Q2 2021 Kemper Corp Earnings Call
Interval.
In an effort to provide insight into the underlying performance of the combined businesses. We also display our financials as adjusted for acquisition. This view removes the impact of purchase accounting and includes historical American access information for periods prior to the acquisition to more readily provide.
Provide a meaningful year over year comparison.
And our financial supplement presentation and earnings release.
We have defined and reconciled all non-GAAP financial measures to GAAP, where required in accordance with SEC rules you can find each of these documents on the investors section of our web site Kemper Dot com.
All comparative references will be to the corresponding 2000 twenty's periods, unless otherwise stated I will now turn the call over to Joseph.
Thank you Mike.
Good afternoon, everyone and thank you for joining us on today's call.
This quarter the country took a significant step forward in its recovery from the pandemic and its clear we are in the middle of a strong.
<unk> economic rebound.
Last quarter, we indicated the reopening would create a very dynamic environment with expected increases in auto frequency and severity.
Further we anticipated decreasing mortality.
The reopening is happening faster than projected as a result frequency in auto increased significantly.
And our supply chain that was already stressed especially related to auto was further pressured on.
Although we largely expected these effects the speed of the reopening magnified their financial impact on this quarter's results.
And our auto businesses, the increasing activity seen through an increase in miles driven led.
Evaded frequency the.
The environment also has significantly increased severity driven by supply chain issues.
Labor shortages.
Social inflation creeping into lower limit policies.
And Florida, Pip court rulings that impact multiple policy years.
Alternatively in our life business.
Led to L. We saw increased demand for our products historically high persistency and a reduction of COVID-19 related mortality.
Our balance sheet and business model remain well positioned to navigate the reopening we're.
We're taking appropriate action to ensure we meet the needs of our customers and continue to create long term intrinsic value.
For.
This specifics on the quarter, please turn to page 4.
We generated a net loss of $63 million or <unk> 97 per share as reported and 53 million or <unk> 82 per share as adjusted.
We also produced an adjusted consolidated net operating loss of $99 million or $1.54 per.
For a huge share as reported an $89 million or $1.39 per share as adjusted.
As highlighted before the speed of the reopening and other environmental challenges negatively impacted these results.
Duane will discuss these issues in greater detail.
Let's discuss the key metrics, we use to evaluate our performance.
Per diluted.
Tangible book value per share, excluding unrealized gains declined by 1%.
The goodwill created from the American access transaction contributed to the majority of this decline.
Note as we stated at acquisition announcement, we expect a relatively short earn back and remain enthusiastic about how the transaction.
<unk> expands our specialty auto franchise value.
Return on tangible equity, excluding unrealized gains was 11%.
In addition, we continue to produce strong cash flow over the past year, we generated $422 million of cash from operations. These.
These metrics highlight how even in a.
<unk> environment Kemper remains financially sound.
Turning to segment results, the Swift reopening and the referenced environmental challenges led to an increase in both frequency and severity this quarter.
Further these inflationary factors and the Florida Pip Court ruling as I mentioned earlier drove adverse prior year.
With our development.
As a result, the specialty P&C segment generated an adjusted underwriting loss of $60 million.
As adjusted underlying combined ratio of 106%.
We believe this to be a short term obstacle that will extend a few quarters, while we take appropriate corrective actions, we expect to return.
Or is there more normalized underlying combined ratio within the next few quarters.
In April we highlighted how the uneven reopening from state to state impacted shopping behavior.
This quarter, we saw demand for our products return and we experienced strong growth.
Policies in force grew 5.5% as adjusted and direct written premium.
Turning to normalized basis grew 13, 2%.
The business remains well positioned for attractive long term growth and through proactive corrected measures appropriate long term returns.
Our preferred segment faced the same environmental challenges our specialty P&C segment, we continue to work to enhance this business.
Turning to our life and health segment, we continue to experience strong policy retention and increased demand the.
The heightened level of mortality, we experienced earlier in the pandemic is beginning to subside the business is positioned for growth and our ongoing profitable growth.
On the capital deployment front, we continue to take actions that enhance the long term intrinsic value.
On a company.
We closed on our acquisition of American access on April 1 and repurchased roughly a $160 million worth of shares through the end of the quarter.
While maintaining a high level of financial flexibility.
In summary, we experienced expected environmental challenges in auto this quarter they ramp.
The coast magnified by the unanticipated rapid speed of reopening on.
On the flip side, our life business has begun to return to a more normalized level of profitability, we have a strong balance sheet and a business model positioned to navigate the reopening and ensure we continue to deliver long term value to our customers and investors.
I'd now like to turn the call over to Jim.
Jim to discuss our second quarter operating results in more detail.
Thank you Joe turning to page 5 you can see the impact that the recent environmental challenges had on our business and short financially. It was a tough quarter, while topline growth returned to a more normalized rate 2 years of increasing severity. Additionally.
Impact why chain challenges and a swift frequency return more than offset last year's premium credit from this year's mortality improvement. This resulted in a reported net loss of $63 million and adjusted loss of $53 million. They reported consolidated net operating loss of $99 million and an adjusted net loss of $89 million.
It is likely to take a few quarters for the environment to normalized corrective actions to begin to earn in and profitability to return to appropriate levels turning to tangible book value per share excluding unrealized gains tangible book value per share declined 30 compared to last June looking at this relative to last quarter.
<unk> signed $5 and Todd.
The primary driver was our investment in AAC and its corresponding goodwill that accounted for $3.7 of the change we continue to expect this transaction to be accretive to franchise value.
On page 6.
Highlight our view of operating income has mentioned this.
<unk> was negatively impacted by certain environmental challenges that led to higher frequency and severity as well as adverse prior year reserve development, our specialty P&C segments as adjusted underlying combined ratio of 106% reflects an approximate 45% to 50 per cent change in frequency and an approximate 8% to 10.
This core increase in severity due to supply chain issues, such as commodity prices and labor shortages.
On the bottom half of the page we display sources of volatility you can see the impact that the increased litigation and social inflation had on the prior year reserve development and on our financial results in a moment Duane will provide additional details.
<unk> on this.
On page 7.
We displaced some of the key capital metrics, we use to track our performance, including growth in tangible book value per share and tangible return on equity.
Over the past 12 months return on tangible equity excluding unrealized gains was 11%.
As discussed.
Earlier relative to last quarter tangible book value per share excluding unrealized gains declined 12%. This was largely due to the AAC acquisition and its corresponding goodwill going forward. The reference industry environmental challenges will likely pressure near term tangible book value per share growth relative to historical performance.
That said.
We believe these challenges to be short term in nature and do not believe they will impact our long run targets.
Continuing on page 8.
We highlight the strength of our balance sheet, specifically, our insurance entities are well capitalized liquidity remains strong and our debt to capital ratio of 27% is well within our stated target.
Range of 17% to 22%.
This profile provides us with a significant degree of financial flexibility to optimally navigate this environment and make appropriate investments.
On page 9 we demonstrate our strong capital stewardship. This year, we've taken approximately $580 million of capital actions through June 30.
It's just 3% of outstanding shares totaling roughly $160 million. In addition, as stated last quarter, we repaid the $50 million term loan increased our annual dividend per share to $1.24 and closed on the acquisition of AAC.
Turning to page 10.
Net investment income for the quarter was $114 million.
Reflecting the strength of our core portfolio and strong alternative investment performance our portfolio construction, which focuses on matching liabilities and total return is designed to provide stable income through various cycles. This is evidence to this quarter's pre tax equivalent yield of 5%.
On page 11.
We re highlight our solar energy investment with Sunrun, our investment dollars are being used to finance the installation of solar panels on our portfolio of residential homes that helps provide a cleaner.
Alternative energy source to homeowners.
From an accounting perspective returns will primarily be recognized from the income statement as tax credits and deduction.
<unk> with a portion of these items offset by reductions in the fair value of the partnership.
While this is a multiyear investment the tax nature of the transaction front loads. The return of cash and income recognition. Net result, most of the expected lifetime returns will be recognized this year the largest expected impact took place this quarter last quarter.
Cumulatively the investment has increased net income by approximately $17 million or <unk> 26 per share. This is a great example of how we can use our capital benefit both the environment and our stakeholders.
In closing, while the company's quarterly financial performance was pressured by industry Environmental factors, we are confident.
On the corrective actions, we have and are taking will return us to our financial targets over the next few quarters.
With that I would now like to turn the call over to Duane to discuss the results of our P&C segments.
Okay.
Thank you Jim and good afternoon, everyone before I jump into our segment specific results.
I want to make a few comments about auto overall, so let's turn to page 12. There are several environmental challenges that are impacting auto loss cost on the frequency side a significant rebound in miles driven has resulted in an increase in claims at the same time severity is increasing due to supply.
The chain challenges labor shortages and social inflation.
Recent Florida Court rulings have changed some of the rules and requirements regarding personal injury protection.
These changes impact multiple policy years as a result, we reevaluated and increased our prior year reserves.
This is part of doing business.
And Florida and does not change our commitment our ability to serve this market in a manner that is good for both customers and shareholders.
1 of our advantages is the ability to quickly adjust our operating model and pricing to these types of legal changes and that process is underway.
Further and in line with what others.
Industry are observed we are seeing an increase in attorney involvement on claims with a reduction in claim activity. During the pandemic plaintiff attorneys have now expanded their focus to lower limit policies. This has resulted in a higher level of expected loss cost to which we have appropriately reacted we continue to monitor the situation and our.
We're actively taking corrective actions.
Moving to page 13, I'll start with specialty P&C.
Given the environmental challenges I just mentioned the segment experienced a $17.3 point increase and its underlying combined ratio, resulting in an underwriting loss of 60.
And yet however, the current loss doesn't change our view of long term profitability of the business, we remain comfortable with our underwriting practices and are taking appropriate actions to return the business to target profitability.
From a top line perspective, we had strong growth across the entire.
Entirety of the franchise.
Specifically policies enforce increased 5.5%, while written premium on a normalized basis increased 13%.
This was significantly driven by Florida, Texas, and our expansion states.
Where we have achieved top quartile growth highlighting the per.
<unk> of our model into existing and new territories.
Lastly, as I mentioned last quarter on April 1 we closed the acquisition of American access it's been a pleasure working with our new colleagues and we're making great strides on the integration that will enable us to leverage their capabilities to enhance our specialty business.
Turning to the preferred segment on page 14, the preferred segment is facing similar environmental challenges as a result, our business business enhancements to date were overshadowed by these challenges.
Overall, the preferred segment in the preferred segment, we continue to expect ongoing profit improvement actions to bring us.
<unk> to our desired results I'll now turn the call back to Joe.
Thank you Duane.
Turning to our life and health segment on page 15.
Overall, the license on health segment's profitability is beginning to improve as mortality returns to pre pandemic levels for the quarter segment income was.
As clothing million driven by lower levels of mortality and strong policy retention.
Further for our products the environment is creating stronger consumer demand.
This is seen through increased new issuance and improved policy retention.
<unk> of 94% is at a historic high the combination of these items produced a net.
Net result of a 5% increase in life earned premiums.
Overall, our outlook for the life and health business remains positive in this segment is positioned for profitable growth.
In summary, while this quarter's financial results were disappointing.
We concluded last quarter's earnings call.
13 of debt, we expect to see a decrease in mortality more auto insurance purchases increases in auto frequency and loss cost inflation, and a robust economy and associated investment impact.
All of these factors came to fruition at a faster than you anticipated rate.
Our balance sheet provides.
We stay Preet financial protection for these types of changes.
Further our business model is designed to be nimble efficient and responsive we expect to quickly improve results and continue to use our competitive advantages to profitably increase market share.
Despite this quarters challenges, we remain in a strong financial position and will continue to deliver on our promises to our customers.
<unk> price and to provide attractive long term results and value creation for our stakeholders I will now turn the call over to the operator for questions.
We will now begin the question and answer session ask a question in there plus Star then 1 on your touch shows up.
Period.
Customer flow please pickup your handset before pressing on it Keith.
I withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Our first question today will come from Greg Peters with Raymond James. Please go ahead.
Good afternoon, everyone.
I wanted to.
Focusing on specialty property casualty segment and the results the underlying results there.
I was wondering if you could give.
Give us some more color about where the deterioration was most severe.
He lives in California, with the expansion stages of Florida.
On the other thing I went back and pulled up by Infinity property casualty model and I have results going back to the early 2 thousands on a quarterly basis and.
I don't think they ever reported.
The combined ratio the Si I'm pretty sure. They never did so I'm just curious I'm sure Youre running everything's integrated at this point, but I'm wondering if you're able to isolate it to a pocket of business or.
Or is it just across the entire spectrum.
Yes.
We'll tag team the result, a little bit here and Greg and thanks for the question.
What we're seeing is a broad set of reopening with a fairly significant bounce up in frequency.
Some very significant.
No issues around severity the supply chain issues.
It has seen a rapid change youre getting youre getting an increase in parts youre getting an increase in.
And costs to get our rental car youre getting delays and how long things take to run through a body shop, because they run through labor shortages or trying to get.
Whether it's chips or parts or the like.
We are seeing some social.
They should creep into our business in ways that we weren't in prior quarters I think part of what you're seeing is that attorneys.
Who had been focusing on higher limit policies when the pandemic saw a reduction in frequency.
They started looking for other places and they moved more into lower limit policies, where we hadn't seen them before.
<unk> influence so that's putting some pressure on that you've got the normal medical cost inflation.
That youre seeing sort of all of those are happening.
Fairly rapidly at 1 time.
We foreshadowed those for you last quarter, we described that we expected to see supply chain challenges.
And in somewhat of a demand surge later in the year.
Honestly I thought it was going to be third quarter and fourth quarter not as much in the second quarter, but it came in largely as expected.
What we normally would have seen in our specialty business as those things would have crept in a little slower.
And our capacity to adjust with.
As with rate would've been more rapid.
Given the last 12 months, a particularly low combined ratios the ability to turn hard on that wasn't there. So.
So it's going to take a little bit of time to do that because when you look back at a rate filing you look back at the more recent history.
It shows some positive profitability.
So.
With the issues.
Not appear to be anything at all from an underwriting perspective and on.
On an underlying model perspective, we're seeing a temperature rise across our book.
Honestly in some ways the way you watched a progressive combined ratio on underlying combined ratio go up over the last.
3 or 4 months very similarly.
We're very much in parallel.
Points of the underlying combined ratio change are similar.
Yes.
John.
Greg maybe what I would add to what Joe was highlighting.
I think 1 of the things you've got some purchase accounting and other noise that are running through here and really.
I really encourage folks to look at what the 6 month underlying combined ratio is for that particular business, which is at 99 again definitely higher than our historical norms, but when you think about the quarter. It has a couple of things that are running through it that arent necessarily just purely indicative of the quarter you've got some intra.
Really incur development that is both related to kind of again, our picks for the year.
And so the more that we have information on this particular quarter and when we think about how that's going to play out in the year in terms of trying to pick an accident year that basically brings in some.
Some elements that create some.
Europe.
Quarter or intra year development.
That would again direct they are accurate when you think about the 6 month view, but they would overstate a little bit what the quarter in and of itself would be the second thing that you see there is again some revised estimates that we have around the severity piece.
Interest not only just the frequency piece now for the year, but the severity piece, we continue to see that uptick.
And whether that's being driven by additional rental car days, because you've got chip shortages or labor shortages or whatever that.
The driver is.
We've.
Further enhanced our thoughts relative to what that is and so again, you've got a good full year I think in that 99.
But it does look higher from a quarter perspective.
Okay.
Oh I'm sorry go.
1 other thought this duane.
Peace in terms I mean, I think you hit on a couple of things there, but Joe mentioned at the profile of the business by and large Hasnt changed I mean, we continue to attract and write the same types of ensures that we have written historically I do believe it's nuanced as you would suspect by state slightly but by and large it's we're seeing it countrywide.
Nuance being driven by by Wednesday, its opened up right. It was pretty much dictated by if some opened up ahead of others. Then we saw different outcomes, California was late to the game. So we saw that certainly later later later in the quarter and as far as history goes.
I don't know that you know if you go far as back as you did with.
<unk> net you probably would've seen the environmental challenges that we've seen both.
As COVID-19 hit and things slowed down so you would've seen some some outcomes there that were very unique and I think we're seeing unique outcomes in the environment as we as we reenter and I think Joe and Jim highlighted those in terms of the severity pressure.
And the frequency pressure.
I think thats going to take a little bit of time to normalize.
Thank you I just it just is.
A follow up on that.
You mentioned that the they are coming after the attorneys started coming up from lower limit policies I.
Yes.
<unk> costs are are outside the policy limits for this.
The lower limit policies or are they inside policies on that so I'm just wondering what the Holy Grail, the lawyers C and <unk>.
Minimum limit policies.
Not not every 1 of our policies are minimum limits, Greg but.
Lower limits, so even if somebody is coming after a $25.50 policy.
They're looking at the dose limit dollars in their filing a suit on there and they are coming to the conclusion that maybe they can find another 10 or $15000. It's on.
What I, what I've described a little bit like the.
They're on the rats in Chicago during the pandemic with less activity they came out of the alleys.
And we're a little more rampant than they were with less activity. Some of the trial lawyers are working in places they didn't work before.
And again, it's smaller limits the day, there theres not going to be a lot of dollars there, but there are some.
And.
That puts a little bit of pressure.
It's not something that we look at and say.
We think we've got something that's a fundamental underwriting issue or problem.
We're comfortable with the business we're writing.
2 or 3 quarters ago I think your question was how long are these combined ratio is going to stay.
Oh, and we told you we didn't expect that they would there would be a pandemic rebound.
I wouldn't compare this against.
Picking the worst infinity quarter I think.
And then Mick created an.
On environment.
Had an abnormal rapid reduction in combined it's going to have.
This low normal return in combines.
And then it will balance itself back out so we're very comfortable with our long term.
In this environment.
An SMS.
Message I'd take away I'd look at the.
The numbers, Jim was pointing you to.
And add back that we're comfortable with our foot on the gas from a growth perspective.
Got it first of all I love the analogy.
Rats, so that's going on desktop.
Go down right.
Detroit in the third and fourth quarter.
Quarter on you say, it's going to take you a couple of quarters, Quebec to normalized.
Combined ratio should we assume that at this point because.
It's emerging getting sequentially Corp, worse month by month that maybe things.
Continuing.
To escalate, but then when we get towards the end of the fourth quarter or we start to see improvement as sort of.
The cadence of what we should be expecting.
Yes, I'm going to answer your question slightly different Greg, but try to get you, where I think youre trying to go.
And I'm going to try to avoid.
Giving giving forward guidance, we're giving.
Yeah.
Number to pick.
What I would tell you that typically in our specialty auto business. We think we can adjust around a profitability issue inside of a couple of quarters.
My sense is this is probably more like a 2 to 4 period, rather than a 1.5 or 2.
Thats because of 2 principal.
And then all the other noise just working through there I think youre going to see inflationary pressure on the supply chain labor shortage and medical costs.
Net are going to continue to stay elevated higher than normal.
For at least 12 months, maybe 18 months.
That's 1.
Number 2 rate filings typically require you to look at your historical data and put some sort of projections for trend.
The historical data that we're all showing across the industry has had some periods of very attractive returns.
This is going to be a conversation with regulators that we're all going on.
Issue quarters of.
Tractive returns.
Either returning severity and.
End up being a set of conversations.
Around which of those 2 would she should we put more weight on the.
In the past or the future.
Windows and.
Ultimately I think the regulators are going to realize that if they don't let the industry move and respond to the forward looking loss trend, it's going to cause them, it's going to cost carriers to restrict availability and it's going to cause.
There's a supply problem from insurance perspective.
But that he usually has to occur before it will take a little bit of time, a little more than <unk>.
Normal it's not something that I think is going to take.
Years, but somewhere in that 2 to 3 maybe 4 quarters.
From time period.
To get back into that.
On mid 90 range that we'd like to be at.
Got it very thoughtful answers I appreciate it thank you.
So.
So on.
Looking at it.
The loss ratios from the specialty business like 19.
And then we had we had the.
Campbell had a couple of points of improvement in 2000.
Which I think most attributed to the.
John.
Okay home orders, but that improvement with a lot less than what we saw in other.
Somebody's theater, mostly standard.
Can I stop you from 1 second Paul.
Make sure I'm understanding which segment Youre talking about again.
The especially on personal auto.
The specialty auto.
Yes, especially Marshall on them.
Okay, because I thought I heard you talking about homeowners.
I'm, sorry on especially first of all Im sorry, I got it got it okay personal on it yet that alright.
The point was they were sort of a couple of points of improvement in 2000 net attributed.
Stay at home orders.
And the thought was that non standard is a little different than say a standard business in net.
Hager drivers was less impacted by stay at home orders.
Now if our back.
The Avi on a run rate basis.
So.
Should I am I wrong to say that that essentially the return to stay at home orders in July.
Just a couple of points.
And that the remainder of that is these environmental issues to pick out.
What is the other pieces here.
Moving to.
Or I.
I guess the Congress is that is that maybe.
2000, and that was masking problems at Starwood or seeing the day, you sort of the culmination.
Or underwriting.
She has.
That started not just this year, but for this quarter were actually on that.
In 2000.
Yeah no. Thanks for the question this is Jim.
Paul I think I might.
Encourage first I'd start with I think it was more on.
But on a couple of points potential impact now some of that was offset by.
Premium credits or effectively there was some increasing severity there was on the other on that kind of brings.
As you to that net answer that Youre referencing.
But now when you step forward, you've now had 2 years of severity trend running through price.
And instead of having like this free cash or some way to come back and say you've got rate that would be similar to the premium credits that we gave up on the other side right.
Alright that would've ex attended that instead of having a couple of point benefit you might have a 4.5 point benefit right there was coming through there.
We now have the other end, where you've come almost instantly kind of back and I think John I'm not too much of a gradual but I think they do a nice job right with the monthly finished and when you see that 40.
48% type frequency increase the speed with which that came back isn't like anything even in the way going down to some extent other than a month and now you have nothing to match that against both for rate to offset the severity pressures on the other.
That are coming back on.
On the other side.
And so it's unfortunate in terms of how these things align if it would have taken a few more quarters for this to kind of normalize from a frequency perspective, I don't think you'll get quite the same level of impact from a severity side because you don't put the same pressures on the supply chain that quite frankly are being put there now.
On top of that you've got.
An increased period of time too.
Provide data to the regulators work with them. So that this is more match and so youre right can be a little bit more balanced right in terms of how it comes in versus what Youre seeing now which is.
Just quite frankly these 2 things are disjointed.
Again, it's unfortunate but it's.
Saying that we won't fix are not used to.
I'd highlight how we responded with au and how quickly we brought that Cushing now we've got an unusual saberi time, we'll work through that but.
This isn't going to change the long term underlying profitability of this business or the benefits that we're going to bring and continue to bring to customer.
<unk> or our ability to take medium and long term market share.
So.
Again unfortunate.
It's definitely got our attention that's an understatement, but will respond and we.
We will get back to where we were.
Can you contrast.
The situation on your line open.
Preferred versus non.
Non standard auto and basically the same themes with the same magnitudes further.
Other differences that we should think about between 2.
Statements in Hill.
And sort of run for them.
Sure Paul.
Largely the same themes.
There's a few things that are exacerbated in the specialty space.
The Florida Pip issues our.
Our specialty only because we don't do Florida business inside of preferred so those.
Our unique and understandably different there.
What we saw.
In the preferred business was a little bit of a difference in the frequency changes.
You highlighted this before in the pandemic the specialty business didn't see as much of a frequency.
Good Guy when people went home.
As the preferred did and the rebound.
It has actually been bigger in the specialty business.
Those folks were less likely to have worked from home before.
As a rule they.
We're less likely to be able to continue to work from home. So as there's been some increase in miles driven.
That gives you a little bit of a difference in frequency Delta and distribution.
Around those I think are our specialty business.
We saw that a little differently I think the biggest issue between them is probably coming around the pip.
And the slope of the frequency numbers I think if I were measuring.
They were net net down to the App.
On the preferred probably is still a little ahead in total net net.
Net from those 2.
You get wonky percentage change when you're comparing period over period, but net net those specialties, a little worse off than that on a combined.
Thank you book cycle.
Yeah.
Our next question will come from Brian Meredith with UBS. Please go ahead.
Yeah. Thanks, a couple of questions here first I'm just curious.
Why wouldn't you just step off the accelerator a little bit on growth right now, while you kind of figure out with this ultimate loss cost situations going on and what regulators are going to give you from a rate perspective.
Sure Brian.
We're very comfortable where we are from an underwriting perspective, and what the underlying business model.
Going on inside of specialty.
We are to some degree we're looking at what the 2 years combined.
It looked like 2020.1.
And what's happened at net net is we got a little less rate in that time period than we would've expected.
From it from a normal time period, we've got a little bit of a severity increase right now thats running hot that you've been more than a normal period and we're highly confident that we can adjust with whatever we.
We put with our rate levers and non rate levers over the next 6 months to put ourselves into into.
On appropriate position. We're also confident that the competition is going to continue to move on.
And have to respond inside of that environment. We believe we've seen the issues earlier.
Responding earlier on and we're confident that that while some folks.
They're the same issues are out there they just probably haven't seen it and describe it yet and there are ultimately going to do that and we're gonna be there like it is often the case.
To catch the business during the market disruption.
It's a confidence.
And are any of the specialty model and the knowledge of what we've got on our capacity to move quicker.
Okay.
And then I guess, specifically just on the <unk>.
Florida Pip situation is that purely just.
Prior year policies being affected or where did it have an effect on your current year kind of underlying loss ratios in the specialty segment and is.
And something you need to price for or is this simply just a 1 off situation.
Yes.
A pip ruling and it changes the way.
Whether youre paying fee schedule or limited.
The numbers and then there is some technicality around at the $50.55 million of associated with that.
Is that from.
Not only impacts the current year, but theres a 5 year opened statute of limitations. If you will so I would really think about that as if it were running over 5 policy years.
Florida for Us that's about $2.5 billion.
So it's not a big number when you put it over $2.5 million policy base.
Net.
June 1 billion it will.
Impacts of the current year on on what impact going forward, but if you look at the combined ratios in Florida over the last 5 years, they've been highly attractive.
And even with $55 million of losses on the tune of $1 billion base remain highly attractive.
So we will factor into our thought process.
It doesn't it doesn't change our view on the market.
And if you do the math just on Florida Standalone basis. It doesn't change the view that you'd love us being in the state and you'd be happy that we were growing it.
Great. Thank you.
Our next.
Question for day will come from the ferry ransom.
As the tolling and partners. Please go ahead.
Yes, good afternoon.
I think in specialty most about what you've been talking about has been on the personal lines side personal auto can you talk a little bit about the commercial I know it has better I see it has better combined ratios.
But are some of the same trends you've been talking about effecting that part of the business as well.
Yeah, Hey, Gary this is Duane yeah.
I think I think you are correct.
It's a little more I would say subtle inside of the commercial line side, but.
We're obviously seeing the frequency impact.
A little bit on the severity side.
It's distributed in terms of volume slightly different than the than the personal than the personal auto side is but again it continues to generate.
Decent returns and we're watching it closely and to Joe's point where were.
Can you know, making changes along the way as the market moves on us where we're doing that inside of that business as well.
We're not really seeing a change in the in the social inflation. There. So whatever was there was there before but obviously he doesn't have any impact of the pip that.
We saw in the Pi.
On May the house.
And it had a little bit of a better starting point. So it's got the general environmental issues, but some of the idiosyncratic things that were running through the rest of the peer personal auto in the specialty space arent there.
Right Okay.
And then in terms of the actions you want to take.
Nick are there obviously there's rate.
As you were talking about.
Are there other things you can do that.
Might change things a little more quickly whether it's how you.
Treat new business or payment plans or other things like that that might have been a meaningful lever to pull.
Hi side of this Duane again, yes, you're exactly right and we continue to manage the underwriting side I'll call it that.
You know.
We constantly monitor that.
And to Joe's earlier comments about how we're reacting we've we've already pulled a lot of those and have been pulling those over the last 30 day.
Hey, Gary on 60 days as we've seen the market and the environment start to change and we continue to do that certainly within the within the guidelines that we have to we have to abide by while we're positioning ourselves for the rate change that we're queuing up we have several of those as you can imagine across all of our business lines to get those in place.
As soon as we can but in the mid in the.
Meantime, we are adjusting through segmentation levers that we have underwriting levers that we have to try to respond to what we're seeing so do your answers long short answer is yes, we are.
We're taken Gary in our in our thought process.
So we're not taking a quarter at a time.
Mind, you, we're taking a longer term view on what I'll point you to as you remember when this management team first came in we had an alliance United acquisition that was running a 125 combined ratio in.
And growing at 30, some odd percent.
Had a relatively.
Quick fix on that and we never slowed the growth in that business below 20%.
Because we believe the best long term intrinsic value creation.
It was to be able to grow that business and.
Produce returns over the long term and.
And that's what we did inside of that so if we thought it was going to be a long.
Longer term.
Jade, we might have a different point of view, but when we look at it we're saying what produces the best long term NPV.
And growth in tangible book value and that's going into our thought process. So it impacts the confidence we have on the speed.
Yeah.
Alright, Thank you very much.
Again, what you'd like to ask a question. It is star then 1 Star then 1 last quick question.
Our next.
John will come from non <unk> with JMP Securities. Please go ahead.
Hey, Thanks, good afternoon.
Just a quick 1 on the prior development we spent.
A lot of time on the accident year, but just wanted to ask I guess 1.
How do you your confidence or conservatism level that kind of went into getting there where they're trying to get at your confidence that at least from a prior year perspective.
Kind of kind of hopefully put behind you.
And then second question along those.
<unk> just from a from a pet perspective, but what's been your experience in terms of kind of the real tale on that day, I know that statute of limitation, 5 years, but kind of which which accident years about 76 really relate to and kind of I'm trying to get out once we get a certain distance away from things kind of wanted to effectively be ever.
Good to see on.
On the tail.
Okay.
So a lot there let me try to unpack age it.
A couple of things and I'm sure, we'll tag team this a little bit.
In terms of the development question and confidence.
I would tell you.
If theres a wide error bar in the environment, but I do believe that we have.
As always we try to put our best foot forward from an estimate but also trying to be at the higher end of that confidence range versus the lower end in terms of where it's at.
And we are we definitely try to take a view.
And think about okay. How are these curves developing so if we think about.
Severity impact that's here today, what do we think is happening from.
And ongoing severity is going to end up with our resolution of those particular claims.
And so that's not a different process for us it's the same less.
Forward.
Same viewpoints that we would have there and I think you'll see from a preference standpoint, we always want to have a strong balance sheet and so from that perspective, we tend to be more conservative.
Conservatives, the wrong word and so I'm trying to stay away, but we tend to if we're going to lean 1.
Level other we tend to lean more towards the items that is going to ensure that we have the right view of the balance sheet.
<unk>.
So let me pause there and see if there's any follow up questions on that before.
Try to unpack it <unk> the second part of your question.
That makes sense. Thank you.
Okay.
In terms of the I think it's gonna be a little hard and I'll ask Duane and showed up here to fully appreciate like when we'll have the 4 pip item of 100 per cent bake from page or other coming in because.
Quite frankly, some of the court cases, just shook out in June so that.
That becomes a little difficult to say, 100%, but when you look back over time periods, even like this.
It tends to be a 9 to 18 month window before you have a.
Are you going to move 1 or 2 points down from your mean development factors at that point are up they're not huge deviations from those component.
At those entered I would also indicate that we've thought about what we think that development pattern is that is included we tried to be really thoughtful with it we tried to set it aside I prefer not to and I think the entire team I don't want to talk about this next quarter on the quarter. After right. So we tried to.
<unk>.
But the best pictures on what those ultimate claims are going to be and within 9 to.
Cash 12 months, maybe 18th the longest well really have strong paid patterns that will.
Validate in there could you have a little bit up or down sure, but I don't think it would be a whole lot.
Duane and Joe.
Maybe give us some maybe I'll jump in here Jim and.
I want to make sure. We're answering the question on where you were asking and I think Jim.
Giving you a balance sheet confidence on the Pip question were you asking that or were you asking.
Sort of changing Pip environment, and how long does it take to sort of work through it and environmentally and from a business perspective.
Good day.
A little bit of book and I think the balance sheet question is pretty clear, but any color on the lateral would be helpful. Yes from it from an environmental perspective.
Florida, Pip is always a little bit of a mess there there's always.
Some group of trial lawyers, some group of medical providers trying to work.
<unk> the system.
On to squeeze a little more juice out of the Orange.
That's part of why it's a good specialty environment. It creates a challenge for folks who arent arent really good at it as strong at it.
There is nothing about this particular set of rulings that we look at and says it's re written fundamentally the way <unk> is going to operate.
<unk> in Florida.
It's a it's a court decision that changes the way most carriers were interpreting whether you pay the fee schedule or you pay the limited amount.
We believe those were intended to be too.
B B written into the law for different purposes, the legislature changed the law.
While a little bit and there were some.
<unk> word changes.
This might be.
A couple of hundred Bucks a claim that is having an impact on our per claim level.
50, 55 million Bucks on $2.5 billion is a couple of points on a business that for us had a combined ratio.
Hi, H low nines, starting point for the last 5 years at different points, depending on which period you picked.
It's been an attractive.
Business for us, it's not it's not fundamentally changing our view on Florida.
It's changing how we work through some some existing inventory.
And how we think about that on newer risings, but.
That's the only thing that happened.
We wouldnt, we wouldnt be changing much about what we were doing in Florida, except the handful of practice changes in a little bit of a review on from open claims.
That's really helpful. I appreciate that.
Insights and.
Best of luck.
Special income from Jeff Schmidt with William Blair. Please go ahead.
Hi, Thank you.
Does any of the adverse reserve development related to American.
Can access or was it all Kemper and ICU IPCC.
Just curious how reserve levels are.
We're looking there.
No the development, that's being referenced as Kemper and.
<unk> combined book, there's no AAC there it's inside.
Inside those numbers and I think we continue to be.
You know appropriate in strong and weak.
Doug through AC multiple times on Canadian <unk>.
Very happy with the acquisition very happy with the.
The strength of the balance sheet underwriting nothing there that has changed any of our thoughts assumptions.
Or other at this stage.
Yes.
So I mean, it doesn't look to be in the same boat as Kemper.
What we're seeing is the same the same issues that you're seeing in an environmentally on increased frequency.
Increased severity.
And the supply chain issues labor shortages the like.
It's working through all of those issues there was no significant tip.
Running through running through that environment.
So.
If you take the tip out the prior year were not a huge set of numbers that we're running through there. So it is just not.
It's got the same.
Is it similar drivers.
On similar roads in similar environments, so the frequency and severity issues, we're seeing on the whole book are there.
Okay.
And then you provided some color on just social inflation moving down in the gross lower limits day.
And on what percentage of claims have attorney representation now versus maybe a year ago or.
Or maybe versus like historical levels.
Yeah, we have a sense of it.
It's not something we typically disclose Geoff we guided depending on which are the which of the different entities. We picked up from acquisition day Count claims a little differently claim counts and feature.
Yes.
Some will count on accident somewhere town the number of cars in Baltimore and count the number of people in the cars you get you get any of these different issues. There were the different accounting profit mechanism. So those rates become a little differently. When we look across the books going historically.
It's a significant change.
But.
Not not multiples.
Okay.
Got it.
And then inflation on the on the homeowner side.
What is that trending yet I mean, we've heard from others that it could be as high as 10% increase loss cost trends are you seeing that there too.
On your count, Yes that yes, we are where I think we're again just like the rest of the environment, whether its body shops or lumber prices are labor rates were.
Fairly consistent with what others are saying in that space.
Okay.
Okay. Thank you.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to Joe Lacher for any closing remarks.
Thank you operator, and thanks, everybody for joining us on the call today. We appreciate your time and interest we know that the pandemic created a lot of it.
Interesting challenges as we all.
Sort of started working from home and staying at home and it's going to create an interesting you said as we reopen but we're very confident about our overall business model and our long term prospects center excited.
To talk to you again next quarter. Thanks, a lot.
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