Q3 2020 Travelers Companies Inc Earnings Call
As a reminder, this conference is being recorded on October Twentyth Twentytwenty at this time I would like to turn the conference over to Ms. Abbe Goldstein Senior Vice President of Investor Relations Ms. Goldstein you may begin.
Thank you good morning, and welcome to travelers discussion of our third quarter 2020 results.
At least our press release financial supplement and webcast presentation earlier. This morning, all of these materials can be found on our website at travelers dotcom under the investors section.
Speaking today will be Alan Schnitzer, Chairman and CEO, Dan Fried CFO and our three segment presidents break Kozloski, a business insurance, Tom Kunkel of bond and specialty insurance and Michael Klein of personal insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through <unk>.
Paired remarks, and then we will take questions before I turn the call over to Alan I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation. Today includes forward looking statements. The company cautions investors that any forward looking statements involve risks and uncertainties and is not a guarantee of future prefer.
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Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors are described under forward looking statements in our earnings press release and in our most recent 10-Q and 10-K filed with the FCC, we do not undertake any obligation to update forward looking statements.
Also in our remarks or responses to questions. We may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release financial supplement and other materials available in the Investor section on our website and now I'd like to turn the call over to Alan Schnitzer.
Thank you Abbe good morning, everyone and thank you for joining us today.
You're very pleased to report third quarter core income of $798 million or $3.12 per diluted share in core return on equity of 13.5%.
Our bottom line results. This quarter reflects strong underlying underwriting income, resulting from record net earned premium of $7.4 billion.
The underlying combined ratio improved 2.6 points.
Strong 91.5%.
We're pleased with the underwriting results in all three segments improved underlying profitability in both business insurance and personal insurance.
Business insurance the underlying results improved due to margin expansion as earned rate exceeded loss trends.
In personal insurance the benefits from lower frequency in the auto business more than offset higher levels of non catastrophe weather wildfire loss.
In bond and specialty insurance the underlying combined ratio was elevated consistent with the outlook, we shared on the call last quarter.
Note that the combined and underlying combined ratios were still under 90%.
Generating solid returns in a challenging environment.
Profitability in all three segments continues to reflect the benefits of our strategic focus on productivity and efficiency come up I don't think in the sub 30% consolidated expense ratio.
Core income for the quarter also included catastrophe losses of $397 million pretax meaningfully above.
Meaningfully above the 10 year average.
I want to acknowledge the devastation caused by recent catastrophe.
We hope for a quick recovery for all those who have been impacted.
I also want to express my gratitude truck dedicated clean team for taking care of our customers. During these extraordinary times the market.
Of the 100000 or so claim notice since we've received so far this year.
Writing up a record number of Pcis catastrophes in the U.S.
Our claims team, it's not our objective of closing more than 90% of the claim rate than you do.
A quick resolution results and a better experience for our customers in a more efficient outcome for us.
Q4, I also want to acknowledge the actions our underwriting and risk management teams have taken over recent years to manage our exposure to weather volatility.
Mmm ticket branded property cat aggregate treaty, which is mitigated our losses.
And actually pick up the balance sheet risk reward meaningfully reduced our exposure wildfire.
Illustrate the point in the areas impacted by the five costly as California wildfires the season.
Third lower than it was two years ago.
Turning to our investment portfolio. This quarter, we again benefited from our well defined and consistent investment philosophy with our.
With our high quality investment portfolio generating net investment income of $566 million aftertax.
Lastly, before I turn to the top line I'll share it with the uncertainty surrounding business interruption claims.
Teach resolved favorably and consistent with our expectations.
So we remain confident on that front.
In terms of the top one in production, we continue to generate strong results.
Net written premiums in the quarter grew by 3% driven by strong renewal rate change in retention in all three segments.
In our commercial businesses exposure change our renewed accounts only modestly negative for both the quarter and year to date.
Compared to a much more significant reduction in economic activity.
We believe that in addition to generating better underwriting results our high quality portfolio of accounts is more resilient to economic hardship.
In business insurance, we achieved record renewal rate change of 8.2%.
Four points higher than the prior year quarter, while retention remains strong.
We achieved higher renewal rate change year over year and sequentially in each of our lines of business other than workers compensation.
In bond and specialty insurance net written premiums increased by 4% as renewal premium change in our domestic management liability business rose to 8.1%, including.
Putting record no rate change overtime.
While retention remained at an historical high.
In personal insurance net written premiums increased by 8%.
Going by strong retention and new business business in both agency auto and agency homeowners.
In our agency homeowners business, you achieved renewal premium change of 8.2%.
Its highest level since 2014.
Across all of our businesses, we've made good progress achieving rate gains in managing other lovers and profitability to improve the outlook for returns and those ones that need it and we'll continue to execute to meet our return objectives.
For all the reasons, we've discussed previously from the loss environment to the interest rate environment. We expect continued momentum in the marketplace.
Notwithstanding our focus on successfully managing through the pandemic and addressing other headwinds impacting the industry.
Important to note that we haven't been distracted from pursuing our strategic agenda.
We remain focused on leveraging our scale and resources to continue to invest and innovate.
As we said before we believe the winners in our industry those deep domain expertise.
Can deliver industry, leading results innovating successfully on top of a foundation of excellent.
From a position of strength, we continue to focus our efforts on extending our advantage in risk expertise provide.
Great experiences and improving productivity and efficiency.
In our commercial businesses, we continue to make progress in digitizing virtually every aspect of the value chain.
Well at the same time enhancing our advanced analytics.
Just as one example, our BOP 2.0, small commercial product, which we launched in 2019 benefits from both.
In the states in which we rolled it out we've seen about a 15% increase in both submissions and new business premiums.
This product uses AI and third party data to improve underwriting segmentation operational efficiency and the agent experience.
That point, you artificial intelligence eases the burden on the agent and has resulted in a substantial improvement in classification accuracy.
In personal insurance, we're balancing sophisticated total account solutions, the streamlined aegion and customer experiences.
For example, we've completely redesigned the experience of our intelligent audio telematics offerings introduced a distraction reading.
We rolled this out in nine states during the second and third quarters and have plans to launch in an addition, an additional 10 states in the fourth quarter.
Reserving a nearly 30% increase in the rate of adoption for intelligence and there.
I never see strong agent feedback.
Also in the fourth quarter Rolling out an enhanced customer self service tool in the new mobile App.
In our claim organization, we're advancing the rollout of virtual end to end claim service tools.
Breaking the pandemic driven trends, an accelerated digital adoption by individuals and businesses.
Customer satisfaction, our Oh, well pay off discipline remains strong.
Somewhat up once you start performance in the face of a pandemic and a challenging underwriting environment.
It reflects the importance of a strong underwriting culture, the benefit of data and analytics and the franchise value we offer to our customers and distribution partner [noise] older.
All of that together with our highly engaged and talented workforce, we're confident that we're well positioned to capitalize on opportunities. If the economy continues to reopen.
With that I'll turn the call over to Dan.
Thank you Alan.
Our core income for the third quarter was $798 million generating core ROI of 13.5%.
Up significantly from core income of $378 million and core orally of 6.5% that we reported in the prior year quarter.
These increases resulted primarily from this year's favorable third quarter P.Y.D. compare.
Compared to net unfavorable T y D in last years third quarter.
As well as a significant increase in underlying underwriting profit.
More on both of those items in a minute.
Our third quarter results include $397 million pre tax cat losses, compared to $241 million in last years third quarter.
This quarters cash, including Hurricane Laura Tropical storm. This is the severe straight line winds that impacted mid west in August and several large wildfires in the western United States.
The increase in the level of cat activity was even more pronounced than those numbers suggest as our net cat result in the quarter was tempered by recoveries on the aggregate catastrophe Xol treaty.
We have recognized a full recovery under that treaty and our third quarter results with $233 million pretax benefit in cat line and $47 million pretax benefiting non cat weather in our underlying results recall that last year, we did not have any recoveries under the treaty until the fourth quarter of course before.
Recovery in this year's third quarter management, there was no coverage remaining from this treaty as we enter the fourth quarter.
The underlying combined ratio of 91.5%, which excludes the impacts of cats and few I'd improved by 2.6 points from 94.1% in last years third quarter.
The underlying loss ratio improved by 2.4 points and benefited from favorable auto frequency related to COVID-19, and the impact of earned pricing in excess of loss trend partially.
Partially offset by an increase in non cat weather losses, including wildfires.
The expense ratio of 29.3% since two tenths of a point favorable to last year's third quarter results and reflects our strategic focus over a number of years on improving productivity and efficiency.
Setting aside quarter to quarter variability our year to date expense ratio of approximately 30% is a figure were comfortable with.
Our topline proved to be resilient with a 3% increase in net written premium as continued strong renewal rate change and retention in all three segments more than offset modestly lower insured exposures and the commercial businesses.
For the quarter losses directly related to COVID-19 totaled $133 million pretax.
$92 million in business insurance, driven primarily by workers comp and $41 million and our bond and specialty business predominantly driven by management liability more.
More than offsetting those losses were lower levels of auto claims and to a lesser extent fewer non covered workers comp NGL claims due to lower levels of economic activity.
The net impact of the cold environment on the consolidated underlying combined ratio amounted to a benefit of about two points, mostly in personal insurance.
Given the ongoing uncertainty in this environment, we continue to take a cautious approach in estimating the net impact of COVID-19 related losses and says.
Consistent with my commentary last quarter, the majority of direct holding losses that we booked year to date through September is still sitting in IB NR.
Looking at the year to date impact of direct holding losses net of related frequency benefits and other underwriting items. Our underwriting results have benefited by a little more than $100 million pretax or about a half a point on the consolidated underlying combined ratio.
Including the impact of premium refunds to policyholders.
However year to date net investment income reflects the significant adverse impact on our non fixed income portfolio.
Turning to prior year Reserve development as previously disclosed third quarter includes approximately $400 million of pre tax benefit from the PGT segregation.
About 80% of that benefit is reflected in personal insurance, but the remainder reflected in business insurance setting.
Shutting PG in each of the side Pete.
The results in the quarter were as follows.
In personal insurance net favorable development of $40 million pretax was driven by auto results coming in better than expected for recent accident years and bonds.
In bond and specialty insurance, there was no net impact from P. Vijay.
In business insurance, we recognized unfavorable development of $295 million pretax as a result of our annualized Bestest review.
While there was some slight improvement in several of our as best as indicators. The overall level of eight losses and general claim activity have persisted at levels higher than we had anticipated.
This year as we do every few years women due to certain macro assumptions underlying our actuarial analysis.
Our updated view of ultimate asbestos related losses resulted in an increase in the low end of the actuarial range. This year.
This year's asbestos charge is greater than last year's charge as a result of our updated view of the range for ultimate losses, not as a result of increases in paid losses for some clarity.
Our some indications that the environment is improving in terms of the emergence of new asbestos claims going forward.
Page 19 of the webcast presentation includes the most recent annual data from the centers for disease control and prevention.
Which shows that the total number of deaths from mutual Sealy, OMA and 2018 decreased by nearly 6% compared to 2010.
Of note as you can see on the bottom two lines of the table.
Economies will see Leone with deaths was much more pronounced in all of the younger age groups. This trying.
This trend is directionally consistent with our expectations that overtime high risk group of people actually exposed to asbestos in the workplace prior to the late 19th Seventys will get smaller and will now.
And will not be replaced by younger people as those who entered the workforce sometime in the 19 eighties should not have been exposed to as best as to nearly the same degree as their predecessors.
Excluding the impacts of the PG any settlement and the annual as fastest review there was virtually no net prior year reserve development and business insurance.
Favorable development and workers comp was offset by an increase to the reserves for legacy liabilities and our run off books related to a single insured arising out of policies issued more than 20 years ago.
After tax net investment income increased by 7% from the prior year quarter to $566 million increase was driven by our non fixed income returns where results for our private equity hedge funds and real estate partnerships are generally reported to us on a one quarter lag.
Because of that reporting lag the rig.
The recovery experienced in the broader markets during the second quarter benefited our non fixed income results in the third quarter.
Fixed income returns decreased by $31 million after tax as the benefit from higher levels of invested assets was more than offset by the decline in interest rates consistent with our comments on last quarter's call.
Also consistent with our prior commentary, we expect after tax fixed income and I in the fourth quarter to be down $35 million to $40 million compared to a year ago.
Looking ahead to 2021, our current expectation is for after tax fixed income and I to be between 420 and $430 million per quarter.
Turning to capital management.
Operating cash flows for the quarter of $2.3 billion were again very strong all our capital ratios were at or better than target levels, and we ended the quarter with holding company liquidity of approximately $2.3 billion well above our target level.
Recall that in April we prefunded, the $500 million of debt coming due in November with a new 30 year $500 million debt issuance. So our holding company liquidity at September Thirtyth is temporarily elevated by that much.
Investment yields decreased as credit spreads tightened during the third quarter and accordingly, our net unrealized investment gains increased from $3.6 billion aftertax as of June Thirtyth to $3.8 billion after tax at September Thirtyth.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $94.89 at quarter end up 2% from year end 2019, and a 5% year over year.
We returned to $218 million of capital to our shareholders. This quarter by dividends, we did not repurchase any shares during the quarter looking at.
Looking ahead, there is no change in our approach to capital management.
Well, there's more clarity on the state of the economy, we may buy back some shares in the coming quarters or we may continue to choose to buy none now I'll turn the call over to Greg for a discussion of business insurance.
Thanks, Dan business insurance produced $365 million of segment income for the quarter, a significant increase over the prior year quarter with prior year development underlying underwriting income and net investment income all contributing to the year over year increase.
The underlying combined ratio of 94% improved by almost two points driven by more than a point of earned rate in excess of loss trends.
A modest favorable net impact from the pandemic contributed about a half a point to the improvement.
As for the topline net written premiums were 1% lower than the prior year quarter.
With strong rate and high retention, mostly offsetting modestly lower insured exposures and lower levels of new business.
As Alan mentioned, we're very pleased with the resilience of our top line in the face of the ongoing macroeconomic challenges.
Turning to the domestic production, we achieved record renewal rate change of 8.2%.
Four points from the third quarter of last year and almost a point from the second quarter of this year, while retention remained high at 83%.
We feel very good about the headline numbers, but as weve shared before the quality of the execution and segmentation underneath the headline numbers are just as important.
To that point, while we achieved meaningful rate increases in all product lines, except workers comp our underwriters are making deliberate you granular decisions with respect to rate and retention and account like no work class by class basis.
Thanks to our focus on continuous improvement data and analytics at the point of sale the quality of the execution is good as I've ever seen.
New business with $505 million was 9% lower than the prior year quarter we.
We attribute the decline to lower levels of economic activity as well as careful risk selection by our underwriters.
Their core middle market business for example, well submissions are up our current ratio was lower as we are taking a disciplined approach given our view of quality of new business in the market.
That's for the individual businesses in select renewal rate change increased to 2.9% Mark.
Marking the seventh consecutive quarter in which renewal rate change was higher than the corresponding prior year quarter Rick.
Retention of 80% was down a couple points from recent periods largely driven by policy cancellations that were deferred to the second quarter due to our pandemic related billing relief program.
In middle market renewal rate change increased to 8.3% while retention remained strong at 85%.
The 8.3% was up by more than four and a half points from the third quarter of 2019, we achieved positive rate more than 80% of our accounts this quarter up from about two thirds in the third quarter of last year.
To sum up we feel terrific about our results and execution challenging underwriting environment.
We also feel very good about the investments, we're making for the future and the benefits we're seeing from those investments.
Those investments include enhancing the experiences for our customers and distribution partners digitizing the underwriting transaction in creating efficiencies.
For example, we've recently launched multiple pilots to automatically in corporate data from our distribution partners Agency management systems directly into our systems substantially reducing the time and friction in the process, while also improving data quality.
We're confident as ever that are meaningful competitive advantages position us well for long term profitable growth.
With that I'll turn the call over to Tom.
Thanks, Greg honest specialty delivered solid returns and growth in the quarter. Despite the ongoing headwinds of code at 19.
Segment income was $115 million, a $24 million decrease from the prior year quarter as the benefit of higher volumes was more than offset by a higher underlying combined ratio.
The underlying combined ratio of 89% increased 5.4 points, primarily driven by estimated losses from co bid 19 and related economic conditions.
Given the products that we write we expect the results of this segment to be impacted in times of severe economic downturn.
We experienced that during the financial crisis and were seeing elevated loss activity in the current environment.
We contemplate economic volatility in our underwriting and in our pricing and as Alan said in these circumstances, we feel good about the returns we generated in the quarter.
We expect that the underlying combined ratio will continue to be elevated at around this level over the near term.
Turning to topline net written premiums grew 4% for the quarter, reflecting strong growth driven by improved pricing in our management liability business.
Partially offset by lower surety production due to the continued economic impact of co bit 19 on public project procurement and related bond demand.
In our domestic management liability business. We are pleased that the renewal premium increased to 8.1% driven by record rate.
This marks the eighth consecutive quarter in which our PC is higher than the corresponding prior year quarter.
Retention remained at a historically high 90%.
These production results demonstrate the successful execution of our strategy to pursue rate where needed while maintaining strong retention of our high quality portfolio, we will.
We will continue to pursue rate increases where award.
Domestic management liability new business for the quarter decreased $14 million, primarily reflecting our thoughtful underwriting and this elevated risk environment.
Similar to what you heard from Greg in business insurance submissions are up while quote activity is down.
So Bob this specialty results remained resilient despite the challenges brought on by cobot 19th we.
We continue to be pleased with our strong execution and feel confident about our ability to navigate through this challenging environment and continue to deliver strong returns overtime.
And now I'll turn it over to Michael to discuss personal insurance.
Thanks, Tom and good morning, everyone.
In personal insurance this quarter, we are very pleased with our continued execution in the marketplace.
Delivered excellent profitability and grew net written premiums by 8% achieving record levels of domestic policies in force.
Personal insurance segment income for the third quarter was $392 million up $261 million from the prior year quarter.
Driven by the pre tax impacts of an improvement of $163 million in the underlying underwriting gain.
And $343 million of higher net favorable prior year reserve development.
Partially offset by $174 million of higher catastrophe losses net of reinsurance.
Our combined ratio for the quarter was 86.4% an improvement of 11.6 points from the prior year quarter.
Driven primarily by the increase in net favorable prior year Reserve development.
Higher catastrophe loss experience in the quarter was largely offset by improvement in the underlying combined ratio.
The improved underlying combined ratio reflects the continuation of favorable auto loss experienced in the quarter.
Mostly offset by higher non catastrophe weather related losses.
I'll discuss both of these dynamics in a bit more detail on that.
Agency automobile profitability was very strong with a combined ratio of approximately 80% for the quarter.
The underlying combined ratio of 81% improved nearly 12 points continuing to reflect favorable frequency levels.
Approximately eight of the 12 points of improvement relate to current quarter favorability.
The remainder results from favorable re estimates of activity in the first half of 2020.
We continue to observe lower claim frequency as a result of fewer miles driven in light of the COVID-19 pandemic.
For the third quarter data from our until the dry program indicates that miles driven increased relative to last quarter, but continued to be down from pre COVID-19 levels.
In response to this continued favorable loss experience, we filed a modest rate reductions and a handful of states during the third quarter.
We will continue to analyze and incorporate current trends into our underwriting and pricing decisions as we balance business volumes and profitability.
In agency homeowners and other third quarter combined ratio was 92.8% in it.
An improvement of 9.2 points from the prior year quarter.
Resulting from 26 points of higher net favorable prior year reserve development, mostly from the PG any subjugation recoveries.
Partially offset by elevated levels of catastrophe losses, and an increase in the underlying combined ratio driven by higher non catastrophe weather related losses.
Our catastrophe and non catastrophe experience reflects a very active quarter with a record 31 PCF events.
West Coast wildfires represented almost half of the total tcs events in the quarter.
Consistent with Dan's comments earlier, the quarter catastrophe losses for personal insurance were also impacted by the Midwestern Rachel Tropical storm, you tell you us and to a lesser extent hurricane Laura.
In addition to pursuing rate increases in property as we have been for some time we.
We continue to review and modify terms and conditions and implement loss mitigation actions in response to the elevated loss activity.
Our actions to date have enabled us to reduce or avoid losses, we would have otherwise incurred.
Improve returns as we continue to grow the line.
Turning to quarterly production, our domestic agency results were again very strong.
Our retentions remain high.
Both in new business were up versus the prior year quarter.
And we remain pleased with our policies in force growth.
Agency automobile retention was 84% and do business increased 9% from the prior year quarter, both contributing to accelerating growth in policies in force.
Renewal premium change was again lower as we continue to moderate pricing in response to favorable loss activity.
Agency homeowners and other delivered another very strong quarter with retention of 86% and a 22% increase in new business.
Renewal premium change increased to 8.2% as we remain focused on improving returns and property while growing the business.
During the quarter, we continued to respond to the needs of our customers and distribution partners.
First and foremost let me add my thanks to our claim professionals, we are delivering on our commitment to be there for our customers and distribution partners in response to the significant number of catastrophe and weather events in the quarter.
At the same time, we continue to deliver new capabilities in the marketplace.
Alan already mentioned, both intelligence and our new my T mobile App, both of which are key tools and helping us attract and retain customers.
We also expanded the availability of our digital photo proposal that.
That gives agents and brokers the ability to send travelers insurance quote to their clients mobile phone.
Interact with them digitally about the terms of the proposal, making the transaction more seamless for both the agent and the customer.
And after reaching our goal of planting 1 million trees for customer enrollment and paperless billing we.
We extended our partnership with American for Us to plant, an additional 500000 trees by Earth day 2021.
We have already achieved that milestone well ahead of schedule, providing our customers the digital experience safety, while benefiting the environment.
These examples and others illustrate our ability to develop and deliver the capabilities our partners and customers value.
We are very pleased with our performance so far this year and I'm proud of our team's efforts to continue to deliver results while investing in the business for the future now.
Now I will turn the call back over to Abbie.
Thank you very much operator, we're ready to start coming in.
[laughter] you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound or hash key please standby will weaken pilots you in a roster.
And our first question comes from the line of Mike Zaremski from Credit Suisse. Your line is open.
Hey, good morning, Thanks first question.
We can talk about some of the.
Reserve changes during the quarter. Thanks for all the commentary I believe Greg when you were talking about business.
The BDI segments.
You didn't mention any additions to general liability and I believe that had been.
We have been adding to that for in prior quarters. So can you confirm.
That's that's what's that wasn't the case and maybe just overall to Alan or or Greg. If you guys can talk about whether you. Your view has changed at all on overall lost expense trends.
Yes, good morning, Mike, It's only let me start with loss trend in the maybe I'll turn it over to Dan to talk about prior development.
So.
In the quarter, putting aside for a second the direct co bid losses in the quarter generally what we saw was favorable loss activity primarily related to code and so I think people staying home less and less economic activity lower levels of frequency is.
As you heard us say last quarter and as you heard us repeat again this quarter, we've taken a very cautious approach to recognizing that.
Thats favorable news there is still a fair amount of uncertainty and so we're going to be cautious about that but.
But we didnt see anything in the quarter that surprised us or cause us to think that that loss trends were deteriorating and Dan why don't you comment on what is sure. Mike. So just to go through business Insurances P y D.
Just for a second quick recap of the summary, so it ended up being about $220 million unfavorable all and that's driven by.
$295 million as we said on asbestos.
Then there there was favorability from B portion of the PG any settlement, yes. It does.
So that was worth about 20% of the 400 million, so thats $80 million of a good guy.
And.
That gets you to about 215 compared to the 220. So the other moving parts you could think about it as as that offsets and those are favor.
Favorable and workers comp.
Unfavorable for a single account and one off from policies that we should more than 20 years ago.
No. We Didnt mentioned the other lines because it was really very modest activity in the other lines, some pluses and minuses and basically net to zero.
Okay.
That's helpful. My My last question is.
Is I guess in regard to the overall competitive environment Alan you.
In your prepared remarks, you talked about expect continued momentum in the marketplace I guess.
What we're trying to get comfortable with is you know.
The investment income levels, we can see thank you for the guidance right clearly there are under a lot of pressure and I think you know in in our shoes, we havent been in a kind of firmed hard marketplace in a while so we're trying to get comfortable that the pricing momentum in excess of loss trends continue because that seems like too.
Except in eye pressure, we have to get to meaningfully better combined ratios in outer years. So just maybe just some more color Alan I know you guys.
You guys. When you say continued momentum do you expect pricing to continue moving higher are these levels kind of good enough for for you guys to start kind of chipping away at offsetting some of the investment pressure.
Yes, well clearly Mike written rate is at a loss trend. So we're definitely making progress at these levels and we're not going to we're not going to give pricing outlook, but we do choose our words pretty carefully and I'll tell you that.
The fact of the matter is that for us and for the industry broadly. There are just many many lines of business that are not yet rate adequate and the drivers are clearly environment. So.
On the wealth side, social inflation isn't going away, we've got weather losses, we got wildfires that that are burning.
As you pointed out interest rates are lower for longer that's going to be a driver of the outlook for returns.
We do have some capacity issues in some lines is there are some markets that are are pulling back on capacity. So we think this broader this broader environmental all of these broader environmental trends.
We'll we'll continue to provide positive momentum in the marketplace.
Thank you.
Thank you.
Our next question comes from the line of Ryan Tunis from Autonomous Research. Your line is open.
Hey, Thanks, good morning.
I guess my first question is it sounds like the cobot benefits, you're enjoying our frequency based mostly short tail lines. So.
I should take that to mean that you've continued to book in lines like commercial auto similarly to the type of loss trend that you thought coming into the year, which I would think would be.
Above your average loss trend correct.
Yeah, Ryan it's Dan that's right, so where we are.
As Weve said, I think last quarter and this part quarter trying to be cautious in our assessment of the net impact of of coated there. There is some benefit in the shorter tail lines, but we're we're trying to be pretty cautious in terms of how much that will be recognized in the current accident year, but in terms of the casualty coverages as you.
Mentioned, yes, yes, that's correct.
Correct.
I totally understand that I'm, just trying to get some perspective on it clearly we don't know what frequency is going to be there could be delays reported claims et cetera, but.
Just from your seat looking at the type of claim activity, it's come in through the door.
But if that were to hold true what's the type of frequency benefit on commercial auto that I guess, we're not at this point seeing and results yet.
Yes.
We're we're reluctant to put a number on that I think we're not going to do it right but.
And frequency it does develop develop certainly lot lot more a lot more quickly than severity as you note the phone rings or phone doesn't ring, but but I think we're going to leave it as we recognize some of that because there was enough of it that we couldn't not recognize some of it but we've been pretty cautious in the assessment.
Got it and then.
The other follow up I had I guess probably for Dan is.
Thinking about just the aggregate treaty I guess it kind of work this year, but it also kind of didnt because were going into the fourth quarter and we've gone through the top.
How are you thinking about.
The strategy about Reinsuring cats, I guess headed into 21 are you thinking about doing more aggregate cover it may be going lower.
Is that something that we should expect.
Potentially be a catalyst for next year.
Before Dan answer that question I'll, just I'll just insert that I think the tree actually worked just fine it was a weather that didn't work so well but.
Fifth and when you take.
Right I think I think we'll do as we would do for for reinsurance.
In any going into any year, we'll we'll make an assessment of price versus risk and then and then decide what and how much how much we're going to buy.
I think I'd say in summary, we're glad that we've had that treaty for the last two years.
To your question specifically about do we go to a lower attachment I wouldn't think so we've got a growing business and if anything we probably would go naturally to it to a higher attachment point just to reflect the growth in the business.
But maybe maybe we'll buy that reinsurance again, and maybe we won't it'll it'll depend.
How we feel about the.
The risk transfer relative to the pricing that we can get because again, we're writing with.
With the idea that we're a gross lines underwriter and we said a couple of years ago. It felt like there was a little more uncertainty in the weather environment and so we wanted to have that treaty and we're glad we had it and we'll see how that plays out going into next year and the other thing I would add to that Ryan is and Thats exactly right. We bought that because we were wanting to acknowledge the incremental uncertainty.
We felt after some.
Wildfire losses, I guess in 17 and 18.
But but as I mentioned in my prepared remarks, we've taken a pretty substantial steps to try to get that risk reward and balance so.
That that would also factor into.
Our view of the value of that reinsurance treaty in the terms, we can get it on next year.
Thanks.
Thank you.
Our next question comes from the line of Brian Meredith from you be asked your line is open.
Yes. Thanks, I guess my first one I guess is maybe.
Maybe some commentary about workers comp I mean, I think that given where interest rates are at some point, we should start to see that line see some positive rate momentum that's an important component, but what are you seeing kind of what are your thoughts on that line right now.
Great Great young to take that.
Yeah, you bet.
Morning, Brian.
So we like our longstanding competitive and economic advantages that we've got out of that line and Thats. Why we are the largest writer in the U.S. and ensure there is there is a little bit of pricing reductions going through that line right now and that always puts some pressure on existing margins, but we aren't standing still we continue to invest in our claims.
Jack This is specifically around medical management sophistication and our underwriters were always given them new tools and new insights to make sure our risk selection in our renewals segmentation offset some of those price reductions and workers comp is just one piece of our portfolio as we remind you all the time, we're more of an account solution than an individual.
Model line writer and we'll continue to write our customers work with accounts. In addition to workers comp. So we continue to feel good about the portfolio in the future that line.
I mean, it was that that improvement in select was that due to comp maybe getting a little bit less less competitive.
Great and select.
Well all both select the middle market are clearly going to follow the linear trend of the bureaus loss cost recommendations and so in the select business, where it's more of a flow business, where did you filed that rate structure you feel it more there than you would in middle market, where you have an experienced matson discretionary pricing and you look at the.
Individual exposure, rather then file at a state level, so little more sensitive to the reductions in select than you would see a middle market.
Great and then just one quick quick follow up for Dan.
The aggregate cover this quarter is it possible to breakout how much of that benefit it kind of non cat weather versus cat losses.
Yes, Brian I gave it actually my prepared remarks, so sorry, I missed that it's quite rightly said, we said so $280 million was the total recovery to 33 wants to cat and 47 million underlying.
And that's largely in the personal lines.
The split the split is a little different between between the two the cat split it's about 50 50 P.I.B.I.D.
The noncash split goes more like 70, 30 P. Ipi.
Great.
Very helpful. Thank you.
Our next question comes from the line of a lease Greenspan from Wells Fargo. Your line is open.
Hi, Thank you. Good morning on my first question is also on the aggregate cover so given that you guys have exhausted that cover on and this is a comment that is specific to fitness insurance on how can we think about the improvement within the underlying loss ratio that you could see there in the fourth quarter I guess.
We could expect some kind of headwind.
Non cat weather, just given the absence of the aggregate or how should we think about the fourth quarter.
At least one Stan.
The the aggregate so as I just said in response to Brian's question not not a big deal to the underlying for business insurance in the third quarter. So it got about 30% of the 47 million that was non cat.
So you could think about that for B is not be in more than 20 or 30 basis points in terms of its impact on the quarter.
Okay. So if we adjust for that and then also for the Colgate benefit that you buy pointed out earlier is that a good type of bomb kind of run rate to think about for some margin improvement that we could see in the fourth quarter.
Well, what I don't think I'd expect the cobot impact to to cease as of as of September Thirtyth certainly.
Certainly the cat cat recovery.
The treating recoveries all contained in the third quarter and you could take that out for sure.
I'm not sure anybody knows what exactly the impact you called that is going to be in the fourth quarter or what what weather volatility is going to look like and I think we're going to get away generally from trying to forecast margins, but.
Happy to take some modeling questions offline. If that's helpful speaks that weekend.
Yeah, and then my second question was on the expense ratio, Dan I think you said that 30% with kind of a good run rate, but as we're thinking like maybe this is my guidance might that you guys did guide would be that on as you're getting a good amount that price and that's earning should we expect that we could see on some improvement.
<unk> expense ratio due to the denominator or is it counter balanced by some investments that you pointed out that you guys have been making internally.
I think I think those are the considerations believes that will go into what it ends up being like I do think you know to the degree that we can get some bottom line growth you be would that be enough.
We in a position to continue to see some leverage on the expense ratio, but as we've said.
Number of times over the last couple of years, what we like about productivity and efficiency that we've generated is it gives us the optionality of whether we make additional investments in places that we feel are going to provide a bigger bang for the Buck down the road or I'll, let some of that come through the bottom line. Although is really trying to communicate was that we don't we're not seeking a drummer.
Not a change in the expense ratio from where we are right now.
Okay. That's helpful. Thanks for the color.
Actually.
And our next question comes from the line of Josh Shanker from Bank of America. Your line is open.
Yeah, good morning, everybody.
On a related question first one is about.
About surety and can you talk a little bit about the premium volume looked pretty reasonable in the bond and specialty business. What are we seeing in terms of the Coca economy for construction starts and whatnot.
Yeah. This is Tom Josh Good morning, when you think about surety.
If you break it up to the non construction on the construction side, our our regular nonconstruction charities owning up quite nicely, but with all of the decline in tax receipts and the difficulties that various public bodies are having.
Funding public works projects, that's what is really driving.
The drop off in surety written premium and so you know we will have to wait and see what the federal government does with any stimulus that that might involve construction, because certainly states and other entities have shovel ready projects.
Is there an implication for things that have already begun construction.
Is there a risk that we start seeing.
Issues with the surety claims because they're not able to be finished.
There are two different issues you know is fine.
You know as far as.
The projects stopping them unless they were ordered to stop by government authority I wouldn't expect to see a project that is ongoing stopping.
And then as far as a slower economy, causing additional default. So that certainly is possible it really depends on the contractors and maturities portfolio and how sound their financial position was going in and how they handle.
Pursuing work or not pursuing work in shrinking the size of their company when times are our lean so we take a lot of pride in and.
And our contractors and we manage at portfolio and we think different surety will perform differently draws this.
Jeff just I'd just I'd just add to that is yes.
We're underwriting that commercial surety book the construction surety book today, the same way, we Didnt financial.
Financial crisis in and it performed pretty well through that so we can't give any assurances who knows but we feel pretty good about our underwriting practices and the people who are making the decisions to put business on the books, yes.
And Ben.
Sort of a philosophical question. If we go back in time, maybe 10 years I don't know when when you came up with a traveler's definition for catastrophe and of course it varies from the PCF definition. It seems as time goes on the risk associated with non cat weather.
Gets greater and greater in terms of volatility on your margins.
The variance between your definition the PCF definition still useful we've gotten to a point where were the reason for that difference.
Our starting to create a.
Certain volatility of results that we wouldn't otherwise hoped to see.
Yes, Josh we think about that a lot. So I appreciate the question and maybe some day offline, we would love to get your thoughts on it I mean, our view is from an economic perspective, the losses are going to be what they're going to be whether they get reflected in a cat liner earned an underlying line correct.
And frankly, we report the numbers the way we manage the business and we think that there is a level of loss activity that is defined as a tcs event that is in a working layer. If you will and that ought to be managed day in day out year in year out by the underwriters that are managing it as as.
Compared to a catastrophe loss, which we obviously defined as a higher level, which which get mad.
Managed and addressed over a much longer period of time. So we think it's the right way to manage the business. We think it's the right way to talk about the business internally and we make the decision to talk about it externally the same way we manage it internally so I get that it might from time to time cost some modeling issues or definitionally issues, but.
But we think the consistency in the thoughtful approach to managing it is sort of the right way to run the railroad.
Thank you.
Thank you.
And our next question comes from the line of Paul Newsome from Piper Sandler Your line is open.
Hey, good morning, Thanks for the call some answers.
I was hoping you could hone in on the competitive environment is the auto insurance business in particular.
Seeing in the market different things from the rate environment, Obviously, you do what you're doing but.
Is it materially more competitive market today than it was recently and.
I'll just give you my follow up question, which is I'd like to know how that competitive environment.
Links up with what you're doing in who we choose business where you're.
Really growing.
My sense is the home insurance businesses is pretty much an outright hard market. So it's a different situation.
So those are the two questions.
Michael Thanks, Paul It's Michael Klein, so on the competition in auto certainly.
We are seeing market rate drop.
And.
I think it's fair to call it an intensifying competitive environment.
That said for the most part.
Notwithstanding some of the headline numbers you see from some key competitors. It's a it's still a relatively moderate adjustment in.
Personal lines auto pricing and from our perspective largely reflective of.
The.
The improvement experienced in the line.
Some of it covered related but frankly some of it you know consistent with longer term trends ill.
Favorable frequency of that that we and other competitors have talked about.
In terms of our ability to compete in that environment as I mentioned in my prepared remarks, and you see on the webcast script, we're pleased with our improving growth in auto.
As we moderate pricing again intentionally tick.
To keep pace with those loss trends and again as I mentioned in the prepared remarks that does include.
Taking some price decreases and a handful of states again mass premium to loss pricing with loss experience. So that's sort of our view on the P.I. competitive environment.
Pumping to your second question about home I would agree if you look at the personal insurance industry right now, it's a little bit of a tale of two cities right, you've got improving loss experience and moderating frequency in auto putting downward pressure on prices. You've got you know a lot of what we've been talking about here. This morning catastrophes non catastrophe weather.
There are still folks in the industry talking about non weather water losses as well, but.
But the pressure on loss costs in the property business is upward we're pleased.
We're pleased with our progress in RPC in property.
We're pleased with the performance of our quantum home to product as we've rolled that out and again as we look at.
The property market in personal insurance as we've described our objective is to grow property, while improving profitability and that's the path we've been on and will continue to be on.
I guess, what I was trying to ask was.
There how much is the link between the willingness to go and whom versus the auto.
You know I would say, we look at it as a portfolio our strategy is to be a portfolio provider and work with our partners by total account solutions to customers.
And so we are actively seeking to grow both lines and again.
Our target returns.
Great. Thank you appreciate it thanks.
Our next question comes from the line of David Mcfadgen from Evercore ISI. Your line is open.
Hi, Thanks, Good morning, I, just just had a question just on on Eni and the impact it has on on ROI for the firm and so you know the Eni.
The Eni guide for 20 to pour 30 after tax per quarter.
I guess do you think that you can get an up margin expansion to offset the eni drag to keep our are we stable in this environment and.
Yes is there enough pricing and margin expansion underneath.
Where you can actually improve our or we use in this interest rate environment.
Yes, well, we think the answer to that is yes, and if you look at.
Written rate versus loss trend margins are.
Our improving from here and we're not going to give guidance, so I'm not going to predict.
Predict whether we will or whether we wont, but I mean, certainly interest rates and investment income our input into our pricing model and so if there is certainly a very direct link between the investment return, we're getting on the product and the price we're charging for it.
Okay, great. Thanks, and then just just another follow up.
You mentioned I think I think Greg mentioned getting rate in excess of loss trend of Oh.
Over a point in B. I.
I guess I'm just wondering if you could elaborate a bit on what gives you confidence that youre getting rate in excess of trend just given the uncertainty around the loss environment courts being closed.
Yes, and just generally the unpredictability of losses in the <unk>.
In the current environment.
Yes, so just just to be clear, we we look at at rate versus loss trend on a written basis and that's the right number you see in production statistics and we've shared before our view of loss trend that one point was or the earned impact of rate and and earn loss trend so to two different bases there.
You know it at this point where we.
We've got rate in excess or.
A rate in excess of 8% and Weve got loss trend, which we shared last quarter, we view on the long term basis at five.
Yes, there is some uncertainty but that gap is big enough that that we feel some confidence in that and it's it's true that in the in a circumstance like this where you've got a disruption in the economy and some disruption in that in the data coming through in the claim process. There is there is a little less.
A little more uncertainty than usual, but but as I shared previously what what we're seeing in losses is actual is actual favorability and and again not perfect clarity into it and it's going to take some time for for us to get more clarity into that uncertainty to resolve but but the thing that were not reacting to is it safe.
Favorable news not not unfavorable trends.
Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your line is open.
Hi, good morning, everybody.
First question around Workers' comp. So clearly we're I am I'm, assuming there is a frequency benefit from non covered claims on the other hand, I would think that.
Frequency benefit could ultimately result in some severity increase further down the road.
Is that a fair way of thinking about it and if so how how are you thinking of the loss picks would that come from.
Abdul dynamic, but it's certainly a possibility and we contemplate that so yes. There is some favorability in noncovered related frequency, but but we do contemplate when we think about longer term trends and when we think about the profitability of the product that they.
There could be down the road some increased severity due to.
Really delayed access to healthcare so so we do contemplate that.
As a as a possibility.
And is that reflected in the fix already or is that something that you will be thinking about as you move into 2021 and beyond.
Instead, I'd say both.
Which goes to the comment that we made a couple of times about being cautious in our in our view of the net impact of Kobin.
And we will continue to consider that as we think about the product on a go forward basis.
Got it.
And then.
Alan I know you and the differing you've been vocal that social inflation trends, particularly in commercial auto glass couple of years.
Yes with ports being shut down now certainly open like are you.
Are you seeing any change in the trend there or is it too difficult to tell just given all the corporate related noise today.
Yeah, I guess, what I can share is we didnt, we didnt see anything that caused us to believe that there was any deterioration in those trends.
And what we saw was again as I said, a few times favorable we think the extent to which is favorable.
Is a temporary phenomenon.
So.
I guess, that's way to answer the question no nothing nothing in the quarter that caused us to think it was deteriorated yet at the same time, we certainly don't think that social inflation is gone away.
So our our long term expectation is that the sort of elevated levels of losses that we've seen related to social inflation probably persist.
Got it.
Thank you for the answers thank you.
Our next question comes from the line of Jimmy Bhullar from JP Morgan Your line is open.
Hi, Good morning, So first I just had a question on pricing in the workers comp line. Obviously, it's been declining are you seeing any signs of stability in that or any sort of what are your views on where that's headed.
No I think Jimmy had repeat what we said last quarter, which is when we look at our data we look at the data coming out of the rating bureaus. We would we would think that we are somewhere near an inflection point, whether it's now in the coming quarters, not really sure but.
But we would expect in the relatively near term for that pricing that come back to negative and then turn positive.
It's impossible picking that quarter to date, that's going to happen, but that would be our near term outlook.
Okay, and then on and sort of you mentioned, you'll evaluate price sources risk on reinsurance seems like the reinsurance prices are obviously going up a decent amount whats your any sort of initial indications of your views on sort of price versus risk given what's going on in the reinsurance markets versus last year.
Yeah, I mean, we certainly expect reinsurance pricing to go up that's one of the factors, that's driving our pricing and the pricing generally in the primary market going up and we think that's going to persist I guess the thing.
I would add as it relates to US is we are as we said many times of gross line underwriter, we like our underwriting we can we can to keep it and so compared to many of our many in the industry, we buy on a relative basis less reinsurance and.
And frankly, we could buy in less than we do we could buy a little more we could buy little less depending on on the the risk and reward that we see in that purchase but to the extent that we're relatively less reliant on reinsurance than than others. The fact that reinsurance pricing going up is probably a benefit to us.
Okay and then just lastly, what are some of the things that you're watching too.
To determine whether to start buying back stock again.
I think to me still own.
Overall economic uncertainty right. So.
Even as we sit here today, what's the.
What's the what's the depth and duration going to be of economic downturn is there going to be.
Second dip in the economy, how quickly are called the case is going to be brought on control. How quickly are things going to reopen there's there's just a lot of uncertainty that could impact both our top line and the loss environment in which in which we're operating so we're we're choosing not to be a little cautious here still and clearly through the third quarter.
On top of all that we had a very active very active cat quarter.
So just didn't feel like the right time to be restarting.
Thanks.
Okay. Thanks, Thank you.
Thank you.
And we have a one time for one further question. Our final question today will come from the line of Mayor Shields from KBW. Your line is open.
Great. Thanks.
I think it was down at four fell and I apologize for not knowing prefer the talks about how you are taking a conservative view of accident year loss picks in light of uncertainty and only recognizing the frequency benefit that you had to was there a sort of similar approach taken too.
Reserve reviews in the quarter.
They are it's Dan I'm not sure I quite like quite understand the question. So the the reserves will be a result of.
The loss picks that we made and the current accident year during the quarter.
Right. So when you so if I understand correctly, there was a <unk> an overall conservatism because of that.
The fact that things are developing differently as we work our way through that and and the economic ramifications and I'm wondering whether that conservatism had sort of an unusual impact on the selections. He made with regard to reviewing part period reserves as well.
I wouldn't think so I think the comment that Alan just made a few minutes ago around the impact of course being closed in settlements being down we see some disruption and the data, but we're not taking that as a favorability in the in the development patterns that were something on a long term basis.
Okay. That's helpful second follow up if I can really quickly just how should we think about.
The impact on return on equity or on indicated pricing if corporate tax rates go up.
Yes taxes are an input in the income statement like any other expense and so.
Flows do are close to the models, yes, so that would that would be one of the many things that gets factored into Italy is our pricing obviously wouldn't it wouldn't just impact us it would impact.
The economy more broadly and.
As Alan said, a bunch of times I think.
We feel like we've got a level playing field with our with our experience.
In our risk selection expertise will.
We'll do just fine.
For sure to be an input into into what the pricing environment is to be going forward.
Okay fantastic. Thank you so much thanks bye.
I would now like to turn the call back to Abbe Goldstein for closing remarks.
Thank you all very much for joining us this morning, and as always if you have any color. Please feel free to reach out to Investor Relations Hope everybody has a good day. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.