Q4 2020 Selective Insurance Group Inc Earnings Call
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Good day, everyone and welcome to selective insurance group's fourth quarter 2020 earnings call. 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 of Han Pie you may begin.
Good morning, everyone and welcome with simulcast things that the call on our website selective dot com and the replay will be available until February of 'twenty eight 'twenty 'twenty one.
Supplemental investor package, which provides the GAAP reconciliations of any non-GAAP financial measures referenced the day also is available on the investors page of our website.
The day, we will discuss our results and business operations using GAAP.
GAAP financial metrics that are also included in the annual quarterly and current reports filed with the U S Securities and Exchange Commission non-GAAP operating income, which we use to analyze trends in operations and the leaf makes it easier for investors to evaluate the insurance business non-GAAP operating income is net income available to common stock.
The Colo excluding the after tax impact of net realized gains and losses on investment 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 guarantees of future performance and are subject the risks and uncertainties.
For a detailed discussion of these risks and uncertainties. Please refer to our annual and quarterly reports filed with the U S Securities and Exchange Commission, which include supplemental disclosures related to the COVID-19 pandemic.
You should be aware of the selective undertakes no obligation to update or revise any forward looking statements.
On today's call of the following members of selective the executive management team, John Maccioni, President and Chief Executive Officer, and Mark low cost Chief Financial Officer, now I will turn the call over to John.
Thank you, Rob and good morning, I'll make some opening remarks, and then turn it over to Mark to provide the details on our results for the fourth quarter and the year that I'll retire the few closing comments before opening the call up the questions.
We generated excellent financial results from the fourth quarter with an 18% annualized non-GAAP operating Roe.
For the full year, our 10, 5% non-GAAP operating ROE was strong in the context of the myriad of challenges from the industry, including from COVID-19 record low interest rates and significantly elevated catastrophe losses.
In addition, the decline in interest rates has resulted in $5.09 of after tax unrealized depreciation and book value per share, which lowered our non-GAAP operating ROE by one two points.
One of 'twenty was our seventh consecutive year of double digit operating Roe vs.
And while our 2020 operating ROE vs fell just shy of our 11% target. This long term track record puts us in an elite group of top performing property and casualty insurance companies.
We're extremely proud of this accomplishment.
Before discussing our results further however, I wanted to highlight what I believe are some of our major accomplishments, which often do not get mentioned.
2020 wasn't many way interest one of the biggest challenges faced by our industry from both an operational and financial standpoint.
I am extremely proud of how we came together as a company to help our customers distribution partners and communities navigate the challenges of COVID-19, and helped by the license businesses back together after the severe catastrophic events that affected many parts of our country.
Times like these help reinforce our value proposition as of insurance carrier.
We also took steps to play our part in the national conversation around race relations continuing to build the culture that celebrates diversity equity and inclusion.
These are key elements of developing a highly engaged team of employees and driving innovation and creativity.
I firmly believe that by working towards the benefit of all of our stakeholders, we will reward our shareholders with sustained financial and operating performance overtime.
Our fourth quarter results reflected strong underwriting and investment performance our.
Our solid premium growth was driven by overall renewal pure price increases averaging four 8%.
The strong standard lines retention rates and an increase in new business, our ability to generate solid profitable growth in a challenging economic backdrop is truly a testament to our excellent franchise distribution partner relationships and sophisticated pricing and underwriting tools.
Our 88, 1% combined ratio for the quarter benefited from five points of favorable prior year Casualty reserve development and one four points of lower current year accident year of accident losses.
Our fourth quarter underlying combined ratio of 93 illustrates the strength of our positioning for continued profitable growth.
I'd like to highlight a few key themes.
We are extremely proud of our ability to consistently balance our growth and profitability objectives are commercial lines renewal pure price increased five 1% in the fourth quarter, which was up from earlier this year.
We were able to simultaneously achieve a commercialized renewal retention of 86% 200 basis points higher than last year.
The smaller accounts with policy premiums of less than $10000 renewal pure price increased four 2% in the quarter, while larger accounts in excess of $100000 in premiums generated renewal pure price increases of six 2%.
Across all size cohorts for the year, our highest quality accounts based on future profitability expectations produced two 9% cure rate and point of renewal retention of 92%.
While our lowest quality accounts generated 10, 4% pure rate and point of renewal retention of 84%.
Our sophisticated pricing and underwriting tools allow us to administer our strategies at an extremely granular level and obtain the appropriate price for the risk we are assuming.
It is this ability of that has allowed us to consistently generate price increases in line with or above expected loss trend for over a decade without sacrificing our renewal retention or new business goals.
This approach also positions us to achieve loss ratio improvement from mix of business changes.
Second the prolonged record low interest rate environment will continue to put downward pressure on industry wide investment portfolio returns and consequently, roes in the coming year.
We will remain disciplined and conservative in how we manage our investment portfolio. We recognize that we will need to increase underwriting margins to offset challenges, including the impacts of lower investment returns and higher reinsurance costs.
Every one of our competitors faced these same issues our track record of delivering strong underwriting results position us to thrive in this type of environment.
Third the pandemic and resulting economic impacts reduced claim frequencies in most lines of business, although much uncertainty remains around the ultimate severities for many of those same lines.
At the start of 2020, the commercial lines pricing environment was reflective of emerging loss trends at our assumption is that those trends will reemerge as the economy normalizes throughout 2021, we've.
We view 2020, as an anomaly in terms of loss frequency and severity in our guidance for 'twenty, one needs to be viewed in that context.
Fourth while fourth quarter catastrophe losses were moderate the year experienced the significantly elevated frequency of catastrophic events. These included a record number of land falling hurricanes as well as convective storms hailstorms wildfires in civil unrest.
This serves as a reminder of the catastrophic potential of not just a large single event, but the accumulation of many smaller events our.
Our combined ratio in 2020 included eight points of catastrophe losses, which was close to our highest level in over 20 years.
We manage our catastrophe risk through underwriting discipline, and a conservative reinsurance program that attaches at $40 million per occurrence within our primary footprint states over.
Over the last 15 years catastrophe losses have averaged a manageable three five points on our combined ratio that said, we recognize that 2017 18 in 'twenty. We're all close to record years of catastrophe losses for the industry and as such we believe it's prudent to expect higher frequency and severity of events going forward.
We've increased our own catastrophe loss assumption slightly to four points for 2021 and continue to view property as aligned in need of additional rate level.
Finally, we took steps during the quarter to continue to build capital flexibility, while optimizing our capital structure in early December we issued $200 million of four 6% perpetual preferred stock, which is an extremely efficient form of capital for us in conjunction with this issuance our board authorized a $100 million share.
Purchase program, which we intend to deploy opportunistically, allowing us to buyback our shares when attractive for our shareholders.
I'll come back to provide a bit more commentary of some of our strategic initiatives for 2021, but now I will 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 the segment operating performance and finish with an update on our capital position the guidance for 2021 of the quarter. We reported net income per diluted share of $2 10.
Our non-GAAP operating earnings per share of $1 84, we reported of annualized ROE of 26% of the non-GAAP operating ROE of 18% with the strong finish to the year driven by both of our insurance and investment operations.
For the full year, we generated a 10, 5% non-GAAP operating Roe.
The increase book value per share by 15% of 17% adjusted for dividends.
We established an operating ROE target based on at least the 300 basis points spread of our weighted average cost of capital as well as the other factors, including market conditions for 2021, we have establish of non-GAAP operating ROE target of 11%, which is close to 400 basis points over our current estimated waste.
Average cost of capital.
<unk> set the high bar for our financial performance balances up the perform at our best and aligns our incentive compensation structure with shareholder interest.
We ended the 2021 of the strongest financial position in our company's long history, including a record level of GAAP equity statutory capital and surplus at the holding company cash and invested assets.
We are extremely well positioned to continue delivering strong growth and superior operating performance.
On the consolidated basis, it was a solid growth quarter with net premiums written up 8% compared with a year ago, driven by higher retention in standard commercial lines overall renewal pure price increases averaging four 8% of new business growth of 7% per day.
Consolidated net premiums written growth was 3%, but included about a full point negative impact related to COVID-19. This impact reflects of $75 million first quarter order premium accrual of the $19 7 million of second quarter of premium credits.
We reported an extremely strong consolidated combined ratio of 88, 1% for the quarter, which included two eight points of catastrophe losses.
The favorable net prior year casualty reserve development totaled $35 million and benefit of the combined ratio by five points.
Secondly, we recorded a $10 million of our one full point benefit from a reduction in the current accident year casualty loss ratio selections and the commercial and personal auto lines driven by low frequencies.
Additionally, we reduced our COVID-19, ultimate property loss estimate, which relates to the board of health mandated cleanup costs of $5 billion from the $10 million.
The association of bad debt provision in the quarter.
On an underlying basis or excluding catastrophes and prior year Casualty reserve development. The combined ratio was 93% in the quarter compared to 93 eight percentage in the prior year period.
For the full year of 94, 9% combined ratio reflects the elevated level of catastrophe losses, we experienced in 2020, which added eight points of the combined ratio of four to five points higher than our expectations for the year on an underlying basis of combined ratio with the profitable of 91%. However, there are several one time.
Items that provided a net benefit to our 2020 underlying combined ratios that I will cover shortly.
Turning to the impact of COVID-19 for the full year of COVID-19 specific pre tax underwriting charges totaled $33 8 billion and increased our combined ratio by one one percentage points, mainly impacted our expense ratio. These charges reduced our 2020 EPS by <unk> 44, a decrease the ROE by one one per <unk>.
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Offsetting these COVID-19 specific underwriting charges has been a lower level of reported claims frequency from 2020 due to the drop off of economic activity. This resulted in a low level of non cat property losses, which for the full year of one two points better than expected. In addition, we reduced our 2020 commercial and personal auto cash.
The loss picks in the fourth quarter, the partially reflects lower frequencies for the shorter tail liability lines of business, which benefited the full year combined ratio by 40 basis points. Despite the low frequencies in 2020, our casualty loss ratio of selections of essentially remained on plan, reflecting the ongoing inherent.
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Moving to expenses our expense ratio was $33 four per cent for the quarter and 33, 8% per the year the <unk>.
Full year expense ratio includes the one one points of the COVID-19 specific items, including the 17 and the $5 million addition to our allowance for bad debt and lower net earned premiums for the auto premiums the order premium accrual of premium credits.
Excluding the COVID-19 specific items underlying expense ratio of 32 seven percentage of reflects ongoing expense management initiatives.
Due to this unique COVID-19, non pregnant environment in 2020, we view of about 70 basis points of these reductions as temporary we do however expect expense ratio improvement in 2021 as well as over the next couple of years.
Corporate expenses, which are principally comprised of holding company costs and low code of stock compensation totaled $6 1 million in the quarter, which was up $2 6 million from a year ago due to higher stock based compensation expense driven by the 30% increase of our share price of the fourth quarter of 2020.
Turning to our segments for the fourth quarter standard commercial lines reported of perhaps a 10% growth. The net premiums revenue new business increased 2% relative to a year ago potential of increased 200 basis points over the prior year two of very healthy, 86% and renewal pure price increase of five 1%.
Renewal pure pricing has been trending up through the App.
The commercial lines combined ratio was an extremely profitable 86, 8% for the quarter. The combined ratio includes one three points of catastrophe losses, and six two points of net favorable prior year casualty reserve development the.
The favorable reserve development includes $20 million from our workers compensation line of business and $15 million from general liabilities driven by favorable claims emergence from the quarter. The underlying combined ratio was also profitable of 91, 7% that includes the 90 basis point benefit.
From a reduction in our commercial auto of 2012 accident year loss ratio of collection due to the low frequencies.
In our personal lines segment, we reported of 2% decline of net premiums written of the quarter, reflecting continued competitive market conditions renewal pure price increases average one 1% retention held relatively steady at 84% of new business volume was up 15%. The combined ratio was the profit of 193, 6% for the quarter.
Dave.
On an underlying basis, the combined ratio was 78, 8% the <unk>.
The lines combined ratio includes the six six percentage point benefit from a reduction in our place the order of 2020 accident year loss ratio of selection due to the lower frequencies.
There was no prior accident year reserve development.
And on the E&S segment, we reported 6% of debt pregnant written growth for the quarter relative to a year ago renewal pure price increases averaged seven 4% of new business was up from 23%. The combined ratio was the profitable of 93 four percentage for the quarter catastrophe losses added one nine points of the combined ratio as it was.
No net prior year reserve development, the underlying combined ratio was the solid 91, 5%.
Moving to investment our investment portfolio of remains well positioned as of year end, 92% of our portfolio was invested in fixed income securities from short term investments with an average credit rating of double a minus and an effective duration of three eight years operating a high degree of liquidity risk assets, which include a high.
<unk> allocation to take within fixed income public equities and limited partnership investments in private equity private credit and real asset strategies represent 10, 4% of our investment portfolio. This is up from an eight 1% allocation of the year end 2019, as we found attractive opportunities for the year to increase our allocation.
The risk assets given market conditions.
After tax net investment income of $55 $5 million was up 18% from the comparative prior year quarter with the growth driven primarily by $18 million of pre tax will flow to the divestment gains, which we report out of one quarter lag the strong capital markets performance of the second half of the year results from $27 million of pre tax gains from alternative to the peso.
In 2020 of we finished the year with $185 million of after tax net investment income the <unk>.
If the tax yield of the total portfolio of 3% per the quarter of two 6% for the year.
The total return of the portfolio was one 8% for the quarter and 6% for the year.
The investment portfolio of delivered a very strong nine points of <unk> contribution this quarter and seven eight points of the year.
Despite the strong performance the average after tax new money yield on fixed income purchases during the quarter continued to decline of was two 1% down from two 2% of the third quarter of two 4% of year ago.
Treasury rates remained low and credit spreads continued to tighten in the fourth quarter.
As I mentioned last quarter, we continue to reinvest proceeds from non sales disposal activity related primarily to AAA rated agency RPX into other high quality, but non AAA rated fixed income the sectors as we find the risk adjusted returns while attractive. This will result in our average credit rating notching down modestly.
The eight plus from double a minus over the coming quarters.
We do not anticipate of materials shift in the overall risk return characteristics of the portfolio.
Turning to capital of capital position remains extremely strong with $2 7 billion of GAAP equity of $544 million from a year ago. Our net premiums written to surplus ratio is at the low end of our target range of one three times operating cash flow was strong in 2020 of 554 billion of 20% of net per year.
The revenue and we've built significant financial flexibility with the $490 billion of cash of investments at the holding company.
During the fourth quarter, we repaid the remaining 167 billion of our short term federal home loan bank debt, we borrowed earlier in the 2020.
Net debt to capital ratio now stands at 16, 7%, providing us flexibility to raise additional debt in the appropriate oath.
<unk>, a strong balance sheet and the holding company cash and liquidity provides us with the financial resources and flexibility to continue to invest in our business to grow our insurance operations.
With regards to our reinsurance program, we successfully renewed our catastrophe program on January 1st with retained our existing structure that maintains the one in 100 of 1% net probable maximum loss of BMO.
The catastrophe risk of U S hurricane at a very manageable $1 of the GAAP equity of one and $2 50, net P&L of 0.4% probability of a full percent of GAAP equity. We also renewed our non footprint of catastrophe program with a $5 million retention for our five expansion states and the E&S states outside of a preview.
22 state of standard commercial lines footprint price.
Pricing on the cap program increased due to both the conditions, but was in line with that the loss free accounts in the U S. As a reminder, our reinsurance program also includes the excess of loss of agreements, which limits the impact to us of the individual large blocks of to 2 billion of both property and casualty losses with factored in actual and expected risk adjusted price increase.
We are forecasting about a 50 basis points headwind to our 2021 combined ratio from higher reinsurance costs.
I'll finish with some commentary on our initial guidance for 2021, we expect the GAAP combined ratio of excluding catastrophe losses of 91%. This assumes no crime accident. The casualty reserve development, while the 91% is higher than our 91% reported underlying combined ratio in 2020 as I've highlighted the.
There was several one time items that had a net positive benefit of over points to our 2020 underlying combined ratio I would point you to our initial expectations of the 91, 5% underlying combined ratio of 2020 is the better starting point of comparison.
Catastrophe losses of four points of the combined ratio. This is higher than the three to five points in the past and reflects expectations for increased frequencies and severities from severe weather events.
After tax net investment income of 182 billion, including 16 billion. It up the tax gains from arc will turn into the investment while we expect continued downward pressure on our fixed income book yield of two two at very low the money rate environment of 2021, we continue to generate strong cash flow that provides some offset.
But overall effective tax rate of approximately 25%, which includes the effective tax rate of 19% for net investment income of 21% of all other items. This assumes the current federal corporate tax income tax rate of 21% remains throughout 2021 and weighted average shares of $65 million on a diluted base.
The simple activity of this does not factor in any share repurchases. We made day of the authorization with that I'll turn the call back over to John for a review of our strategic initiatives.
Thanks, Mark and I'll kind of highlight some of our major areas of strategic focus as we move through 2021.
We're well positioned when of high quality book of business that continues to generate strong profitability.
With the tailwind of rising commercial lines pricing, we will be focused on identifying opportunities for profitable growth, including maximizing market share with our distribution partners strategically appointing new partners and identifying new states to expand our footprint.
We continue to investing tools and technologies that enhance our market position with our distribution partners. Our market match tool provides our distribution partners with insights into their overall portfolio and positions them to expand their relationship with US we have rolled out the total of 250 of our distribution partners and already seeing substantial.
Cash and believe we are only in the initial stages of recognizing its full potential the.
We're all out of our new agency interface for small business remains on track and should continue to enhance our opportunities in the space by significantly streamlining the quoting an issuance process.
We ended 2020 with 1400 distribution partners and average commercial lines premium volume per agency of $1 6 million. We added approximately 90, new relationships net of terminations of trend. We expect to continue in the next few years.
We also anticipate restarting our geographic expansion strategy the.
The five states we opened during the 2017 from 2018 timeframe, including a new southwest region are all performing ahead of expectations over the next two years, we plan to open three additional states with others planned for subsequent years. Our long term goal is to have national capabilities, Although we will following measured and disciplined approach.
The two identifying and opening new markets in personal lines, we have begun shifting our focus towards the affluent market our customer base of is less price sensitive and derive greater value from coverage and service for E&S. Our enhanced automation platform is rolled out the new business in late 2020, enhancing our competitive position in this important market.
Second we remain focused on delivering a superior omnichannel customer experience, which has been a true differentiator in the current environment.
We were able to generate significant value for our customers through proactive and targeted communications based on their preferences enhancements to our digital self service offerings have resulted in utilization growing to over 40% of our customer base, our claims and safety management teams continue to enhance the customer experience and increase operational efficiency through deploy the.
<unk> of virtual servicing technologies.
Finally, one of our biggest priority remains of building a culture that fosters innovation and idea generation as we seek to develop a deep bench of leaders to take the company into the future.
Building, a highly engaged team of employees and leaders as one of our core strategic imperatives.
The firm believer of that creating a culture centered on the values of diversity equity and inclusion is essential to keeping employees engaged and contributing at our highest levels. We've already taken a number of steps during 2020 to raise awareness around this issue within the company as well as increase the level of diversity at all levels within the organization. This will remain a major.
Our priority for us in the coming years as you can look out to 2021 of beyond I'm extremely confident in our competitive position of the marketplace and the tools talent and relationships on which we have built our platform over the past several years, we have demonstrated our ability to generate consistent industry, leading financial returns for our shareholders.
And I'm optimistic in our ability to continue to do so in the coming years with that I will open the call up for questions operator.
Sure.
Now begin the question and answer session. If you would like to ask a question you May press star followed by the number one.
Do you think of your phone and record your name and clarity of when content.
The ceded to introduce your question.
The cancel your request you May press star followed by the number of cute.
First question is from Mike Zaremski of Credit Suisse. Your line is open.
Hey, good morning.
Good morning.
Maybe first question if you can maybe try to.
The car park kind of watch, what's causing the the topline.
Growth too.
To accelerate nicely and maybe you could talk about.
Exposure changes versus the competitive environment versus I know.
Tough to quantify but maybe some of the digital.
Improvement processes, <unk> group and speaking to the sheer.
The agencies.
Yes, sure happy to answer the question and I. Appreciate the question I think let me just start with exposure change, which was one of the topics you were looking for a little bit more insight in and remember with the action. We took in Q1 by recording of $75 million accrual for expected negative audit and midterm endorsement premiums.
Yes.
We got a lot of that out in front of us and that was for the $3 31 in force policies for the balance of their lives. The unearned premium on those policies. So that we took that noise out of our of our subsequent quarters and we don't have that drag because of that as that estimate is largely held up and as you heard of <unk>.
Earlier, we've got about $25 million remaining of that accrual so.
If you include that and look at exposure overall, and again exposure, sometimes hard to measure, but I would I would characterize our exposure on a renewal portfolio for the year of about 1% positive and do you think about a normal year for us would be end of 2% to 3% range and I think of lot of that does have to do with our arc Mexico business.
And our mix is skewed towards contractor classes, which is about 40% of our premium and actually in the audit of all lines of GL and comp it to a higher percentage probably closer of 50%. So I think that's helped the exposure base on our on our customers hold up a little bit better than average certainly rate has contributed to our growth rate we've seen.
A little bit of acceleration, there and as I mentioned in my prepared comments at 86% our retention was about 200 basis points over prior year.
And we think that also speaks to the approach we continue to take in the granularity of which we administer our pricing philosophy now the other benefit clearly the interest even in this environment and with the lower average exposure of industry wide. We saw commercial lines, new business up a little over 2% for the full year and that's something we're very proud of.
I think we always talk about the strength of our agency relationships and our franchise value model and I think in of time like this you really saw the.
The true evidence of the strength of those relationships because of the significant role we play for our partners I think they were inclined to find ways to continue to grow with us and that's certainly helped as well the mix of business. We're seeing from from new business I would say is relatively stable with what we've seen in prior years I think small commercial non contract.
In small commercial as the area of <unk>.
The most significant pressure.
For us we saw a little bit of an improvement in large account business, which for US is over 250000 premiums, but the primary driver for US continues to be our strong middle market presence, which we would define generally speaking as accounts between 25% of 250000 of premiums.
So I think I hit most of the topics you were looking for but I would say those are the primary drivers of growth for us and the other point I do want to reinforce I think it's an important one is the same discipline. We have in the same granularity we use on managing our renewal portfolio is also deployed on new business. So we are very responsive.
The writer of new business, we measure.
Underwriting quality and nutritional pricing at a fairly granular level and feel very confident about where the growth is coming from.
That's helpful would you would you say that.
Okay.
Talking to your agency partners debt selective.
Asking from a little less rate increase then.
And then the industry average of certain peers, which seem to be kind of.
Pushing.
Potentially maybe some corrective actions more so than been selective.
Well I won't comment on individual competitors I think one important point, though to make is when you look at one of the headline price number is coming from in many cases, it's coming from the large the higher exposure areas. The more specialty lines of business like <unk> and EPL and excess.
The significant excess layers that theres not a lot of that in our portfolio.
If you focus more on the net.
Sort of main lines of business property GL worker's comp in commercial auto and focus on the small to middle market and of the of the business I think our pricing might be a little bit lower than average, but I think in the context of our profitability.
<unk>.
It should be and I think that's put us in a good position and again I know we've been a bit of a broken record on this you can look back at our disclosures in our guidance over 10 years and what Youll see is a very strong discipline not just around rate level and getting rate level, but also having an explicit assumption for <unk>.
Trend year over year, and recognizing that our expectation for trend was always our hurdle rate for pricing in terms of driving that loss ratio of improvement that has put us in a good position and has allowed us to have to go out from market with significant price increases that do cause disruption for our agency partners.
Understood.
If I could switch gears.
Q John your comments about.
Increasing diversity within the organization.
Are there just curious.
Do you think selective and I think others too it's tough for us to to really measure.
The weather diversity levels are increasing or not do you expect to put out some metrics over time to help investors and others.
Track.
The performance of these goals.
We do and I appreciate the question and I appreciate your follow up to the points gyration in the prepared comments because this is a very important issue for us and we think should be for all companies across the country. We have taken specific actions and I think you probably saw our most recent corporate responsibility report of our ESG report, which was the <unk>.
First the duration from this past March and with our next generation. Our full intent is to provide more data relative to where we stand from a diversity of perspective and I think.
We are more than willing to acknowledge that we have work to do on this front in the work for US has really come on in a couple of areas number one is making sure. We have not just the right practices for hiring new hiring but more importantly, we do have a lot of diverse employees in our organization that we have made sure have full <unk>.
Access to the training opportunities and developing opportunities and mentoring opportunities that we make available to our employees and ensure that our next generation leadership programs are appropriately balanced in terms of the diverse makeup of the those groups and I think thats been a big part of our focus of <unk>.
But I'll also say of the other part of this that has always been one of our core values as a company is inclusion and thats more of a level of leadership approach and you could do a lot to build a more diverse organization in terms of your employee population, but I think it's equally important to make sure that you lead in a very inclusive manner, so that people of <unk>.
Backgrounds can actually feel like they can have an impact on the organization and I would see the inclusive aspect of investment spend as much of a focus for us as has been the diversity and then the final points I'll make there and I think this has always been.
Topic for us, but I think you saw in the last year of real positive move here is making sure we have diverse backgrounds and experiences on our board of directors and we added four additional board members. This year, which was a little higher than we would normally do but found for people with excellent backgrounds and also very diverse.
Dividual as to our board, which we've already seen improved the level of discourse on our board of close of the different perspectives may bring.
Okay, Great look forward to seeing the next set of corporate responsibility report.
My last question, probably for Mark and it's probably in your prepared remarks, and we will go over the transcript, but I think you mentioned.
Some of the reserve releases.
<unk> from general liability or maybe it was current accident year benefits as well maybe you can kind of I think most of the industry Hasnt.
And releasing that much in the GL line, maybe you can talk about what youre seeing there.
Sure Mike.
You're right if we had some.
Reserve releases from the current quarter on the prior accident year.
$35 million and as I mentioned in his prepared commentary was $20 billion of decades of workers' compensation $58 million per the general liabilities.
We also took a hard look at the 2000 <unk> fully exited here as we closed out the year.
And clearly with the year characterized by low frequency for.
For the short of tail liability lines within commercial auto of postal, though we did respond to a portion of the low frequency.
That was the to the tune of $5 million commercial auto and $5 million first of all of that had a net benefit of one four percentage points of the combined ratio as of per quarter of 40 basis points for the full GAAP.
And then when you look at the reserve releases for the full year. It was the $85 million 60 from Workers' comp 35 from general liability and then you might recall in the third quarter. We did take some action on the commercial or whatever of the prior year.
The increase of the service by $10 million.
Net of the day $85 billion out of total for the 2000 for the year.
I would just add to that if you look back over the long term.
The general liability line has significantly outperformed the industry on a very consistent basis. So you could strip out the prior year development this year and each of the last several prior years and on an accident year basis that line has run right around 90% for us.
The other on us on a straight or a risk adjusted basis is very strong performance and again I think reflective of we do have a bigger portion of contractors are we right that extremely well our limits profile tends to be lower we write a fair amount of manufacturing in wholesaling quite it's not the real heavy products exposure that creates some of that volatility. So that's just the law.
Why that we have really outperformed on and feel like we're in a really good position relative to the underlying performance I think you've seen that over over the long term.
And the.
Just to be more specific the GL prior year reserve part of it.
Of the development was that the sprinkled across all of a lot of previous accident years of any any color on the on the accident years.
When you look at <unk> will be.
Everything goes according to plan filing the 10-K in the next two weeks. So we'll have quite of bit of reserve information in there as well as the efficacy of the statutory yellow book at the end of February so.
So you have all of the specificity, but <unk> was sprinkled across the.
Multiple accident years going back it's no particular accident year that touch of cell.
On the workers' compensation side, we typically do an annual tail factor of review of the fourth quarter, so that impacts the older accident years of.
<unk> 2010, and that was the big.
The bigger driver of the.
The fourth quarter to $40 million.
So at the least the case growth, but we've also seen already sort of favorable emergence of the $16 17 of 18 years the book the compensation of slow.
But no specific is really standard in.
The general liability.
Thank you very much.
Thank you. Thank you.
The next question is from Matt <unk> of JMP your line of sight.
Hey, Thanks, good morning.
Any of that.
John I was hoping I caught in your comments.
About personal lines I think you said, you're kind of shifting towards more towards the mass affluent market and I was hoping you could just dive in a little deeper there and kind of.
The non Hao.
How the product might be changing whether it be service levels of coverage level of things like that and then how we should expect to see that whether youre kind of go state by state or what the timetable is.
Yes, no sure. Thanks again for the follow up question on that side of it.
You have of correct our move in the personalized spaces into a segment of the market. We think there is a much better fit for how we do business and it's the mass affluent market. So youre, telling talking about income levels between the 200 to a $1 million.
The network networks in the millions of $5 million, it's not the the high network, our ultra high net worth at some of that the minerals metals slice in that tier I would actually say from a product and service perspective, we have the majority of of what we need to serve that market now there are some items around the edges in terms of product.
A little bit on the service side that we intend to start rolling out on a countrywide basis in mid 'twenty, one and there is a couple of additional items that will rollout in the latter part of 'twenty one the until the early part of 'twenty, two sorry from our product and service perspective, I think there's there's.
There's really not more non a lot more we need to do I think it's more of just clarifying our appetite and our message the agents in terms of our desired market segment and I'll also say that our agency partners. Our current distribution partnerships are well positioned this tends to be a lot of what they focus on from the personal lines perspective.
So this is really allows us to very quickly ramp this up and we're going to expect from rolling out in all of our personal lines states on that same calendar starting in call. It early third quarter of this year.
Okay, Great that's very helpful.
Maybe just shifting real quick too.
Standard commercial.
Circling back to <unk>.
One of the questions Mike had on kind of working through kind of topline growth trends.
How should we think about Q1 and I'm not asking for guidance or anything like that but just if my notes of right. If I recall right you guys took about kind of of $75 million.
Wind in Q1 'twenty from <unk>.
Premium midterm endorsements kind of COVID-19 related stuff.
Is the right way to think about it that that was that was the one time and as we anniversary that that kind of goes away. So kind of add $75 million back to the Q1, 'twenty and that kind of the the starting renewal level. If you will and then we can assume whatever.
Macro trends, we want to assume from there how should we think about that as we get the Q1.
Yes, Matt this is the.
Absolutely, Brian I would add the 75 billion back to the top line to get a better sense as to what the MPW upwards.
Ability for comparison for the Q1, if you look back of Q1 2020 of the state of commercial line, we were down 5%.
But we've had a pretty significant negative impact from that audit premiums accrual that went through it in the actual underlying growth rate was closer to 8% to 9% 8%.
What's the growth rates I would add that back now just as a reminder of the 75.
And MPW number and.
That was behind the <unk>.
Remaining life of those policies, which go all the way through till March 31 of 2021, most of that was fully <unk> in the 2020 year, there's a little bit of a tail of the trickles into the Q1, 'twenty, one but on a relative basis.
It didn't have much of an impact.
In the fourth quarter, because it really reflects the two weeks of the earnings of net adjustment to when the COVID-19 started.
But I would just highlight the impact versus the.
Net premiums written the impact as well.
Okay, Great and then my last question sticking with the standard commercial.
I got the across the book, but I presume most of the standard commercial when you think about the the accident year ex cat accident year guidance the of 91 combined.
How should we.
Broad strokes think about the puts and takes is it is it obviously you have auto lines, where there were.
Some frequency benefits in 'twenty that.
We'll see whether they keep repeating or not but probably the good presumption of do not assume they do.
On the flip side of that should we think about some of the other lines, where youre getting the right ahead of trend and there might be.
The favorable glide slope to the to the accident year results.
Yes, why don't I start, Matt and then John.
Chuck net of provide some additional commentary it's a good question because when you look at the guidance of <unk> 91, the actual reported underlying was $90. One in 2020 of both John and I provided to provide price would provide a little bit of commentary of the prepared comments. The really the best boating pointed to kind of adjust out some of those one time is clearly slowing 40, what's the.
Unusual year.
So not to get into too much.
Details of that.
I provided most of these items that my comments, but there was the one one points of COVID-19 negative impact debt will reduce the starting point.
We had the non cat property, which was favorable by one two points. The current accident development, which is favorable in the fourth quarter. You have the fact that out of that was 40 basis points the <unk>.
Underwriting expense ratio.
Ex COVID-19 was favorable by about 70 basis points of its about 20 basis points of other and that kind of get feedback from the 91, five which was our initial expectations going into 2020 as the better starting point of comparison when you roll from 'twenty to 'twenty. One now when you roll from 'twenty to 'twenty, one we typically provide.
Pretty detailed waterfall chart kind of investment Investor Cockroach, Inc.
February that we'll probably do it again this year, but a couple of the puts and takes would be.
When you start with that 91 five from flow into of 91.
You have about 50 60 basis points of headwind from reinsurance costs as I mentioned.
Reflecting the high risk adjusted price.
All about programs for the <unk>.
End of 'twenty, one we didn't have rate.
And we have strength and our expectation is that rates will continue in 2021 of our newest basis.
The trend we have some underwriting and claim benefit that will drive some underlying margin improvement and then we expect to drive the expense ratio down in 2021 as well. So when you put it all together, it's about net debt of about 50 basis points of.
Most of the improvement year to year.
And.
A portion of that really is driven by the rate of <unk>.
Trend expectations net of of course varies by line of business.
Great very helpful. Thank you.
Thank you. The next question is from me.
Mayor shields of <unk>.
Your line is open.
Thank you I wanted to go back to the personal lines Flanagan, John I think if I understand what you're saying you have the.
Capabilities to service debt.
Market adequately.
Higher demand does it kind of any impact on the mix between lots of expense ratio on that book.
I'm sorry, Mary you really broke up there you are looking for the difference between the loss and expense ratio on that book sorry, Yes in other words as you said two two.
Net with customers is there a different allocation of the combined ratio of two expenses rather than philosophy.
Actually no I wouldn't I wouldn't think there would be honestly.
A significant difference between loss and expense a lot of the the servicing expense the commission loans, which is the driver of major of expense ratio arent going to be meaningfully different I think this is more about of book that you would expect to have a higher persistency, which over time will also generate a little bit of loss ratio of benefit.
But I wouldn't view this as necessarily a segment of the market that's kind of that's going to command a higher expense ratio in terms of the performance.
I think the other point on first the lines for the expense ratio as we have really worked hard to drive the expense ratio down you can see sort of improvement in 2020 versus 2019, we believe we need to continue to drive that down a bit but the <unk>.
Pettitte in that space.
The other point of insight to the extent there are additional coverage and.
Enhancements that are contained in our program for certain customer base, we're going to assume that the incremental price that underlies that enhanced coverage is adequate and should be loss ratio of neutral to the extent those coverage enhancements are added on a policy by policy basis.
Okay, that's very helpful.
I can switch gears a little bit.
The only be sure of how this can be answered, but what are.
What would it take before there is like an official acknowledgement that some of the frequency benefit in workers' compensation or other lines that are longer tail would take before youll have comfort, saying, okay. That's done.
Well I'll start.
I appreciate your lead into the question because there is no clear answer to that question and it's going to be very company specific I mean, our philosophy around reserving continues to be the same which we do a full reserve review for all major lines of business on a quarterly basis, and obviously the longer tail lines that youre referencing the.
Severity on those lines and included the <unk>.
Claim reporting as well certainly takes well beyond the end of the accident year to comment the full view.
Is the is the frequency decline that we saw across all lines real yes. It is and I think as we mentioned previously the question remains what is the offsetting severity impact of how long will it take for that to emerge in a manner that we have confidence with so the only way I can really answer the question is to say with each passing quarter.
And what the feature associated reserve review with each passing quarter, our level of confidence on the accuracy of our views of ultimate frequency and ultimate severity by line will continue to grow in confidence we did take a little bit of action in commercial and personal automobile because of that is aligned that has us slightly.
Faster reporting pattern at a slightly faster development pattern and we felt that what we saw gave us the confidence to make those small adjustments for the 2020, a year in the fourth quarter, but for GL and conflicts of it's a much longer maturation process of really get a good insight into the into an accident year.
Okay. That's helpful and then just the final.
Question on that.
Should we assume that the same.
Service of I think the answer is yes, but at the same conservatism underlies the pricing that you are putting in place of the blind the business.
Yes, so we've got a very disciplined process and the results of our reserve review feed all of our accident year of planning our accident years are fully baked into our pricing indications from the rationale pricing team, thus pricing indications don't just drive our rate filings in.
All lines. They also file the pricing guidance that we provide to our accounts. So our underwriters on an account by account basis. So.
What you see in terms of our view of the 2020 accident year is fully reflected in how we think about pricing on a go forward basis and as those numbers adjust then youre pricing indications adjusted accordingly, because you've got multiple accident years that are built into your pricing indication process.
Okay excellent. Thank you so much.
Thank you Mary.
Thank you. The next question is from Bob Farnam banning of Scattergood. Your line is open.
Yes, Thank you and good morning.
So given your guidance in your commentary it sounds like 2021 that set up pretty well for you guys, but one of your biggest concerns as we move through the year. What are you what are you worried about the most.
Particularly regarding the ability to reach our objectives for the year.
Yes, So I think obviously, we've we continue to be in a pandemic and the pandemic and certainly having some economic impacts of note. Some of those economic impacts as we mentioned are impacting our expectations for investment yield on a go forward basis, which supports the need for additional margin improvement and we're assuming that the price.
The environment remains constructive and remains of tailwind and we think that that's going to be.
The support for us in terms of achieving our objectives.
As investment ROE V has continued to drop you need a corresponding drop in everybody's combined ratio of to make up for that difference to the extent, we see competitors look at 'twenty, one 2020 and view of our something other than the anomaly and view it as some sort of a fundamental shift in frequency of severity trends that could create.
Little bit more headwinds in the market and we will knock knock us off of our of what we are focused on because I think we've demonstrated we can manage pricing regardless of the market environment overall, but I would say that continues to be of risk and then obviously the longer we go with the economic pressures it could ultimately start to impact the exposure is more significantly.
In the past at this point so the.
Are those concerns, yes, but I think the way you open. The question is which is how we think about it which is we're very well positioned and our higher operating leverage it puts it requires less underwriting combined ratio improvement to make up for that loss of investment yields and I think other companies that are operating at a one to one.
Or even a lower half of a bigger GAAP to make up for that loss in investment ROA.
Right. Thanks for the color.
My last question is on share repurchases. So given your new authorization kind of what goes into your decision to repurchase shares rather than use your excess capital of some other way.
Yes. Thanks, Good question follow up and I would start with the best use of our capital is to deploy it into our insurance operations and to growth.
The franchise.
We generated very strong with attractive returns in our business.
And Thats, what we want the continue to do so we will look into growth and the disciplined profitable way. We're looking for ways to continue to accelerate the growth rate Tom talked about the strategies around retooling of the personal lines strategy of the Geo expansion of the new technology with the excess and surplus clients out of surplus lines and that really is.
The number one use of our capital is to put it back into the business.
To the extent that we do have excess capital above what we need to run the business the bubble of risk tests.
We're a conservative company to have a little bit of a buffer of little bit of the headroom and then when we get into a position where we have what we would call returnable capital on excess above our excess then we looked at different ways to think about.
Using debt.
Which would include a variety of capital management objectives, including share repurchases. So we look at a couple of different metrics, we looked at the IRR calculation vs.
The cost of capital for share repurchases, we look at.
Book value accretion of time period.
First of looking at share repurchases.
So look at a variety of different metrics today, we havent executed under the share repurchase program as we mentioned when we put that as the clients that bit of a December we'd be opportunistic and disciplined in terms of the share repurchases, but we view it as the nice tool to have of the toolkit today. It allows us to return capital to our shareholders over time.
<unk>.
As part of phase.
Delivering good growth and book value per share plus accumulated dividends over the long run is not only delivering the strong ROE as John mentioned, the seven years of consecutive years of double digit Roe.
But also make good stewards of the company's capital and to the extent, we do half of returnable about that it's a good return that we will look to execute of the share repurchase program.
Okay.
Very good thanks Mark.
Thank you.
The next question is from Ron Bachman of capital returns your line is open.
Hi, Thanks, a lot.
Good morning, everybody hope everybody is well.
I had the two questions one.
Just curious sort of what percentage of the of <unk>.
The office staff.
Maybe headquarters are coming in.
On a regular basis of just sort of curious about the rough figure and then I had the question about the wholesale business.
What is the recent sort of trend of late whether it be fourth quarter.
The even early in January generally speaking.
As far as sort of application count.
The level of competitiveness amongst the other.
Impeding markets.
<unk>.
Sure. Thanks, Yes, with regards to percentage of our employees that are.
Either corporate headquarters of one of our physical locations.
Roughly 75 employees across all of our offices out of 2400 employees. So very small percentage and then again. We've said this previously in part of this is our strong distributor of employee model that we've always had and a lot of work from all employees, but all of our employees have the tools to work remotely.
And it's really just some folks and our data center, which happens to also be hearing Correctional, New Jersey, and some folks should be the company had to do some sort of mail scanning to distribute mail or electronically to folks that are ones that are considered essential and coming in on a regular basis.
With regard to the E&S business.
If you look at our performance for the year.
We saw some pretty strong new business growth I think impacts of mix pressures that are kind of little bit more top line volatility in total, but our new business was up around on an average of about 20% for the full year, which is pretty strong and that is driven by its by some higher.
Application activity of our submission activity, but there are pockets of competitiveness and I think we did see a little bit more success in new business on the brokerage side than we saw in the small binding authority side of for US again brokerage is not the the higher hazard open brokerage business. It tends to be business, that's just a little bit above our binding.
Already constraints that we offer the wholesalers, so I feel pretty good about the flow of new business opportunities.
I don't I haven't seen any significant shifts in the competitive environment all of that.
There are certainly a lot more opportunity coming in for wind exposed in coastal property, which is not part of our appetite per E&S. So I think of lot of what might appear to be significant uptick in opportunity.
Lot of markets have tightened down on the capacity per coastal wind is just not really helped us based on the the underwriting philosophy, we have for that segment.
Okay, and then just as far as whether its the fourth quarter compared to the third or even.
The January compared to the fourth quarter any change in the true true.
The trend line the trajectory as far as <unk>.
Submission flow again, the E&S business, we're not noticeable.
I would say its not noticeable now for us we're pretty excited about the new automation platform, we just rolled out and it rolled out in the latter part of the fourth quarter on the new business basis, which we really think helps improve our competitive positioning in this space. It makes us a lot easier to do business with and the small binding and the <unk>.
More brokerage side as well and Thats something we do expect regardless of what the overall market dynamic is in terms of opportunity I think by improving our standing from the ease of doing business perspective, we expect to provide us moving into the first quarter and the balance of 'twenty one.
Great well, congrats and good luck with debt.
They will.
As of yearend.
The next question is from the Scott <unk> from RBC capital markets. Your line is open.
Hey, good morning.
Sure.
I was just curious I don't know if you can share of voice or data if you want to but the the geographic expansion you mentioned the three states I don't know if those are when do you want to share if not that that's completely fine too and I was wondering if those will be and is that going to be in both commercial lines and personal lines or one of the other or is that still kind of being worked out.
Yes so.
Im happy to answer the question I think we've talked about some of those phase III had on our list of targets, but I don't know if we specifically disclose the three the.
The work has begun so the next free that we have.
For expansion, which youre going to be launched call of latter half of 'twenty two but the work is starting in earnest as we speak would be Alabama, Vermont in Idaho that was a really round out stage of an adjacent space of our existing footprint. They don't have the same opportunity in terms of market premiums of some of our more recent space, but as we restart.
Those were the three most obvious candidates and we've got a number of others that we're evaluating for the next tranche, where the work will start in <unk> and 'twenty two as.
As these states are starting to rollout.
Okay and is that so is that in the system alright, Alexander of commercial lines, only sorry, I know, you're asking of them, which runs out okay got it.
Okay.
Yes, okay.
And then I was just curious too on the the agency plans it sounds like those.
Those are still going to be kind of similar of with what you've seen the for 2020 of what you've seen in recent years.
So was wondering if from.
So it sounds like COVID-19 didn't really have an impact on on the new appointments or.
Personal lines the high net worth personal lines initiative that there really has an influence how you're kind of looking at that does that.
Scott there was a bit of a lull in terms of new appointments coming on board and the.
Call. It April to June timeframe as agents were scrambling to get their legs under them in this remote environment, but we had all of our prospecting the process takes a long time.
We engaged pretty actively before we make an appointment and go through a process to ensure that it's a good fit so that pipeline is pretty robust and allowed us to continue to make appointments I would say this year of probably a little bit more back loaded in terms of when the newer appointments came on but a number of 90 net of a small average.
Termination number as a run rate we would expect to continue for the next few years and that doesn't anticipate new states and new states will obviously be adequate to that number but this is all within the context of our longer term targets of achieving the 3% market share of pushing on two levers the share of wallet, which we talk a lot about and the agency control of the market.
Net were in being at least 25% across all of our states. We've got the headroom there were about 22% on average across our footprint. So this is still within the strategic framework of franchise value.
As we push towards that 25%.
Okay understood and then just last question was just on the personal auto you talked about the.
Increased loss picks and everyone's seeing the lower frequency.
Yes, the day rate the rates are coming down pretty much from what we hear across the board and you're seeing some competitors taking share rate declines in certain states. So I'm just wondering how youre looking at.
Yes, the growth appetite versus the rates kind of continuously coming down in and whether you see a big change and have you had have you seen of big change in the competitive environment.
Since March in Covid, 19, and all of the auto insurers, you're having favorable frequency.
Anything you can share there.
Yes.
There's no question the competitive environment per Standalone auto has definitely become more competitive.
And this ties into the earlier discussion about how you view 2020, and how you modify your base pricing on a go forward basis to incorporate the results of 2020, which is certainly whats happening in personal auto the.
Personal auto is also set up to more quickly.
To the extent of frequencies and severities normalize based on the annual policy cycle and the fact that base rate final changes actually immediately make their way into their foot of your book on an earned basis as you renew policies. Unlike in commercial where base rates are just one piece of the equation of managing your price on a year over year basis.
Yes, the competitive environment as Titan, but I think this is also share of underlies our shift in strategy and our expectation is and we've already been writing a fair amount of business on a multi policy basis were writing both the auto and the home and as we sort of migrate to the Apple market.
The price still matters, but price isn't the deciding factor like it is in the mass market for personal auto and I think that's just the that's a tough business to compete in mass market personal auto unless you've got significant scale of significant expense ratio of advantages because of there is much more of a price game and we're migrating into a different.
A different marketplace.
Alright, great. That's very helpful. Good luck. Thanks. Thank.
Thank you Sir.
Thank you that's our last question on queue speakers you May proceed.
I am sorry, operating we're having a hard time hearing you.
Oh, that's our last question on queue. You May proceed great well. Thank you very much for attending and for your time. This morning I appreciate the questions and as always any follow ups. Please reach out to the wrong. Thank you. Thank you.
Thank you and that concludes today's conference call. Thank you all for joining you may now disconnect.
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