Q2 2021 Travelers Companies Inc Earnings Call
Good morning, ladies and gentlemen, welcome for the second quarter results teleconference for travelers.
I ask that you hold all questions until the completion of formal remarks at which time, you'll be given instructions for the question and answer session.
As a reminder, this conference is being recorded on July 22021.
At this time I would like to turn the conference over to MS. Abbe Goldstein senior.
Senior Vice President of Investor Relations.
Mr. Goldstein you may begin.
Thank you good morning.
And the travelers discussion of our second quarter of 2021 for adults.
Our press release financial supplement and webcast presentation earlier. This morning, all of these materials can be found on our website of travelers dot com under the investors section.
On today will be Alan Schnitzer, Chairman and CEO, Dan Frey, Chief Financial Officer, and our 3 segments President Greg from Laskey of business insurance, Tom Kunkel of bond and specialty insurance and Michael Klein of personal insurance they.
I will discuss the financial results of our business on the current market environment. They will refer to the webcast. The presentation as they go through the prepared remarks, and then we will take questions.
Before I turn the call over to Alan I would like to draw your attention of steep monetary notes included at the end of the webcast presentation.
Our presentation today includes forward looking statements the company cautions investors that any forward looking statements involve risks and uncertainties and is not a guarantee of future performance actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors of prescribe.
Under forward looking statements on our earnings press release and in our most recent 10-Q and 10-K filed with the SEC, we do not undertake any obligation to update forward looking statements.
Also in our remarks or responses to questions. We may mention from non-GAAP financial measures. Reconciliations are included in our recent earnings press release financial supplement and other materials available in the investors section on our website and now I'd like to turn the over to Alan Schnitzer.
Thank you Amy good morning, everyone and thank you for joining US today, we're very pleased to report excellent underwriting and investment results for the second quarter and first half of the year.
Core income for the quarter was $879 million for $3.45 per diluted share generating on core return on equity of 13, 7%.
In terms of underwriting result, higher underlying underwriting income and net favorable prior year reserve development as well as the lower level of catastrophe losses, all contributed to higher foreign.
Underlying underwriting income was 8% higher than in the prior year quarter.
Driven by record net earned premiums of $7.6 billion and an excellent underlying combined ratio 91, 4%.
We are particularly pleased with the continued strong underlying fundamentals of each of our 3 business segments.
In business insurance net earned premiums were higher and the underlying combined ratio improved by 3.7 points.
On the specialty insurance and personal insurance, both deliver meaningful increases in net earned premiums and continued strong margins.
Turning to investments our high quality investment portfolio of generated net investment income of $682 million after tax reflecting very strong returns in our non fixed income portfolio.
These excellent results together with our strong balance sheet enabled us to grow adjusted book value per share by 13% over the past year after making important investments for the future and returning significant excess capital to our shareholders.
During the quarter, we returned $625 million of excess capital to shareholders, including the $401 million of share repurchases.
Turning to the top line the combination of the strong franchise value we offer to our customers distribution partners together with excellent execution of our field organization produced terrific results.
During the quarter, we grew net written premiums for $8.1 billion, an increase of 11%.
For 8% after adjusting for the auto premium refunds from the prior year quarter.
Each of our 3 segments contributed meaningfully to the top line growth.
The business insurance net written premiums grew by 5% driven by retention, which ticked up almost a point on.
On the premium change at a near record high of 9.5% of 9% growth the new business.
The combination of strong pricing and higher retention reflects the continuing strength in the pricing environment.
Inside the renewal premium change pure renewal rate change was the strong 7.1%.
Greg will share more detail about the texture underneath renewal rate change in a few minutes.
We know of premium change also included the highest exposure growth we've seen the 9 quarters now.
<unk> signs of improvement in U S economic activity.
In bond and specialty insurance net written premiums increased by 16% driven by record renewal premium change of 12, 7% in our management liability business, while retention remains strong.
In our commercial businesses written pricing continues to comfortably outpace estimated loss trend, which will continue to benefit margins as it earns in.
Continuing strong pricing and retention reflects the industry's clear eyed view the ongoing headwinds impacting returns for the industry.
Including weather volatility low interest rates and social inflation.
We expect pricing to continue to outpace loss trends for some time.
Turning to personal insurance production was again excellent this quarter net written premiums increased 8% after adjusting for the other premium refunds in the prior year quarter.
Policies in force in both auto and homeowners are record levels, driven by continuing strong retention and growth in new business.
While the impact of the pandemic on claims frequency seems to be attracting a lot of attention. When it comes to personal auto we've been equally focused on applying our companywide perform and transform mandate to this business.
Very pleased with the results.
We've accelerated our domestic auto policies enforced growth from 1% to 4% over the last 6 quarters bring.
Bringing pip count to a record high.
This demonstrates the ongoing success of our 3 pronged strategy of personal insurance to meet customers, where they are sort of them, how they want and give them what they need.
Going forward, we will continue to invest in advanced segmentation multi channel distribution and providing great experiences to continue to deliver profitable growth.
Mike will share more detail on a few minutes.
Our excellent top and Bottomline results of this quarter and for the first half of the year demonstrate the continued successful execution of our strategy to grow the top line at attractive returns.
As long as the effectiveness of our well defined and consistent investment philosophy.
Our focused and well executed innovation agenda has been an important contributor to the growth and profitability we have achieved.
We'll continue to relentlessly pursue our priorities of extending our list of risks extending our lead in risk expertise.
Providing great experiences for our customers distribution partners and employees and improving productivity and efficiency.
With the momentum we have and the best talent in the industry, we are well positioned to continue to create meaningful shareholder value over time.
With that I'm pleased to turn the call over to Dan.
Yeah.
Thank you Alan.
For income for the second quarter was $879 million compared to a core loss of $50 million in the prior year quarter.
The significant improvement was the result of positive factors across the business.
Clothing, the lower level of catastrophe losses improved results in our non fixed income investment portfolio.
More favorable prior year reserve development and increased underlying underwriting income.
Our second quarter results include $475 million of pre tax cat losses, compared to $854 million for the last year's second quarter.
This quarter's cash for somewhat below what we would have assumed for a typical second quarter, but year to date cat losses are still above what we would have assumed given the high level of losses in the first quarter.
On a year to date basis sort of accumulated about $1.5 billion of qualifying losses towards the aggregate retention of $1.9 billion on our property aggregate catastrophe excess of oil tree.
The treaty provides $350 million of coverage on the first $500 million of losses above the aggregate retention of mob.
Underlying underwriting income increased 8% to $617 million pretax, reflecting the higher level of earned premiums in each of our segments and the strong underlying combined ratio of 91, 4% consistent with the prior year.
As you'll hear from Greg, Tom and Michael improvements in the underlying combined ratio in both business insurance and bond and specialty for offset by an increase in the underlying combined ratio in personal insurance.
Some of the increase for personal insurance was expected given that last year's quarter benefited from unusually low auto losses as a result of the pandemic.
The underlying loss ratio came in at 61, 7% up 1.3 points from last year's second quarter as the beneficial impact of the earned pricing in excess of loss trend was more than offset by the comparison to a very low endemic related personal auto loss ratio in the year ago quarter.
Expense ratio of 29, 7% as 1.3 points lower than the prior year quarter as last year's results was elevated primarily due to the premium refunds, we provided to our personal auto customers.
Turning to prior year Reserve development.
Personal insurance, both auto and property losses came in better than expected for recent accident years, resulting in $65 million pre tax net favorable <unk>.
In bond <unk> specialty insurance $44 million of pre tax net favorable <unk> was driven by favorable loss experienced in surety and fidelity related to recent accident years.
In business insurance net favorable prior year reserve development of $73 million was driven by better than expected loss experienced in the workers comp across multiple accident years, partially offset by reserve strengthening in our run off book.
Net investment income improved to $682 million after tax this quarter on.
Our non fixed income portfolio of targets, particularly strong results this quarter, reflecting performance in the equity markets contributing $265 million after tax.
Consistent with our expectations fixed income returns were down slightly from the prior year quarter as the benefit from higher levels of invested assets was more than offset by a decline in yields.
For the remainder of 2021, we expect fixed income NII, including earnings from short term securities of between 425 and $435 million after tax per quarter.
Turning to capital management operating cash flows for the quarter of $1.8 billion were again very strong all of our capital ratios were at or better than target levels and we ended the quarter with holding company liquidity of approximately $2.4 billion.
During the second quarter, we took advantage of favorable market conditions and raised $750 million to help fund future growth with the 30 year debt issuance of 3 point of 5%.
The representing our second lowest 30 year coupon ever and achieving 1 of the tightest spreads ever for a 30 year note issued by the insurance company.
The market value of the bonds in our portfolio generally rose as U S Treasury yields declined and credit spreads tightened during the second quarter and accordingly, our after tax net unrealized investment gains increased from $2.8 billion as of March 31 to $3.2 billion of June 30th.
Adjusted book value per share, which excludes net unrealized investment gains and losses.
Was $103.88 at quarter end up 4% since year end and up 13% year over year.
We returned $625 million of capital to our shareholders during the second quarter of $224 million of dividends of $401 million and share repurchases.
Coming back to reinsurance for a moment, let me direct your attention to slide 20 of the webcast presentation for a summary of our July 1st renewables the.
The structure of our main cat reinsurance program is generally consistent with the prior year.
We renewed our northeast Cat Treaty effective July 1st the substantially similar terms and pricing that was up only slightly on an exposure adjusted basis.
Our cat bond long point re 3 is now on the final year of its 4 year term.
And the annual reset for the 2021 hurricane season the <unk>.
Catchment point was adjusted from $1.87 billion to $1.98 billion, while the total cost of the program was flat year over year.
More complete description of our cat reinsurance coverage, including our general cat aggregate ex ol Treaty that covers an accumulation of certain property losses arising from multiple occurrences is included in our 10-Q, which we filed earlier today and in our 2020 form 10-K.
Before turning the call over to Greg I'd like to make a few comments about inflation as the consumer price index has gotten a lot of attention lately.
We are relatively less leveraged to overall CPI type inflation as compared to say medical inflation and social inflation.
1 place CPI type of inflation can impact us is in our short tail lines.
Notwithstanding our strong profitability and Pi as you'll hear from Michael we are experiencing a degree of elevated severity. However.
However, relatively short payout periods in the short tail lines and limit the impact of that exposure.
And although it takes time to earn in over the policy period, we can price for those increases reasonably quickly.
Additionally, it's important to remember that we have some natural hedges in our business that mitigate the effects of inflation for.
First higher inflation is often associated with stronger economic activity as well as higher wages on asset values, all of which contribute to higher insured exposures and as we've discussed before higher exposure of contributes to improved margins.
Although we're not seeing it at the moment to the extent interest rates are correlated to inflation, we would benefit from higher returns on our investment portfolio as inflation increases.
Finally, let me reiterate that we are conscious of the inflation environment and the uncertainties surrounding it when we established our loss picks and our balance sheet reserves and with that I'm pleased to turn the call over the growth for discussion of business insurance.
Thanks, Dan business insurance had a great quarter with strong financial results and terrific execution in the marketplace.
Segment income was $643 million for the quarter compared to a loss of $58 million in the prior year quarter higher net investment income lower catastrophe losses, and higher underlying underwriting income and favorable prior year Reserve development all contributed to the year over year improvement.
We're particularly pleased with the underlying combined ratio of 93, 3%, which improved by 3.7 points from the second quarter of 2020, primarily attributable to 3 things for.
First about 2 points of the improvement resulted from earned pricing exceeding loss cost trends.
On the other half a point or sold resulted from lower non cat weather.
And third the improvement also reflects the comparisons of the modest net charge, we took in the prior year quarter related to the pin debt.
In terms of non cat weather, while the year over year improvement was about a half of point favorable as I. Just mentioned this quarters result was about a point and a half better than what we assumed for the quarter.
Turning to the topline net written premiums were up 5% benefiting.
Benefiting from strong renewal premium change, including both strong renewal rate and exposure levels that are trending back to pre pandemic levels and higher year over year, new business volume.
As for domestic production renewal premium change was 9.5% of historically high result, and on.
Almost 4 points from the second quarter of last year.
Underlying the RPC, we achieved strong renewal rate change of 7.1% and healthy exposure growth debt reflects an improving trend in our customers' outlook for their businesses.
As Alan said, our ability to continue the achieved historically high pricing with the improved retention speaks for the stability of pricing in the market.
New business was up more than 9% with both select and middle market contributing well.
I'll discuss those results in more detail on the moment when I get to the individual businesses.
We are very pleased with these aggregate production results and our marketplace execution.
We've generated written pricing that has been in excess of estimated loss trend for some time now resulting in significant improvement of the profitability of our book.
While this quarter's renewal rate change of 7.1% remain remains well in excess of loss trend. There was a little lower sequentially, let me provide a little more context around that.
The substantial majority of the decrease is attributable to a rational moderating of rate in our 2 specialty business units.
The excess casualty, which is inside the middle market and national property.
The moderation comes after 3 years of very strong compounding rate increases in these 2 businesses. So the tempering of rate is appropriate considering the improved return profile.
Also while renewal rate change was down sequentially for those businesses rate increases we're still in double digits.
More broadly the rate increases we are seeing across the business insurance continue to be stable and widespread across all of our lines of business and our distribution of accounts.
As illustrated on slide 12, and our middle market of National property businesses, we achieved rate increases on 84% of the accounts that renewed in the second quarter up from 81% in last year's second quarter.
Given the persistent loss pressures in low fixed income yields we will continue to see great to further improve our margins.
We will also continue to focus on all of the non rate levers to improve the risk profile of profitability across our portfolio.
For example, at our National property business, our underwriters continue to focus on improving terms and conditions transaction by transaction.
Changes in terms like increased deductibles management of sub limit and reinsurance optimization are meaningful tools and enhancing our profitability and our underwriters continue to be active in utilizing all of those levers.
As for the individual businesses in select renewal rate change was for 3% more than 2 points higher than the second quarter of 2021.
While retention was 80%.
These results reflect deliberate execution as we pursue improved returns in certain segments of the business and we're pleased with the progress we're making in this regard.
Exposure growth was up over 4% for the quarter, which is an encouraging sign as the economy reopens.
Lastly, new business was up 6% over the prior year quarter, driven by the continued success of our new <unk> 2 point of product, which is now lot of 31 states.
This is David the arc product includes industry, leading segmentation and a fast easy quoting experience.
We are encouraged with our agents adoption of the new product is both submissions and new policies are up.
In the middle market renewal premium change of over 9% and retention of 87% were both historically.
Renewal rate change at 7.4% remains strong and well in excess of loss trend.
Finally, new business was up 16% over the prior year quarter, driven by success with larger accounts as well as some improvement on the quality of the flow in the market.
As always we remain disciplined around risk selection and underwriting.
To sum up business insurance had a terrific quarter by all measures were pleased with our execution and further improving the underlying margins in the book and we continue to invest in the business for long term profitable growth.
With that I will turn the call over to the top.
Thanks, Greg Bond and specialty posted excellent returns and growth in the quarter.
Segment income was $187 million considerably more of the double the prior year quarter, driven by favorable prior year Reserve development.
Significantly improved the underlying underwriting margin and higher business volume.
The underlying combined ratio of $83 for improve.
The improved by over or on a half points from the prior year quarter as pricing that exceeded loss cost trends drove a lower underlying loss ratio.
Turning to the topline net written premiums grew an exceptional 16% in the quarter with solid contributions from all our businesses in.
In management liability renewal premium change was a record $12, 7% driven by near record rate retention remained strong at 86% new.
New business increased 6% from the second quarter of last year, our first quarterly increase since the beginning of the bad debit with strong new business pricing.
Sure. The also grew for the first time since the beginning of the pandemic and international again posted meaningful growth, including strong retention and rate.
So on specialty results were excellent.
And reflect our ability to successfully manage this business through a variety of business and economic cycles.
And now I'll turn it over to Michael for personal insurance.
Thanks, Tom and good morning, everyone for.
Very pleased with our second quarter personal insurance results.
Net income of $121 million was up $111 million from the prior year quarter.
Spending from lower catastrophes, and higher net investment income and higher net favorable prior year Reserve development.
Partially offsetting these improvements for the lower underlying underwriting gain which I will discuss in more detail in a moment.
Our second quarter combined ratio improved from the prior year quarter by about 1.5 points to 99, 7%.
Net written premiums grew 16%.
Recall that in the prior year quarter, we provided $216 million of premium refunds to automobile customers in response to the impacts of the pandemic.
Adjusting for these premium refunds net written premiums grew a very strong 8% with domestic homeowners up 12% the domestic automobile up 4%.
Automobile delivered another excellent quarter with the combined ratio of 91, 6%.
The underlying combined ratio was an impressive 92% of.
Although up 6 points from our prior year quarter, which reflected lower loss activity during the initial months of the pandemic.
The current quarter results reflect the benefits of modestly lower claim frequency compared to pre pandemic levels.
As we exited the quarter claim frequency was closer to pre pandemic levels and we would expect that trend to continue into the third quarter.
Our strong current quarter profitability also reflects increased severity, particularly in collision and third party physical damage claims driven primarily by higher cost of used vehicles and parts.
At the auto loss experience of approaches pre pandemic levels, we plan to begin filing for rate increases on selected states. Later this year as we continue to balance the business volumes of profitability.
While it will take some time for future rate actions to earn into our results. We are well positioned to continue to profitably grow in auto.
In homeowners and other the second quarter combined ratio of 108, 3% was 6 points lower than the prior year quarter driven by of $13.5 point reduction of catastrophe losses.
Partially offsetting the catastrophe favorability was an 8 point increase in the underlying combined ratio.
Approximately 1 third of this increase reflects non catastrophe weather losses, which were in line with our expectations, but elevated over of less active prior year quarter.
The remainder of the increase reflects continued elevated frequency and severity of fire and non weather water losses.
The increased severity we saw on the second quarter includes higher repair costs due to a combination of labor and material increases.
We continue to seek rate increases in response to these trends and we will continue to actively monitor of inflation and loss cost trend changes and factor them into our pricing and underwriting decisions.
Turning to quarterly production domestic automobile of retention was up slightly to a strong 85%.
New business increased by 19% and policies in force grew 4%.
Domestic homeowners and other delivered another excellent quarter with retention remaining strong at 85%.
The renewal premium change increasing to 8.2%.
And new business growth of 28% reflective of increased quote activity and increase in average premium.
Along with the ongoing successful rollout of quantum home 2 point out.
Policies in force grew 7%.
As Alan mentioned, our policies in force growth across both auto and homeowners are at record levels.
Actually our policies in force across both auto and homeowners are at record levels, reflecting our ongoing efforts to perform and transform in personal insurance.
When we launched quantum auto 2 <unk>, we designed it with the modular product structure to give customers, what they need and to deliver long term performance.
This has enabled us to seamlessly introduce new rating variables such as vehicle history. Prior insurance history of telematics, allowing us to continually improve our pricing segmentation.
Regarding the telematics, we've seen take up rates for Intel the drive increased by 30% since the launch of our second generation offering which feature of the fully redesigned mobile experience monitor as distracted driving and improves our ability to match price the driving behavior.
Our momentum in auto aligns very well with our goal of providing total accounts solutions for customers. The quantum home 2 <unk> product is now available on over 40 states generating consistent growth in policies in force.
Both distributors and customers continue to see value in our combined auto and property offerings.
Our multi channel distribution strategy allows us to meet our customers where they are.
As a result of the success of our new products are existing relationships continue to perform well. Additionally.
Additionally, we've seen more demand for agent appointments, which is contributing meaningfully to our growth.
In order to serve customers how they want to be served we are also investing in our digital capabilities with.
But the advancements that are my travelers mobile App, we continue to digitize of the customer journey with over 600000 customers already downloading the app since its launch earlier this year.
Going forward, we will continue to invest in solutions that meet customers, where they are give them what they need and serve them how they want while working with our distribution partners. So the deliver a profitable growth now.
Now I'll turn the call back over to Abbie. Thanks, Michael before we open it up for Q&A I'd like to turn the call back over to Alan for a moment.
Thanks, Abby is bittersweet as it is we have 1 last piece of business. This morning, before we turn to Q&A.
I wanted to on balance and thank our partner and friend, Tom Kunkel will be retiring in September after a spectacular 37 year career travelers.
On the impact as the leader of our very successful surety and management liability businesses has been profound.
In addition to delivering exceptional financial results over many years, Tom and his leadership team from fostered a culture of care community and excellence and extends throughout our bond the specialty organization throughout travelers.
It's 1 of the many reasons why im so pleased the Jeff Quinney currently a member of <unk> leadership team and head of our management liability business will succeed Tom.
Jeff has been the travelers from more than 20 years. He is a proven leader in the perfect candidate to take up the range from Tom.
You'll hear from Jeff on October on our third quarter earnings call.
Tom we're all going to Miss you personally and professionally.
With that we're happy to take your questions.
Thank you.
This time, we would like to take any questions you might have for of Sydney.
If you would like to ask the question simply for us.
Then the number 1 on your telephone keypad.
Yes.
We have our first question from the line of Michael Phillips from Morgan Stanley. Please go ahead.
Thank you Bill and good morning, everybody wants the drill first I guess, Michael on some of your comments on on personal auto.
On your comment I think towards the end of what you said you'll begin to see.
While some rate increases later in the year question kind of centering around the timing of that.
The frequency benefits for you seem to be less than a little bit longer than some of your peers, maybe thats the mix of business issue.
But you might have a little more preferred maybe you can confirm that but on what's driving.
If frequency is starting to come back to pre pandemic levels and you expect that to continue on.
I guess why not take right now why wait till later in the year.
What's driving that need for range, if it's not frequency of maybe it is it is it more of the severity. So kind of a couple of pronged question of there, but more on the timing of the rate why not now and then really kind of.
What's driving is it more of the frequency or severity of that's driving your need for rate. Thank you.
Sure Michael Thanks for the thanks for the question really the timing is really just a function of the process.
We're actively.
Putting together filing packages and engaged in conversations with state insurance departments as we speak.
So it's not a question of waiting to get rate of just a function of the process of working with regulators to get rate increases filed and approved.
And to your question about frequency and severity.
Again, I think in my comments about the quarter in particular, we're seeing frequency coming out of the quarter returning more towards the pre pandemic levels and we are seeing severity pressure.
I spiked out the some.
Some of the physical damage pressures.
I can give you just a quick example, there right.
The news about used car prices being up 50%.
On that particularly impacts us in the case of total losses.
Where the average cash value of that total losses up.
Pretty significantly there is a little bit of on offsetting good guy there because we get more for the salvage recovery on that total of vehicle.
But net net that's putting upward pressure on severity and that's 1 example of total cost of repair vehicles is up.
Bodily injury severity is also Scott.
Scott got upward pressure on it. So so we're responding really to both frequency and severity to answer your question on the drivers.
Okay. That's helpful. Maybe just the follow up on on that.
If the timing of this is more of a process it sounds like you'd rather do some sooner rather than later on.
Yes.
Does the.
I mean your margins today in the second quarter were still better than <unk> 22, COVID-19, I'm sorry.
Better than pre Covid.
What you expect things to change.
So.
No.
Sure.
The margin still better.
Not much of a pushback from anybody at the state level. The city you guys and maybe some of the industry still have really good profit here.
So that might be a bit of of pushback on the I don't know how much you expect to get from rate, but there might be some pushback on the ability to get rate that you're 1 given pretty decent return still.
Yes, Michael I think it's a I think it is of great observation and it is part of that process that debt.
Described is really a conversation with regulators about what the historical experience has been.
But also pointing out that part of that favorable experience is really due to the extraordinary event that was the that is the pandemic.
And so we're in conversations with them about how to weight historical experience versus prospective views of trend.
And also state by state.
<unk> berries, and our starting point of various by state we've talked in prior quarters about the fact that we did take rate reductions.
Over 20 states across the country and so those are certainly some of the places. We're looking initially to see if we should take some of that rate back.
Which is a different conversation maybe then in the state where we didn't file a rate decrease historically so.
Great observation and really all part of that all part of that process that were that were engaging in as we speak.
Sure.
Okay. Michael Thank you very much for the details and I appreciate it.
Thank you the.
The next question is from the line of Ryan Tunis from Autonomous Research. Your line is open.
Hey, thanks.
Good morning can you guys hear me.
Yes.
Sorry about that just got back of the office of the sort of getting use of the old phone.
I just wanted to keep it on personal auto.
When we think about where youre seeing some of the elevated loss trend Michael is the.
Is it more geographic or is it.
Preferred versus more standard.
What are the kind of the variables that you are looking at the most of the kind of think about.
What are you seeing losses are going to come back the motion.
Yes, great Great question, Ryan and good morning, welcome back of the office.
We are we are seeing it there are variations across geographies. If you look at things like return to normal indices, we look at driving data by state by geography, but broadly speaking of.
The most areas of the country are seeing driving activity of return again close to pre pandemic levels.
Closer in some places than others.
We also continue to monitor as we've talked about in the past.
The commuting miles versus non commuting miles and there is still on.
A different mix of miles today than there has been historically, but but.
But when you put all of that together and you look at claim frequency.
The frequency benefits, we saw in that book.
Part of my comment about as we exited the quarter.
The frequency benefits, we've seen over the past few months and quarters have started to wane and waned throughout the second quarter, which is part of our comment about trends returning to pre pandemic levels.
Got it.
And I guess my follow up is more on the home side for the home of Attritional loss ratio is above the 60% that's clearly somewhat elevated.
We've seen the.
On the place of something like lumber timber has come down quite a bit.
No.
Mid to Q, how much of an alleviating factor should we think about debt moving forward.
In terms of the type of price and Thats, putting on the loss ratio on a home or was putting on the loss ratio on home.
Sure. It's of Great question, Ryan I would tell you a couple of things first in my remarks, I did talk about <unk>.
Frequency and severity in particularly.
Frequency and severity of fire of non weather water losses, driving some of that underlying deterioration.
So clearly the lumber prices are of severity item not of frequency item.
And we are seeing.
Did see upticks in the quarter in both.
I would I wouldn't take of just a quick step back as we're talking about auto and property, though and just make.
Couple of observations and then come back and finish the answer to your question.
If you take a step back and you look at the segment combined ratio on both on overall on an underlying basis its very consistent with the long run for long run average for this business.
And when you look at the auto combined ratio not surprisingly.
In the quarter it still ran below the long term average in <unk> and.
And in property in the quarter on.
On the combined ratio is call it 4 to 6 points above those long term averages on the total on an underlying basis. So that just sort of gives you on.
Little bit of on order of the magnitude of what we're talking about here.
I'd also remind you of that property in property of the combined ratio of the highest combined ratio we see in the year is the second quarter.
So you got to sort of put the second quarter into context.
But that said the severity pressure we saw on the quarter was a combination of combination of labor and materials. So certainly the 50 plus percent increases in lumber are in there.
Double digit increase in roofing materials in there.
High single digit to low double digit increases in labor isn't there.
And when we look at our property loss cost mix, it's really labor followed by content followed by materials. So even if the.
The short answer your question I think as EBIT, if lumber prices come back down.
Still a relatively small component of the loss costs.
But we do see period to period volatility in frequency and severity and the.
Attritional loss in property so.
Again, Thats part of why I give you that long run view of where the quarter was relative to history.
And at the end of the day, we take a step back and we look at the renewal premium change we're driving in property and our focus really is the continued to drive rate of property to address some of those pressures.
That's really helpful. Thank you.
Thank you. The next 1 is from the line of David <unk> from Evercore ISI. Please go ahead.
Hi, Thanks. Good morning, just wanted to just follow up a bit more.
On the on the auto side.
So maybe Michael I'm, just wondering I guess, obviously, you're taking rate, but how youre thinking about balancing taking rate versus what could be maybe short lived severity increases or is the view that these increases in severity that you're witnessing are not transitory it might.
The more sustainable.
Yes, it's a great question and certainly.
We've talked about severity trend over time, we've pretty consistently talked about the fact that debt, we take a long run view of trend.
When we set our prices now.
If the starting point the was elevated because we've seen an uptick in severity on that in our loss cost.
The question is as your starting point of elevated and are you trading off that elevate the starting point or.
Is your experience youre seeing or does the experience we're seeing in this quarter an anomaly.
I think if I broke apart frequency and severity for you I'd say again, we continue to see the frequency trending towards the pre pandemic level of debt continuing.
How much of the auto materials cost physical damage cost inflation is transitory or not is a key question.
There is a lots of varying opinions around that and we'll factor of our best estimate into.
On that assessment as we factor in what we think we need for rate on a go forward basis.
Let me just add to that weather, whether inflation with our view on whether inflation is transitory.
Clearly looking out over the duration of the liabilities. So when we're talking about CPI type of inflation again lumber used cars of the spirit.
That's impacting relatively short tail lines. So we don't we don't really have the forecast long term in that case and because it's short tail on the claim activity comes in pretty quickly we see it reasonably quickly and we can react to a pretty quickly yes, great going on.
Got it that makes sense that's helpful.
And then maybe a question for Alan just on the investment and for Dallas I was hoping maybe you could elaborate on on the thought process behind that.
And maybe sort of thinking around.
Your own non admitted offering and sort of aspirations there.
Yeah. Thanks, Thanks for that question we've got.
A fair amount of interest in this which I'm thrilled to have the interest in that we're interested in it as well let me let me just putting a little bit of context, you can infer from the fact that we didn't disclose terms, it's not a material investment for us. So I think that's just important background to start with.
That when we think about investment activities were and as we said we're interested in things that provide some strategic capability and we've said for a long time that we're underweight E&S and and this gives us a window into a successful innovative management team.
That has a lot of expertise in the niche not in the non admitted space.
And then price in geographies that are debt.
Could could teach us something as well so it really is about it really is about a learning exercise for us.
Got it thank you.
Thank you.
Thank you. The next 1 is from the line of Jimmy Buhler from J P. Morgan.
Hi, Good morning, So first just sort of the question on what Youre seeing in the.
Workers' comp market in terms of pricing I think there's been an expectation that things would begin to return are you seeing debt.
And.
The net follow up.
Good morning. This is Greg yes, the orders.
It's kind of continues.
Bounce around we've thought.
Not that we were going to hit the bottom of a couple of quarters back and then with the pandemic. There's clearly been some favorable frequency activity around workers' comp and think wages payrolls et cetera, as we continue to work with the bureaus in terms of their loss cost recommendations. They are coming in less negative and I think the key will be around how they.
<unk> 2020, that's an anomalous year or if theyre going to factor that into the overall ratemaking. So go for our book of business, we didn't quite hit of positive rate number of at or slightly negative in the quarter, but we do see improvement on it every quarter.
And then on towards costs and sort of social inflation with sort of the reopening of course should we assume that we should start to see a little bit of the pickup in social inflation and how does that affect.
Your loss ratio and have you been assuming.
Have you been incorporating continued high social inflation in your loss picks.
Through the past few quarters.
Hey, Jimmy it's Dan I'll take that 1.
We have we have taken the view that social inflation has gone nowhere.
The elevated level.
Level of losses that we saw call. It pre pandemic are going to persist and that the elevated level of <unk>.
The loss trend even off of that higher level of losses is going to persist.
So that's what we've that's what we've assumed is we've continued to make our loss picks and assess the SSR reserves.
And I think it is going to be a while before we see.
Of course work through the backlog of having been.
Closed for much of the past year.
Priority and in some jurisdictions is going to be given the criminal cases over civil cases, whether the ports are reopening for in person discussions or virtual is still a question in some jurisdictions. So I think it's going to be a while before we know the answer.
We said pretty consistently last year debt.
There is uncertainty of that environment and because there is uncertainty we were taking a cautious view on our view of loss picks on reserves, but the short answer to the question as we think social inflation is as strong as ever and that's reflected on our numbers.
Okay, and then just lastly, I think Alan noted the fact that you didn't disclose the price on Fidelis.
Means that it wasn't a large investment it should be assumed that there should be any impact from.
The investment on your share buyback plans for this year.
The Jimmy Choo.
Part of our overall capital management strategy, that's not going to be sort of almost by definition, it's not going to be non.
Of that going to have a meaningful impact on our capital position.
Thank you.
Thank you. The next 1 is from the line of Josh Shanker from Bank of America. Please go ahead.
Yes, good morning, everyone.
Just wanted to talk about I know, there's been a lot of questions on personal auto for I have 1 more.
This has been the best month for growth in terms of the new policies that you guys have seen from back in 2016.
Given that you firmly expected frequency of return is there a risk that you've put on customers who came in because of a good price.
The independent demick, but the price.
Adequate price post pandemic can they might leave.
Yes, Josh it's Michael.
I suppose there is always a risk and certainly there is pressure on retention when you start to increase prices.
That said, we feel comfortable with the pricing levels that debt, we've been putting business on the books.
I mentioned intelligent live is a key driver of some of our.
Some of our growth distribution expansion has been a driver of some of our growth. There is a lot of things that you can point to.
Including elevated COVID-19 activity that our drivers of growth in auto.
We've seen some slight improvement in close rate in auto.
For the past.
A few months as we've written we've maintained the RPC essentially flat, but there are a lot of other drivers of growth than just price that we can point to that probably alleviate some of that.
Hey, Josh Dan just 1 other comment on that.
I think we've done a terrific job on the auto book over recent years in terms of understanding our appetite on having a consistent appetite and I'd just point you to the last time, we did take significant pricing in auto back in 2017.2018 timeframe.
We did not shrink the pip count in that environment.
Good point of good point.
And on <unk>.
Unrelated topic, which sort of been addressed with the court reopening from whatnot can you talk about whether in <unk>, you're seeing convergence between modeled loss cost trends and actual experience I assume that you are prepared for a lot more losses on the incurred basis. During the fourth the pandemic that didnt occur because of the nature of the court is that net.
Narrowing right now or are we still experiencing.
Loss cost from far below the model.
Overall.
Let me make sure I understand the question Josh you mean, you mean the trend in the in the loss ratio or you mean, the level of incurred losses relative to ultimate losses.
In every line of business you assume that the loss cost trends in the 4%, 5%, 6%, but during the pandemic it wasn't that because of court for other reasons, but you assume that that's just the delay I'm trying to think.
Is your loss experience.
Closer in line with your modeled protections.
Or are we still have a.
Huge backlog of reserves for claims that haven't come through because pandemic conditions persist.
I think closer to the latter so we still have for example, low paid to encourage the ratios. We still have for example, the majority of the ultimate losses, we recognized for Covid sitting in IV NR.
And to the earlier question on court reopening again I think people are maybe jumping the gun on that I think it's going to be quite a while before we worked through the backlog here and see so we are still expecting longer periods of development in terms of how long, it's going to take to get the ultimate.
And again as we said previously even though the data itself looks good we took a cautious view in terms of our loss picks and our reserves with the assumptions more in line with our normal long term loss trend.
Alright.
Well the digging a little bit later, but I don't want to keep of Hawaiian. Thank you very much.
Thanks, Josh.
Thank you. The next 1 is from Tracy from Barclays. Please go ahead.
Thank you Dan you mentioned that travelers is less leveraged the overall CPI type inflation.
Theyre better macroeconomic indicators, we should be looking at CPI, the lesser measure for long tail lines muscle memory from a formal rule that there are other indices you look at that as more nuance for your businesses to measure claims inflation.
Yes, So let me start and Dan can fill in whatever I Miss.
Actually not trying to forecast CPI or inflation generally we're trying to forecast loss costs.
We do that by analyzing our own data and incorporating forecast from third parties and we do that on a very granular basis. So.
Take workers' comp for example.
Forecasting medical inflation, we're looking at component, so think prescription drug prices durable medical equipment et cetera, and we're doing that in the same mix that those loss cost.
Tribute to our actual losses. So it's hard I mean, obviously, we can't give you a single number and it's hard to say Gee go look at this index for that index, because we're doing it on a on a very granular basis in part by tumbling their own data squaring triangles and by reference to third party sources.
Okay. So all of those nuance on.
Factors that you're looking at does that worry you with respect to depletion of CPI is not the.
The indicator, we should be super focused on.
No.
Nothing about Theres nothing about.
Loss cost of inflation, that's worrying us at all in fact, we.
The emphasis on in the conversation years because to a degree we are seeing it but we saw pretty good profitability in personal lines and it's in it's in the short tail lines on the consequence of that is we can see it very quickly and react to it very quickly and contrast that to say social inflation, which was an issue for us a few years ago, where it takes a little bit longer for us although I.
I'll say that I think as compared to many we saw that very very quickly.
And theres not its not nearly as much leverage on the balance sheet. So theres not theres not as much risk in the reserves and we can price for it relatively quickly. So there is there's actually nothing at all about the inflation environment that's of concern to us at the moment in short tail lines of our long tail lines.
Okay, Great just 1 follow up on Fidelis on.
It's also of reinsurers. So I'm just wondering if this partnership could look like a side car, where you can feed your own premiums for this platform, where it could potentially compete with reinsurance on your panel.
Uh huh.
Not certainly not at the moment not as the way we've contemplated the it really is just the way we presented it it's pretty simple.
It's a really interesting business model, it's a fantastic management team they've got a great track record there that the cultures are very compatible what they do is very interesting to us and we wanted to learn more and thats for the time being that's really all of there is to it and maybe over time, we will collaborate with them and there will be business opportunities, who knows but but for the time being.
It really is just as we've laid it out.
Thank you for taking my question.
Thanks Tracy.
Sure.
Thank you. The next 1 is from Elyse Greenspan from Wells Fargo.
Hi, Thanks, Good morning, Alan and I guess my first question is on the Fidelis investment as well on.
And that's really your as you said on you guys Werent interested in reinsurance deals. Obviously, there's unique features of the investment away from cash when Sharon, but I just wanted to get a sense of just as we think about M&A like is your stance on the reinsurance changed and then you've got $750 million of.
In the quarter and it was earmarked for business growth. So I'm just trying to.
Tying that capital into potential M&A or is that more on Irma.
For organic business growth.
Let me start with the Dallas and ill ask standard comment on the capital range. So there's just nothing at all about this the signals any shift in our thinking about about reinsurance we are.
Primarily focused on being a primary writer with very limited interest in reinsurance and that remains the case. It just so happens at Pinellas Reits some of their business in the flow of reinsurance, but that's just 1 of their 4 pillars of the business.
There are some interesting aspects of the reinsurance business, they've got really thoughtful risk management tools are really thoughtful risk and reward and so there's the potential for us to learn something in terms of managing our own cat portfolio.
And I will point out.
It hasn't been.
Don't expect it to be any significant focus for us we do write a little bit of reinsurance, where it's complementary to our core business. So for example, we've got a lot of boiler rebid losses. So it's not completely for them to us. It's a very very very small part of what we do.
No no change in strategic focus, but it's not it's not alarming to us and in this respect we think that there is something for us to learn.
And the lease regarding the capital the capital question.
No change at all in our.
Philosophy or or urgency around M&A or lack of urgency around M&A.
It's really coincidental the timing of when these things came together and again the fidelity investment was small enough that it wouldn't have necessitated.
Much of the way of capital management Anyways, I think if you go back in the transcripts 6 for you.
Even 8 quarters ago, we were talking about eventually we would have the need to issue more debt just to keep up with growth in the topline and to maintain the debt to capital ratio of that work that we're comfortable with.
Okay and then my second question on cash.
Can you guys quantify the EMS.
<unk> got exposure had on your premium growth in the quarter and then within select accounts within business insurance I noticed that the premiums declined in the quarter, but I thought it.
Would've benefited on that line as well.
So at least it's Dan I'm going to.
As presented resist the temptation of sort of try to do a reconciliation of of written premiums to the degree that there is positive exposure the same way that to the degree that there is positive right that just means that the accounts that renewed would have renewed at that much more having said that it's applicable to the accounts that renewed that's the.
That's the measure of that it would apply to.
Greg, Yes, I mean, just a little bit more color on select we've shared with you that we've been very focused on improving the profitability of that business in.
So we're certainly have been very thoughtful around production and pursuing margin improvement through rates and terms of conditions and that sort of I will tell you also on the select business during the pandemic.
Cause of some of our ability to have a little more flexibility for our customer we suspended some from billing and some cancellation activity and now thats back in play on the marketplace. So you have a little bit of drag on the top line with that just back to normal activity, but when comparing that to the base period debt has a little bit of an impact also at least.
Okay. Thanks for the color.
Thank you. The next 1 is from Brian Meredith from UBS.
Yes, Thanks, most of the Nash.
Curious wildfires are kind of kicking up here.
In the West Coast.
Maybe you could talk a little bit about which you've kind of been doing over the last couple of years to kind of manage your exposure of the wildfires.
Sure Brian This is Michael and certainly we are managing our exposure of wildfire across.
Across the business, but I'll start with the personal insurance I think of a lot of the actions are common.
Across the place, but Greg can chime in if I Miss anything on the commercial line side.
It really.
Is the continuation of the conversation that we've been having with you in terms of the way we've been managing it I think.
We've talked a lot about California in particular in the context of wildfires, but certainly the apparel is the apparel that exposes us across more states in the west the just California.
So 1 specific development I would point you to.
In 2021, as we've extended our agreement with wildfire defense systems to apply to Colorado. In addition to California, So we've got that sort.
The risk prevention partnership extending.
Across an additional state in the West, which we think on the margin is helpful.
And then maybe just an update on our progress in California.
Dish into the launch of the new product.
Which we successfully got in market in 2020, we're now converting California policies to that new product, So think new pricing segmentation take new rate level think new eligibility.
As respect wildfire exposure and just last month, we got an additional 6.9% rate increase approved on the property product in the states. So we continue to manage through rate eligibility.
In terms of conditions and we do continue to work our way through the non renewal activity subject to the lifting of the moratoriums as they expire.
As another as another lever, we're pulling in and again a lot of those are specific California comment, but you can think about those on in terms of again segmentation modeling.
Exposure management of applying more broadly across the west.
Thanks.
I guess, a quick follow up here.
Just curious you continue to have some really strong growth in your commercial property lines.
Talk a little bit of what's the kind of market dynamics are on that line. That's the 1 area that we're seeing pricing really kind of moderate the quickest.
Yes.
As you saw we of a plus 9% of across the property line and really the primary amount of growth underneath that as RPC driven and that's why.
We gave you that supplement exhibit or excess casualty of national property, where 2 of our of many specialty lines that we have flipped to the has certainly been the poster children for some rate momentum over the last couple of years and as I said still get in double digits, but moderating somewhat but thats whats driving that growth.
Thank you.
Thank you.
Thank you.
We have time for 1 more question and that will be from mayor shields from <unk>. Your line is open.
Great. Thank you so much for fitting me in 1 last 1 well obviously the last question on personal auto can you talk about the trajectory of frequency month by month in the second quarter. Just so we can assess what's going on.
Okay.
Meyer I don't know if I'm going to give you a number of more specifically inside the quarter I think I think what we said, we'll let stand which is.
You know that as we exited the quarter of frequency with the closer to pre pandemic levels.
You sort of know where it had been running I think coming into the quarter and again it approached pre pandemic levels.
As we left of the quarter.
Okay fair enough.
Then I guess for Greg when we look at the presentation on select accounts the RPC for the first quarter of 'twenty..1 it showed up as 8.8%. When you ask me the reported <unk>. It was $6.7 of it seems from the outside like the Big change I was hoping you could talk about the process and how we should.
Think about the inherent estimates in the RPC.
Yes Meyer.
Both of those quarters bulk of.
The fourth quarter and the first quarter develop up as you said of about 2 points and I'll just remind you that.
And the estimate of what we believe the current force is going to look like in terms of the exposure growth. So we're always estimating that and when you have of the impact in the economy. Your model, sometimes don't keep up with that really quick on the drawing change thats happening. So we basically shortened our model period. So if we were using a 6 month moving average.
I think we moved to a 3 month moving average to try to keep up with that change in the marketplace and that gives us a little bit changed the development. So we think we'll be in front of that going forward, but that was basically the methodology underneath that.
Okay, perfect that's exactly what I needed. Thank you.
Thank you.
There are no further questions at this time Ms Abbe Goldstein.
Thank you.
Thank you very much appreciate everyone's time and for joining.
Joining us this morning and as the OE.
Okay.
Good day.
This concludes the conference call. Thank you for participating you may now disconnect.
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Yes.
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