Q2 2020 Hanover Insurance Group Inc Earnings Call
Good day and welcome to the Hanover insurance groups second quarter earnings Conference call. My name is Jason there will be operator for today's call.
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Thank you operator, good morning, and thank you for joining as far out quarterly conference call, who will begin today's call was prepared remarks from Jack Roche, Our President and Chief Executive Officer, and our Chief Financial Officer, Jeff Farmer available to answer your questions. After our prepared remarks, I Dick Lavey President of agency markets and.
Right. So the tore president of specialty lines before I turn the call for Jack Let me note too that our earnings press release financial supplement and a complete slide presentation. Today's call are available in the Investor section on our website at www dot handle or dot com. After the presentation, we will answer.
Machines in the QNX session, our prepared remarks and responses to your questions. Today I've been statements of historical fact includes forward looking statements regarding among other things our outlook for Twentytwenty and the ongoing impact I hope that carbon 19 pandemic and the subsequent <unk> session on company before.
There are certain factors that could cause actual results to differ materially from that was anticipated. We caution you with respect to reliance on forward looking statements and in this respect are good for you to the forward looking statements section in our press release, the presentation deck and our filings with the FCC which include supplemented.
At least factors related to the club at 19 pandemic and general economic conditions. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios excluding catastrophes among others every conciliation of these non-GAAP financial measures to the close.
GAAP measure on the historical basis can be found in the press release, the slide presentation on the financial supplement which are posted on our website as I mentioned earlier, but those comments I will turn the call overture, Jack Thank you actually get.
Good morning, everyone and thank you for joining our call.
I'll start by reviewing our second quarter financial results in the context of the current business an economic environment.
I will then discuss starts free strategic areas, especially focused the next 12 to 18 months.
These areas of focus will help us advance our long term strategy in this rapidly transforming markets.
Capitalize on some particularly attractive emerging opportunities.
Then turn it over to Jeff for detailed review our financial results and.
Before we get into our agenda, however, I would like to acknowledge the extreme personal challenges that so many people across our country facing as a result of the cobot, 19% dynamic.
Economic headwinds.
And the recognition impact racial and justice.
As an organization, we're committed to doing our part to help country front. These issues through our business operations as employer and as an active in responsible corporate citizen.
We hope each of you your families and friends are safe and healthy and we look forward to better days ahead for all.
Now turning to our results.
We're very pleased with our second quarter earnings performance. Despite the impact of the elevated catastrophe losses, we reported earnings per share up at Dollarssixty, three and an operating return on equity 9.5%.
Our broad based profitability and strong financial position are enabling us to effectively navigate the current market conditions, while remaining laser focused on our long term strategy.
Investments, we've made innovation analytics underwriting claims handling and our agency partnerships provide us with a strong foundation and represent a distinct competitive advantage as we work to meet the needs of our agent partners customers and our shareholders now in the future.
I'll discuss our strategic priorities in more detail shortly but first I would like to take you through the highlights of our second quarter performance.
As outlined in our July 14th Preannouncement, we incurred elevated catastrophe losses in the quarter.
The damaging hail and wind storms that affected the Midwest in southeast as well as property damage from civil unrest resulted in total losses of $148 million roughly 13.5% of second quarter net earned premium.
Unfortunately significant ashby happen from time to time.
It's part of our business and our losses appear to be consistent with our market share and the experience across the industry in the quarter.
Higher than expected cat losses were offset by an improvement in our current accident year loss ratio, excluding catastrophe, which declined 7.4 points from the prior year to 51.8%.
The lower loss ratio, primarily reflected the temporary benefit from lower frequency of auto accidents and other claims throughout our business portfolio as many states only began to emerge from stay at home orders later in the quarter.
We remain prudent in setting our reserves as businesses begin to reopen you're very mindful of the potential for delayed claims reporting increased legal costs potential impacts from the recession changes in severity and other factors.
As for Cobot 19 related losses, our overall exposure remains manageable our ultimate loss reserves for cobalt 19 related losses are now $19 million in total which include approximately $6 million. We added in the second quarter to account for workers comp assumption orders sensibility.
Actual overall over at 19 related loss activity has been limited thus far and these reserves are holding quite nicely.
With that being said the underlying long term loss ratio expectations for our business remained stable given our proven ability to implement rate increases that meet long term loss trends.
Second quarter premium production was impacted by the significant and sudden slow down in economic activity as well as the auto premium returns we issued to our customers in April and May.
Adjusted for approximately $30 million in premium returns and personal auto and very small amounts in other businesses and some other discrete items in the quarter, our underlying premium decline was approximately 2%.
Yeah business declined and personal and commercial lines, which clearly we kept the low point in may.
We also saw meaningful endorsement activity from our core commercial customers, most notably in certain industry classes that were most impacted by the stay at home orders.
Our momentum improved meaningfully as we exited the quarter with net written premiums flat in June and up slightly in July.
Held by rising rate levels declined it endorsements and an increase in new business.
We expect our Q2 net written premiums to represent the low watermark for the year.
We're pleased with the metrics underlying or premium production in second quarter, including our execution on the balance between rate and retention.
Personal lines rate increases remain relatively stable at nearly 5% despite increasingly competitive market conditions.
Renewal retention increased as expected a function of lesser count remarketing during the initial weeks of the pandemic as well as higher customer persistency.
Our commercial rates ticked up by about 50 basis points to 5.1% with increased retention.
Our specialty rates also improved as we are starting to see the spill over effect of a substantial market firming in the large account specialty classes.
We're very pleased with our granular segmented pricing strategy, which delivers lower rate increases in our most profitable lines of business segments.
Higher rate increases in lost prone sectors and accounts, increasing the underlying profitability of our book of business.
Consistent with our capital allocation framework, we repurchased shares in June and July as market conditions stabilize.
Our strategic approach to capital allocation is driven by and unyielding commitment to both maintaining a strong financial position and delivering value for our shareholders.
In that regard I'm pleased to report that am best recently affirmed our financial strength rating of a and our long term issuer credit ratings up eight plus.
All in we feel good about where we ended the second quarter financial and operational perspective I.
Hi, I'm, particularly pleased with the agility and focus our team has displayed during this dynamic Jerry.
Moving on now to our strategic priorities.
And this remarkably fluid environment and profit pools customer preferences and operating landscape are rapidly shifting it is critically important for us to look forward to anticipate these changes and have a clear set of priorities to guide our efforts over the next 12 18 months.
These priorities align with our goal of being a premier franchise for our agent partners in innovation driven company with specialized products and capabilities that is capable of exceeding industry premium growth rates and delivering top quartile returns our near term priorities will allow us to advance our fundamental strategic imperatives, while also.
Capitalizing on the challenges and opportunities of the current environment.
First we are laser focused on risk and portfolio management.
This enables us to optimize our underwriting performance to navigate short term market dynamics effectively.
The same time benefit from the profitable growth opportunities that present themselves in this environment.
In commercial lines, we are shifting our mix away from business classes that may have more lasting impacts from the pandemic as remain cognizant of some lingering economic effects.
On the other hand, we're implementing growth plans at our most profitable segments, including technology life Sciences, Marine and other lines and sectors that are associated with greater returns in our book of business.
These segments continue to thrive generate strong profitability in the current environment.
Together with many of our agent partners, we have implemented plans to meaningfully grow market share in each of these segments.
We're already seeing the benefit of our Swift actions.
For example, our tech and life Sciences business combined grew 20% in the quarter.
Personal lines team is also applying an opportunistic growth strategy to drive the top line for example, our Hanover prestige product, which was fully deployed last year represents a growing portion of our personal lines portfolio.
This product offers our customers multiple coverage enhancements and a concierge like claims experience positioning our company as the carrier of choice for to Coutts.
A resilient customer segment that generate strong growth and profitability opportunities. We successfully doubled this business in the second quarter. Despite the pandemic general decline in shopping.
Second we are committed to helping our agents navigate this challenging environment and optimize the value of their books of business.
Our agent partners are integral link our value chain and strategy and we are well positioned to help them thrive.
One unintended benefit of the pandemic is the way our partnerships are becoming even more critical to our agents.
Our selective distribution strategy provides franchise value first rate product and service capabilities and local responses.
These factors have become critically important to agency success and sometimes even survival. When agents are challenged with customer service levels connectivity and work flow issues in a difficult market environment, where organic growth may be scarce, our ability to help our agents reach new customers retain existing law.
Funds and create operational efficiencies is an important competitive differentiator, we have invested in and continue to introduce relevant industry focused content and virtual underwriting expertise that can be easily access and distributed by or agent partners as they shift to a more virtual and digital sales approach.
Coupled with our recent investments in sales force marketing cloud and our market leading customer service center.
The expertise and tools, we have developed allow us to become even more actively engaged in the agency marketing sales and renewal process. Additionally, we have an exceptional level of transparency with our agents, allowing us to share unique knowledge and unparalleled insights and build detailed and thoughtful roadmaps to drive ARPU.
Neutral success.
When new businesses not as available agents are much more focused on optimizing the inherent value in their current portfolios and achieving efficiencies across the entire books of business consolidating market and assembling multiple coverages for one customer with what insurance carrier provides benefits and allows for agents the strength.
Got it relationships with customers and enhances their profit potential.
One measure of our value in this regard is the book consolidation commitments, we receive from ages.
Lease commitments grew significantly in the second quarter, indicating that our approach is working.
We believe that these efforts will position us favorably with our partner agents enhance customer experience and helped drive an improved growth trajectory. During these challenging times and as we emerge into the new normal.
Third we are more aggressively driving technology and digitization across our organization to help our agent partners respond to evolving customer preferences and achieved growth in 2020, the world quickly change in ways, we hadn't envisioned and most of us have had to adapt to new ways of doing business innovative capabilities.
More important than ever as social dispensing requirements and stay at home orders of clearly demonstrated we believe many of the changes we and others have made in our businesses will have lasting effects and will greatly accelerate industry transformation, we are ready.
We have accelerator investments and data analytics and technology, including digital capabilities beginning in 2016 in 2017, we have invested approximately $200 million over the last four years, while continuing to substantially improve our expense ratio, we have made meaningful but targeted investments in every area of the inch.
Parents value chain from customer acquisition data and analytics to policy and claim servicing making our agents an integral part of our innovation roadmap.
Over the last few years, we have invested over $100 million and point of sale and operating efficiency technologies to help our agents improve their workflows. We are focused on improving the overall efficiency of data exchange between agents customers in our underwriters through various agency management system vendors and ensure tech solutions.
We remain highly engaged with the leading technologies and ensure tech organizations and are working together to drive improvements for the industry. Many of these investments are bearing fruit with some significant and critical successes.
And these investments have provided us with additional line of sight into the expansion of our top line moving forward.
On the claims side, we are leveraging technology platforms to complete 80% to 85% of all auto estimates and reinspection virtually this increased to 100% during the stay at home orders.
On the property side, we're utilizing our downloadable self service App global 360, and virtual interactive inspection capabilities, which together account for over 50% of losses that would have previously been adjusted in person.
We've seen a sharp increase in use of these digital capabilities over the last several months.
Along with the usage of drones. These transformative changes allowed us to gain meaningful operating efficiencies and proved to be extremely valuable as stay at home orders were put in place.
We are evaluating opportunities to implement these capabilities into our claims process is permanently considering the strong quality of the estimates and exceptionally high levels of customer and agency satisfaction.
Our ability to flex our vast array of technological virtual tools combined with our deep agency insights and broad and relevant product capabilities gives us confidence in our upward growth trajectory and our ability to deliver mid to high single digit growth when the economy fully stabilizes, which we currently project to be.
The mid to late 2021.
As we close the books on the second quarter and shift our attention to the second half of this year, we're stronger and better position than ever before.
We are a top quartile performance with a diverse and relevant portfolio mix achieving broad based profitability.
Our results demonstrate that we can operate successfully even in challenging environment.
And I am convinced that companies that outperform and demonstrate agility will have an outsized opportunity to grow in the next couple of years.
Our excellent financial Foundation unique strategy brought an innovative product set and superior distribution capability represent a true competitive advantage are extremely talented team and inclusive culture will enable us to take the company to the next level.
Now I will turn it over to Jeff.
Thank you Jack Good morning, everyone. We're very pleased with our overall earnings performance in the second quarter, particularly in light of the elevated catastrophe loss experience across the industry.
In the quarter, we reported net income of 115.2 million worth $3.01 per fully diluted share compared to 74 million were $1.79 per fully diluted share in the second quarter of 2019.
After tax operating income was 62.7 million were $1.63 per fully diluted share compared to 77.7 million or $1.88 per fully diluted share in the prior year quarter.
We reported an all in combined ratio of 96.2% compared to 96.1% in the prior year quarter.
The X cat combined ratio was 82.7% in the quarter, which improved meaningfully from 90.7% in the prior year quarter and reflects the substantial decline in claims frequency.
We experienced a temporary decline in claims frequency as a result of stay at home orders in all lines across our book of business, while we reflected such frequency in short tail lines to a fair extent, we took a prudent and conservative approach to liability exposures, given the uncertainty and our does.
Prior to be well prepared for potential issues.
As Jack mentioned earlier being prudent with our reserves and current loss picks in the quarter will prepare us well for any deferred reporting of claims excess legal costs, social inflation recessionary impacts and other uncertainties.
We reported net favorable ex Cat reserve development of 4.9 million.
We continue to experience favorability in our workers compensation line, which was partially offset by adverse development in commercial auto from continued bodily injury severity trends.
We consistently achieved commercial auto rate increases of 10% or higher over the past several years, which gives us even more confidence in the line of business and loss picks.
But we recognize there was more work to be done to achieve target returns in this line.
In our CMP line, we experienced property loss increases on a handful of claims from the latter half of 2019.
In personal lines prior year trends continue to stabilize but we remain prudent and cautious.
Our overall conservative approach to reserves reinforces our commitment to react quickly to trends and mitigate the potential for issues down the road.
We're very pleased with the overall expense ratio improvement in the quarter, which decreased 20 basis points from the prior year period to 31.3% with some substantial movements underlying the headline results, we chose to pay commissions to our agents on the auto premium returns.
Along with the loss of cost leverage from premium. This factor added approximately one point to the expense ratio in the quarter.
This was offset by a nonrecurring premium tax refunds from several earlier years.
These items aside our expense ratio was relatively flat and included specific cost savings and operating efficiencies offset by the timing of certain expenses and continued investments in our business.
We believe this a very strong results considering the topline pressure we have experienced.
Putting aside the temporary impacts of climate 19 related premium returns and the temporary effect a favorable frequency. We are confident in our ability to achieve continued steady underwriting margin improvement overtime.
We believe our underlying loss ratio trend is stable overall.
We have line of sight to continue achieving rate.
In line with long term loss trend and stable loss ratios in the longer term of course. This expectation assumes commercial lines rate levels will continue their steady upward trajectory.
It is possible we might see an improvement in the loss ratio overtime, if commercial pricing meaningfully accelerates in our markets. We're also confident in our ability to continue improving our expense ratio in the long run driving increased underwriting margin.
Our consolidated net premiums written declined 5% in the second quarter.
Results included some nonrecurring items, the most impactful being premium returns primarily in personal auto.
After adjusting for these items are net premiums written declined approximately 2%.
Exposure reductions further lowered our net written premiums by roughly three and half points in commercial lines and by about two points overall.
We experienced a strong increase in retention as expected in part due to lower policy remarketing, which has its natural offset in new business.
Various cancellation moratoriums also temporarily inflated retention metrics.
We increased our bad debt expense to seven and a half million in the quarter to account for these potential cancellations as a reminder, bad debt expense sits in other operating expenses in the income statement.
Now that most of these moratoriums have expired across our footprint, we expect our retention to return to these normalized levels. We also expect new business to pick up as the economy reopens.
We are optimistic about future growth and believes that the second quarter was the low point for our growth as production metrics showed some bounce back in June and continued into July.
For example, our small commercial premiums were flat compared to the same period in 2019, well specialties saw strong growth in several areas such as professional lines healthcare and marine.
We're seeing a rebound in new business results in personal lines small commercial and certain specialty segments and they are approaching our new business production levels posted in 2019.
Endorsement activity has also started to normalize with personal lines Notching, it's 12th consecutive week of positive activity. After a sharp decline in March and April.
Commercial lines negative endorsements have rebounded, but are still below our historical norms.
Retention has been stable through mid July, but there is still a possibility that the true impact of cancellations will be felt over the next month or two potentially resulting in a slight drop in our retention. We also saw strong market consolidation across our portfolio with 24 million signed in the second quarter in person.
And the lines, which is our strongest quarter in the past several years.
We've also seen a meaningful acceleration in core commercial.
We are confident about our growth prospects going forward and believe our full year 2020, net written premium will likely be relatively in line with 2019 levels.
We also have a line of sight to an accelerated premium growth trajectory as the economy fully opens later in 2021.
And exiting the year with a run rate in the mid to high single digits.
Now moving to our underwriting performance.
In personal lines, we delivered a combined ratio, excluding catastrophes of 76.8% and improvement of 12.1 points that was entirely driven by the personal auto loss ratio.
The personal auto ex cat current accident year loss, and LAE ratio improved 19.1 points to 50%.
Due to the temporary decline in frequency from stay at home orders across the United States.
The majority of the favorability stem from property coverage as well, we took a prudent approach to reserving for potential liability exposures to consider delayed claims reporting legal costs, social inflation and other uncertainties.
In July we continued to see auto claims frequency below our historical averages. Although it is inching back toward these levels, while declining frequency too often translate to increased severity from collisions at higher speeds. We have seen a limited impact from these type of trends, but remain vigilant to it.
Sure our picks prudently reflect these observations should they emerge.
The homeowners current accident year loss ratio, excluding cats increased slightly from the prior year quarter to 51.6% driven by a few larger fire losses.
Personal lines net written premiums was down 5.5% from the same period last year as result of the premium refunds and lowered new business activity.
Excluding the impact of the refunds personal lines growth was up slightly highlighting the resiliency of our portfolio even in the most challenging market environment.
We are continuing to drive needed rate increases consistent with our plans achieving 4.8% during this.
Our whole account preferred customer base and our strong reputation in the market as one of the leading carriers for customers with more sophisticated needs gives us confidence in our ability to achieve low single digit growth for the rest of the year.
Turning to commercial lines.
The segment posted a combined ratio excluding catastrophes of 86.8% in the second quarter, an improvement from 91.9% reported in the prior year quarter, which was driven by the reduce claims frequency in the quarter.
I would like to summarize our Corbett 19 exposures again for you.
The 13 million reserve provision we discussed in the first quarter is holding very well and initial loss claim activity remains quite limited.
This reserve was primarily earmarked for potential losses from business interruption exposure for certain claims, which specifically included this coverage.
However, the reserve also included losses for other areas of potential concern such as recession related exposures, but did not contemplate risk associated with workers compensation presumption compensable city expansion by states at that time.
During the second quarter, we added approximately 6 million in reserves to our workers compensation line to reflect this exposure.
While underlying loss trends in this line remain favorable and frequency was reduced we believe it is necessary to reflect enacted or anticipated presumption orders into our selections.
For context, our workers comp portfolio is only about 7% of our overall mix and has no exposure to hospitals or first emergency responders.
Less than 1% of our premiums are in non hospital medical facilities, which results in very limited exposures, even in the most stress scenarios.
I would also like to remind you that we do not right any trade credit event cancellation or travel insurance Accordingly, our loss experience related to covert 19 is limited and very manageable.
Commercial lines ex cat current accident year loss ratio improved 4.9 points in the quarter to 53.2%.
Driven by lower frequency of losses to varying degrees across all lines.
Similar to personal auto the frequency benefit was mostly felt on the property side of our book and we remain cautious and reacting to the favorability we are seeing on long tail liability coverages.
We're cognizant of the potential for increased legal activity recessionary impacts in certain lines and additional liability exposure in certain areas as the economy reopens.
While we have not necessarily seen these trends yet we want to remain especially prudent given the significant uncertainty ahead, we posted improved loss ratios in both commercial auto and CMP in the quarter standing from decreased property frequency.
In workers' compensation as mentioned favorable frequency was partially offset by a 6 million dollar reserve provision for presumption orders.
However, the overall improvement in loss and LAE ratio ex cat was 2.7 points to 58.3%.
Other commercial lines results also reflected some limited frequency declines across short tail property lines, especially in comparison to elevated experience in the second quarter last year.
We continue to remain prudent and reserving our long tail coverages, including professional and management liability health care and some potential credit exposure in surety.
Commercial lines net premiums written were down 4.6% from the second quarter of last year, primarily due to lower new business exposure related adjustments and the continued impact of profit improvement actions in our program business. The decline was partially offset by strong rate, which increased to 5.1 person.
Second quarter commercial and temporarily improved retention of 86.9%.
Turning to our investment performance.
Our net investment income during the quarter was 57.7 million down about 12 million from the prior year quarter.
As we anticipated and dimension on the first quarter call. The decline was almost entirely driven by a 4.6 million dollar loss on limited partnerships versus income of 4.8 million last year.
As a reminder, we report partnership results on a lag and we can have some performance variability from quarter to quarter.
Our fixed income and equity portfolio reported slightly lower income compared to the prior year as result of the continued low interest rate environment and some reduced dividend income.
Moving forward, we expect our investment results and investment partnership returns to be more stable, but they're not immune to their share of industry dynamics, including historically low interest rates and tightening credit spreads.
Turning now to our equity and capital position.
Our operating return on equity was 9.5%, reflecting all of the unusual activity in the quarter, our book value per share of $81 in 10 cents increased 12.6% during the quarter, primarily due to an increase in unrealized appreciation on our fixed income portfolio from improved market conditions throughout the.
Quarter as well as net income.
After a pause in our repurchase program starting in mid March we reentered the market in early June repurchasing approximately 142000 shares or approximately $14.4 million.
We have continued this activity into July and are keeping a keen eye on overall market conditions.
We believe our strong financial foundation and line of sight into loss exposures in the current market allow us to return capital to our shareholders.
Before opening the line for your questions I would like to update you on our guidance.
As you May recall, we suspended our topline outlook on the first quarter call given that we were in the early stages of the pandemic.
After a few extra months of closely monitoring our premium activity and the impact on our customers. We believe that our top line will be relatively flat to 2019. Despite the premium returned to customers in April and May.
We will continue to reevaluate our expectations as the overall economic picture becomes clearer through the rest of the year.
Net investment income unchanged of approximately 255 million in 2020.
Assuming markets and yields remain at current levels for the remainder of the year, but subject to the volatility from time to time of quarterly partnership income.
Full year ex cat combined ratio of 89.5% to 90.5% down from our original guidance of 91% to 92%.
The improvement takes into consideration the frequency benefit of shorter tail lines, we observed in the second quarter, while still remaining prudent on liability exposures.
Accordingly, the expected X cat combined ratio for the last six months of the year will average in the mid 91% level.
In terms of our expenses, we are maintaining our expectation of a 10 basis point expense ratio improvement from the full year 2019, with some variability between the quarters, despite existing 2020 premium challenges.
We have a third quarter cat load of 4.8% of net premiums earned.
And in effective tax rate to roughly equal the statutory rate of 21% in.
In closing.
Our carefully constructed book of business strong financial Foundation diversified business mix and high quality investment portfolio position us well for the quarters ahead.
Well in the short term there is uncertainty related to covert 19, and the recessionary environment. We're confident in our strategic objective to further enhance underwriting performance in the long term through a stable loss ratio and continued improvement of our expense ratio.
We remain vigilant in managing risk and strategic and pursuing business opportunities.
We have a strong team industry, leading tools and agency partners to achieve our goal to be the premier property and casualty franchise in the independent agency channel.
With that we will now open the line for questions operator.
We'll now begin to question answer session. Telsey question. You May proceed Star then one on your Touchtone phone.
You use any speakerphone, please pick up your handset repricing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble a roster.
First question comes from Matt Carletti from JMP Securities. Please go ahead.
Thanks, Good morning.
Right.
Jack I have a couple of questions for you that relate to you to some of your opening comments.
First is that one point in your comments you mentioned, some some increased competition and as hoping you could just clarify there where you're seeing that commercial versus personal and any any detail you can give and then secondly, appreciate your comp and on kind of how you're.
Maybe repositioning isn't the right word, but just kind of tweaking some of the focus in the business.
Terms of how the world might look coming out of that let's hope you might be able to get into more detail there on.
Some of the areas that might be little less emphasized and some of the area I think arguments intact, but but maybe some others that that might be more emphasized.
Yes, Thanks, Matt.
You know there's no doubt that this is maybe the most dynamic environment that any of us.
Opportunity to work in and.
And so with that we're trying to make sure that we continue to move forward on the portfolio management action that we had planned for the year.
But also acknowledge that.
There are some temporary.
You know dynamics and market environment issues that need to be contemplated so that we don't have a static playbook.
So I think to your first point. This is a competitive business. There's no doubt in personal lines. There's been some competitors that have decided to.
Go after some new business, a little bit more aggressively.
And we will continue to do that in the right. They used in the right areas, but as you saw in our renewable we're maintaining a pretty high level discipline on our rate need and are balancing that with the proper attention than we actually quite proud of that result.
But as Dick and elaborate on where we're a.
We're determined to make sure that we continue to build that book of business and we think there's opportunities for us to navigate.
And overall competitive environment and continue to grow.
On the commercial lines side I would tell you that we're.
There is the slowdown in the economy in the readjustment than many of our agents that have had too.
Two.
Just to like we have.
Caused a temporary slowdown in new business activity in particular high quality New business. I think in May was was was hard to come by unless you had something in your pipeline.
There was some additional.
I think.
Competitive pressure put on the business because account managers and csrs.
Held obligated to fill their time into new business wasn't that active they were going to see where remarketing efforts will be fruitful. So, but we see that already starting to taper off and now I think the competition comes down to what sectors and lines of business and to some degree what geographies you're playing in.
So we as you know play in.
For the most part preferred sectors in the commercial loan space, so they're going to remain competitive.
We don't play in the public Dino business, we don't play in the Med Mal business, we're not in the high end the DNS. So while those areas are experiencing.
The more from pricing there's likely good reason why they are and so we're net net happy that were in the sectors that we are and that we have the line and mix than we have and we're fine playing Ana and a continuing competitive environment that we think we've been.
Successful navigating.
Great. That's very helpful. And then maybe just one last one probably for Jeff.
Related to the guide and particularly the accident year combined ratio guidance with the back half.
91, and a half ish.
You know it looks to me like weather compared to the original guidance for the year just kind of.
How that plays out that you're not assuming much of the frequency benefit you saw on Q too much if any you.
Continues on in the back half the year that in my reading that correctly and if so is that more just conservatism on your part or have you seen something already in July that would indicate to you that were getting back to normal maybe more quickly than we would've thought.
Yes, Matt from a mathematical perspective, that's correct right obviously at a mid 91, that's basically saying the second half of the Euro look like what we guided to upfront. The reality is throughout July we have seen a continuation of frequency decline.
And we really don't know how long that will that will continue we've seen a slow engine back to some more normal levels, but it's still there it's really hard to know a remember we do have a whether to think about obviously Q4 weather could be.
The you know a higher in terms of a in what's happened last couple of years. Although you know the cat load is loves you put it all together and where we haven't react into in the guidance an expectation that we'll have continued low frequency, although that is entirely possible for some period of time.
Okay, Nothing's very prudent, but thank you thanks to the color and welcome aboard.
Yeah.
The next question comes from Paul Newsome from Piper Sandler. Please go ahead.
Oh, yes.
Well, let you hear me I'm, sorry about that.
Yes, so maybe talk a little bit now about the your thoughts on the other one.
We should trend.
Obviously, we're all trying to pull out the.
The kobin related stuff to get to what's going on underneath and travelers talking about two basis point increase in their long term trend for inflation and maybe you can just kinda talk about how the pieces add up for you guys.
Well this is Jack I'll, just make a couple of comments and then I think is Jeff wants to comment as we go through our being very disciplined in understanding the difference between short term and more longer term trends.
And overall I would suggest you that we think we're being very prudent with our picks that we are we have worked hard to continue to improve on our portfolio.
And we are taking some underwriting actions and I think it's impacting our growth to some degree but we're committed.
More than anything to make sure that we come out of 2020 in a healthy position and able to capitalize as the economy comes back and as business opportunities emerge in 2021 that that's mine number one goal for organizations that as 2020.
You know subsides and people really have a firmer understanding what their cost of goods sold our.
We believe we're going to be well positioned well reserves and have the appropriate for an accident year picks to be able to jump on the opportunities as they emerge in 2021. So net net you haven't seen us feel the need to increase our.
Picked as you're suggesting others may have but Jeff I don't know if you want to build on that commentary. So we focus on long term loss trend as Jack mentioned.
We're getting very good rate at the moment and we feel that that raises generally above long term loss trend.
But we're cautious about it and that's in core commercial and specialty we're actually getting better rate than the.
5.1 points or rate, we've talked about and there's probably even a greater delta relative to loss trend. So we're we're cautious we worry about social inflation, we continue to focus on the long term trend, even though there might be some some invading for very short period of time, and we feel good about our ability to maintain or even slightly.
He's our margin.
The little bit Merrell there've been some conversations about workers comp finally, bottoming out and you have any thoughts on whether that might actually happened or are we back to the regular trend if we.
Sure pull out all the noise that we saw this quarter.
Yes, Paul this is John.
I think that the highest level I would suggest you that we agree with that synopsis that we have WAC pricing come down in the workers comp line.
For several years.
Too many of our surprise surprise and they those rate decreases have been justified in that there has been some meaningful off content has moved its way out of the workers comp system.
But I think what you're seeing now is that.
Particularly many of our larger competitors, who have relied on that workers compensation line to kind of bolster their profitability are starting to anticipate those margins being compressed.
And eventually the state rate will start to contemplate more normal loss trends coming into reduced earned premium which will be exacerbated frankly by the pandemic.
So it's our belief that.
State rates will eventually start to stabilize in head and the other direction, but probably more immediately some of our competitors will be forced to start to back off some of the discretionary credits that they've applied in order to protect their margins and to prepare for increased.
I can see in severity into the future. It is inevitable. We are we have seen unprecedented low in declining loss trends in that line. So I conclude with one other thing on that point is that as we said in our.
Prepared remarks.
We have really one of the lowest market shares in workers' compensation in the top 25 carriers and we all while we've been growing that line in the small commercial and in some of the preferred areas like technology and life Sciences, we have been preparing ourselves for the other side of this market, we believe that when those changes.
Happen, we will be able to step to the play and be able to via more vibrant workers comp player.
Profitably. So we look forward to that opportunity down the road when we think those dynamics start to hit the marketplace.
Thank you your thoughts are much cruciate.
Thanks, Paul.
The next question comes from Sean right in Buck from KBW. Please go ahead.
Hi, I was hoping you could more elaborate on the personal auto competition. You match mentioned earlier, how exposed do you feel to some of these larger competitors have talked about decreasing rates and is it going to be a more state by state approach based on how frequency trends are developed with the ongoing endemic.
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Yeah. Shaun this is Jack I'm, just going to say a couple of overarching comments and then I think Dick is a has got some some views to share with you on that topic.
Overall, you know obviously personal lines makes up half PNC sector personal auto being two thirds of that is a meaningful line of business that we all are paying attention to but it's not one big business. It is and we have moved ourselves into a being a preferred account right.
In the eye, a channel and some of the competition you hear about.
Some of it inside the ATM, but much of its not so I'm going to turn it over to Dick to kind of maybe unpack that a little bit and tell you why we believe net net we're in a reasonably good place right you hit on it in your opening sort of question comment it matters in the segment you play and the they play we as you would.
Expect track like all aspects of the business falls within our channel and outside of our channel, we're really diligent about watching market share trends and activities.
Sort of between as you know I, a direct captive and our analysis shows that the I channels and very resilient over the years and holding share and you know a lot of this year. It has been treated as between direct and captives. So you know with accounts is losing market share to that.
Direct so that's when you see some price reductions kind of publicly being promoted you know we don't think that that's going.
In a dramatically affect the I channel because even quite resilient. We also study hard of course, the product and service offerings I'm hearing ourselves to do in our value proposition is the other channels and feel terrific. When you look at our platinum in our procedure offerings in the strength and those will hold up to a you know sort of price competition. There's there's.
Less price elasticity certainly in those segments of that matters a lot within as you know our into the age of course Likewise, we studied the competitiveness a very closely with the market basket of relevant competitors and we watch their their price competitive moves and we've been consistent and.
We don't chase down kind of the outlier, we don't change the competitor that might be dropping prices to grab market share we've been very.
Responsible and a consistent in our in our agents really appreciate that consistency over time, so with our account strategy with less price elasticity has resiliency and the quality of our products. We just think we're going to be able to continue to grow with our current strategy and John This is Jack that one thing.
Moving to Mark I would make on that as I suspect, we'll look back 12 in 18 months from now on say.
We made a good trade off in keeping our retentions high in our pricing.
Stable on a renewal book than last two or three points of new business.
At a discount I think that might be short term thinking and won't lead to good stable growth overtime in the aging.
Okay. Thank you that's a that's very helpful.
The only just we've we've seen reports of reinsurance rates, you noticed continuing to accelerate terms and.
Conditions are firming how's that reshaping if at all your reinsurance program and purchase strategy.
So we went through our seven one property renewal, which you know consists of both a property per risk as well as a cat program or Cat program is a three year Rolling program. So we really only in one third of it.
I see some firming in price and we added some additional carriers to the reinsurance panel.
Also had a little bit of reinsurance, which we haven't yet disclosed, but you'll see it later to the top of the tower to make sure that we had Wendy.
Generally the cost went up a little bit so we will deal with that in the magnitude of a few million dollars or something like that for the rest of the year. So not a not a big issue, but we're very satisfied with the overall program and we were able to navigate through terms and conditions.
In a reasonably acceptable way.
Okay. Thank you very much.
Again, if you have a question. Please press Star then one.
The next question comes from Mike Zaremski from Credit Suisse. Please go ahead.
Hi, Good morning, I know up Paul and others are asked this question, Bob maybe I'll try to asking a different way maybe get some more insight potentially so you know.
Terms the guidance about the loss ratio trend being stable.
Can you kind of have.
Good line of sight into that because you expect.
Commercial rate levels to continue their upward trajectory. So you know it sounds like then you're you're prudently assuming that loss trend.
More likely than not.
We continue to move north as well and I guess another question, we get the most from investors is just what.
What's driving.
Loss trend higher end and how can investors kind of get comfortable that the industries.
Well to get ahead of that and so any kind of color. Our insights is it just broadly so so social inflation more on the general liability side and commercial auto side that you guys are expected to continue its upward trajectory.
Yes. It is it you know you're you're just seeing industry reserve levels fall due to due to that and then any any color help us kind of feel more insights into what's what's driving your application for our loss trend.
Outside of cultivated which right now you know clearly there's some frequency decline, what's driving reputation for loss trend to continue going north.
Yeah, Mike you know very good question and I and this is Jack I'll I'll just tell you I think a separate my thought on the industry versus our company because to be clear, we're not experiencing an upward trend.
Our loss trends right, that's not what we're seeing is really not even what we're contemplating what what we are seeing though in the overall industry. If you look at.
Some of the particularly the higher end of the liability sectors is that we're quite certain they're seeing some some elevations right in and.
And that's why I think the difference is for US is that we generally play in the low to moderate hazard business with relatively low limits profile. So if social inflation and some of the other factors that are impacting liability trends are in fact going up on a relative basis. They.
Should affect left off and you're also looking at geographic.
Views and it's clear that folks that have major concentrations in the major metropolitan areas are experiencing a different level of loss trend freak than those that are putting aside kind of the judicial hellhole that live outside of the major metropolitan area. So at the end.
Today, I think what we would say to you that we're trying to look forward into the future and suggest that when you look past them. The short term trends. It is at least possible that some of what we saw in terms of social inflation in terms of increased litigation couldn't get exacerbated.
Right, we're pretty sure that when this recession kind of fees its way through.
They'll be a lot of economic pain of which people both families and businesses are going to try to reconcile and that generally doesn't.
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Lead to kind of stable litigation rates or or demand. So I think it's more of us being thing being thoughtful about where the trends could go but in the short term, making sure that we get as much rate as we can in the marketplace with the sectors in the geography that we play in and that's been.
Reasonably stable for us.
Got it very helpful and that's my only question. Thank you.
Thank you Mike.
This concludes our question and answer session I'd like to turn the conference back over to axon out Luca Szczerba for any closing remarks.
Thank everybody for your participation today, and we're looking forward to talking to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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