Q2 2020 Hartford Financial Services Group Inc Earnings Call

[music].

Good day, and welcome to second quarter, Twentytwenty Hartford financial results webcast, all participants will be in listen only mode should you need assistance leasing only conference specialist.

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After today's presentation, there will be an opportunity to ask questions last quick question in the press Star then one on your telephone keypad withdraw your question. Please press Star then too.

Please note. This event is being recorded I would now like turn the conference over to Susan's feedback senior Vice President Investor Relations. The Hartford. Please go ahead.

Thank you Andrew Good morning, and thank you for joining us today for our call and webcast on second quarter Twentytwenty earnings. We reported results yesterday afternoon, and posted all earnings related materials on our website, but the call today, our speakers there, Chris Swift Chairman and CEO, the Hartford, Doug Elliott President.

And baskets that Chief financial officer, following their prepared remarks, we will have acumen a period.

Just a few comments, but for Chris begins today's call includes forward looking statements as defined under the private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different we do not assume any obligation to update information ortho.

We're looking statements provided on this call investors should also consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings.

Our commentary today include non-GAAP financial measures excellent well nations and reconciliations of these measures to the comparable GAAP measure are included in our FCC filings as well as in the news release and financial supplement.

Finally, please note that no portion of this conference call, maybe reproduced or rebroadcast in any form without the Hartford prior written consent.

Replays of this webcast and an official transcript will be available on the Hartford's website for one year.

I'll now turn the call over to Chris.

Good morning, Thank you for joining us today.

Trust you on your family's remain safe and healthy during this pandemic or hubs go out to those grieving ill or confronting economic hardships.

Let me begin my remarks with some overarching comments.

When we last spoke at the end of April we were just weeks into the wave will stay at home orders that would eventually affect most of the country and much of the globe.

In the market was only beginning to develop a sense of how sweeping the consequences of cobot 19 would be.

At that time, there was considerable uncertainty as to the scope duration and economic impact of the global health crisis.

No as we entered the second half for 2020 I am encouraged by the progress the country has made in a number of areas, although tremendous challenges and a host of unknown persist.

I want to thank our employees across the United States and around the world as well as are many partners for their extraordinary dedication during this unprecedented times.

As we have navigated this crisis together.

Throughout this crisis. The Hartford has remained focused on serving customers working closely with distribution partners and taking appropriate steps to safe guard, the health and safety of our talented team.

At the same time, we have continued to execute on our original 2020 strategies, including.

Realizing the full potential of our product capabilities in underwriting expertise.

How many easier companies to do business with.

And attracting and retaining the talent we need for long term success.

In support of the strategic goals program focused on elevating customer needs simplifying business routines.

Further leveraging remote work in achieving expense savings of approximately $500 million in 2022 as measured off our 2019 expense base.

Well the initial work on this program predicts the pandemic. It is all the more applicable unresponsive to the current environment.

I am excited about the impact of this initiative, which we referred to as Hartford next as it represents the next step in our focus to increased competitiveness and drive operational efficiencies, while continuing to provide outstanding service to our agents and customers.

That's will provide additional financial details in her commentary.

Now, let me turn to our results for the quarter.

Despite the many challenges we faced we delivered strong underlying performance with core earnings of $438 million or dollar 22.

Our diluted share.

3.5% growth in book value per share, excluding AOCI guy from yearend 2019.

<unk> trailing 12 month core earnings are a week of 12.7%.

These results demonstrate the fundamental strength of our businesses.

In property and casualty or broader product offerings and expanded distribution are providing more opportunities to leverage positive pricing momentum in areas of the market that are hardening.

Group benefits results reflect continued favorable incidence trends in solid sales.

The quarter was impacted by number of unusual items, including incurred losses related to covert 19 of 251 million.

Which is based on an exhaustive review of all applicable policies.

213 million of the incurred loss is attributed to our property and casualty business.

And 38 million to group benefits.

And the PNC side, Cobot, 19 incurred losses, primarily relate to property workers' compensation and.

And financial lines.

Of the 213 million attributed to PNC.

101 million relate to reserves for a small number of property policies.

In particular.

Within our middle and large commercial and global specialty businesses.

There are a handful of unique policies, which were intended to provide a broader range of coverage or specific business needs such as crisis management or performance disruption.

In addition, we have a small number of highly manuscript policies that do not contain a physical damage requirement.

We believe the reserves established appropriately cover claims arising out of our property portfolio.

With the small group of policies into context.

Well nearly all of our property policies include coverage for business interruption.

99% of them contain a clear requirement that a direct physical loss or damage to property must occurred to trigger coverage.

In addition to this requirement 99% of our property policies with B. I coverage also contained standard exclusions.

We believe preclude coverage for covert 19 related claims.

And finally.

We also have a specific virus exclusion on the vast majority of these policies.

As I've said, many times before responding to customer claims and doing well is at the heart of who we are [laughter]. We are in the business a pain covered claims and that's exactly what we're doing.

Unfortunately.

When it comes to business interruption claims, resulting from this pandemic.

We believe it is self evident that covert 19 does not cause direct physical loss or damage to property and that the various stay at home orders were issued to reduce community spread.

Not to prevent property damage.

As a result, Coburn 19 related claims are outside the scope of our policy terms and conditions in simply are not covered.

We are highly confident in our contract language in coverage positions and have put up 40 million in reserves to cover the estimated legal cost of defending our business interruption policy language, excluding the unusual items in the quarter commercial lines underlying results continued to benefit from underwriting at.

Actions to improve profitability and drive efficiencies, along with accelerating premium momentum and what can be characterized as a hardest market in decades.

At the beginning of 2020 I shared my outlook for the pricing cycle anticipating 18 to 24 month period of significant rate increases.

Now I have even more conviction that the hardening market in many commercial lines is sustainable with ongoing price momentum despite the challenging economic conditions of a slowing economy.

Our core PNC underwriting platform expanded through the navigators acquisition is benefiting from higher prices in middle market in global specialty.

With the exception of workers comp.

Global specialty results reflect improving risk adjusted returns in the business acquired driven by underwriting actions taken as we integrated the business and robust renewal rate increases.

With a significant pricing momentum in these lines.

We are on track to meet or exceed our targeted earnings margin goals.

While the largest rate increases are in lines within our global specialty segment.

Renewal pricing in our standard commercial lines also continues to be strong.

Doug will provide additional detail in his commentary.

Turning to group benefits.

I am pleased with the operational execution and financial performance of the business, reflecting our strong underwriting and risk management discipline.

Group benefits posted solid results for the quarter with core earnings of 102 million in a 6.9% margin.

Earnings were down versus prior year due to.

38 million before tax of Cobot 19 related losses as previously mentioned.

A 14 million.

In the allowance for uncollectable premium.

And lower net investment income.

Partially offset by excellent disability.

Results.

The disability loss ratio was 62.6 improved 10.3 points versus prior year, driven by higher recoveries and continued favorable incident trends.

We also updated our year to date Cobot 19 short term disability assumptions, resulting in a favorable adjustment of 5 million.

The tax.

The life loss ratio was 85.9, increasing 8.1 points from the second quarter of 2019, driven by covert related losses of 43 million.

On the topline.

Persistency remained solid at approximately 90%.

In new fully insured sales were 149 million up from prior year driven by National accounts.

With the recent spikes and cobot 19 across the country states are continuing to evaluate their respective policies pertaining to social gatherings and stay at home orders.

These impacts could contingent.

Continue to affect revenue.

And results in the quarters ahead.

As a market leader well positioned operationally to respond to the challenges of the pandemic and economic recession, while continuing to meet the.

Needs of our customers.

Let me now close with a few comments about important to the economy.

And our industry.

And we reignite the nations economy.

Means Americans will need to safely transition back to work.

And back to the office.

We must ensure that obstacles to this critical transition are appropriately addressed.

Be specific I believe federal legislation, creating a timely targeted and temporary safe harbor against frivolous lawsuits related to cope with 19 is critical to providing businesses of all sizes the confidence they need to reopen.

[noise] occurred around workers comp.

Sensation presumptions.

While we value and appreciate this workers there is important to note.

Okay that the current workers compensation circuit success story for over 100 years.

We except the decision by some states to impose a limited presumption for those who come into close contact with those suffering from the coated 19 virus in the course of providing them medical aid or and treatment.

But we are troubled by efforts to alter well established principles of the current system.

The significant costs.

Will ultimately be borne by the admits penalties and businesses.

At a time when they are all struggling to recover.

In addition.

Any measures that impede the ability of insurers to appropriately account for an increase in the cost of claims in future rates.

I would represent an unfair tax on the industry.

Third and finally.

The devastation caused by this pandemic is unlike anything we've experienced before.

Since the outbreak of covered 19, we have extraordinary action.

To contain the virus protect Locke.

Me.

These events in the magnitude of the interview.

I have made it clear that pandemics and other widespread viral outbreaks are fundamentally uninsurable.

That said, we understand the insurance industry has unique knowledge expertise and capabilities.

That can and should be brought to bear to help develop solutions to address future.

Pandemics.

We believe a federal response is critical both from a coordination in funding perspective.

In short a robust public sector based solution is necessary and we are working closely with our industry Trade Association and the agent and broker community to support the recently released business continuity protection program.

Well be CPP.

This program would provide immediate relief the businesses in the form of revenue replacement assistance for payroll.

And employee benefits in other operating expenses in the event of future pandemic.

Any federal solution designed to protect against future Pandemics should provide timely effective in affordable relief to businesses across the country.

I believe the BCP provide such a solution.

To recap the Hartford second quarter results demonstrate solid execution as we adopted adapted to the next normal.

Despite the challenges of covered 19, and the resulting uncertainty of the future. We remain focused on investing in the business for growth inefficiencies, while producing top quartile returns on equity for shareholders.

I remember I remain confident our company will manage through the crisis.

And emerge well position to continue to achieve our strategic goals.

Now I'll turn the call over to Doug.

Thank you, Chris and good morning, everyone.

I can't agree more that the challenges are unprecedented and certainly contributed to many other financial impacts in the quarter.

Overall property and casualty core earnings were 309 million and written premium was flat to prior year at 2.9 billion.

The underlying combined ratio of 97.6 was quite good considering cobot charges of 243 million.

Overcharges consist of underwriting losses of $213 million or seven and a half points and a $30 million increase or 1.1 points in the allowance for credit losses on premiums receivable.

I also continue to be pleased with the strong pricing in our non workers compensation commercialized.

Before I get into the segment details let me summarize the actions we took this quarter with respect to covert 19 cats and prior year Reserve development.

Recognizing the it the economic impact to the pandemic on our customers during the quarter. We responded with several actions three of which I'll highlight.

First we endorse nearly 250000 policies to adjust for changes in risks returning over 35 million in premium to our commercial customers since the middle of March reflecting lower payroll and other exposures.

In a related action, we also reduced expected audit premium leading to a 100 million reduction in our audit premium receivable.

When netted with losses and commissions this led to a third results.

Second we delivered personal auto refunds of 81 million or 15% of the second quarter premium, reflecting favorable frequency trends in the quarter.

And third we extended billing grace periods through May 31 on all policies, while waving late fees that would otherwise apply.

The extension drove second quarter personal lines and small commercial policy count retention four to five points higher than the historical run rate and increased property and casualty allowance for credit losses on premiums receivable by 30 million or 1.1 points.

Operating losses, the majority of which relate to IP in our reserves were $213 million for the quarter or 9.9 points.

Property losses were 100.

Turned 41 million, including a fourth.

Certain business interruption did not.

Workers' compensation losses were 70.

For those states that enacted presumptive legislation.

Offsetting the gross loss was coveted related favorable frequency in the quarter of 40 million driving a net impact of 35 million.

Financial lines and other losses were 37 million primary early for Dino you know and surety claims.

Turning to catastrophes property and casualty recorded losses of 248 million, including 110 million for civil unrest.

The remaining losses for wind and hail storms were less severe than a typical second quarter.

And for the quarter was 268 million and contained a number of reserve actions, including.

400 million a favorable cuts.

Tas Trophy reserve development, driven estimates for the 2017 and 2018, California wildfire.

89 million segregation benefit from PGN eight.

Continued favorable development in personal lines auto and workers compensation.

Bond Reserve development was also favorable in the quarter, while we strengthened commercial auto.

Reserve strengthening of 102 million for sexual miles station and abuse claims and finally net unfavorable ex Cat reserve development of 49 million on navigate.

And our reserves, primarily in the Lloyd Syndicate, DNL and domestic general liability lines.

54 million of the total development was from accident years, 2018, and prior and therefore economically covered by the adverse development cover.

Turning now to our business line results the commercial lines underlying combined ratio was 102.9, increasing 9.7 points over prior year, including 11.1 points for coated charges.

The remaining variance was primarily due to a lower expense ratio from reduced travel and incentive compensation costs and some modest early wins from our transformation program.

And improved inland marine losses from a year ago.

As a pivot to pricing the industry continues to achieve much needed pricing gains as another positive quarter contributed to a strong six months.

This is particularly evident in auto specialty and excess casualty lines.

For the quarter renewal written pricing and standard commercial lines was 3.6% down 70 basis points from quarter one.

However, excluding workers compensation, which was negative 1.3% pricing was up 7.8% quarter.

These results continued to demonstrate our ability to achieve rate increases across each of our non workers compensation commercial lines.

I would remind you that the 7.8% is standard lines only adding core global specialty lines would move this pricing measure higher.

In middle market renewal written pricing in the us excluding workers compensation increased 9.3% down slightly from the first quarter, but still a very strong result, and 520 basis points better than the second quarter 2019.

Property and general liability pricing, our each in the high single digits and auto is now in the low teens.

I'm also pleased with the continued pricing momentum and reshaping and global specialty.

Strong pricing gains continue in both our us wholesale book as well as the international portfolio, which is primarily written and Lloyd.

Yes.

The U.S. wholesale bucket, chief 24 points of rate in the second quarter, nearly five points better than quarter one.

Auto and property lines are strong in the high teens, while excess casualty eclipse, 30% in the second quarter up over nine points from quarter one.

You asked financial lines also had a particularly strong quarter, achieving pricing a 17% more than doubling the first quarter results.

Pricing gains in the international trend with very strong results in Peru.

Cargo.

Commercial businesses, beginning with small commercial which posted an underlying combined ratio of 92.9.

In quarter of 2019, including 5.8 points from covered charges.

Small commercial written premium was down 9% versus prior year, driven by several factors new business declined 24%, excluding the 2019 foremost renewal rights transaction.

Topline was also impacted by a reduction in audit premiums and negative exposure endorsements, partially offset by strong retention.

With that said I am encouraged with our spectrum new business flow in June and July.

July quotes are up 6% and new business is expected to exceed 2019 X foremost.

Middle and large commercial reported an underlying combined ratio of 112.9 in the second quarter, an increase of 12 points over the prior year period, including 16 points from cobot charges.

A favorable expense ratio and lower inland marine losses contributed to the X cobot improvement.

Sure largely driven by lower new business and expected declines in retention due to our underwriting and strong pricing actions.

Our re underwriting as intended to improve profitability levels in portions of our book to that end I am confident the underlying businesses improving as expected.

The decline in new business within middle and large commercial however is larger than I expected, causing us to look hard at those levels across lines classes and geographies.

I sense, we're not alone and experiencing compressed new business levels during the coated prices.

I also see increasingly competitive workers' compensation marketplace.

However, there is sequential progress with new business from an April low through our current view of July.

Moving to global specialty the underlying combined ratio was 105.5, increasing 14.8 points from the second quarter 2019, including 13.4 points from coded charges.

We continue to be pleased with the navigators acquisition.

The acquired diversification of product offerings has put us in a much better position to take full advantage of this hard market.

Additionally, considerable portfolio reshaping continues including shifting industry and geographic mix, raising attachment points and reducing policy limits.

Combining these actions what our sustained pricing work I'm pleased with the improving risk adjusted returns.

The global specialty.

The early returns are positive year to date, the underlying combined ratio for global specialty was 101, including 6.8 points for coated charges.

Considering the impact of the covered charges and that the underlying combined ratio for global specialty was 98.5 in the second half of 2019, we've seen significant improvement almost entirely coming from the navigators book.

Shifting over to personal lines, let me first say how pleased we were to announce a 10 year renewal where they RP in may.

We also had strong underwriting results in the quarter.

We do however, appreciate that the shelter in place guidelines, resulting from the cobot environment favorably impacted the strong performance and led to the aforementioned auto premium refunds of $81 million.

The underlying combined ratio of 80.7 improved 10.3 points from a year ago.

In personal lines auto the underlying combined ratio of 86.3 was 10.4 points better than 2019.

Frequency was down significantly during the first two months of the quarter and increasingly less favorable during June as the number of drivers and the corresponding miles driven increased with the lifting a shelter in place orders.

Claim severity was consistent with what we expected in the quarter.

In homeowners the underlying combined ratio of 70.1 was 9.1 points better than prior year, driven predominantly by a favorable non cat weather in the quarter.

We've had a strong six months of non cat loss performance in our homeowners book.

Let me now step back from our business results and reflect on what we might expect for the second half of the year.

As we've seen predicting the course of this pandemic and its economic impact can be incredibly difficult.

The status of state reopening plans are constantly changing as new virus hot spots of pure across the country.

Within small commercial and middle and large commercial third quarter total written premium could be down moderately versus prior year.

I expect renewal pricing for specialty and non workers compensation lines will remain strong and mitigate lower new business levels.

While there have been encouraging signs in June and July with respect to new business endorsements and premium cash collections. The actual results for the quarter will also depend upon the success of gradual reopening and macro economic conditions.

In closing the second quarter, certainly been extraordinary yet as I look through the impacts of covered 19 on our business. The foundation is solid and diversified.

The work we've done over the past five years with our insurance and risk management platform will drive new business growth and strong underwriting results and our talent is poised to be responsive yet thoughtful to capitalize on risk opportunities in a dynamic market.

Let me now turn the call over to bet.

Thank you, Doug before fund and quite Brett I would like to take a moment and just that's fair there our process for establishing loss reserves.

Our objective is always to establish appropriate loss reserves to cover the expected ultimate cost of claims incurred today.

Rely upon multiple actuarial techniques to formulate our views considering estimates for both reported claims and those incurred but not quite yet reported.

Typically these techniques project reserve estimates by looking at historical patterns and trends and establishing a view of how claims will develop over time.

Obviously, the Colgate 19 pandemic is an unprecedented event given the lack of historical claim data on which to based loss reserve estimates, there's a higher degree of uncertainty in developing reserves associated with Colgate 19th.

We took this into account in determining our loss reserve estimates for the quarter.

For example, in our reserve represent over 80% of our estimate which is higher than usual as we expect more extended claim reporting pattern given the economic disruption created by the pandemic.

Additionally, do you know you know and employment practices liability policies are written on a claims made basis and our loss reserve estimate is based on claims reported or notice to June thirtyth.

In the quarter, we also increased our allowance for credit losses on premiums receivable by 44 million before tax, including 30 million in PMC and 14 million in group benefits, reflecting a higher amount of aged receivables and the effects of the economic strain unexpected collection of premiums.

Now turning to investments.

Net investment income was 339 million for the quarter down 149 million from the second quarter of 2019, primarily driven by a loss on limited partnerships.

As a reminder results for Lps and.

Well there alternative investment I reported on a quarter led to the second quarter loss reflects the decline in underlying funded valuations in the first quarter.

Well equity markets have improved we are expecting LP results to be better it's still at a loss in the third quarter.

This reflects the deterioration in business fundamentals during the second quarter, a more muted recovery in valuation multiples given continued economic uncertainty and relatively low public equity market exposure and the underlying funds.

The current investment yield before tax excellent limited partnership with 3.4% down from 3.8% a year earlier and up from 3.3% in the first quarter.

We expect it before tax investment yield exiting LP over the remainder of 2020, giddy about 20 basis points, lower and the 3.4% or the second quarter.

The portfolio yield has been impacted by lower reinvestment rates and lower short term rates.

Our yields have also been impacted by our efforts to increase liquidity.

Last quarter I mentioned that we were carrying more liquid assets in our normal benchmarks and that continued in the second quarter.

We ended the quarter with almost 7% of our investments in liquid assets.

Given in previous years for operating cash flow, we would expect to reduce that to roughly 5.5% in the third quarter.

The net unrealized gain position of 2 billion after tax on fixed maturities increased by 371 million from year end driven by a decline in interest rates, partially offset by wider credit spreads.

Unrealized and realized gains on equity securities, which are recorded within net realized capital gains and the income statement, where 75 million before tax in the quarter, reflecting an increase in valuations due to higher equity market level.

During the quarter, we recorded credit losses of 42 million pre tax on our investment portfolio, consisting of a 20 million increase and the allowance for credit losses on fixed maturities available for sale and a 22 million increase in the allowance for credit losses on our commercial mortgage loan portfolio based on revise economic for.

Our cash and updated property values.

Our fixed maturity investment portfolio is broadly diversified and high quality with an overall average average credit rating of a plot.

96% of the portfolio is investment grade with nearly three quarters of that rated a or better.

Turning to Hereford funds core earnings of 33 million were down 13% from second quarter of 2019, resulting from the decrease in fee income driven primarily by lower average daily AIU and partially offset by lower variable operating expenses.

Perfect Fund assets under management were up 15% compared to the first quarter. However, they were still down 3% year over year.

Net outflows were 675 million in the quarter compared with net outflows of 105 million in the second quarter of 2019, reflecting the movement in funds driven by the economic effect of coking 19.

The corporate core loss, a 6 million in the quarter compared to a core loss of 35 million in the second quarter of 2018.

The retained equity interest in Talcott, which is reported on a one quarter Lad was the biggest driver and contributed income 68 million before tax compared with 3 million of income in second quarter 2019.

The increase in comes on the Taliban investment largely reflects the result of Talcotts hedging program.

Given how equity markets increased during the second quarter, we would expect to give back about a third of that gain in our third quarter reporting.

Moving on to capital management as you know, we paused our share repurchase activity in March we have not resume share repurchases and we'll continue to monitor the economic and other impacts of cobot 19th.

Book value per diluted share, excluding AOCI I was $45 in 25 cents, representing a year over year increase of 8.9% and an increase of 3.5% from year end 2019.

A 12 month quite earnings early was 12.7%.

As Chris indicated we have initiated a program to improve our overall efficiency, which look achieved annual operating expense savings of approximately 500 million in 2022 and contribute to our goal of reducing our PNC expense ratio by two to two and a half points are good benefits expense ratio by one.

0.5 to two points and our claim expense ratio by half a point.

To achieve these savings we expect to spend approximately 360 million with 320 million expense through 2022 of which 130 million will be classified as restructuring costs and will not be included in core earnings.

We have included a summary table in the earnings slides, which provides a more detailed breakout by year of the estimate expense reductions and related costs in.

In the coming quarters, we look forward to updating you on our progress.

As you look to the second half of 2020, it is difficult to forecast the business climate going forward given the recent ryzen covert 19 infection in many states of the country and uncertainty surrounding the economic recovery.

States that have relax restrictions on businesses and lessons stay at home guidelines are now putting restrictions back into place.

As such there they range of scenarios in terms of impacts to our top line, particularly in commercial lines and the amount of coven 19 losses, we might expect to see in future periods.

As Doug noted written premiums could be down moderately.

From a loss perspective, we will see additional covered losses due to new incidence in areas like workers' compensation and group benefit.

We will continue to monitor claims within financial lines related to the economic strain created by depend on it.

Additionally, we could see impacts to the frequency trends experienced and affected line.

The magnitude of all these items will be impacted by how the virus progressive and the actions undertaken to reduce the impact of the virus and the effectiveness of the economic stimulus from the federal government.

Well there is uncertainty as to the full impact of the virus. The hurford is well positioned to whether this pandemic with strong underlying performance as well as a strong balance sheet with ample liquidity as we continue to invest in our businesses and achieve our strategic objectives.

I'll now turn the call over to season. So we can begin the Q and a session.

Okay.

Thank you Beth a Andrew well take the first question.

Yes.

We will now begin the question and answer session to ask your question. Please press Star then one on your telephone keypad, if you're using these speakerphone. Please pick up your handset equal pressing the keys if at any time. Your question Isnt address and you would like to withdraw your question. Please press Star then one.

The first question comes from David.

Much of Evercore ISI. Please go ahead.

Hi, good morning.

Just a question for dog.

If I look at the accident year loss ratio ex cat in commercial lines and I take out.

Hi be Colgate charges of roughly 10 points I get to around 58%.

Accident year loss ratio ex cat.

That's better than over the last few quarters. Since you closed the navigators deal a 59 to 60.

Yes, I'm just wondering what was driving that improvement and if there's any benefit from lower non Colgate attritional losses, that's flowing through that.

David on our casually lines, we essentially did not move our picks in the quarter. The year is still very immature we did share with you in our workers comp coated charge that we had a.

Favorable frequency that we did recognize saw it actually to make sure you've made that adjustment in your ex cat numbers, but essentially a it was our ongoing loss trends, we still feel like the loss trends that we had talked to you about expected for 2020 are essentially right, where we see them too.

Day ex Covance and so no no material changes.

Okay, Great and then if I could just asking question on the cost to program and.

I guess, just if I think about the two to two and a half points in PMC of expense ratio improvement and one and a half to two points in group benefits by 22.

Just wondering I guess, what is the view on on top line levels within that expectation for the reduction or should think about.

Should I think about.

Yeah Yeah.

Tendulkar greater than 500 million of cost saves.

In order to get to the two to two and a half points in PMC and one and a half to two points in group benefits by 2022.

Yes, David it's Chris Thank you for joining the in the question.

It's a combination right as we outlined.

We are looking to extract $500 million of what we would consider fixed cost savings in 22, but we're also cognizant of the fact that premium volumes may fluctuate up or down from where we closed out 2019, which is.

As the measurement base. So as we go through I'll call. It. The next couple of years will.

We'll have to make any a appropriate adjustments because at the end of the day, we want to get closer to.

All in expense ratio that a inc. at least in commercial is close to that the 30.

<unk> percent, marking if it premiums or greater that means.

We'll have a lower ratio and put it premiums are less you know what we'll look to the other fixed another variable cost due to take out to achieve our result.

Great. Thanks, so more anchor in terms of the expense ratio than the dollar amount of cost saves. That's that's helpful. Thanks for thanks for taking the questions.

Next question comes from Ryan Tunis of Autonomous Research. Please go ahead.

Hey, Thanks, good morning.

Just one or more hard for the next couple.

A couple of questions on diving first of all creates if you could use giving us a little bit more perspective on the Genesis as guys.

I'd also like what's the long game here again thinking longer term view is that you can.

Offer more affordable policies on.

Or is it purely a driver do enhance you are we over time, that's that's the first part and then I'd just.

Along with that.

$500 million is clearly quite a bit of costs what are the offsets we should be thinking about.

Hi.

When we think about what might ultimately fall to the bottom line in 2022. Thanks [noise].

Sure.

But I think that you are the Genesis up.

Your question is [noise].

If you look back over the last five years I mean, we've been investing in the platform.

I think quite significantly and it appropriately.

There have been in product, whether it be an underwriting whether being you know I T platforms a digital.

Our data and analytics capabilities robotics.

And how we could continue to.

Just it'd be more productive so.

I think it just took a culmination of those years of investing in stepping back and saying, we probably need to harvest more gains in then.

We have to date and rally everyone and this is a company wide effort everyone's involved the all businesses all shared services.

And you know we want to we want to harvest the gains.

I think our initial point of view right now is to.

To to drop the majority to the the bottom line, but I do want to think about growth organic growth, particularly in what we might be able to do and either new areas or existing areas.

You know potentially to capture more share, but initial thinking right. Now is is more dropping to up to the bottom line.

And I would say the timing of all this.

It was fortuitous in at least in my judgment, we had.

And a small team thinking about this in the fourth quarter.

Ah doing our benchmarking.

And then really you know first and second quarters, I would say Beth and basket at her color we developed the specific action plans.

And I'm really really detailed basis, so that we felt comfortable.

Obviously announcing it here today.

With the appropriate investments.

You know that are needed and when I. When you look at the cost think of in essence that the separation cost to separate but there are also investments that we're still going to making our platform primarily in the.

Technology.

Side, you know to wring out structural savings over long term. So that's what I would share with you.

Brian and back I don't know if you would add anything yeah. Thanks for the only thing I'd I'd just to pick up on a comment that that Chris made is you know we have been working on the efforts for planning for that over the course, the first and second quarter. So we have very detailed plans that we are tracking to that will achieve these benefits.

Over the next couple of years, you know well over 600, <unk> de <unk> individual initiatives and as Chris said, it's across all aspects of the business on but we really are now in execution that no. This isn't as if were planning to determine how to reduce our cost we have detailed plans and we will be executing to them and.

As I said, we'll update you on our progress as we go off and running.

Thanks, and then.

Hello, This is probably I'm going to come back, but the defense cost portion of the of the VI charge that you talk how do we think about that was that mostly.

That your view of what this is ultimately going to cost you or how Ah.

I guess, how how encompassing exciting was 40 or 50 million Bucks home encompassing you got charge. Thanks.

Right. It's very encompassing you were very thoughtful about it working in conjunction with our.

Legal team or our general counsel, yeah, recognizing that this isn't a kind of go away overnight. I mean, this is going to be an extended period of time, where theres going to be a litigation disputes.

And it's a multiyear view of what we think we are going to spend to vigorously defend our policy terms and conditions.

Thank you.

Next question comes from the least Greenspan of Wells Fargo. Please go ahead.

Hi, Thanks, Good morning, My first question.

But we back out that 11.1 points, that's the commercial called it impacts.

Some of your underlying that's about 150 basis points.

Year over year improvement so just tied together some of the earlier comment it sounds like there was nothing on kind of one off I guess a week from conveyed in the quarter. So is that the right level kind of underlying margin improvement, we could think about for the balance a year and you know Jeff.

Given kind of what you know now.

Well, it's just a couple of points to respond to that first thing is you know some of that variance was expense related. So we had a good quarter on the expense side and you see that in our printed numbers I'd also remind you that you know that's in addition to the allowance for doubtful account charge. We also took on a quarter. She does.

You bet you could adjust the quarterly number for <unk> for what we gave you in terms of the 30 million dollar bad debt change.

Secondly, we did talk about inland marine losses, being better and middle commercial in the quarter. So there is some good news on the property side in metal, but essentially I think you have it well laid out.

Okay. Okay and then my second question on we've been hearing some color about how the workers compensation market Nike bottoming on do you guys had some thoughts there and if we think about.

Hi Crane.

Let me kind of like flat and potentially could start to see some positive rate.

Sure, let me start and if Chris and Beth want to add any color there would be great. Oh, we would agree that we think we're seeing some bottoming in the workers comp pricing. That's a that's good news and obviously it matters deeply to our company.

I would add that if you just isolate factors. The one factor that will now be you know joining all of the new filings going forward is a very different yield curve assumption and all our filings. In fact, you know if you look at the 10 year over the last 12 months just go year to year, a filing today versus 12 months ago, we're probably talking about.

150 basis points, plus or minus and maybe up to three to five points of change just on rate need alone for yield curve. So the yield curve will be one of the stimulants and then as the experience works its way through the process, we expect to see more recovery, but I think a flattening and maybe a slightly upward trend is fair.

Our two to look at that scenario Chris.

Yes.

It's it's well said Doug.

I just look at some aggregate numbers, maybe at various states, California, New York I mean, we're approaching a 100% combined ratio today.

So the pressure is only going to get.

More.

Intense, particularly as you said is as far as interest rates.

Great Yeah, although frequencies continue to behave very well.

At least.

And our point of view, but I think at all points to you could you could foreshadow four to six quarters out you know that there really is a beginning of a an inflection point.

Okay. That's helpful and one last quick number question on eating program on duty.

<unk> expenses are the charges that you laid out in military segment. So that just among some of the your corporate segment.

Yes. So the expenses that are considered core those would once the ran the business segments really the restructuring cost would run in the corporate segments.

Okay. Thanks for the color.

Next question comes from journey Bar of JP Morgan. Please go ahead.

Hi, good morning, when it first a question about just your expectations on claims trends in the disability business.

There are concerns among investors that as the economy weaken claims will go up and wondering how you see the interplay of the weaker economy versus sort of the work from home environment and net Matt do you see disability margins potentially improving despite the weaker economy or do you expect them to get worse.

Jimmy It's clearly a watch area.

Yes.

Yeah, historically, one unemployment rises.

You know disability claims that tend to go up I would tell you that.

Our data both on the short term and long term side.

Does not show any pressure.

But.

Under long term disability, usually has 180 day elimination period. So it does take some time before you would see new incidences that that could translate into two more claims over longer period of time. So our incidence trends in 20 continue to be again, it at very low levels, all time low low.

Levels, although there might be some modest pickups in certain segments.

So it's clearly a watch item, but it's its not emerging in our data yet.

But as we make three year rate guarantees, particularly we're in the one 121 season right now we're taking this all into consideration to provide ourselves a an additional margin or additional buffer.

For potentially more incidences, and obviously, a lower interest rate environment.

Oh.

And on workers comp you mentioned racing potentially increasing given.

So the uptick in and.

The combined ratio industry wide your margins in the business had been pretty good.

If pricing does it sort of stabilized and group do you think your margins could sustain where they are even potentially improve from recent levels, which have been really good.

I think that's a bit premature and now you're out into a 21 22 conversation, which were not prepared to have right. Now you know we've talked about the 2020 year. Our small commercial book is experiencing some compression and workers comp margins. That's a that's where we are relative to those prices being negative. So we will continue.

To update you, but I.

I think it's a little premature to talk about improve margins workers comp today.

Okay.

Yes, I would add just a you're getting my comments were geared more at accident year results not calendar year. So I'm not sure. What your comment was geared up at mine mine were clearly accident year based you and I was it was accident year as well and I was thinking more about next year them and the or be on <unk> and 2022 as opposed to this year, but.

On L.D. I you had in laws, obviously because of the lag effect of the big equity market in one Q I was assuming that and Duke and DQ given that the market that covered you would actually be Dan maybe not all of the <unk> losses reversed, but at least part of them, but I think that's implied that you remarks, we'll still be not going.

Give them I did I hear that correctly, yeah, you did hear that correctly and Jimmy Lee when we look at it we don't expect it to be on as large of a loss as we had in in Q2, but you know again the valuations are not just based on equity markets some of them or it's also based on forward look.

The earnings and so forth sell again, given some of that items that I referenced we would expect potentially to see still a little bit of a loss there as we go on into into Q3.

Okay. Thank you.

Next question comes from Mike Zaremski Credit Suisse. Please go ahead.

Okay, great. Thanks, good morning.

If we can talk about the workers comp presumption issue and change as is.

Is are the presumption changes largely only focusing on coated 19. So you know when this pandemic is hopefully over you know kind of be a <unk>. This will be behind us or are there presumption changes also.

Kind of permanent regarding kind of any virus or sickness going forward and so we should be thinking about this may maybe a different claims rate in the future even when the pandemics over.

Mike let's.

Parse that apart I would say in general the presumption by state New guidelines are targeted at cobot.

And most of them have sunset clauses on the back side. So we are paying a lot of attention to that particular state by state I think as of June 30, There were 14 states and several of them were very important big states for us.

So think about it in the context of Cove, It and we're working with trades and our teams here to make sure we understand all the the nuances and it's an ongoing matter because there are certainly ongoing discussions in various states today that continued to be important as we think about our workers compensation line.

Okay got it okay. That's helpful and lastly, so thanks for the disclosure in the 10-Q on business interruption I think you've kind of talk to more than 150 cases. It seems like based on the data out there that Harper is yeah has its kind of and.

Valdano somewhat disproportionate number.

Number of business interruption cases versus the overall pool is there anything we like any reason why that's the case or anything we should be thinking about.

Clearly you gave good color on the I'd been our levels and whatnot, but it seems like Theres just lawyers poking at you guys a little bit more than others.

Yeah, Mike I think I've seen your report on that I did I don't I don't know if I agree with it completely God just given how.

Thanks things that you might have been counting but.

I'm not going to comment upon any specific litigation, but I wouldn't I wouldn't draw any conclusion to you know to as being picked on you know by by Council I think I think it's fair game for everyone. A I think theres lot of.

Equal opportunity to get sued in these areas. These days with what some of our peers, so but bottom line as I said in my prepared remarks, I mean, we are.

Infinite in our policy language terms conditions.

And are gonna have to defend it over an extended period of time.

Yeah, I understood and yet I think all investors had been happy to see so far the courts have started with the industries and thank you very much.

Thank you.

Yes.

The next question comes from Brian Meredith of you'd be yes. Please go ahead.

Yeah. Thank you two questions personally yeah, that's I'm, hoping we talk a little bit better Doug about some of the reserving actions in the quarter first still little surprise, we're seeing auto liability commercial auto liability adverse development, what what's going on there and then also just the navigators I know, it's it's got the stock was covered but.

I'm still a fair amount of development, there is that kind of well above expectations and in where's that coming from the didn't have any stockton loss picks currently.

So start with auto liability.

Our 2019 2080, I'm, sorry, 2018 Peck was just a little light. So we felt like we had to top that up Brian.

Commercial liability has been a frustrating area for us over the last five to seven years, we have I think done a lot of underwriting work, we have priced aggressively obviously, we haven't caught all the trends I think we're on top of that as I mentioned in my script. Our pricing now is in the teams and our middle market, Buck and even stronger and our global especially.

The book so.

If we understand that Nick we're in a better reserve position and yes, it's been a little bit of a nagging issues at best and I just wanted to get on top of relative to navigators.

I would describe the international do you know as specific situations that we had to make adjustments for in our reserves are there were certain cases that we just felt like our case reserves were not adequate and then a in the U.S. book I talk about general liability, we just strengthen our tail factors on the backs.

Side or some of our curves. So those are the two areas that in NAV I think we made the appropriate adjustments with.

Again.

We understand that book more deeply today than we certainly did the day, we purchased said and I feel good about where we are and I just would add that on tier air or other question Ryan does not change our view of our current accident year packs and feel very good about on how that bucket is performing killed or anything like a product that we're making on it.

Proving the profitability on associated with that so from that standpoint, no change there.

Right I just add one one other comment just on the overall deal.

I I continue to be.

Really pleased you know with with the overall performance of the acquisition the team the talent that we talked about.

You know modestly I think our timing was a really really good.

I didn't know that we're going to go through a hard market, but we'll take a little we'll take a little tailwind.

At our side and again, if you're if you really remember when we announced as you know transaction, we purchased an 80 see cover because we.

We we knew their reserves were short we were willing to absorb obviously.

A corridor lost layer of that the first 200 million.

But then we we did transact with a third party to transfer all that risk from there. So we knew they were short that's why we did the AIDC.

Honestly.

It's not surprising to see whether you know that right now but.

That's the context of how we're thinking about the deal and specifically the ITC.

And I would just close right Brian on the on the liability pieces that you know we've talked about this publicly we wanted more general liability liability expertise and our portfolio. It was an area that we were working on organically and so as we acquire the navigator, which is a core fundamental throughout their product family you know we.

Do that in a time of increased loss trend, we understand that and we've had to make some adjustments along the way. So I think that all sets up what happened in Q2 and over the last couple of quarters.

Great. Thanks, and then second question, Chris just going back to some of your initial comments about the Safe Harbor said you know in the federal stimulus that week. These discrete I'm. Just curious you know as you think about this going forward.

What does it mean, if we don't get it is that something that you kind of contemplate in your kind of current casualty picks that maybe we do see a pickup in.

Litigious activity I mean, there's an article in the journal about it today and is there any way that you can protect yourself as a commercial carry with policy, where do you anything are you doing that from from some potential pick up in lawsuits.

Yeah, It's a great point, you know, Brian I think they would add only to the impacts of social inflation that we're experiencing today that everyone's talking about so yeah, I I would say, it's it's bad now and it could get worse.

Going forward, if if there isn't a.

As I said temporary relief right I mean, we want we want people to try to go back to work in reopened the you know the economy and as long as there isn't call gross negligence or just bad behavior, you know that im employers I think vast majority would would know better but there's there's still needs to be.

The level of protection I don't know what what is what is feasible as far as litigation going forward I hear more more litigation each day.

You know that is happening as as people.

Think about you know returning to work indoor wrongful death claims you know this morning.

I think really what it means is particularly in all our policies and we take a proactive stance and looking at their policy terms and conditions, Oh and inappropriate communicable disease exclusions already in a lot of our.

Ability policies, but well continue to just be thoughtful and.

Take necessary action, where appropriate you know with policy terms and conditions.

Great. Thank you.

The next question comes from Yeah wrong IR Goldman Sachs. Please go ahead.

Hi, good morning, everybody, thanks for hospitals with manager.

Just a couple of questions one looking at small commercial I think you call out.

Couple of corporate items that impacted year over year results I think if we strip those out.

Got to some year over year improvement so wanted to hear what the favorable offsets why does I think earlier.

In response and other question you were talking about.

Central expense ratio improvements, but any color you can offer in small commercial would be appreciated.

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But I think about small commercial and I'm, assuming you're you're looking at margin and.

Zacks said.

Essentially when you adjust our quarterly.

Underlying for Kobe do you get an 87, one which is I think a really competitive terrific answer for their business I have commented that.

Were impacted by Cobot 19 relative to production commented, we expected that in the quarter. We watch that I also will share with you that.

Our on the glass.

Underwriting.

Tool.

Early March when we saw this thing coming we made adjustments on the glass for referrals to underwriters and certain classes that we just wanted to exercise and I'm sure that influenced a bit of the flood.

You know there a lot of settle factors that go into how we run that business, but I feel very good about our underlying margins. The adjustments we've made a and our go forward prospects with all that said you know we have to.

Roughly the reopening across the country and.

No we can't do it this on ourselves we have to participate in the economy and large.

Yes, Doug when I was trying to get out is as I think once.

The margin the underlying margin actually approved and small commercial.

Some of the negatives I was just curious as to what's on before.

Well, there's a little bit a good news on the expense side and I would say.

Many of the other pick so we commented on the workers comp news relative to coated and.

Quite a bit of that would be small commercial but I don't.

The significant points.

Okay. Okay. My second question I'll, just start off by saying I thought the disclosures.

Excellent does this quarter. So thank you for that.

But you know.

Good for a little more.

Hundred million dollar property cope with loss specifically that.

The portion came from a physical.

Where are you taking full limit.

Losses there.

And also just curious as to why.

Jim approach on the on those policies that.

That have physical damage.

Sure Great thing other 99% of policies yet your keep Andre.

Virus or more qualitative just thinking vast majority.

Just wondering what's the thought process around the different treatment.

Between the two once [noise].

Chris So I would I would.

On.

I'll call it the.

It's basically took that's sort of reinforced.

Right that you know business interruption is standard and most sees.

In but it does have a.

Yeah the.

So you know the second point, so that when we were.

We havent made.

Came to the people that will listen is that.

You know besides you know the direct physical Austria requirement, we also have nation exclusions.

Mm again, 99% the of UBS exclusions really.

Bar coverage for any material welfare.

And then the third.

The virus exclusion.

And.

That's how we think about sort of how policies Arkansas.

Trusted and you know is sort of the the.

Yeah, the terms and conditions and how it really works and I almost think of it as you don't even get to virus. If you don't have no direct physical loss and then.

That's why I sort of put it to lab test in the waterfall.

Okay as far as it 100 million and 1 million any any additional detail at that point.

Hi, I'm as far as policy limits and things like that I'm, just not going to comment upon I mean, we looked at it in aggregate we.

We know what the policy limits are we know what claims in exposure analysis on.

At the might come in and that.

So our number and that's all I'm going to say.

Okay. Thank you.

And the answer session I would like to turn the.

Conference back over to Susan will be back for any closing remarks.

Thank you we appreciate.

You are joining us today, if we didnt get to your question on the call. Please follow up.

Back to again the conference has now concluded thank you.

For attending today's presentation you may now disconnect.

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