Q3 2020 Hanover Insurance Group Inc Earnings Call
Good day, and welcome I hand over insurance group's third quarter earnings Conference call.
It's Nick I'll be your operator for today's call.
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I would like to turn the conference over to Oksana Lukasheva. Please go ahead.
Thank you operator, good morning, and thank you for joining us for our quarterly conference call. We will begin today's call. This prepared remarks from Jack Roche, our President and Chief Executive Officer, and Jeff Farber, Our Chief Financial Officer available to answer your questions. After our prepared remarks are Dick Lavey President of Asia.
Your markets and Brian Salvatore President of specialty lines.
Before I turn the call over to Jack Let me note that our earnings press release financial supplement and a complete slide presentation for today's call are available in the investors section on our website at www Dot handlebar dot com, our prepared remarks and responses to questions today other than statements.
Historical facts include forward looking statements regarding among other things our outlook for the fourth quarter and full year Twentytwenty the ongoing impact sales.
Slide 19 pandemic economic conditions and other factors on company performance. 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 refer you to the forward looking statement section in our press release.
The presentation deck and our filings with the FCC, which includes supplemental of risk factors related to the COVID-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.
Yes, excluding catastrophes among others a reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement which are posted on our website as I mentioned earlier with those comments I will turn it.
The call over to Jack Thanks.
Thank you Oksana good morning, everyone and thank you for joining todays call.
I will begin by discussing our third quarter financial highlights in the context of the current business and economic environment.
I will then provide a strategic review of each of our segments and our accomplishments during the quarter.
Jeff will review, our financial results and outlook in more detail and then we'll be happy to take your questions.
We are pleased with our third quarter financial performance, especially given it was a particularly active catastrophe quarter across the industry. We reported earnings per share of $2.46 and an operating return on equity of 13.8% for the quarter.
Our results reflect strong execution on the strategic tenants that drive our business forward.
Our company an earnings stream are well diversified and position us well to withstand environmental challenges, including weather volatility and the ups and downs of the economy and market.
We remain steadfastly focused on the hallmarks of our company are.
Our unique distribution strategy and approach.
Broad based profitability.
Disciplined underwriting.
Active expense management in a thoughtful capital allocation strategy that includes returning excess capital to our shareholders.
Turning to our third quarter highlights first we are very pleased with the trajectory or bar growth and the consistent signs of building momentum in our top line.
We achieved 2.1% growth in the third quarter, which represents a significant and expected recovery from the 2.3% premium decline we reported in the second quarter normalized for one time premium returns.
Our leading production indicators are quickly improving and we are encouraged by agency support and commitment, which once again validate the strength of our differentiated strategy and our broad and relevant product offering.
Looking ahead, we are confident in our ability to drive growth across our portfolio and continue to build on the strong pre pandemic momentum we had established.
Second as noted in our pre release on October 13th our Cat losses were slightly elevated in the quarter as a result of tropical storm systems in particular Hurricane you say, yes, and to a lesser extent wildfires in California and Oregon.
Our ability to mitigate the impact of weather events in the quarter. It's a reflection of the concerted proactive efforts, we have made over the past decade to prudently refine our mix of business.
To this end, we have expanded our specialty capabilities and struck the right balance between property and liability risks, while continuing to diligently manage our geographic concentrations and proactively adjusting our business mix to counter the increasing frequency of weather losses, we reduced our exposures and vulnerable.
Engines, or the South East Gulf Coast, and West coast, while reducing micro concentrations and enhancing our reinsurance protections.
These and other actions have enabled us to address potentially increasing weather related property risks as we grow going forward. We're confident these actions along with our increasing use of advanced tools and analytics will position us to continue to deliver consistently strong results across our business.
Third we continued to benefit from lower claim frequency in the quarter, particularly in personal auto well.
Well frequency declined year over year. It is beginning to trend toward pre pandemic levels as the economy reopened.
At the same time, we also experienced several large property losses in commercial multi peril, which occur in our book of business from time to time.
After carefully reviewing the causes of loss and related circumstances, we found no clear correlation between the losses themselves or the prevailing economic environment.
Given our strong underwriting guidelines in risk management practices, we have confidence in our ability to manage such risks, while continuing to drive profitability through rate increases and prudent mix management.
Lastly, the third quarter was a very active one for us from a capital management perspective.
As announced last night, we entered into a 100 million dollar accelerated share repurchase agreement, reflecting the strong excess capital we have generated so far this year from earnings.
This decision further demonstrates our commitment to deliver value to our shareholders and the confidence we have in our strong prospects moving forward Jeff.
Jeff will provide more details on these items shortly.
Moving on to review our business highlights starting with personal lines.
We delivered net written premium growth of 2.3% in the third quarter compared to a decline of 5.5% in the second quarter were flat excluding premium return.
New business submissions in the third quarter were consistent with the third quarter of last year across most territories.
Contributions from renewal premiums continued to fuel growth, although retention was somewhat impacted from the backlog created by the lifting of cancellation and nonrenewal moratoriums over the summer.
Our disciplined account strategy enabled us to effectively manage our business in a highly competitive environment and to drive profitability.
Our performance reflects a focus on striking the right balance between rate and retention, while achieving price increases where we need them. The most.
Overall personal lines rate increases of 4.7% in the quarter were fairly consistent with prior trends and we're satisfied with the underlying retention when adjusted for the temporary increase in cancellations and Nonrenewals following the temporary second quarter increases.
Our personal lines year to date retention of 82% is a more indicative measure of our persistency and should move back to the mid eighties overtime. Additionally, we are encouraged by the continued success of our prestige offering which is adding 600 new accounts. Each month book consolidation activity also is continuing at an accelerated pace.
With $71 million assigned to the first nine months of the year exceeding our expectations for the full year.
This level of activity further validates our unique approach to cultivating deep partnerships across the independent agency channel.
We continue to broaden and enhance those relationships by expanding our geographic reach and introducing product capabilities to address unmet customer needs across our footprint.
From a strategic and operational standpoint, we made significant progress during the quarter.
Earlier this week, we announced the expansion of our personal lines business in Maryland further diversifying our book of business and expanding our personal lines presence to 20 states.
We also are expanding our product capabilities in personal lines. We recently launched a new suite of products home business solutions to cover home based businesses entrepreneurs throughout the country are starting home based businesses in record numbers, yet nearly 60% of these businesses lack adequate insurance to address that.
GAAP our product provides all the card options that can be bundled with existing homeowner policies, including our prestige offering.
As importantly, our personal lines team continues to execute exceptionally well in a new regulatory environment in Michigan falling personal auto reform, which went into effect in July as a top ensure in an industry thought leader in Michigan with 12% of our overall premiums in Michigan personal auto we.
Advocated for auto reform for more than a decade and it was essential that we excel in our implementation.
The reform provides michigan consumers with the ability to save money on premiums in exchange for a reduced personal injury protection limit.
Cost control measures such as fee schedules and utilization controls should substantially reduce the severity of claims and increase the efficiency of the system once implemented mid next year.
At the beginning of last year, we laid the foundation for the transition with a proactive plan that included operational educational and self service tools for agents and consumers.
Our third quarter, Michigan Auto premium grew approximately 4% while average net premium per customer for us remain relatively consistent.
In summary, we remain confident that we will maintain our underwriting profitability in Michigan, while we gained share of the high quality risks in the state outperforming the market over time.
Overall, we are very pleased with our personal lines performance and how we are navigating the market are predominantly full account and more complex customer profile position us well in the competitive environment.
We are closely watching the competitiveness of our products and adjusting our rates to strike the right balance between growth and profit.
We are keeping an eye on frequency and anticipation of it returning to more normal levels.
Our unique agency insight tool coupled with comparative rate monitoring provides great transparency within our distribution and allows us to navigate the market successfully.
Turning to commercial lines, we're very pleased with the growth momentum in our business we.
We delivered net written premium growth of 1.9% up from a decline of 4.6% in the second quarter. We are encouraged by the accelerated pace in most production metrics, including renewal premiums, which are trending higher than historical averages and new business, which has rebounded from a low point in the second quarter, but still remain so.
Dude compared to pre pandemic levels.
In small commercial we are pleased with policy exposure levels, which turned positive for the quarter.
Although still slightly negative middle market exposures have come back significantly from the second quarter.
Notably the growth momentum in our specialty businesses has almost returned to pre pandemic levels. We have rebounded to our 2020 direct written premium plan on a year to date basis with robust new business and renewals.
Our management liability healthcare DNS and specialty property businesses have posted growth in the double digits in the quarter, while specialty overall growth was 5%.
The success of our specialty business goes back to our value proposition that providing a broad set of relevant and distinctive products and capabilities that are delivered to customers exclusively through high quality independent agents.
Ray continues to accelerate in our core commercial lines book now standing at 5.7%, while specialty rates are meaningfully higher led by management and professional liability healthcare in specialty property in core commercial we're seeing significant rate firming in property lines, while we continue to push a double digit rate in commercial.
Auto.
Over the last several quarters, we and others have commented on the need for rate across the commercial insurance space. The.
The cumulative impact of rising social inflation severe weather and continued lower interest rates should help continue to push commercial rates up in the near term.
While social inflation was less obvious during the height of the pandemic with a backlog of court dockets and overall economic distress, we fully expect that to reemerge and perhaps even exceed previous levels on the basis of focusing on these long term loss trends. We believe that the rate. We are achieving currently is meaningfully in l.
Excess of loss trend.
We are very optimistic that commercial lines upward great trajectory will continue.
On the technology and innovation front, our newer product launches continue to expand with Ns growth accelerating and growing double digits with our best agents in our target markets.
We continued to broadly leverage our core commercial infrastructure and relationships to drive specialty growth.
As a logical and important step in this evolution. We've recently expanded our tap sales online quoting issuance capability to include management liability and miscellaneous professional liability products, enabling our agent partners to easily quote rate buying an issue standalone small business specialty policies.
The investments, we are making in technology and innovation leverage our broad account base focus and drive meaningful efficiency solutions.
Most importantly, with all of our businesses, we continue to execute on our differentiated agency centric strategy, enabling our future growth.
We remain incredibly committed to staying connected with our distribution partners.
To that end this quarter. For example, we conducted over 50 virtual CIA be executive meetings with many of the top 100 agents around the country during which we discussed how we can enhance our capabilities to help all of us grow and better serve our customers.
In addition, we are in the process of holding virtual road shows with our agents in our key markets across the country to date members of our senior management team have connected with over 500 of our agents. These engagements have been extremely fruitful.
In response to these distribution touch points, our efforts to enhance our digital marketing capabilities are front and center as is our next generation of our proprietary analytics tool the agency insight.
We pride ourselves on having our finger on the pulse of the market and on bringing contemporary capabilities forward to meet the needs of our agents.
Our agents are responding very favorably and we expect these efforts will contribute to our accelerated growth trajectory going forward.
I am very proud of our team and our outstanding performance in the face of so much adversity. This year.
I am excited about the opportunities we have as we build on the solid foundation, we have established to drive our company forward.
Over the next several quarters, we will continue to invest heavily in digital capabilities finalized new product launches and advance underwriting capabilities across the portfolio as we position our firm for long term success.
We are better positioned today than ever to take our company to the next level delivering for all of our stakeholders and achieving our goal to be the premier property and casualty franchise in the independent agency channel.
Now I will turn it over to Jeff. Thank you Jack and good morning, everyone.
I want to reiterate Jack's comments about the strength of our book of business, which is reflected in our terrific bottom line performance.
For the third quarter, we reported net income of 118.9 million were 313 per fully diluted share compared with net income of 118.9 billion or 296 per fully diluted share in the same period last year.
After tax operating income was 93.5 million or 246 per diluted share compared with 93.0 million to 31 per diluted share in the prior year quarter.
We recorded an all in combined ratio of 94.2% compared with 94.4% a year earlier.
Our X cat combined ratio was 88.4% and excellent result, compared to the 91.3% in the prior year quarter.
The improvement reflects the continued benefit of favorable frequency primarily in personal auto.
While frequency continues to be lower across several lines in our portfolio. We are seeing signs that is returning to more normal levels as economic activity resumes.
At the same time, we continue to maintain a prudent reserving approach longer tail liability lines, given the continued uncertainty and the potential impact of increasing social inflation as well as the potential for increased claims severity and.
We believe our balance sheet has never been in better shape.
Catastrophe losses at 65.9 million or 5.8% of net earned premiums came in slightly above our expectations for the quarter, but we were much more benign than the industry experience.
Our performance is a testament to proactive actions taken over the past decade to better manage our exposures by line of business and geography to maintain our disciplined approach to underwriting and to diversify our footprint.
In addition in the quarter, we benefited from favorable prior year Cat development of 9.6 million, which stems from a variety of events from recent accident years as well as to a much lesser extent, a small remaining favorable settlements of the 2018 wildfires.
Turning to our ex cat prior year development.
We reported net favorable development of $2.6 million with strong favorability in workers compensation and other commercial lines.
Partially offset by additions in small commercial auto in CMP.
Commercial auto continues to be a focus area for us and a concern for the industry over.
Over the past couple of years, we have consistently achieved rate increases around 10% and executed on a variety of underwriting actions to better position our portfolio.
We will continue to stay firm on rate to overcome the assess continuing social inflation in this line.
Our CMP business experienced unusual adverse development related to three large losses from recent accident years Quincy.
Who incidentally this quarter, we incurred about six and a half million a favorable development from a few large CNP property claims that stems from prior year catastrophe events. There is a certain level of randomness, we expect from property losses in our portfolio and this quarter results are a good example of this.
I'm pleased to report that our loss activity related to the $19 million in coated reserves, we held at the end of the second quarter remains limited we.
We continue to hold these reserves in the event they are needed to pay COVID-19 related claims, including those related to sub limited business interruption endorsements and workers comp presumption orders.
We continue to monitor the ongoing legislative and regulatory environment very closely.
We believe recent court activity recent pronouncements in the U.S. has been favorable and supportive of the sales.
Contracts.
Turning now to expenses.
Our expenses ticked up 10 basis points in the quarter due to the timing of certain agents and employee incentive costs.
Year to date, our expense ratio was consistent with our original budget of 31.5% and we have a clear line of sight to the expected 10 basis point expense ratio improvement for full year 2020.
In the Europe subdued growth, our deliberate business investment planning and expense discipline is serving us extremely well.
We expect to continue delivering a 20 basis point improvement in the expense ratio going forward.
Additionally, we recorded a non ratio bad debt expense of approximately 3.6 million, which continues to gradually decline from the highs we recorded in the first and second quarters.
Consolidated net premiums written grew 2.1% in the third quarter as we continue to see increasing momentum from the low point in the second quarter.
Our trajectory was fueled by strong renewals and increasingly robust new business and agency book consolidation activity.
All of this with the backdrop of continued lower economic activity.
We have confidence that this momentum will continue over the coming quarters.
Moving to a review of underwriting performance by segment.
In personal lines, we delivered a combined ratio, excluding catastrophes of 83.5% representing an improvement of 6.9 points from the prior year quarter.
This improvement was almost entirely driven by the temporary frequency benefit and personal auto.
While such frequency continues to be lower it is trending back towards historical averages.
We continue to be especially prudent in reserving for potential liability exposures from delayed reporting legal costs or social inflation.
We're also monitoring our book carefully remaining vigilant were increased severity some accidents at higher speeds.
Homeowners current accident year loss ratio, excluding cats was 48.2% essentially flat from the prior year period.
Turning to commercial lines, we reported a combined ratio, excluding catastrophes of 91.8% relatively consistent with the prior year quarter.
Commercial lines ex cat current accident year loss ratio was also in line with the prior year the temporary frequency benefit in certain property coverages was offset by elevated large property loss activity in CMP.
CMP current accident year loss ratio ex cat is 59.1% up.
2.7 points in the prior year quarter, driven by several large property losses.
We reviewed our underwriting and causes of loss did not find any correlation to the current challenging environment, we're underwriting issues.
These types of losses, but her from time to time.
We feel comfortable with our overall pricing as we continue to achieve rate above long term loss trends in this line, including an increase in rate in the quarter.
Commercial auto ex cat loss ratio improved 3.2 points to 64.4%, reflecting temporary lower frequency and physical damage claims although not to the extent we reported in personal auto.
Given the trends we are seeing in prior accident years, we're particularly focused on ensuring that we have a more conservative approach the liability yes.
Workers comp loss ratio was flat at 61.2% with some diminishing but still favorable frequency of losses in the quarter.
While underlying trends continued to be favorable we remain prudent in our reserve decisions.
Other commercial lines improved 1.4 percentage points to 54.1% due to slightly lower losses in short tail property lines. Overall, we are very pleased with our underwriting performance and improved growth dynamics in the third quarter.
Now moving on to investments net.
Net investment income of 67.6 million was down slightly from the same period of last year as we continue to experience pressure from lower new money yields.
Our partnerships portfolio performed well contributing 6 million to Eni in the quarter.
Barring any unusual market volatility moving forward, we expect partnership income to be consistent with pre pandemic levels.
With that said, we will continue to see some impact of the low interest rate environment earn in increasingly over time.
Cash and invested assets were 9 billion at the end of the third quarter with fixed income securities and cash representing 86% of the total our.
Our fixed maturity investment portfolio has a duration of 4.7 years and is 96% investment grade.
The well Laddered and diversified portfolio remains high quality with a weighted average of eight plus.
Turning now to our equity and capital position.
We delivered a strong operating return on equity of 13.8% in the quarter and 12.1% on a year to date basis, despite elevated cast, particularly in the second quarter.
Our book value per share of 80, 432 increased 4% during the quarter driven by operating income and both realized and unrealized gains in our investment portfolio, partially offset by the payment of our regular quarterly dividend.
From a capital management perspective, this was a very active period.
One of the strategic strength Jack talked about earlier is our capital allocation strategy.
This year it highlighted the quality of our earnings as well as our ability to consistently generate excess capital with.
With this in mind and considering current market levels, we have entered into a $100 million accelerated share repurchase agreement, we expect to receive 80% of the total shares on October 29, and anticipate receiving the final delivery of the remaining shares no later than early February 2012.
Wow.
After the final delivery of all shares under the HSR agreement.
We will have repurchased approximately 2.2 million shares were 6% of the outstanding shares from the beginning of 2020.
We will have approximately 122 million remaining under the existing share repurchase authorization.
In August we issued a 10 year $300 million senior unsecured note at a very attractive annual coupon of 2.5%.
We used a portion of the proceeds to retire from $175 million of subordinate debentures with the 6.35% coupon.
Improving our capital cost and overall capital structure.
The strong investor support we received for this issuance underscores the confidence they have in our strategy and future growth prospects.
As we move into 2021 this transaction further enhances our financial flexibility and will support organic growth opportunities across our business as well as other capital uses.
We are confident in our earnings trajectory growth prospects in earnings resilience going forward and we remain fully committed to our stated return on equity targets, we generate ample capital to support future growth and believe that the best use of excess capital is often to return to shareholders, especially and such.
Valuations right.
We take seriously our mandate to serve as stewards of our investors' capital and we're continuing to demonstrate that commitment not only with words, but with actions that we believe are in the best interests of our shareholders.
Turning to guidance.
We expect full year 2020, net premiums written growth to be slightly positive compared to 2019.
We are increasing our full year 2020, net investment income target to $260 million to reflect performance in the third quarter.
Our fourth quarter ex cat combined ratio expectation has improved to around 91%.
As I mentioned earlier, we are maintaining our expectation of a 10 basis point expense ratio improvement in 2020 from full year 2019, and then returning to 20 basis points improvement in 2021 forward.
We have a fourth quarter cat load of 3.8% of net premiums earned and assume an effective tax rate to roughly equal the statutory rate of 21%.
Given where we are in our corporate wide financial planning process. It is still too early to comment on most guidance items related to 2021, but we are confident in the improving top line trajectory and our profitability moving forward. Despite the many challenges and headwinds we have faced this year.
In closing we are pleased with our performance in the third quarter, while the market always presents challenges. Our team continues to successfully deliver on our strategic imperatives remaining agile and opportunistic as we advance our goals and those of our agents and customers.
We entered the home stretch of 2020 in a strong financial position with the unique and proven strategy, a strong and committed team more focused than ever on the opportunities that will enable us to continue growing profitability in the years ahead.
With that we'll now open the line for questions operator.
Well now begin the question and answer session ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
Well, it's growing your question. Please press Star then too.
This time, we'll pause momentarily to assemble the roster.
First question comes from Mike Zaremski Credit Suisse. Please go ahead.
Good morning, and thanks for all the insights in the prepared remarks.
Good thinking maybe first question.
Jeff.
In your prepared remarks, you talked about.
You mentioned the balance sheet has never been in better shape I believe you're referring to last for his service and if im incorrect feel free to tell me that.
Are there any data points you can point us to in order to elaborate on that comment you guys have a lot more insights than we do when we look at kind of prior year Reserve development clearly it's been.
Causative, but now it's been fairly fairly small year to date.
So.
In the commercial lines on speaking to kind of ex the catastrophe loss reserve development its not been trending no less than less than a point. So any anything you can elaborate on there that could help us.
Thanks, Mike sure overall.
Overall as you know the frequency in the second quarter and continuing into the third quarter have been much lower than.
It had been in previous years in previous quarters, particularly in the second quarter. It was down a lot and as we said it was still down more in the auto lines, but even in the second quarter was down really across the board quite substantially. So our approach was to be concerned about whether there was any delay.
In claims reporting whether there was a social inflation or other additional legal costs. So we took the opportunity to really be more prudent on reserving for those matters, particularly the longer tail lines. So it's a little hard for me to point to anything.
Specifically, but I can say with a lot of confidence that we are further along in terms of percentage of expectation that we've been able to reserve releases in the last two quarters and if we look at how things are behaving in prior years, it's Rob.
Turning off very comfortably on a co that perspective.
19 is holding quite nicely, we're keeping it there on coal reserves, we don't do travel trade credit event cancellation very low workers comp. So we're feeling really good about our reserve levels at the momentum and very well position Mike.
Okay.
It's helpful and maybe maybe that your answer kind of ties into.
Okay and my next question on the accident year ex catastrophe loss ratio in commercial lines.
You know it's kind of.
Flattish year over year and year to date, it's improved a little bit but not.
Ton despite cobot benefits so is that right.
I think it or maybe I'm trying to get at like maybe if you can kind of try to quantify the non cat weather was heavier this quarter, but maybe maybe you guys are right not the pilot you're maybe not lowering your picks as much as you as you potentially could.
On the on the underlying but maybe you could kind of talk about the non cat weather, except that was something you called out that's quantifiable and.
I guess long winded to maybe you can talk about your view on the commercial loss trend that's changed.
Sure. So I'll start on the CMP line, specifically, yes, Jack referenced the.
Number a handful or so of large losses that we had in the third quarter and we thought we think those are sort of anomalous and you are not likely to continue on a regular basis. If you roll back to the first quarter. We had one very large loss, which was a fire loss.
Switch happened to hit the aggregate annual deductible. So it was a 10 plus million dollar loss. So when you you put that together, we believe we had an elevated property experience in both the third quarter and the year to date period. You then combine that with our interest in fee income.
Serve it particularly in the long tail lines really across commercial.
It really gives us an opportunity to be more prudent with our balance sheet and still react to the things that we saw so I think the combination of those two is keeping.
Keeping those loss ratios relatively flat Jack maybe I'll pass it to you that cover rate versus loss trend, which we feel great about.
Yes.
Thanks, Mike for the question and listen this is overall, we have a lot of confidence in our commercial lines profitability and our ability to continue to grow profitably.
As Jeff said, the CMP line had some some some property volatility in the quarter. We've done as we always do extensive analysis to make sure that there isn't something that.
We didnt contemplate or something that's emerging and we really didn't find anything of significance.
We look back really over the last five years and this has been a terrific line of business for us averaging high Thirtys low fortys loss ratio. So we have every confidence that when that line gets back in line that we can show real favorable proper profitability and the prudence that we're showing.
And in our liability and workers comp.
Mix and reserves.
I think we'll will prove beneficial overtime. We are definitely following that same philosophy that Jeff articulated in and although Thats true for 2020, It's also true for the last.
A few years, we have been exercising a much more conservative reserving philosophy that we think will pay dividends over time.
On the rate versus loss trend side of it Mike we're getting very substantial rate is 5.7 points on core commercial and on the specialty side, we're getting north of seven points of rate when you compare that to long term loss trends, it's substantially in excess.
So long term loss trend, which bodes quite well for underwriting margins as we as we go forward.
Okay very helpful. And then lastly, just switching to personal lines and thank you for all the color on Michigan, So definitely so far so good but just.
More higher level, just trying to think through the dynamics there it.
It seems like you guys are still pushing.
Mid single digit rate increases retentions falling though.
Its profitability do you feel like on I know there is a lot of noise and profitability. If I'm kind of asking is do you think profitability is going to where it needs to be and you guys can Kyle let off the gas on.
On on rate increases.
Or what's the kind of your outlook, you think on on and growth versus margin in personal lines more broadly X kind of I.
I think we're assuming once you disagree that there's continues to be some auto frequency benefit.
Yes, Mike This is Jack again listen overall, we are very pleased with our personal lines performance and our confidence in being able to continue to bounce back to kind of pre pandemic growth levels.
The second quarter.
It really was.
You know was significantly impacted by as you know the premium refunds as well as.
Moratoriums and so.
So while we acknowledge that there is some competitive forces in the market I think when you normalize our retention bonus in the third quarter for kind.
Kind of a catch up of those cancellations coming out of the moratorium.
And you look at particularly our account business, that's running at around an 83% retention ratio.
And the new business that is starting to pick up I think we highlighted in our prepared remarks, the signings that were having in market consolidation the increase.
Success in our prestige product.
We believe that this is a high quality business and has the opportunity to continue to grow.
So a lot of confidence in our loss ratio performance and increasing confidence in our ability to compete even.
Even in a competitive environment and I would I would suggest to you that while were not immune from the competition. That's out there our strategy to move towards mid market and upper middle market.
Business and really being a preferred market for the high quality agents in this sector is providing us the resiliency and the pricing persistency.
That we were hoping for inside those pricing trends I can assure you that we're making a lot of.
We're adapting our pricing on a segmented basis, and making sure that we're getting high quality, new business and that we're protecting our best renewals. So overtime that we believe that you will see our retentions drift back up to the mid Eightys, where they should be and that our new business.
Elevate back to pre pandemic levels.
Thank you for all the color.
Thanks, Mike.
Thank you next question comes from Matt Carletti of JMP. Please go ahead.
Hey, Thanks, good morning.
Hi, good morning.
Jack I wanted to ask a question about at a high level I mean, you you touched on in your opening remarks.
About I mean, obviously a core.
Core piece of Hanover is your strong agency relationships and that's a very differentiated approach can you talk a little bit about you know.
How those relationships have had changed or how they've gone during the pendency period kind over the past three to six month kind of what you've learned from kind of those relationships as an asset thats, the Hanover and maybe if it.
Yes, those relations ships have changed anyway.
Let me, let me give you some some highly responsive to that and then I'll maybe ask.
Dick to chime in based on all the hard work that he has been driving through our partnership strategy along with Brian.
Listen net net we think that this pandemic environment has caused us to be even more focused on our distribution strategy.
Showing our partner agents that we are going to do everything we can to help them be successful and assume that if we do that well will be rewarded.
With profitable growth and.
The reach out as we spoke about in our prepared remarks is significant all of us on the senior team all of our field leaders have been doing extensive work I think we are one of the only companies that actually had our annual agency.
Recognition function that we we replicated virtually instead of being able to do it in person we've done a number of CSC Avi calls instead of our ability to go to the Colorado in that important industry function. We're doing agency town halls were doing branch visits virtual.
Great.
And frankly the response, we're getting from our agency partners is really positive and not just because of the emotional part of it but because they need help navigating through these dynamic times and so we're spending a lot of time not not only talking about how this is affecting them and how they are.
We're generating new business activity and what help they need for us to do that but also there's a increased focus as you would expect on the digital capabilities that are building the ability to bring expertise based content to the customers the ability to service claims in a in a better and unique.
Way all of that innovation work that.
We are doing with our agents is just becoming more relevant in this environment. So I would say the appreciation we're getting from the consolidators. The Marsh agency the hub international the U.S. side, all those folks all the way down to the small and mid size agencies I think they are feeling the strength of our partnership.
More than ever Dick do you want to yeah, only briefly I mean.
Great answer Jakone.
I would suggest is if anything we deepened our relationships in many situations. During this time and it's also shown us that they're they have a real first for sort of data and more importantly insight so our agency insight tool.
Tool that we bring to them.
Isn't higher demand and.
As referenced in our opening comments were working on the next generation of that tool to try to bring in more relevant insights.
Were responding to their demand and need for digital marketing capabilities right. During these times, whether that's a virtual expert or bringing some claims insights are some interesting industry content to the table. So our agility allows us to plug in quickly and.
Our assess ability and connectedness is really paying dividends during this during this period.
All right great. Thanks, that's really helpful. And then just one follow up on really a follow up to the Jack here you had some comments about.
A fairly detailed on specialty business.
My question is when I think when you guys talked about this in the past a big piece of the focus has been that.
You have existing Hanover customers that buy a specialty product elsewhere and building. This capability, obviously will allow them to consolidate the relationship further with Hanover.
I'd be curious just if you could provide some color on you know that excess success youve seen in the specialty line. So far how much of it has been kind of along those lines versus kind of new new customers to Hanover that that weren't a preexisting relationship or across south.
Yes, listen I will make a few comments in but I think Brian would we'd love to share with you a few data points around that but our our bounced back in the third quarter and specialty was was was significant.
And I think what we saw not only in terms of the growth, but also in terms of the agency interaction.
There's even more focus I think at the large and mid size agents to look at their portfolios and figure out how much of their specialized specialty business, they should be placing direct to the carrier versus over relying on wholesalers they'll always be a need for wholesalers. They provide a very.
Important function for.
Either agents that don't have expertise or just don't have the capacity to remarket some of that business, but make no mistake the agents that have been.
Exercising a lot of M&A and have been consolidating the industry are increasingly looking at how they can get better economics and better serve their customers on the specialty side more directly and we that's what we built this company around was the ability to get after that both capability and from an operating models.
Standpoint, and.
And it's really paying dividends right now Brian you want to just make a few data points around that.
Yeah sure. Thanks, Jack and thanks, Matt just a few things so earlier, Jack had mentioned our growth of 5% and.
And the number of our areas right management liability healthcare Ns specialty property, all getting double digit.
Increases and honestly also our economic professional liability areas getting decent growth. So so so nice growth across.
The book and when we look at where it's coming from it's disproportionately coming from our our better. However agent in fact, it's really a subset of the handover agents that are driving the vast majority of our business. So the proposition is resonating with them and you know one of those areas was.
We get asked capability that we expanded to be focused on the retailer that's up by 10% for the quarter.
New and we're still growing it.
We introduced a financial institutions capability in the beginning of the year, it's exceeding its plan for the year and across both of those Matt We're seeing really good we're seeing some independent purchases, but we're seeing some really good purchases.
From the existing customers of Hanover or accounts that are agents are bringing to us and asking us to place in a coordinated way. So I think we have a lot of really good proof points from the work that we've been doing to really drive that relevance.
Two our agent from our specialty offerings hopefully that helps.
Very helpful. Thank you for the color and best of luck on Port.
Thank you Matt.
Thank you next question from Paul Newsome with Piper Sandler. Please go ahead.
And good morning.
Thanks for the call so.
Hoping you could just kind of review with us the.
The math behind your capital management, and how you got to the Internet.
Accelerated buyback.
Just to give us a sense of kind of where you are from a capital perspective as well as how to.
You are thinking about it if anything.
Mattoon changes as well.
Thanks, Paul as we've talked about before we have a number.
A number of different capital metrics, we use we have our own economic capital, which is sort of our truenorth S&P has a capital model and then Moody's has a framework around gross underwriting leverage and PML et cetera, but.
We always keep a set of redundancy in terms of our cushion to keep plenty of capital and also plenty of opportunities for growth in the current year earnings were very strong and we had more modest or subdued growth. So that created a substantial capital redundancy that we feel we had to do something.
With so through let's say today, we probably had already bought a little over $100 million of capital and we felt very comfortable with a $100 million in an MSR that coupled with the valuation levels provides an extraordinarily low payback period.
In terms of buying back buying back the stock.
I guess it goes without saying that the prioritization, if we think about future buybacks has not materially changed.
Well, we have we still have ample capital and that's excluding the capital that was raised in August when we issued $300 million of debt and paid down $175 million subordinated debentures away, which has 6.35% coupon so that capital is your.
Mark to be redeployed hopefully with.
Larger a rebound in growth in 2021, we anticipate with the improving margins rate versus loss trend. The rebound the economy that we can grow at or above industry levels.
Getting into 21 at single mid single digits, or even better and much of that capital can be redeployed, but again, depending on the level of earnings the level of cat you have in any given year, we still feel good about opportunities for stock buyback as well.
Okay perfect. Thanks, guys appreciate it.
Thank you Paul.
Again, if you have a question. Please press Star then one.
Next question comes from Meyer Shields KBW. Please go ahead.
Thanks, I want to focus on personal auto.
I understand what you're saying and since it matched with regard to the recovering frequency, but definitely there is a lot of moving parts right now.
With maybe more people working from home than they had in the past or higher unemployment toward an aversion to public transportation can you talk about I guess, how quickly can you make.
Rate changes as these factors to evolve and how important is that level of agility and your target market.
It's critical.
Mayor that so thanks for asking that question.
As you may recall.
Couple years ago, we spent a significant amount of money rebuilding our platform in personal lines with this exact purpose in mind the added benefit of that personal lines point of sale and infrastructure build is that we have a much better ease of doing business in a much better.
Appealed to our agent accounted decks.
Make no mistake the major rationale for investing in a new person lines infrastructure was to be able to have a more sophisticated.
Home product pricing and also to be able to more rapidly update our multivariate pricing models and get them to market quickly. So it is super critical and even though it is our direct strategy to try to.
To provide our customers and our agents with some level of pricing stability, there's a lot of variance inside each day and each.
Kind of segmentation.
That allows your pricing to be potent and to be effective.
So this is a huge part of our personalized strategy is to have the capabilities of a multi variant product, but then deliver it to a customer set that isn't.
As.
Pricing sensitive.
But you still need to be able to maneuver in a way, where you're getting you're getting market pricing, but you're getting the right segmentation that pricing so that the quality of your customer base continues to improve.
Okay. That's that's exactly what I needed to know second question are as of the end of September our the delayed cancellation and non renewals have been both all been cleared it will be in the back in the fourth quarter.
I think we're going to be well will be have been through the majority of them right. We've seen that the trend start to reverse.
So cancellations are coming back to normal and.
We're actually even seeing some positive you coming through on endorsements as people are adding vehicles and other other adjustments. So I believe the majority of that's behind US now and if you remember back to the second quarter, we really pushed our sales hard to make sure that even beyond the cancellations that were coming out of the moratorium.
EMS.
We were also looking very carefully at the exposure bases in our commercial lines business and making sure that we are capturing.
As much of that as quickly as possible. So we weren't having to reconcile that in 2021. So we'll see how that all plays out for us and for the industry, but I think we're.
I think we've been as conscious about trying to get our earned premium as accurate as we can.
So that we can grow in a substantial way going forward.
Okay excellent. Thanks, so much.
Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Ms. Oksana Lukasheva for closing remarks. Please go ahead.
Thanks to everyone for your participation today and we're looking forward to speaking to you next.
Blair.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
[laughter].
Thank you.