, including our balance sheet loss reserves as of June Thirtyth.
Both reserves do not include estimated amounts for auto accidents that will occur at Thanksgiving or on new year's Eve.
Those would be fourth quarter events and accordingly, they will be recognized in our fourth quarter results.
The same principle applies when we consider losses related to cold in 19.
While only some losses have been reported to us so far the losses, we booked in both the first and second quarter reflect our estimate of the ultimate amounts that will pay for all losses and related costs that have been incurred as of June thirtyth.
Including those for which we have not yet received claim.
In fact, as I said earlier, the majority of the cobot related insurance losses, we have booked through June thirtyth are still sitting in our Ivy and our reserves.
That said the pandemic is clearly not over and tens of thousands of new infections are being confirmed and the United States each day.
It is foreseeable that healthcare worker for example, who did this point has not contracted coal that 19.
We will become mail from Coleman 19, as a result of their job duties in December but again that loss activity will be included in our fourth quarter results.
We similarly with not advanced the recognition of any continued favorability from lower frequency and non coated workers comp clients.
Finally, I'll remind you that on year to date basis setting aside net investment income the impact on our results from coven 19, and its related effects as a net charge of about $50 million pretax and with that operator, we're ready to take questions.
Thank you at this time, if you like to ask the question Press Star one on your telephone to withdraw your question pressed upon Keith Please wait while become father questions.
Your first question comes on line, it's Michael So lets but Morgan Stanley. Please go ahead.
Thank you everybody.
Yes. Thanks, Thanks for the clarification, Dan on my last comment that's helpful.
I guess I'm trying to get our arms around business business insurance and margins and pricing.
Trying to kind of pull out the effects of coal would you said cobot was pretty modest in the quarter pricing, which will be very strong.
Yes, yes core margins improved 40, bips or 20, Thats, where well side, so I guess.
Trying to understand it does that mean.
And now you gave lots of your commentary on pricing does that mean that the current level pricing so isn't enough to expand margins today or.
How do we think about that versus global conservatism that might be baked into the through the current numbers.
Yes, Michael Good morning, its Alan I'll start equity response, and what's on your mind at the current levels.
Written rate is is in excess of loss trend. So looking nearly at those factors, we are underwritten bases expanding margins.
Is that is that what you're getting up.
It is yes, it is I guess.
Yes, and business interruption, you had 20 basis points improvement so.
Not as much as maybe one would expect given the level pricing and so.
That's what I'm trying to get my arms around.
Yes, so as always there are a number of factors that are driving the underlying combined ratio in the quarter and Thats true true for any business. So you've got you've got weather. So year over year that was that was better and in this quarter serve within the normal vary within the normal level of variability we would expect for that you've got the earn.
The impact of rate that as I as I said about the written and earned basis rate is is it had a loss trend.
We've had improved performances in some business. He got some some impact of cobot it was modest but not zero.
You've got that year over year in that sort of ongoing carry on impacted.
Social inflation that Alco old news with.
What weve recognized in prior periods and that continues to roll through.
So those are.
Yes.
Given the relative stability, we're not going to quantify the pieces, but essentially those entities.
Okay. Thank you that's helpful. Thanks, I guess, but didnt Didnt see mentioned and I guess this is good news since you mentioned those anything on the commercial auto side for for a few I'd. It. So maybe could you speak to kind of that piece and does that mean that theres been possibly some leveling off paid activity that's been part of the concern there.
Michael This is Dan.
As we had last quarter. So we had some movements in few I'd. Some some puts and takes.
And continued good news in comp some continued pressure on the other liability lines. There were small adjustments in commercial auto and the general liability lines in CMP, but as I said in my remarks.
Relatively modest compared to compared to those reserve based.
Okay. Thank you then.
Your next question comes from the line of Ryan Cindy.
Research. Please go ahead.
Hey, Thanks, good morning.
[music].
I just wanted to get a better feel for just forget about the net benefit from Nicole Good news from the direct to losses alone.
The direct impact what was going on.
The hit that that had in business interruption on a combined ratio.
This this interaction specifically our business insurance.
Business insurance without without considering the offsetting benefits.
What was just the.
The direct loss impact or direct could impact on that number.
Yes, Brian as Stan I don't think we're going to give the pluses and minuses, but within the.
Within the we told you that there was $114 million of directly related charges and while that included some.
Some charges for the management liability coverages and bond and specialty the majority of what we took came through business insurance.
Okay, and then in terms of thinking about the benefits that were seeing I think in the Preannouncement. You said it was mostly short tail lines.
So should we take that to me I mean first of all outside of the short tail lines are you seeing act actual to expected look a little bit better in some areas in terms of frequency and is that not something and if so is that something that you're not recognizing you're you're being conservative waiting to see if that.
Continues to be the case.
Yeah, Ryan Dan again, so we are for sure seeing some some favorable indications relative to what you would otherwise expect.
And in this current environment.
And when we look at that there was.
Too much favorability to simply say zero is the right reaction.
But as Alan said in his comments as I tried to reiterate in mind I think we've been very cautious in terms of the degree to which we recognize any good news and anything other than the short tail lines, but there's some because it's very apparent in the data.
And then just one more real quick.
I was I guess, a little bit surprise exposure growth held in I think especially in select lines retention is only declined modestly.
How should we interpret that as retention is capturing cancellations or is that modest debt.
You know, mostly a function of you guys, taking worried I'm just trying to figure out how to interpret those numbers that seem relatively modest given what's happening in the macro landscape.
Yes, Ryan let me take this is Greg let me take hold those in the order that you took a number one in terms of exposure change if you're looking that relative to middle market, that's really a product mix dynamic in the select business. We have the thrust of the premium is two products CMP workers comp and the CMP product the rating on that is driven more off.
Property than the GL and so you don't we're continuing to see pricing and inflationary pressure on the property and so there's some inflationary impact that that impacts on the CMP products and so you don't see as much of a drag on exposure on select that you do on middle market, where the GL product is more on a standalone rated basis.
Then the retention overall personal lines that we certainly put our estimate of what we see in terms of.
Ms Insolvencies bankruptcies and Thats all inside the BT, 2% number.
Thank you.
Okay.
Your next question comes the line of Mayor shelf, but KBW. Please go ahead.
Great. Thanks, Greg if I heard you correctly in your prepared comments you talked about 50 basis point increase in loss trend and as we need to flesh that out a little.
Sure there yet we look at loss trend every quarter and across the full portfolio Thats, obviously, a headline number what we did this quarter as we looked at the impact of the new economy that we see in front of luck. We also look at some of the social inflation or liability dynamics that Dan just talked about.
When we rolled out all up in aggregate, we believe we've got to 50 basis points increase in our loss trend in front of US I think I'd add to that Myers that is reflected in the underlying combined ratio we reported for the quarter as as is.
A piece of that that would be catch up from the first quarter.
Okay, perfect that last point of view that before.
Second question, I guess with workers compensation being the most vulnerable to expose you to pressure.
Did that impact rate need.
On the expense ratio. Thanks.
So the question again.
I'm trying to understand I know the in general workers compensation pricing have been coming down because industry experience has been good.
But we seem to be seeing a fairly significant.
Exposure unit headwind and I'm trying to get my arms around what that implies for indicated pricing.
Yes, my or there's a heavy regulatory component to pricing as you know and it tends to be a little bit backward looking and it and it sort of factors in the overall profitability. The line, which is as you know is been has been very favorable over the years and that will continue to be the case so.
Clearly exposure will be will be one impact on profitability today, which will impact pricing tomorrow.
But it's really hard to isolate anyone in any one factor and its impact on profitability because.
Everything goes in guide you got you start with your expiring rate and then you've got whatever the rate changes you've got exposure change you got lost trend things like that so.
It's definitely a factor it's hard to isolate extended the effective.
Okay understood. Thank you very much.
Your next question comes from the line of Elite Greenspan Wells Fargo. Please go ahead.
Good morning, ladies.
Hi, Good morning can you hear me no we hear you now.
Hi, sorry, thank you.
In terms of business insurance I was hoping for the Clovis 19 losses on and I recognize the response earlier question, maybe you aren't giving to for loss impact in business insurance, specifically by line, but could you give us a sense of where you saw the majority of your Colgate losses, that's ignoring the favorable in.
Pat.
The second quarter, specifically within business in time.
Yes at least so so thats what I had tried to do so we took a $114 million across the enterprise and direct indirect cobot losses, none of that was in personal insurance.
There was some component of management liability within bond and specialty insurance, which Tom described and going through their combined ratio, but the majority of those dollars came through business insurance.
At least so you asking for a breakdown by by product line.
Yeah, I was hoping by product line, even if not in terms of dollars you could just give us a sense of business insurance product line.
The majority of your Cobots.
Yes, the largest line for sure as workers comp.
Some some property losses.
Both domestically and internationally.
And then dribs and Drabs I would say in other lines, but those are those are the two drivers with comp by far being the largest.
Got to lease I'd point, you to my prepared comments or at what I did share that there was a modest net impact when we look at the offsetting favorable frequency on some of those lines also.
Okay. Thanks, and then my second question is maybe a follow up on the prior question on workers comp on we've heard a few folks to the industry. It seems like starting to point toward the bottom of comp in terms of just the pricing dynamic there, but if I go back to your comments throughout the call.
Doesn't sound like you guys are thinking that the weight decline that we've seen in that business or close to coming to an end on so if you could just help us think about workers comp in terms of the pricing dynamics, there and whether we might hit an inflection and I'm not talking 2020, perhaps.
Into 2021 as well.
Yes, well at least it's a great question. When you when you look at the information coming out of some of the rating bureaus and when we look at our own we would say that we are sort of at or near a bottom in workers' comp pricing.
Okay. That's helpful. One last numbers question could you give US you said that they were small numbers, but is there could you give us a sense of the dollars in terms of the adverse development within general liability and commercial multi peril in the quarter.
We're not going to do that at least they're all pretty modest.
Okay. Thank you I appreciate the color. Thank you.
Your next question comes on as David Mcmahon with Evercore. Please go ahead.
Hi, Thanks, good morning.
Dan I guess I know I appreciate the comments.
That you made it just before the culinary, but I guess I'm just wondering if you could give us some sense, though.
How you're thinking about.
Colgate related adverse impacts throughout the rest of the year.
And you had the exposure and you think theres a possibility that there could be a loss on it just wondering to get some some thoughts there figured I'd take a shot at that.
David Good morning, Italianate, let me start with that and if I Miss anything I would like to end that ticking up we're not we're not going to forecast future losses, our obligation under GAAP. This report that the.
Incurred and and and reported losses as of the balance sheet date, Thats, what weve done.
It's hard to forecast future Theres. Some uncertainty we don't know that trajectory of the disease. They don't know when we were going to vaccine we don't know.
With the outlet for the economy is in and frankly, it's probably the uncertainties for the economy the biggest impact on.
But of the pandemic on on us but.
But I I I do think it's relevant to slightly pointed it out a few times that are our net losses in the first half the year were net charges were about 50 million bucks, putting aside the investment side.
And Weve put up that net number with the with a high degree of caution.
So I can't I can't give you a number we tried in mice are line by line review to take some of the factors that we think about but.
I think it's it's not it's not a relevant to that assessment to think about our experience in the first half of the year.
Okay, great that that's helpful. Appreciate that.
Alan.
And then just just one more so excluding workers comp the renewal rate change. So it was pretty strong you said double double digits wondering if we get a finer point put on that and then just sort of how that compares versus the last few quarters.
And also sort of thinking about it and I think Dan you had mentioned.
So you're looking at loss trend of 5% now updated thinking and Thats I guess, what could be comparing to the 7.4% renewal rate change that you got in the quarter.
Yes, I think Thats stand I think thats, the right way to think about rate versus trending.
It's about Thats ballpark I think we'd said previously that trend was around 4.5% and we're taking it up about about a half a point in.
And the current quarter, but you're going to look at that and in relation to pricing momentum.
As well and I think.
Thank you correct me, if I'm wrong, but the the pricing momentum you see in this quarter is a reflection of.
As a reflection of the strength in the market and the continued need for rate due to the only thing I'd add there it to your point outside of comp all of our products were positive.
And so we feel great about that execution and mostly the changes lineup with where the rate need is also.
Okay, great and if I, if I could just sneak one more in on the adverse development in general liability.
Hoping to get a little bit more color in terms of what you saw in the quarter odd that I guess.
You to to make that changed because I thought that.
Most of the courts were closed during the quarter right I would think the paids would be nothing really accelerated during the quarter or was it more just a view of.
Oh, yes or was it more just ongoing review that resulted in the change there.
Yes, so it's more the ladder and remember as we're doing reserve reviews, especially in long tail lines like those you're looking more backwards at at your data so.
The actual loss environment.
May and June were aware of it but it's not really you don't have enough time to gather all that data and fully factored into the reserve view that you're making at that time. So little more of that is still backward looking in terms of waste things have developed say through the first quarter.
And again this band.
Again to stand up in his remarks those are those were relatively small movements.
Yes, great understood. Thank you.
Your next question comes the line of Paul You saw what Piper Sandler. Please go ahead.
Oh, you've hit the big ones for me, but one just quick one.
From an investment perspective.
Do you have expectations that we would see increase defaults as well come through.
I guess, we'll be able to realize.
And is that sort of booked into the investment.
Expectations.
Gave us this quarter as well.
The action before that we might see from the recession.
Yes, Paul It's Dan we gave a fair amount of detailed at a fair amount of commentary on the constructed investment portfolio and our.
Comfort level with the way, we thoughtfully investing and we've given you an update of.
Of that investment detail again in the appendix or the webcast presentation.
This quarter.
I wouldn't say more than we said I think last quarter in terms of feeling really good about the way we've managed risk on.
On the asset side of the balance sheet, clearly were aware of and looking and looking at and have a regular process to assess credit impairment in default rates and all of that stuff is baked into our numbers, but it's really it's really not a big big impact on us given the thoughtful investment approach in the first place.
He has his ratings migration had much of an impact yet.
At all.
On the capital.
Relations So you guys.
No one has now.
Great. Thank you.
Thanks, Paul.
Your next question comes on line of Brian Meredith, but yes. Please go ahead.
Yes. Thanks, just two quick ones here first when it was the impact of premium adjustments on the B. I premium this quarter compensation pig.
I'm not sure I understand the question, Brian It's me like for workers like like reevaluating.
Like.
Like what like Pointman stuff is on workers comp you usually do in the fourth quarter, but where there is there any kind of.
Early ones, where you adjusted premium kind of to reflect with.
What's going to look like.
The year.
So I wouldn't say, we normally do it in the fourth quarter I think what you're referring to back as we do it at the when the policy period has ended July trickle up there has been some and we've been open to it there has been somewhat more requests by customers to do some of that mid term, but thats baked all that's baked into our production statistics and the written premium numbers.
We reported for the quarter Brian.
Yes.
Take out that one fees.
Okay. Thanks, and then the second just quick question just to understand the 50 basis points of increasing trend in the beach.
Is that inclusive of what you're seeing with respect to cope with 19, and maybe the benefits or adverse stuff youre seeing uncovered 19 or is that more related to what's going on with just general kind of toward inflation in some of the increase you saw in your GL reserves in your CMP reserves.
I think were we consider everything brining in included in there and there are some puts and takes them net of the puts and takes was half a point increase to the trend.
Great and just on that following on that Alan you made some comments about maybe some favorable stuff happening the court system as far as.
Some early quick settlements, but in general what you're kind of take on what's going on with tort right now.
Could we potentially see an increase in toward inflation.
As a result, what's going on with koby 19th.
Yes, I mean, I think we certainly could and that's one of the reasons why were such big proponents of liability report I think it's important in terms of making sure we're protecting.
Nations recovery from from the pandemic.
I think you hear a lot of rhetoric out there on that topic.
But you know every everything everything we see in everything we are anticipating is in that loss trend up.
Great. Thank you.
Thank you.
And we have time for one more question coming from the line of Jimmy Bhullar with JP Morgan. Please go ahead.
Hi, Good morning, So first a question on just the commercial auto business. If you could talk about what you're seeing in terms of.
Frequency is that picking up as traffic has been increasing recently and then related lead just your views on the rate adequacy in that line.
Given that you've been raising prices for for a while or do you think beats me to go up for that.
Hi. This is good morning. This is Greg yes, we certainly that's seen some favorable frequency activity as the smelter at home has taken place certainly not to the levels of person one churns.
And just as a reminder, in commercial auto it's a little unique impersonal, where we do have layup credits or premium credits when there is limited use and so.
There's a slight offset as we see that frequency we have mechanisms to give bet that give that back now as the economy is starting to reopen we're seeing that frequency moderate.
Okay and on the personal auto side are you assuming or expecting additional refunds.
In the third quarter results.
So we don't we don't have further refunds planned in personal auto I.
I think I think like many we're looking forward at what rate adequacy overtime and looking at lunch traditional mechanism Blake rate filings.
Make sure that rates in line with loss trend the loss costs.
And personal auto the refunds really we're we're a mechanism to respond to acute an acute issue in the early days the pandemic a sort of the way we're thinking about it.
And then just lastly, you mentioned majority of the covered losses related to workers comp you Didnt really mentioned anything about business interruption and I'm, assuming those losses were pretty modest but is that more because you haven't seen a lot of claim submission or is it just PRB you have seen submission, but your view is that those plans are underway.
Sure.
Given the policy language.
Yes, we've certainly seen some submissions and theres some claim activity around it and even some litigation around it.
As we've noted we've got.
Provisions in our policies that we think.
Make that coverage inapplicable and so we don't expect many of those claims.
Actually to payout.
Instead 1.1 related comment to that even where we don't expect.
That ultimately to pay the intensity on the loss, we have acknowledging our reserves. The fact that will spend some money defending against claims that come in for for business for business interruption, Okay and on encore bed is that the line where you see the most uncertainty in terms of planned given what happens on the of in terms of litigation active.
I'd or are there other lines, where theres not a lot of clarity based on looked up.
Okay.
I don't think there so I don't think theres a lot of uncertainty around business interruption I mean, certainly there's some because there are some litigation and there's always uncertainty when you have litigation, but we've got the requirement for direct physical damage. We've got to court set of upheld that so far.
And and we've got a specific virus exclusion in our standard policy forms that we we don't actually see a lot of uncertainty there and we don't expect that to be a material loss contributor for us.
Okay.
Thank you. Thank you.
I will now subject I will now turn the call back over to add for closing remarks.
Thank you all for joining us this morning appreciated and as always if there's any follow up please get in touch with Investor Relations and we're happy to answer your questions.
Well and.
This concludes today's conference call you may now disconnect.
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