Q3 2020 Selective Insurance Group Inc Earnings Call
[music].
Good day, everyone welcome to selective insurance group's third quarter 2020 earnings call after.
At this time for opening remarks, and introductions I would like to turn the call over to senior Vice President Investor Relations and treasurer role on pipe.
Thank you and good morning, everyone.
Copies of the call on our website selective dotcom and the replay will be available until November 28, 2020 I.
A supplemental investor package, which provides GAAP reconciliations of any non-GAAP financial measures referenced today.
Also is available on the investors page of our website.
Today, we will discuss our results and business operations using.
GAAP financial measures that are also are included in our filings with our annual quarterly I'm comfortable were filed with the U.S. Securities and Exchange Commission.
Non-GAAP operating income, which we used to analyze trends in operations and has the least makes it easier for investors to evaluate our insurance business.
Non-GAAP operating income is net income excluding the after tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities and statements and projections about our future performance. These forward looking statements under the private Securities Litigation Reform Act of 1995 are not yet.
Ease of future performance and are subject to risks and uncertainties.
For a detailed discussion of these risks and uncertainties. Please refer to our annual and quarterly reports filed with the US Securities and Exchange Commission.
Which includes supplemental disclosures related to the COVID-19 pandemic.
You should be aware that selective undertakes no obligation to update or revise any forward looking statements.
On today's call are the following members of selected the executive management team, John Marchioni, President and Chief Executive Officer, and Mark Wilcox Chief Financial Officer, now I'll turn the call over to John.
Thank you Ron and good morning, I'll make some introductory remarks, and then turn it over to Mark to provide details on our results although recover some closing remarks before opening up the call to questions.
We experienced another quarter of elevated atrophy losses, and while the impact on our results is not worthy. These events have a stated a number of individuals and businesses.
Our number one objective in times like these is to help our customers get their lives and businesses back in order and I can proudly say that our claims team delivered on that mission as they always do.
Despite these elevated catastrophe losses, we generated an extremely strong annualized operating Roe of 10.9% in the quarter.
Our premium growth driven by solid price increases excellent retention rates and strong new business volumes is a testament to our unique market position and deep distribution partner relationships.
The customer centric focus of our employees has been essential to our success in navigating this challenging environment we.
We generated a profitable 97% combined ratio for the quarter, despite the significant catastrophe losses, which highlights the excellent underlying profitability of our book.
While growth in insurance is easy generating consistent growth and profitability is much harder to achieve.
Our track record on delivering bolt is a reflection of our unique strategy depth of distribution relationships and sophisticated underwriting and pricing tools and capabilities.
I want to highlight a few key themes for the quarter.
First our results include $80 million of catastrophe losses, which accounted for 11.4 points on the combined ratio.
Our losses in the quarter related to 21 separate catastrophe events designated by Isos property claims services or Pcms, the Midwest direct channel at $28 million and Hurricane Sandy is at $22 million for the largest drivers.
Given our moderate size none of these individual events reached our excess of loss catastrophe reinsurance program, which attaches at $40 million per occurrence.
While we have had sizable losses during the last two quarters, our catastrophe exposure over the last 15 years has averaged three points on our combined ratio.
Our historical success, managing catastrophe loss volatility stems from our focus on geographic diversification.
Strict underwriting standards for catastrophe exposed zones, and a strong reinsurance program.
Despite two consecutive quarters of elevated catastrophe losses, there has been no notable change to our underwriting portfolio and we expect our longer term catastrophe loss load to remain largely stable.
Second while alternative asset returns strongly contributed to the overall, 9.4% investment income or are we in the third quarter the longer term outlook for overall book deals is challenged.
With treasury rates near record lows reinvestment yields will reduce forward book yields putting more pressure on underwriting results to generate adequate RMBS we.
We will maintain our conservative philosophy to managing our investment portfolio and focus on boosting our strong underwriting margins to achieve targeted returns.
The low interest rate environment benefits strong underwriting companies like selective.
A short term bounce in pricing from a firming market environment will provide near term relief to most market participants. However, the winners in our business over the long term must be skilled at underwriting and sophisticated and granular in their pricing strategy.
The long term winners will consistently managing manage pricing relative to loss trend not based on the wind to the marketplace.
Our commercial lines renewal pure price increased 4.6% in the third quarter or 5.6%, excluding workers compensation, which was up from earlier this year.
Overall renewal retention in commercial lines of 86% is up 200 basis points for the quarter and on a year to date basis.
And as our granular and sophisticated approach to pricing that has allowed us to generate pure renewal price increases in line with or above expected claim trend for the past 10 years without sacrificing policy retention or growth.
For smaller accounts with policy premium of less than $10000 renewal pure price increased 3.9% in the quarter, while larger accounts in excess of $100000 in premium generated renewal pure price increases of 5.8%.
Across all size cohorts on a year to date basis, our highest quality accounts based on future profitability expectations produced 2.8% pure rate and point of renewal retention of 92%.
While our lowest quality accounts generated 9.6% pure rate and retention of 84.5%.
Finally, I remain extremely proud of how despite the challenging economic and health environment. Our team has remained focused on executing our objectives.
These goals our balance between delivering near term profitable growth and positioning us for long term outperformance we.
We are confident that the investments in agency and customer experience underwriting and claims sophistication and operational efficiency will secure our position as a market leader for the long term.
I'll come back to provide a bit more commentary on this front, but first I'll turn the call over to Mark to review the results for the quarter.
Thank you Don and good morning, I'll review, our consolidated results discuss our segment operating performance and finish with an update on our capital position and guidance to 2020 there.
There are several moving parts this quarter saw made shows by bit the major variances.
For the quarter, we reported very strong net income per diluted share, but those 16 and adult segment non-GAAP operating noted Fischetto, we reported an annualized ROE of 11.9% at a non-GAAP operating Roe of 10.9%.
For the first nine months of the year, we have generated an 8% non-GAAP operating already which is three points below our 11% targeted driven mainly by elevated catastrophe losses and to a much lesser extent over 19. However, despite the underlying performance of the underlying performance of our business has been exceptionally strong.
This year and we are well positioned to continue to generate superior performance.
On a consolidated basis. It was a solid growth quarter with net premiums written up 6% driven by higher retention overall renewable fuel prices increasing to both at 5.4% and new business growth in each of our segments for the first nine months of the year net premiums written growth was a modest 2% relative to a year ago.
As a reminder, yet today net premiums written was significantly impacted by close to 19 related items, including the post quarter to $75 million oil premium accrual at the $19.7 million of second quarter quarter, improving credits that have collectively reduced our topline by 94.7 million this year at a growth rate by full.
Five percentage points.
We reported a consolidated combined ratio of 97% for the quarter. An excellent result in light of $79.5 billion catastrophe losses that added 11.4 points to the combined ratio prior.
Prior year reserves continue to trend the favorable claim promotions resulted in $25 billion of favorable net prior year casualty reserve development that benefited the combined ratio by 3.6 points.
Posted 19 related items are relatively modest this quarter at 40 basis points to the combined ratio.
On an underlying basis or excluding catastrophes and prior year Casualty reserve development. The combined ratio was an excellent 89.2% as significant improvements compared to 93.6% in the prior year period for the first nine months of the year. The underlying combined ratio of 90% represents 250 basis point.
The margin improvement compared to a year ago it.
That is also better relative to our original expectations of 140 basis points of underlying margin improvement we were full dosing of the sodas the gym.
Underlying margins so far this year benefited from lower than expected non catastrophe property losses and reduced underlying operating expenses.
Turning to the impact of COVID-19, the underlying combined ratio reflects modest COVID-19 related items this quarter that reduced pre tax underwriting income by $3.3 million increase in combined ratio by point coal volumes and reduced diluted EPS by four cents.
Posted 19 items related to the earned impact net of reduced underwriting expenses and losses about post quarter $75 million pointed premium accrual yes.
Year to date, the specific posted 19 related pre tax underwriting charges or totaled $37.4 billion and have increased our combined ratio by 1.7 percentage points. These items have reduced by year to date EPS by 49 cents and are already by 1.7 percentage points recall earlier. This year, we took a proactive approach.
Spoken a number of COVID-19 related items and we've been very transparent in our disclosure of these items.
These include the 75 million audit accrual that we booked in the first quarter during the quarter, we booked $19.7 million or premium adjustments against this accrual related to lower exposures, which for the accrual down from 61 million last quarter to $41 billion at the end of this quarter.
As I mentioned last quarter, we will not know the full extent of the impact from the reduced exposure on a whole interval premiums until the latter half of 2021, but thus far as activity has been within our expectation.
Second we recorded a $10 million and ultimate losses in the first quarter for losses related to the small portion of our company policy that have specific sub limited coverage for experts spend associated with the government orders cleaning today is $10 million ultimate net loss estimate remains unchanged at also silver of April at the low.
As noted for the second quarter, we increased our allowance for uncollectible, creating sustainable by $13.5 million due to expectations of elevated post 2000 for the combination of increased business insolvencies and the temporary billing holds where we refrain from 10 point policies for loan payment.
After the billing holds the lifted this quoted collection activity has been better than we expected and as a result, we did not increase the loans over this quarter.
Our combined ratio guidance last quarter, we expected some additional pressure for bad debts in the second half of the year.
In addition, as we noted last quarter. The current accident year reported claims frequency have dumped above and below normal levels due to the drop off in economic activity. Despite that with the exception of the second quarter premium credit related reductions in auto lines on 2020 casualty book loss ratios remain on plan.
Due to the inherent uncertainties presented by both 19, including the potential for higher Severities Labor 40 claims and the bulk on economic environment, we have not fully reflected the temporary frequency reductions at this time however.
However, we will continue to monitor these trends.
Moving to expenses, our expense ratio was 32.4% for the quarter or 32.1%, excluding the Coca 19 specific items.
For the first nine months the expense ratio was 33.9 or 32 point pulled excluding COVID-19 related items, which have added 1.5 points to the expense ratio that Jim.
The underlying expense patients coming in better than expected and reflects ongoing expense management initiatives.
Some of the benefits. However is of course due to lower travel and entertainment expenses as.
As well as some short term deferrals of projects to new highs and lower employee incentive compensation that opus volumes are likely to return to more normalized levels. However.
However, we continue to seek out ways to improve our operational efficiency leverage our infrastructure and reduce our expense ratio, while continuing to invest in our business. We believe there is room for further expense ratio improvement over the next couple of years.
Corporate expenses, which is principally comprised of holding company costs and long term stock compensation totaled 3.9 billion in the quarter reduced from $6.4 billion, a year ago because of lower stock based compensation expense.
Turning to our segments in the third quarter for our standard commercial lines, we reported a very strong 8% increase in net premiums written this strong growth was particularly encouraging in light of the challenging macroeconomic backdrop and reflects the strength of our three sustainable competitive advantage to.
New business increased 3% relative to a year ago retention increase for a very healthy, 6% and renewal pure price increase for 4.6%.
Fuel renewal pricing has been trending up and is about a fully time year to date compared to the same period last year.
The combined ratio was a very profitable 82.3%. Despite the heavy catastrophe losses, which added seven points net favorable prior year casualty reserve development benefited the combined ratio by 4.5 points at included favorable claims the motion of $15 million in workers compensation and $10 million in general liability the underlying.
The combined ratio was also very profitable at 89.8% and has improved two points year to date.
In our personal line segment, we reported a 2% decline in net premiums written reflecting continued competitive market conditions renewal pure price increases averaged 1.8% retention held steady at 83% compared to the third quarter's 19, although it was down a point on a sequential basis, new business volume was up 18%.
However, our combined ratio was an unprofitable hundred 19% as we have sold 37.4 percentage points in catastrophe losses in the quarter, which is well above long term friends.
On an underlying basis, the combined ratio, 81.6% and benefited from lower non catastrophe property losses at a lower expense ratio. There was no prior accident year Casualty reserve development.
CNS segment, we reported flat net premiums written volume for the quarter relative to a year ago renewal pure price increases to average, 7% and new business was up a strong 29%.
The combined ratio, however, reflected a high level of cans, which added 19.5 points and resulted in an unprofitable, 112% combined ratio for the quarter.
The underlying combined ratio was a solid 92.5% there was no car accident year casualty reserve development over the past few years targeted price increases business mix changes that exiting specific underperforming causes of business have contributed to the improved underlying combined ratio performance in this segment.
Moving to investments our investment portfolio remains well positioned as of September thirtyth, approximately 94% of our portfolio was invested in fixed income securities and short term investments with an average credit rating of double a minus an effective duration of 3.7 years and office a high degree of liquidity.
Risk assets, which include a high yield allocation to payments fixed income as well as public equities and limited partnerships and private equity private credit real assets represent 9.8% of our investment portfolio. This.
This is up from an 8% outpatient at year end as we have found attractive opportunities. This year that increase our allocation given market conditions. At this point, we may increase our risk asset allocation modestly, but a robust fully invested given our current investment risk appetite.
After tax net investment income of $55.1 million was up 22% from the comparative quarter with growth driven primarily by $19 million pre tax alternative candidates, which we report on a one quarter lag we more than fully recovered on second quarter will total losses with the gains in the third quarter and Weve reported 8.9 billion pre.
Next came from alternative investments thus far in 2020.
The after tax yield on the fixed income portfolio, including high yield funds was 2.6% for the quarter. The overall after tax yield on the total investment portfolio was 3.1% and.
And the total risk in the portfolio, which includes after tax realized and unrealized investment gains and losses as well as intense was 1.8% for the quarter a strong 4.1% year today.
In addition, the portfolio delivered a very strong 9.4 percentage points of operating our OE contribution this quarter.
Despite the strong performance of the average after tax new money yield on fixed income purchases during the quarter. It was down to 2.2% in 2.7% of the second quarter, reflecting the contraction in credit spreads as well as the continuation of low benchmark rate over.
Over the coming quarters, we are expecting meaningful loan sale disposal activity from high end book, yielding double life took lay rated securities May lead agency backed RMBS.
Given the steepness of the credit code as a lack of spreads and yield for the highly rated securities we will likely reinvest some of the proceeds and other fixed income asset classes, where we are obtaining better risk adjusted returns.
This will likely result in our average credit rating notching down modestly to eight clubs for the double a minus in the coming quarters, but will help preserves and book yields without materially changing the overall risk profile of our investment portfolio.
Our capital position remains extremely strong with $2.4 billion bump equity up 9% from year end, our net premiums written to surplus ratio is 1.4 times and we've built significant financial flexibility with 343 million of cash and investments at the holding company.
Operating net cash flow has been strong this year at $381 million or 18% of net premiums written compared to 15% last year.
During the third quarter, we repaid $85 billion of short term FHLB debt bar and we borrowed early this year and we expect to repay the remaining 167 million by year end.
Our debt to capital ratio stands at 23.1% on a long term debt to capital ratio stands at 18.7% well below our longer term target.
Overall, our strong balance sheet and holding company cash and liquidity provides us with the financial resources and flexibility to continue to invest in our business and growth of insurance operations.
Our board of directors approved a quarterly dividend of 25 cents per common share, which represents a two cents a 9% increase a.
Before I turn the call back over to John I'll finish with our updated 2020 guidance based on a year to date results on our current expectations for the full quarter. We have revised our full year guidance to include a GAAP combined ratio, excluding catastrophe losses of between 88 and 89%. This assumes no prior accident year Casualty reserve development.
Fourth quarter catastrophe losses of eight points on the combined ratio.
After tax net investment income of $175 million, including $10 million to $15 million adopted tax case from alternative investments.
But overall effective tax rate of approximately 18.5% and weighted average shares of $60.5 million on a diluted basis with that I'll turn the call back over to John for a review of occupancy initiatives.
Thanks, Mark while most of our focus this year has been on maintaining operating continuity and delivering best in class service to our customers and distribution partners. I also wanted to emphasize cross progress. We have made on a number of key strategic initiatives, which underlie our strong market position now and into the future.
First our constant focus on delivering a superior omnichannel customer experience as paid significant dividends in this current environment.
Our capture of customer communication preference has allowed us to enhance customer interaction through this unsettling time.
Enhancements to our digital self service offerings as resulted in utilization growing at 40% of our customer base and with ongoing travel and in person meeting restrictions, we quickly deploy tools that allow for the virtual delivery of claims and safety management services enhancing both the customer experience and increasing operational.
Sure.
Second we continue to deliver tools for our underwriters to help them make better decisions faster our deployment of a workable management tool along with the automated retrieval and presentation of the majority of our account level information required to underwriting account will drive significant productivity gains.
The underwriting insights tool provides an individualized pricing guidance on prospective new business accounts based on the knowledge of our enforce inventory accounts by industry seat and line of business. In addition to the value provided on individual underwriting decisions. It provides great management insight into the quality and price.
Turning of new business, a key consideration and projecting forward underwriting margins third.
Third we continue to focus on maximizing our share with existing distribution partners late last year, we introduced a tool to help our distribution partners to better understand their overall portfolio and opportunities to increase or share with us these tools and deployment approximately 15% of our distribution partners to date and.
Contributed to our ability to generate solid growth in commercial lines throughout these challenging economic times.
We've also begun the initial rollout of a new agency interface for small business designed to dramatically streamlined the quoting an issuance process for this key business segment.
The new platform is currently deployed for BOP and auto to a pilot group of distribution partners with a full rollout for these mines expected by year end. The remaining lines of business are planned for rollout over the course of 2021.
All 2020 has presented many challenges. It is also enable us to stand out and highlight our capabilities and value proposition to our customers and distribution partners.
As we look forward our competitive position is extremely strong the tools talent and relationships that we have built position our platform well for continued operating and financial outperformance with that we will open the call up for questions operator.
We will now.
And in answering session to.
To queue up for questions. Please press star followed by the number one please.
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Our first question.
Is from the line of Mike Zarinsky of Credit Suisse. Your line is now open.
Good morning, Hey, Hey, good morning.
First question.
In the prepared remarks, I think of as Marc you kind of stated that we have not fully reflected some of the frequency benefits.
From lower claims activity.
This quarter, maybe you can kind of talk through that more because I think the underlying loss ratio.
Accident year ex cat in commercial lines. So this is excellent sales than expected.
And reserve releases were also much better than expected so maybe could comment.
To elaborate.
Yes. Thank you. Thank you I'll. Let me this is John let me start and the market could walk you through the movement in the underlying and the component parts of that but just there to address the first part of your question relative to the 2020 accident year and the and the lower frequency that has been referenced.
As Mark indicated in his prepared comments, while the property.
Results are reflective of that frequency that's on the back office flow right through for us the longer tail casualty lines remain on our loss picks and what we are saying areas. There remains uncertainty, particularly on the severity side, but also to a certain extent on the frequency side.
I think we want to make sure that we're very deliberate in how we evaluate the current accident year, you do have potential for higher severities and certifications that might be related to covance and it could also be related to non co funded through general inflationary trends you also because of the economic environment at some risk around smaller reporting of.
Claims and then we are still mindful and watchful relative to the potential exposure in the GL and workers comp lines.
To cope potential cobot exposure.
Yes, I think we're acknowledging that there has been some frequency benefit I will say in the third quarter you have seen our reported claim counts bounced back a little bit closer to more of a normal level and certainly higher than we saw in the second quarter, but at this point as we always knew we talk to our best estimate and evaluate each accident year.
Based on the information we have available to US now Mark consistent certainly reconcile the underlying for you show on thank you John and good question Mike.
But as John mentioned, we.
We stayed on plan and as I mentioned in my prepared comments with the 24 the accident year from an Tom from a loss ratio perspective for the long tail casualty lines that essentially the Odeon frequency benefits come through has really been on.
Three trading credits that we gave back in Q2 for the commercial postal that line. When you do look at the underlying combined ratio is very strong.
Today on an accident year ex cat basis, all end, whereas 90% underlying combined ratio.
Might recall that last year, we were 92 nine and as we presented our full year expectations at the end of January our forecast for this year was a 91 five silver fully.
Better than last year as showing both an improvement from initial expectations at the start of the year, but its ability to yes. There are lot of moving parts to the underlying combined ratio.
A couple of things I'd point, you to when you look at that 90%.
One is there is a little bit of a drag associated with coated eighties embedded at 90, and Thats 1.7 percentage points as I mentioned in my prepared comments 70 backed that out to kind of dance with 80, athree, but relative to our expectations of what we think non cap property should run on on kind of a normal year to date basis, it's about one.
0.2 points of benefit from non cap property, and then from an expense ratio perspective.
We characterize some of the benefit that we've seen on the improved expense ratio ex totaled 19, as a little bit of a one time benefit from the book from both environment and lack of TNT and of course reduced incentive compensation. As the are we is that at eight yesterday posted by focus of 11, so thats about employee benefit but when you.
Put that altogether used today we're.
Kind of from accounts sitting on about a 90.5 underlying combined ratio and then when you go back to the guidance that we issued last night, we give you the ex Tac guidance, if you take the favorable reserve development.
With both year to date of two of the hub points kind of normalize that over the full year. It's about two points of benefit that we get you back to about a 90 to 91 underlying portfolio 2020, and kind of back to kind of the mid point of focusing on that yesterday system.
45, so hopefully that's helpful motor moving costs, so that deal with coconut 18, non cat property as well as expenses, but certainly some strong underlying low to improve with seeing the Sam and I think thats. The key point. The reports there is when you adjust for all the moving pieces in there we expected to have strong underlying performance.
We do have and strong underlying performance.
We test yet clearly came through Mark can you elaborate or maybe I missed it in the prepared remarks on the prior year reserve development in terms of color on the commercial side, what what were the puts and takes.
Yeah, So let me review.
Review that it was down 25 billion in total $15 million benefit of workers compensation and $10 million in the general liability line. Unlike last quarter, where we saw a little bit of pressure on the 16 to 19 accident years for commercial order book.
We sort of need to adjust the prior year reserve for for the commercial auto line of business. So 25 in total.
The best way to hop points on the overall, a 3.6 points on the combined ratio this quarter.
Okay.
And last question could be stepping back.
Now the top.
Top line is is is has rebounded nicely.
The pair remarks, it sounds like you guys bought I want to put words in your mind what are you.
How are you feeling about the competitive positioning how maybe by though the business lines versus last quarter is has anything changed.
I would say nothing has changed our position in standard commercial lines has been and continues to be extremely strong I think thats demonstrated not just in the overall topline growth in that segment, but also when you look at new business in particular in an environment, where our average exposures are likely down we're generating.
Yes.
Small, but solid increase in new business in that core commercial line space and I know we've said this on multiple occasions and most companies will suggest this but I think the new admissions for ultimately supports it is our relationship model that has an underwriter assigned to an agent in a one to one relationship.
Allowed us to move into this environment and continued to support the flow of business and opportunities coming through I think thats really important for us to reinforce and I think that supported our position and continued position to grow commercial lines. Our service experience has not suffered and in many ways housing and fit.
And as I mentioned or virtual delivery of both safety management interactions as well as claims interactions. The feedback we're getting from customers and agents on those are extremely strong and I think those are those are long lasting benefits VAT tax that we maintain beyond the current environment and I also think our can pricing tools.
We have that we deployed for new business also gives us confidence that when we look at the pricing and the and the underwriting quality of the business. We are acquiring we feel very good about it because we do see in an environment where pricing is up.
Just market wide as as meaningfully as it is not every company is taking the same granular approach. So you do see opportunities coming into the market that are probably being priced well above where they should be and we think that presents us with some excellent opportunities obviously personal lines for us has been a segment that's been pressure for the last several quarters and I think thats.
Largely our competitive positioning in the in the auto side of that market less so in the in the home, but because we write most of our business with a companion auto and home policy is put pressure on the overall growth I do think we were out a little bit ahead of the market in personal auto pricing you are seeing some movement back up again.
Personal auto loss a bit of a mixed bag, but for US I think we're really repositioning our personal lines business to serve a different client base going forward and one that might be a little bit less price sensitive and a little bit more focused on coverage and service and asset transformation that will be happening over the course of the coming quarters.
And then he has side we like our position is that the profitability has improved significantly last couple of years and obviously some noise. This year, because a cat losses and the growth has been a little bit up and down but remember our the business. We're in for DNS is low double the smaller policy on a lower hazard.
Contractor Habitational type accounts that are not really driving the market movement. Like you are seeing in the higher severity larger property type larger casualty type accounts that I think are generating saw the headlines, but we like our position there and think we solve a lot of opportunity for additional growth in that segment.
Thank you very much for the color.
Adjusted.
The next question is from the line of Jamie Inglis from fellow Smith. Your line is now open.
Good morning, good morning, guys.
Doing.
It's really explain to me why the.
Cat losses in the third.
Third quarter, we're still dramatically different if you look at the standard commercial versus DNS third quarter, a year ago. They are both two or three points in this quarter since commercial seven points CNS is almost 20 points.
That makes the business is it a geographic mix difference what would cause such a divergence.
I'll ask this is John I'll start and then market could follow on the first and most important point of note is that the DNS book is much smaller than the standard commercial lines.
And that will create a little bit more volatility Rts walk is predominantly casualty, it's about 75% GL and were not up a property writer and real cat exposed areas now that said some of the the Gulf coast events. Despite our small profile there to generate a little bit of outsized impact but.
On a dollar basis that is thats really relatively small number.
And for US a normal year on Ns for catches about two and a half point space on that profile, so little bit of geographic difference in that we'd have a little bit of Gulf exposure in our DNS portfolio not true posthole more inland but.
We don't have that exposure in the standard lines of standard lines was more driven by those two events that we mentioned, which was hurricane inside the us, which clearly was an east coast event and came up and through New Jersey, and Pennsylvania, and the northeast and then the direct show, which was predominantly for us in Iowa event and in many ways more.
Slanted towards personal lines, and Iowa is a personal line space for us and hit us, particularly hard.
Based on the location of that particular event. So I would say those are the primary drivers of the difference, but again ill highlight for US yes, it's two quarters of elevated catastrophe losses from fairly localized events and a lot of small events, but our long term port.
Portfolio mix has not changed in any meaningful way and I think you want to focus on the longer term trends and even if you assume some industry wide increase in expected cat losses, it's still relatively low compared to the industry for us.
Okay, great. Thanks.
The next question is from the line of Mark Dwelle from RBC capital markets. Your line is now open.
Yes, good morning.
A couple of things.
Mark you described it when you were talking about the investment portfolio.
Some type of.
Shifter reinvestment shift could you go through that again I was I couldn't quite get it all down show.
Sure.
Let me kind of walk you through what I was referring to which is our investment philosophy hasn't changed we will continue to have a very conservative investment philosophy. So let me start with that.
Embedded within the asset allocation there were a number of different fixed income costs is that we have and we have a relatively sizeable allocation to agency.
Yes.
Hello.
Please standby as we try to recover connection with our speakers.
Okay.
Yes.
[noise].
Okay.
Operator can you can probably have reconnected.
Yes, Sir we are now back live you May proceed sir Okay apologies for that everybody. So let me see.
Jump back into the question no add on the.
Shifting to slide shifted investment portfolios. So we have an allocation to agency RMBS, it's a highly rated asset clubs principally AAA.
About a december $1 billion of coffee value.
That had some negative convexity and as interest rates go down you tend to see an elevated level of prepayment activity and what we've seen this year is an elevated level of prepayments coming in free agency RMBS that we need to come back to work.
The new money yields are those securities is around a point today so.
So if we continue to redeploy the.
Non cell disposals back into agency RMBS, it'll be a pretty significant drag on the overall book yield. So we're looking to redeploy those cash flows back into other very high quality fixed income securities, where we can pick up additional book yield.
Over time, as we redeploy had slightly lower credit average credit ratings, we can see theres a slight migration of the overall average credit rating of the investment portfolio ticking down modestly from a double a minus two and a plus but overall, we'll continue to make a.
So the investment portfolio was principally a majority allocation to fixed income and short term investments.
So long.
Hopefully you're still on connected.
I think I'm still on can Uri, yes, we can thank you. Okay. Thank you that's it.
That was helpful. Notwithstanding the glitz.
Hey.
Second the second question on kind.
Kind of just relates to workers compensation.
We've heard some commentary over the course of earnings season, maybe there's some firming in pricing happening I'm just curious what your experience has been.
In that area in that line.
Yeah, I would say from a pricing perspective.
We see in our own portfolio I was just trying to slight movement. So you know 2% negative in the quarter versus a two and a half on a year to date basis. So so just a small movement.
We think the pricing environment in workers comp and there's really two aspects to it one is what's happening in terms of filed loss cost by the NCCN individual say bureaus and then the second consideration aspect to it is what is the market doing beyond what file loss cost changes are let me start with the file lost.
Cost changes, which have continued to be negative, although less negative and I make that as a general statement. Obviously, that's going to vary from from one state to the next and I think that was trending towards closer to zero. If you roll. This forward pretty cold I think the the manner in which the NC.
Hi, and the various state rating bureaus incorporate or ignore the cobot impacts is yet to be seen and then add to that what the regulatory responses to those lost cost filings in the current environment and I think thats, an unknown relative to what happens as we move into 21.
On the on the lost cost filings with regard to the market conditions I would say, we've seen and I wouldn't say, it's continued or accelerated but for the last few years you have seen a market competitive move beyond what was filed in terms of loss costs and I say not just in individual disk.
Crushing rated credits, but you've also seen specifically on low hazard.
Four wall pipe exposures Youve seen significant increases in commission by a number of market participants as a way to improve their competitive position I can't say I've seen that change materially in the last quarter.
It might on a go forward basis because of the concerns over the underlying loss costs are we continue to view workers comp as a very competitive line in.
In the marketplace and I think you see it in our own growth of that line relative to the other lines, which has been well below the package business, we write with our other major lines of business. So I guess mark that the short answer would be.
I have not seen a material change at this point.
Thanks, I was really very helpful color.
One last question, if I can I say.
Hey, your expense ratio improved you made a few comments about that I know, it's been an area that you've been focusing on from set for some time anyway is there any way you can kind of just generally split it out of a couple of points of expense ratio improvement how much of that you might view as kind of ongoing or sustainable relative to just some savings that are in the.
By product does the current situation.
I'm showing off at least on and John can jump in as well. So if you look at our expense ratio on it used today basis, where we're sitting at 33.9%.
And that is elevated versus our expectations for 2020, as we put our guidance out back in late January we were forecasting that some expense ratio improvement is down from the 30 creates the 33 book.
But included in the 33 nine are the Cobi 19 related chosen but when you think about the low premium from premium credits as well as the order to build premium adjustment, we put out as well as the increased bad debt. That's about a 1.5 percentage point drag on the expense ratio used today, so I would I.
We refer to as the underlying expense ratios 32.4 used today, which is about a point better than we were expecting for the full year I would characterize most of that point as I do in that one point benefit is temporary in nature.
You think about the deferred hiring.
Short term deferrals and project lower travel and entertainment expenses and also spoken incentive compensation to a low payout ratio given the reduced profitability because as I indicated in the past.
About a point of that benefit I think is temporary the current yet not to say that we wouldn't see expense ratio improvement as we move ahead, how we do strongly believe that we can continue to grow.
Rationalize our expense base leverage our infrastructure continues to make the necessary investments.
But we would point to a target in the short to medium term of about 32 points or 32% as an appropriate expense ratio given our mix of business between commercial line DNS and post the line so.
Well not necessarily.
Okay. That's what we're looking for next year, we will present, our updated guidance.
Come back come January after 2021, but we do believe that some of the benefit to become in the next couple of years and I would just add to that I think market. All the key points I do think some of what might be perceived as short term related benefits do have some long lasting effects and I'm not in the camp that.
The work with all environment as a permanent shift, but I do think clearly there's like there's a positive impact that TV expenses of some portion going forward, mostly with inter intercompany travel where meetings can be done virtually that were previously done with individual employees traveling from one office to another I also.
I think as I mentioned in my prepared comments, the virtual delivery of claims and safety management services as received high marks and I think the pace at which that got deployed and accepted both by our professionals and by customers and agents I think has been accelerated because of that and there is a clear efficiency gain.
I mean in that when you think about the capacity of your employees in those different disciplines to deliver that service to more customers by doing it virtually I think there are some long term benefits from that perspective as well on top of everything else that market's highlighted that we're focused on to drive greater efficiencies going forward.
Thanks, Thanks, very much for the answers.
Okay. Thank you.
The last question is from Bob Farnam from Boenning and Scattergood. Your line is now open.
Good morning, Bob.
Oh, Yes, I mentioned, the rollout of the streamline small business product.
I just wanted a little bit more color. There I didn't that was that something that was suggested by agents is this is the businesses that you are targeting in seeing type and size that to your standard businesses.
I imagine it's early but have you gotten any feedback yet from the rollout that you mentioned that you have gotten out too.
Yes, great great questions and so small business has always been a core part of who we are and the business. We write and I think if you look back over the last decade or two we would have always been rated by agents as one of the easiest companies to do business in this space, but obviously that line of best in class.
Is constantly moving with technology advancements and other market participants advancing so yes, we're on evaluation and clearly feedback from agents I think we saw the need to invest in a complete redesign of the interface taking advantage of a lot of the technology and the intelligence artificial intelligence.
It's available to us to streamline the amount of information required to generate a quote to allow more business to flow through and add thats, what thats really the the investment we're making I would say if you look at our portfolio of small accounts, we generally being viewed as the best company in the market for small contractors.
And I think we've been trying to improve our competitive position more specifically on BOP pipe accounts. So more of the retail serve professional service type accounts, where we certainly right back, but it but it's been a little bit further off on the competitive positioning side and I think thats, where we would expect to see the greatest left it to your other point the feedback.
And we have the poise us with about 150 agents to this point relative to the business owner policy umbrella Ella and automobile I would say the feedback has been excellent and feedback really in terms of speed and also.
No amount of information required to generate a quote so we'll continue to roll that out I don't think other than maybe around the edges for some of that bought pipe business. This would be necessarily a significant shift, but we think it provides additional growth opportunity beyond what you've seen from us and on a run.
Great basis for this segment of the market that we haven't been.
Generating as much growth as we have and small contractors and core middle market across all segments.
Yeah that was actually one of my follow up questions was.
Yes, since you're you're automating it quite a bit in this is it's going to have an expense ratio advantage or perhaps a advantage on the loss ratio, but it sounds like this is more of a growth vehicle been a been a profitability type vehicles hitting us. It's it is a growth vehicle, but I think to your point the cost of acquisition of this business.
This is lower relative to the business that's more manually underwritten by our underwriting staff. So over time, there is some incremental expense ratio benefit and also at the same time as you know this business does tend to carry higher retention rates, where they are which also generates a loss ratio benefit over the long term so.
I think there is there is certainly near term benefit on the gross side, but I think there is also some longer term benefit on the on the combined ratio side as well.
Hey, great. Thanks for the color.
Thank you Richard.
At this time there are no further questions on queue.
Well. Thank you all for joining we apologize for that trend brief technical glitch and office offline and appreciate all the questions and participation and any follow ups. Please reach out to more for Roland. Thank you have a great day.
That concludes the conference. Thank you all for participating you may now disconnect.
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