Q3 2022 Hartford Financial Services Group Inc Earnings Call
These statements are not guarantees of future performance and actual results could be materially different.
Do not assume any obligation to update information or forward looking statements provided on this call investors should also consider the risks and uncertainties that could cause actual results to differ from these statements.
A detailed description of those risks and uncertainties can be found in our SEC filings.
Our commentary today includes non-GAAP financial measures explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings as well as in the news release and financial supplement.
Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without the hartford's prior written consent.
Replays of this webcast and an official transcript will be available on the Hartford's website for one year.
I'll now turn the call over to Chris.
Good morning, and thank you for joining us.
Hartford produced a strong third quarter with core earnings of $471 million 44 per diluted share, which includes the impact of hurricanes.
And the ongoing effects of a dynamic macroeconomic environment.
Before discussing our results in detail I wanted to extend our thoughts and prayers to all those impacted by hurricane.
A powerful and devastating storm.
It is in moments like this.
I'm, especially proud of our Hartford claims team.
To date, we have inspected with approximately 95% of all claims submitted.
And Ah issued initial payments on 50% of those claims.
Over the coming months, our team will continue to work tirelessly to help all of our customers affected by the storm.
[noise] nearly a year ago at our Investor day.
Hold you how confident I was in our portfolio capabilities expertise talent and our ability to deliver consistent and sustainable returns.
As we look back the clear proof point that our strategy is working is our financial performance.
In the first nine months of 2022, we've delivered.
Core earnings growth of 18%.
Core EPS growth of 27%.
Top line growth in commercial lines up 12%.
Our commercial underlying combined ratio of $88 six.
A group benefits core earnings margin of five 9%.
We returned approximately $1 6 billion to shareholders and yesterday announced a 10% dividend increase.
And we also produced a trailing 12 month core earnings Roe of.
A 14, 3%.
These are terrific results that reflect the hartford's performance based culture and demonstrate why despite the continued headwinds of inflation and economic uncertainty.
We are confident in our ability to continue to execute at a high level.
In commercial lines, we remain disciplined and prudent in establishing loss picks.
We continue to have approximately 100 basis points of spread between renewal written pricing.
And loss trends, excluding workers' compensation.
Our small commercial results continued to be exceptional.
Next Gen spectrum, our market, leading business owners product is fueling much of our new business success as we gained market share at very favorable margins.
The digital customer experience, we provide in small commercial is a significant competitive advantage for customers agents and brokers as it provides a fast intuitive and efficient platform for doing business.
The most recent small commercial keynote study ranked as number one in digital capabilities for the fourth consecutive year.
Our score climbed four points and we are now 20 points higher than our closest competitor.
Middle and large commercial is benefiting tremendously from the combination of deep industry specialization and product breadth.
Leading to new business growth and improving loss and retention ratios.
We are confident that our data science.
<unk> segmentation and claims execution will continue to support underwriting discipline.
In global specialty results are outstanding.
Underwriting margins have improved materially over the last three years.
Execution has never been stronger and the enhanced underwriting.
Expertise, we bring to the market is strengthening our competitive position and driving market share gains.
In personal lines, we continue to take pricing actions as higher inflation impacts results.
As Doug will describe we continue to file for increasing rate changes across our book to restore profitability.
Overall I am confident we have the right strategy and execution in personal lines.
Turning to group benefits in the quarter core earnings were $117 million with a margin of seven 2%.
Reflecting lower excess mortality and stroke disability results.
Long term disability trends are stable and within our expectations for incidence rates and recoveries.
Modestly higher expenses reflect increased investments in capabilities.
<unk> digital claims automation and administrative platforms.
Fully insured ongoing premiums were up 6% compared with the third quarter of 2021, driven by an increase in exposure on existing accounts as well as strong persistency in sales.
Fully insured ongoing sales were $106 million in the quarter up 29% with increases in both group disability and group life.
In many ways the fundamentals of the group benefits business are stronger than prior to the pandemic.
Product awareness is greater as both employers and employees are highly engaged on benefit offerings with growing demand for supplemental products.
Is an opportunity for us to deliver higher value.
A differentiated experience for our customers.
And lastly investments results were healthy in the quarter and are beginning to reflect the rising rate environment, which will earn and more meaningfully in 2023.
Taking a step back.
I want to touch upon some overarching themes.
Yes.
The impact of inflationary pressures and changing weather patterns on pricing and loss costs.
Second the positive impacts of the current interest rate environment.
And third the importance of a healthy and balanced insurance regulatory system that ensures stability and predictability for all.
As we have discussed over the last several quarters across the industry carriers are dealing with elevated inflation related to goods services and most components used in manufacturing.
These inflationary pressures are likely to remain.
As the fed continues to tighten monetary policy and despite some early signs of reduced demand and economic output.
At the same time changing weather patterns continued to drive increased frequency of events and associated claims severity.
There is no silver bullet to fix this problem.
Calling efforts to build more resilient homes communities and commercial properties.
Needs to be an ongoing focus of policymakers insureds agents and carriers.
Taken together these trends point to the need to maintain underwriting discipline.
And ensure pricing keeps pace with loss trends and reserving assumptions.
As long as these trends continue.
Rates will need to rise.
And in some cases will reaccelerate pricing pricing increases over the near to medium term.
The Hartford is committed to maintaining price discipline and.
And we have clearly communicated to all our underwriters the need to expand or maintain margins ex workers' comp, while prudently growing our book of business.
Because interest rates are expected to remain elevated.
We anticipate our portfolio yield excluding limited partnerships.
Will increase by approximately 50 to 60 basis points in 2023 compared to full year, 2022, which will benefit earnings.
Finally on the regulatory front, our state based system of insurance regulation is generally serve customers and the industry well.
Although at times has experienced instability in certain jurisdictions.
Across certain product lines.
At its core the mission of insurance regulation is to protect consumers, while ensuring a stable market one that fosters market competition and safeguards carrier solvency.
Balancing these two aspects of the regulatory mission is critical to ensuring widely available and affordable insurance.
Recently, we have seen instances, where regulation has become politicised.
Creating instability in the market and upsetting the balanced regulatory system is designed to achieve.
Recall on policymakers to respect the insurance regulatory framework take the necessary steps to address rising legal system abuse.
Great inadequacy and persistent under insured exposures, while working with the industry to support a well functioning marketplace.
We're insureds get the coverage they need and carrier secure an appropriate return for the risk they undertake.
As a company, whose purpose is to underwrite human achievement.
The Hartford stands ready to engage on these issues actively and constructively.
Before I close.
We announced the retirement of Doug Elliot as the Hartford's President at the end of the year.
Seth and I have worked together with Doug and the entire Hertford team over the past decade to transform the Hartford and build the foundation for our company's future success.
Doug was instrumental in expanding our product suite of products.
Developing industry specific verticals within our property and casualty business.
Overseeing the integration of the Navigators group and elevating our underwriting excellence.
Thanks to Doug strong leadership, the Hartford is well positioned for profitable growth in the years ahead as we build on the momentum created to best serve all of our agents and brokers and customers.
I want to thank Doug for his many contributions to our company.
Thank you Doug.
That leaves us many gifts, including a seasoned group of executives who are going to continue our high level performance.
I have tremendous confidence in the talents skills and focus of this leadership team.
In closing, let me leave you with some concluding thoughts.
These results demonstrate our strategy and the investments we have made in our businesses have established the Hartford is a proven and consistent performer.
We have outstanding execution capabilities and exceptional talent that drives my confidence in our ability to continue to produce superior returns.
We are managing the investment portfolio prudently and all holdings are well balanced across diversified asset classes.
And we are proactively managing our excess capital to be accretive for shareholders.
All of these factors underpin my confidence that we will continue to meet or exceed our core earnings.
Objectives.
Now I'll turn the call over to Beth.
Thank you Chris core earnings for the quarter were $471 million or $1 44 per diluted share with a trailing 12 month core earnings ROE of 14, 3%.
Before reviewing the results by segment I will cover the impacts in the quarter of catastrophes, and specifically hurricane and.
We recognized catastrophe losses of $293 million with hurricane and losses of $214 million.
In commercial lines, and losses were $133 million, including $35 million in global rate.
In personal lines losses were 81 million of which about 72% or auto losses.
It reflects our market share in the regions impacted as well as a higher average loss per claim due in part to inflationary pressures.
Moving on to segment results in commercial lines core earnings were $363 million and written premium growth was 10%, reflecting written pricing increases in exposure growth along with an increase in new business and small and middle and large commercial as well as increased policy count retention.
Pension in small commercial.
The underlying combined ratio of $89 three was up two one points from the prior year third quarter, primarily due to several non catastrophe property losses.
In personal lines core loss of $28 million and the underlying combined ratio was 95 nine reflecting continued increased severity in both auto and homeowners, partially offset by earned pricing increases and a lower expense ratio in both life.
P&C prior accident year Reserve development was a net favorable $53 million with workers compensation being the largest contributor.
Turning to group benefits core earnings of $117 million and a seven 2% core earnings margin reflects a lower level of excess mortality losses and growth in fully insured premiums.
The disability loss ratio was flat to the prior year quarter.
Collecting lower COVID-19 related short term disability losses.
And then long term disability higher estimates of claim recoveries were more than offset by less favorable incidence trends compared to the prior year quarter, but in line with our expectations.
I'll pause excess mortality was $26 million before tax compared to $212 million in the prior year quarter.
The $26 million included $14 million with days of loss in the third quarter and $12 million of losses related to prior quarters.
Turning to Hartford funds core earnings were $47 million, reflecting lower daily average.
Which decreased primarily due to equity market declines and higher interest rates.
Net investment income was $487 million.
The annualized limited partnership return was six 3% in the quarter.
We have been very pleased with the performance of Lps in the first nine months of the year and expect the full year return to be at or above the high end of our 8% to 10% range.
The total annualized portfolio yield excluding limited partnerships was three 3% before tax a 30 basis point increase in the second quarter.
Expect another 10 to 20 basis point improvement in the fourth quarter.
The investment portfolio credit quality remains strong with an average rating of a plus.
During the quarter, we recognized minor losses on sales of fixed maturities as we reduce portfolio duration and modestly reduced risk in the portfolio.
So while interest rates and capital markets May remain volatile, we are confident that our high quality and well diversified portfolio will continue to support our financial goals and objectives.
During the quarter, we repurchased five 4 million shares for $350 million.
As of September 30th we have $3 1 billion remaining on our share repurchase authorization.
We were also pleased to announce a 10% increase in our common quarterly dividend payable on January four.
This is the 10th increase in the dividend in the last decade, and another proof point of the consistent capital generation of the company.
In summary, we had strong performance in the first nine months of the year and believe we are well positioned to continue to deliver on our targeted returns I will now turn the call over to Doug.
Thanks, Beth and good morning, everyone.
Across our property and casualty business, we continue to be well positioned to sustain industry, leading financial performance.
The strength of our broad product portfolio and underwriting execution are evident in our excellent year to date topline growth of 9% and sub 90 underlying combined ratio.
In addition, the relative size of our <unk> loss is further proof of that underwriting discipline.
In commercial lines, we achieved double digit written premium growth for the sixth consecutive quarter and underlying results remain strong even with some volatility in our non cat non weather property results.
Having deeper into third quarter growth U S standard commercial lines written pricing, excluding workers' compensation was up about half a point to six 7%.
Pricing increases in auto and property correspond with comparable inflationary increases and in the coming months, we may see further improve pricing and these lines workers.
Workers' compensation pricing remained positive benefiting from wage rate growth.
Within global specialty rate for the quarter of three 2% was down about two points from the second quarter, driven primarily by excess public D&O.
For most of global specialty lines pricing was in the mid to high single digits and in the aggregate ahead of loss trends with very strong accident year results.
As Chris highlighted in total for commercial excluding workers' compensation renewal written pricing is still about 100 basis points above long term loss trends.
In addition to positive pricing commercial line's top line growth benefited from strong new business in small commercial and middle market up 15% and 8% respectively.
Our industry, leading products and digital capabilities within small commercial continued to drive excellent organic growth as evidenced by a terrific 190 million new business quarter.
Retention remains strong across markets and continued audit premium momentum from customer payroll growth was another bright spot.
Within small commercial as further evidence of our broadened appetite, we're particularly proud of the capabilities, we're building and the excess and surplus line space.
By the end of this year written premiums will likely exceed $100 million.
Going forward, we expect to become a leading destination for binding opportunities a strong complement to our existing retail offering.
In addition, we're leveraging small commercial's underwriting and digital expertise to capture lower complexity business in both middle market and global specialty and expect to take advantage of the growing technological developments implemented by our top brokers.
Turning to loss ratio results were largely in line with our range of expectations and property coming off a favorable third quarter of 2021 fire loss frequency was a bit elevated in the quarter.
With respect to workers' compensation indemnity severity remains in line with wage rate growth and actual medical severity trends are well within our long term assumption of 5%.
Our liability lines continue to perform consistent with our expectations and we are dialed in on social and economic inflation trends.
Closing out the commercial discussion I'm really pleased with the results. We posted this quarter small commercial continues to deliver superior operating results global specialties underwriting underlying margins improved two four points from a year ago to a strong $84 five and middle and large commercial delivered a solid 93.
Seven.
We move into the fourth quarter from a position of financial strength, both in terms of accident year performance and balance sheet adequacy.
Let's switch gears and move to personal lines.
Our third quarter underlying combined ratio of $95. Nine reflects continued auto physical damage severity pressure driven by elevated repair costs related to supply chain and higher labor rates and.
In response to those loss trends, we have been increasing pricing since the fourth quarter of last year to ensure rate adequacy and overall profitability.
Auto rate filings have averaged mid single digits through the first nine months of this year with renewal pricing of.
5% in the quarter up a point from second quarter.
Filed rates will move to double digits during the fourth quarter and we expect mid teens for the first half of 2023.
And home overall loss results were in line with our expectations non cat weather frequency continues to run favorable to long term averages mitigating material and labor costs, which remain at historically high levels.
We continue taking written pricing actions with home and nearly 12% for the quarter.
Turning to production written premium grew 5% for the quarter, largely reflecting pricing increases from both auto and home.
Auto policies in force were flat to the third quarter of 2021 and up 1% from this year's <unk>.
We will be prudent with growth balancing rate adequacy and quality of new business and marketing productivity.
Before I close let me share with you a few thoughts about our recent participation in the annual C. I a big conference.
Common feedback centered on the complementary strategies across our businesses strong cross sell execution and excellent risk collaborations.
Our position and engagement with the top brokers has never been stronger and there are many exciting initiatives underway as our teams pursue deeper penetration with these partners.
In closing I remain bullish about the future of our property and casualty business as I shared with you last quarter my confidence comes from our broadened and Responser product portfolio, the enhanced underwriting and data analytic capabilities. We built in our state of the art technology and digital tools as.
As I leave the organization at the end of this year I could not be prouder of the nearly 12 years I've spent here at the Hartford.
I am confident my teammates are well prepared to successfully tackle the challenges ahead, while delivering consistent industry, leading profitable growth.
I look forward to watching their success in the coming years, Let me now turn the call back to Susan. Thank you Doug operator, we are ready to take our first question.
Thank you as a reminder, if can I just ask a question that you can press star one on your telephone keypad.
A lot since draw. Your question you May press Star two please.
Please ensure your on me two likely when asking your question.
First question for today comes from Alex Scott of Goldman Sachs. Alex Your line is now open.
Hey, good morning, Thanks for taking the question first one I had is on the commercial underlying loss ratio just on the year over year comparison, I think even adjusting for some of the non cat items.
You mentioned.
Uh huh.
It didn't.
Improved all that much I think you've even deteriorated a touch and I just wanted to see if you could unpack what some of the drivers are I think there was some mention of workers' comp in the 10-Qs.
At least a partial drivers. So I was just looking to see if you could add some color around how we should think through the year over year comparisons there.
Thanks, Alex I'll start and I'll, let Doug.
Doug provide some some additional cover so first I just yeah. Doug said this in his comments and I think it's always important when we start a conversation on small commercial is by any measure I think our results are outstanding.
As Doug discussed we did see some impact from property losses, non cat non weather related that obviously impacted the compare.
Year over year, but when we look at year to date, where we are compared to what we thought at the beginning of the year. We are right in line on as it relates specifically to the workers' compensation point.
If you go back to what we were expecting from the beginning of the year. We're very much right in line, we did not make any changes in the quarter as it relates to workers' comp and our loss picks from where we've been from the beginning of this year.
We had said at the beginning of this year that in this line, we expected a small amount of compression in workers' comp and that's exactly what we've been booking to when I say small less than half a point.
Part of the compare to last third quarter and why that was called out was in last year's third quarter. We had some true ups in the quarter related to just some favorable frequency in rate coming in a bit higher than we had anticipated.
Really more about last third quarter this year and what we're producing over all completely in line with what our expectations were and no changes.
Got it thanks for that and maybe just a more broad question with my second I think we've heard a couple of your peers discuss standard lines, becoming a bit more competitive and I think.
Another was commenting on casualty pricing needing to reaccelerate as.
Sort of highlighting the economic exposure potentially beginning to decline and being less of a tailwind could you frame for us the way youre thinking about the competitive environment and pricing and what you see needing to happen.
Casualty and property side from here.
Alex I would start by saying that we look at overall performance and we feel very positive about what we produce for nine months and look at our position in the quarter and just very pleased about that performance level.
Now given the challenges we all face as I commented in my script, we're very conscious of both social and economic pressure inside our loss trends and are watching them carefully across all our lines.
Across all our segments.
The other thing I would say is we're coming off a significant Nash.
Natural peril disaster in the southeast part of this country. So we expect that the property market will go through some changes in the coming quarters.
Starting very shortly so we're in market with our cat reinsurance program that renews one one our folks have been in Bermuda, all week and I expect over the next several weeks that we will talk about that structure I do not expect anything material to change relative to our reinsurance structure, but I think between property and social.
And economic changes, it's a really critical time that you stay on top of your trends and we're trying to do exactly that here at the Hartford.
Yeah.
Got it thank you.
Thank you Nick.
Question comes from at least Greenspan from Wells Fargo.
Your line is now open.
Thanks, Good morning I wanted.
To go back to the commercial discussion right. So you buy.
A bit above the full year guidance year to date, I know, there's moving pieces and when I say 10.
10 basis points would you given.
Q4, I think seasonally does tend to run better than some of the other quarter would you expect to be within that guided range for the full year.
At least we do so.
We're expecting to hit guidance Youre right. There is seasonality in our book of business and so we're mindful of that but based on what we see today and the early start with October very early start of October we expect to be in that range.
Okay. Thanks, and then my second question.
Is on the group benefits business, Chris I think you mentioned some higher expenses, there, but if I look at the core margin, excluding COVID-19 that was nearly 9% in the quarter versus <unk>.
7% target and you mentioned long term disability trends are stable. So if we think about the run rate of that group benefits business ex Colby you think you might exceed that to 7% target margin.
At least you're focused on forward guidance.
We've obviously talked about what we think we can do but I would just share with you. Yes, we feel good with the overall performance of all our businesses really through the first nine months and that's why I sort of called that out.
Investment results.
<unk> been very favorable across our.
Our portfolios.
Particularly with the strong.
L P contributions, but rates are rising so.
So we still like our long term view of six to seven.
Sort of a normalized basis. If you if you were going to look at it that way, but we'll always continue to try to outperform and exceed expectations, but.
I saw what have you anchor in that six to seven range.
Okay. Thanks for the color.
Yeah.
Thank you.
Next question comes from David <unk> from Evercore ISI, David Your line is now open.
Hi, Thanks, good morning.
Chris and Doug you. Both mentioned that you have approximately a 100 basis points of spread between renewal written pricing.
And loss trends, if you exclude workers' comp.
Just wondering what that is and if we include workers' comp given how big that is within the commercial lines business.
Yes, I'll just reinforce what Beth said, David is that going into the year.
Our pricing plan compared to what we thought loss trend was.
You're going to have a modest.
Negative effect, probably half a point.
I'm sort of combined ratios I think through the first nine months were outperforming.
Half a point negative pressure.
But that's that's the way I would frame it and Doug.
Doug I don't know if you would add anything else.
But I'd like to just have you think of comps and its own different.
Sort of spear is as far as our historical performance the regulatory oversight and that one David and Thats why we just talk about it ex comp spread.
David I would just add that even inclusive of comp our total commercial spread is still about the same so the calculus is plus or minus 100 points.
And yes to Chris's point comp continues to perform for us across our markets.
Okay, great. Thanks, that's helpful.
And then also just a follow up for Beth.
Beth you had said that there were some true ups in the third quarter of 2021 related to favorable frequency in rate coming in a bit better than you had anticipated I was wondering if you could just size the favorable impact that that had on the third quarter of 2021 and commercial lines.
Yes, so I guess the way I would characterize it is that when you look at that Delta.
On the tool last third quarter and this third quarter.
For our small commercial.
Delta and workers comp is probably.
A bit over a point and again that really is coming from the favorability we saw last.
Lastly, last third quarter and as I said, we were sort of anticipating.
And when we set our loss picks for the year that we see you know like I said about a half a point deterioration. So I think that helps size a little bit of just kind of the delta and what we're seeing and the remainder then would be property yeah.
Great I appreciate that thank you.
Thank you.
Our next question comes from Brian Meredith of UBS, Brian Your line is now open.
Yeah. Thanks, a couple questions here for you first I wanted to drill in a little bit on the mid middle and large commercial lines underlying combined ratio is here. If we if we take a look at year to date are flat you know in the last couple of quarters have been up year over year I'm. Just curious what's kind of surprised you relative to what you were kind of expecting coming into 2022, and what are you doing.
We need to address some of those surprises you are seeing in that market or that.
One.
Yeah.
Brian This is Doug.
The only real aberration through either nine months and also in the quarter.
As our non cat non weather property volatility so I look at the rest of the lines and look at our performance essentially right on target so that little volatility in the quarter is the only thing we're looking at year to date against our expectations.
It would.
Place to maybe a little bit higher than you expected on some of the property stuff is that essentially it.
I mean, theres a little inflation.
We've talked about inflation, but our pricing has been.
At or right on expectations as well so I think we're matching.
What we're seeing on the economic loss trend side with our performance on the pricing and so I feel good about that.
Gotcha, and then with the new global specialty business I'm just curious.
You all have the capacity or the desire to potentially take advantage of what could be a.
A much better pricing environment for cat exposed property business, what's your appetite for that.
Okay.
I don't think youre going to see us in the next six months to become a major cat writer right. We don't have that as an ambition, but are growing ambition over the past decade has been to be a stronger more thoughtful deeper.
Bigger property writer and that goal remains and we're doing it selectively so in our.
Middle and large commercial business, we've got a large property segment, we've got a growing property book in our core Middle book and then we also have a really neat, especially business property business and our global specialty So I look at property across the franchise and I think that on the optimistic side, you will see that grow over time, but I don't think we're going to step right.
And I tried to take advantage of.
Timing moment, right now with cat property.
Got it I appreciate it I think that's been one of our strategic themes and Doug and I have talked about for years is just to have a broader property skill set.
In all our business segments, whether it be small middle or large.
E&S in specialty and then the only color I would add on our reinsurance operations as you know it's a global.
<unk> casualty focused reinsurer that has some specialty orientation also to it right.
Writes about all $500 million of total premiums, Doug I would say its profitability and execution has been outstanding the last couple of years.
It did obviously suffer some.
<unk> impacts this quarter that.
We called out, but generally it's a nice specialty orientation and and that global specialty area.
Very disciplined very thoughtful and maybe some selective opportunity here that and global re Brian They will take advantage of I was more referring to the primary space, but it's been a strong complement to our.
Property capabilities in our thought process.
So I think it'll be opportunistic we'll be thoughtful about what we do relative to cat Pearl.
Great. Thank you.
Thank you.
Our next question comes from Greg Peters of Raymond James Greg. Your line is now open.
Great Good morning, everyone.
I guess for my first question I'll focus in on the expense ratio.
And obviously there is a broader mix.
Hence ratio across the entire enterprise, but I was looking at the commercial lines expense ratio I think it's on slide seven.
It was 31, 5% versus 31, eight a year ago and I know you've been working on initiatives to improve it. So I guess with the growth that we're seeing I guess I'm kind of surprised youre not getting a little bit more improvement. So maybe you can unpack, what's going on with the expense.
As shown on where the improvements are coming from.
Yes.
The good guys and bad guys I guess in the expense ratio.
Okay.
Yeah, Brian Let me live context, and then yeah.
Sounds good and best conduct can add their capabilities.
That said.
<unk> remarks, and you can see in our deck.
Really pleased with the execution of our Hartford next program over a multi year.
That program and the savings that are generated is allowing us to think differently about investing going forward and we've maintained sort of our view that we see.
Still want to build the organization when certain capabilities areas, whether it be.
Digital whether it be a P eyes. So we still are investing in the organization at a healthy healthy clip.
<unk>.
If that is sort of muting the underlying efficiencies that we're gaining I would call out.
The investments, we're going to continue to make sort of in our cloud journey is a big initiative over a multiyear period of time, we've got a large initiatives and global specialty over the next couple of years from a data science side and then lastly.
From a group benefit side, we are going to develop a new administration system with the outside.
Outside the service provider to modernize that 40 year old Tech stack. So.
I think you know where builders where growers in that.
It's part of why you are seeing maybe less less benefit on the expense ratios as we sit here today, but that's what would you add yeah I would agree with those comments I think specifically as it relates to third quarter I believe in the third quarter of last year, we had a little bit of a relief and bad debt.
That made last years number you know, maybe 30 basis points better so that obviously affects the.
The compare a little bit and then also you know we we also look at our commission ratio has ticked up just a small amount as well, which again some of that reflective of just the strong profitability.
In the book and how that comes through in some of the supplemental comp. So those those I think help to explain why it was maybe you wouldn't see more of a benefit.
Over a quarter.
Yeah.
Great. Thanks, Thanks for the color.
I'm going to pivot and I know you spent time talking about this in your prepared remarks, but on the personal line side.
You look at the.
The rate increase trend, it's all moving up.
Hmm.
Call travelers comments on their call, where they were talking about.
Mid teens type of rate increases for their book of business.
Next year and I know you have a specialty auto book, but.
Maybe you could spend a little bit more time, just telling us how.
How you see the rate trend moving over the next several quarters in the context of all the inflationary pressures we're reading about.
Sure Greg.
So maybe I'll build on what I shared in my script.
Fourth quarter as I said, we'd expect that change of five to move our rates move up into the 10 category and then.
Moving to mid teens.
Our expectations in the second half of the year that our Phys dam loss trend would abate a bit did not come to pass so.
The world, we see today and the trends we're experiencing at this moment, we're expecting those to continue into 2023, which are driving our assumptions inside our rate plan activity.
Describe the first half of 'twenty three and active.
Process for Us and I think mid teens will allow us to get on top of those trends.
And I expect as we move through the first quarter into the second quarter will be a very adequate terms for our book of business keeping in mind that as we introduce prevail into the marketplace, which is a six month policy. We still have lots of policies out there that are 12 months old.
Hartford Auto and home product as a 12 month products. So there is a mix that will head towards six months.
Quicker, we work our way through prevail, but at the moment, we still have a lot of 12 month policies there.
Greg its Chris.
Characterized your question is our specialty.
<unk> carrier I would push back on you that I mean, we considered a preferred segment.
Through our AARP relationship over 30 plus years, so maybe you.
You just confused thoughts in your head, but it's not a specialty orientated.
Auto book it as a preferred class of.
Customers at least in my mind.
Right I understand that one poor word choice, but thanks for the additional color and congratulations on your retirement.
Thanks, Greg.
Thank you.
Next question comes from Andrew <unk> from Credit Suisse.
Your line is now open.
Hey, good morning.
Reading through the press release.
Talked about a decrease in new specialty business could you share a little color on.
What lines you are pulling back on and now perhaps what lines you are seeing some strength in new business growth.
[noise], Andrew our comments relate to.
Competition in the specialty space.
Primarily in the professional lines area, so our thin lines area as U.
As I commented seen depressed pricing affect our pricing went negative in the second quarter I'm, sorry, the third quarter for D&O.
But it's an area that has gone through significant profit.
Opportunity and now as the lines are very adequate for us and probably many others in the industry.
A lot of competition has gathered so we see that competition, we are not going to chase poor pricing, we're going to keep our discipline and I attribute the lack of growth compared to prior periods and that global specialty space really to competition in us keeping our discipline, which we intend to maintain as we move into 2023.
So could you could you see a further.
A decline in sales new business.
So hard to predict and we always give you our best view of the future when we talked to you on the fourth quarter call.
But I think the fourth quarter, probably will not be a lot different in behavior than what we saw in the third quarter a little early to talk about 'twenty three I think at the moment.
Hopeful Andrew maybe Theres, a little more rationality that comes back into the market in 'twenty, three but time will tell.
Got you and then shifting back to personal lines.
It was interesting to me that you sited auto physical damage.
As a real pressure on the loss ratio, but no mention of the medical cost inflation.
I think.
Allstate had highlighted.
Some pretty severe movements in there.
Reserving for medical on the auto line so.
Any thoughts on where medical is trending.
Yes, so included in our loss picks and auto.
Component of that is in medical we have seen some uptick and that's reflected in our estimates and has been and we haven't called that out because it hasnt been a significant driver of the changes that we were anticipating for the year, which has really been on the physical damage side, because as you recall we had.
We anticipated to see some relief and inflationary pressures in the second half that that have not obviously.
Obviously materialized.
Okay, maybe if I could just sneak one quick one in there.
You wrote some new business as you cited in the release in the <unk>.
Personal auto are you given the rate increases that you need or are you comfortable with that new business that you're putting on the books or could that be a little weak in year one.
Andrew Good question, we are spending a lot of time on the quality of the new business, we're writing in personal lines and I think our team.
To date still feels very solid about the quality, but we are moving on the pricing side and we'll continue to move and it's one of the reasons that we have slowed that prevail rollout still moving forward, but slow slightly to make sure that our rate adequacy as we introduce a new product into market are where they need to be given our view of current trends and and as you know and as we've discussed.
That trend has been moving on us throughout the year. So I'm very confident about where we are today and know that quality is something we've got in our front do you find are day in day out.
Thanks, a lot.
Thank you. Our next question comes from Michael Phillips of Morgan Stanley Michael Your line is now open.
Thanks, Good morning, I guess I want to continue with auto for a second.
I scratch my head with some other results of some companies.
I've got to put yours in that category and I'm, a little confused on something.
And then if I look at your auto core results you've been north of 100, even in the back half of last year Youre pricing back then was low single digits now five it could be a button. That's good it's going to get better.
What I guess, what I don't get it.
Your average and north of a 100% last year.
The question might be just kind of when did you start seeing maybe you saw it differently. When did you start seeing the physical damage may be slowed a little bit later.
But despite north of a 100% and low single digit pricing even back then.
I know you've taken favorable development, so I'm confused on that and how long that might last.
Yes, Michael we started seeing adverse Phys dam pressure to our book and our expectations by late mid to late summer last year. So our filings ramped up in the September timeframe.
And they have continued to ramp throughout the year. Many of these states are now in the double dip stage. So we're taking two bites of that Apple.
Inside the year.
And our expectation for 'twenty two was that we would see some of those physical damage trends contain themselves a bit in the back half of the year, which we have not seen over the third quarter. So as we project forward.
Our activities will deal with the.
Climate, we see it today and as such our fourth quarter pricing activities are going to be in the 10% range that is reflective of where we think those rates need to be filed at and as we continued to 'twenty three as I said that'll go north from there.
And then the only thing I'd add because you did mentioned the favorable prior year development that we saw in the auto line that was primarily related to 2018 and prior just to put context on where we are seeing that benefit.
Yeah. Okay. That's helpful. So it was prior to 2021.
And I guess he is concerned.
Maybe the numbers, we're putting up.
In the back half of last year had some padding for it. Despite the fact that as you just said you're even starting to see the iron trends last year.
You must have put some patent and then for 2021 accident here.
Yes, we had increased our our views on physical damage in the second half of 'twenty. One again, our expectation was that those were going to start to level off on and we start to see some improvement in the back half of this year, which obviously, we've not seen and we've been responding accordingly.
You know each quarter as we felt the current quarter activity.
Michael I think it goes without saying, but obviously that activity quarter by quarter now is rolling into our filings. So what we experienced in the fourth quarter became a big part of the first and second quarter filings in the first quarter. So.
As we think about the experience we have tried to reflect that in our loss pick calls, but also on our filings as we move ahead.
Okay. Thank you for the color I appreciate it.
Thank you next.
Our next question comes from Josh Shanker of Bank of America, Josh Your line is now open.
Yes. Thank you all looking at the healthy increase in the dividend I'm, just trying to understand the Ida.
About a permanent 10% increase in the dividend versus extra.
<unk> powder for share repurchases below or increase the dividend how are you balancing those two things.
Yeah, well I think we've been consistently balancing of things, we do think that it's important for us.
On to maintain a competitive dividend and I think the dividend really in my mind speaks to just the ongoing earnings power as we see in the organization and as I said in kind of path of increasing that each year as our earnings continue to increase I think we've got a very healthy repurchase authorization that allows.
To execute on deploying our excess capital.
Feel very good about the balance that we create in both of those items.
Yeah.
And then I didn't I didn't catch it in the prepared remarks, maybe I missed it but did you give us a gross loss for Ian so compared to the net loss how much of a reinsurance picked up.
I did not but I would say that from a reinsurance perspective, it's like 15 to 16 million of recoverable that we booked within those estimates are.
We're in line.
That's perfect. Thank you.
Thank you.
Next question comes from Matt Young from Jefferies.
Your line is now open.
Thank you good morning, everybody and congratulations to Doug on the retirement.
I guess first question just with your plans of really keeping the reinsurance structure unchanged next year.
Realize nothing's really set in stone, yet, but assuming you're able to do that.
And reinsurance cost probably going up and.
Thank you guys are mostly in the admitted market. So maybe you see the ability to offset that through price lag a little bit.
I guess all of this said is it reasonable to think that all else equal margins could see a little bit of a little bit of pressure at least in the early half of next year.
I think that's a little bit big step to take right now.
Our property pricing moved up in middle and large commercial.
Towards the end of the third quarter, our underwriters across the franchise on property know they've got to look hard at insurance to value.
Numbers on all of our accounts I think their understanding and looking back at their cat models, given what happened in the last 30 days. So we're moving on the primary side and you know our experience.
Certainly from a cat perspective reinsurance has been generally very very solid over the last decade. So it is too early to tell but I'm not thinking about property compression right now I'm thinking about it in terms of making sure we get needed rate on our book of business across every line that is writing the property.
Okay.
You said it well.
It will always think about economics of what it what does it mean in sort of that risk.
<unk> trade off but as Doug said, our historical performance.
Our deep partnerships with our reinsurers in the fact that we do have multi year rate guarantees and different layers.
Immunizes us a little bit from any pressure on rates that we might face so.
Time will tell and we'll report back to early next year.
Understood.
And then on the D&O competitive pressure commentary could you maybe add a little more color on where this pressure is coming in.
More is it more into primary layers as it more access you're seeing it more from new entrants or incumbents.
Well I would share our book is approximately 80% access in the U S. D&O space. So you know it.
I can comment on what we're seeing there which is.
Where the pressure we're seeing we're also seeing on the primary side, but our book is primarily access so I'd start with that you know they have been.
A series of new entrants over the past 24 months as we.
We all have talked about the IPO market has slowed and the stock market has slowed as well so the new new opportunities of the marketplace plays are not where they were.
One and two years ago, so lack of.
Upside opportunity and <unk>.
Very solid strong rate adequacy has led to quite a bit of competition, which I think is fueling inside this booking on assets hitting primarily in our excess area.
I understand that Youre most of the excess but ultimately if the primary.
Alere is coming in at a lower price. It also reflects on the access.
Price I think so.
I guess, it's more of the pressure coming from the primary layer coming in or is it more from the access layer.
Pricing diminishing.
I think there's pricing pressure up the tower.
There is some.
Pressure in the primary but I'm really speaking to primarily excess where we've seen.
Quite a bit of new capacity come in easier to come in and the excess.
Area, and that's where we're experiencing that pressure today.
Got it thank you.
Thank you. Thank you.
Our next question comes from Michael Wood <unk>, Michael Your line is now open.
Thank you guys.
I was just wondering you cited volume related staffing costs for commercial.
Just curious is that is that related to workers comp claims or I guess, what does that pertain to.
We had heard about this and group in the past, but not necessarily for PNC.
Yeah, I I would call that more on the production side not on the claim side. So you know again, you can see from our very healthy topline from a dollars perspective, we also just see similar costs relative to that production.
The fact that volume, but not claims related.
Okay. The.
The rest of my questions were asked thank you very much.
Thank you.
Our next question comes from Jimmy <unk> from J P. Morgan Jimmy Your line is now open.
Hey, good morning. So first just had a question on the development in the commercial side I think you mentioned adverse development in commercial auto if you could just go into detail on what that related to and what the driver was.
Yeah.
Yes, so in commercial lines auto really.
It really relates to accident years, 2017 to 2019 and specifically.
Had one claim that had an adverse verdicts.
Verdict during the quarter that we reacted to.
Okay.
And then on personal auto obviously, you're raising places it'll take a while to flow through your results. Given your 12 month policies do you have any views on states that are not allowing price hikes, right now like California and whether.
The companies are making some sort of had to be in convincing regulators to approve price hikes.
Jamie I'm not going to comment on the regulatory environment, because it's a <unk>.
Pretty dynamic in various parts of the country and you mentioned, a one particular state so.
We pride ourselves on.
With all our regulators in a constructive fashion.
Hopefully that can continue in some of these.
Problematic areas.
Okay. That's all right. Thank you.
[noise].
Yeah.
Thank you. This concludes the Q&A foot state I'll hand back to Susan Spivak for any further remarks.
Thank you all for joining us today and as always please reach out with any additional questions have a great day.
Yeah.
Thank you for joining today's call you may now disconnect.
Yeah.