Q3 2023 The Hanover Insurance Group Inc Earnings Call
[music].
Good day and welcome to the Hanover Insurance group's third quarter earnings Conference call. My name is David and I will be your operator for today's call. At this time all participants are in the less listen only mode should you need you need assistance. Please signal a conference specialist by.
Pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I'd now like to turn the conference over to Oksana.
Luca Shove a please go ahead.
Thank you operator, good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, Our President and Chief Executive Officer, and Jeff Farber, Our Chief Financial Officer available to answer your questions. After our prepared remarks are <expletive> Lavey, President debate GNC markets and.
Bryan Salvatore President of specialty lines before I turn the call over to Jack Let me note that our earnings press release financial supplement and a complete slide presentation for today's call are available in the investors section of our website at Www Dot Hanover Dot com. After the presentation, we will answer questions in the Q&A.
Session, our prepared remarks and responses to your questions today other than statements of historical fact include forward looking statements as defined under the private Securities Litigation Reform Act of 1995. These statements relate to among other things our outlook and guidance for 2023 economic conditions and related.
Facts, including inflation supply chain disruption potentially recessionary impact evolving insurance behavior emerging from the pandemic and other risks and uncertainties side. She has she will weather and catastrophes that could affect the company's performance and or cause actual results to differ materially from those anticipated we caution you.
With respect to reliance on forward looking statements and in this respect refer you to the forward looking statements section in our press release, the presentation deck and our filings with the FCC todays discussion will also reference certain non-GAAP financial measures such as operating income and accident share loss and combined ratios excluding could.
After fees among others a reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement which are posted on our website as I mentioned earlier with those comments I will turn the call over to Jack.
Thank you Oksana good morning, everyone and thank you for joining us I'll begin today's call with my perspective on our third quarter results and a summary of the success. We have achieved in our underlying margin recapture initiatives to date.
A review of the actions, we are taking to improve our catastrophe resiliency, including new initiatives, we have underway.
Jeff will review, our financial and operating results in more detail.
And then we will open the line for your questions.
I'll begin by acknowledging the heavy impact of caps on our third quarter results and the great sense of urgency with which we are executing on our cat resiliency actions.
I'll expand more on this topic shortly.
Excluding catastrophes, we are very pleased with our third quarter performance I'm.
I'm happy to report that our third quarter ex cat results were slightly better than our expectations in part due to the continued strong execution of our margin recapture plan, which helped to drive meaningful underlying improvement in all three of our business segments.
Our progress in the quarter reflects the inherent strengths of our company, including our distinctive strategy and business model broad and innovative capabilities strong well managed balance sheet <unk>.
Experienced and committed team.
And deep mutually beneficial partnering relationships with many of the best agents in our business.
The last of these our deep agency relationships is particularly important today as we and others are thoughtfully increasing prices.
To flying terms and conditions and tightening underwriting requirements.
In keeping with our commitment to being a premier property and casualty franchise in the independent agency channel.
We are working closely with our agents and their teams to help them better respond to their customers and navigate today's challenges.
At the same time, we are further leaning into one of the hardest markets. We have seen in property, particularly in personal lines as we deliver on our margin improvement initiatives.
Those factors along with many others give us a very high level of confidence in our ability to drive disciplined execution further and enhance profitability over time.
Our third quarter ex GAAP results are a strong testament to the successful execution of our comprehensive margin recapture plan as well as the important work we are doing to get back to our expected performance levels.
We continue to be focused on three main levers.
Price increases property underwriting enhancements and loss control and risk prevention measures.
In personal lines margin improvement is driven by robust and accelerating earned price increases earned.
Earned pricing is outpacing loss trends, helping drive a one point improvement in personal lines current accident year loss ratio in the third quarter compared to the second quarter. This year, primarily driven by personal auto.
Auto collision loss trends remain elevated but we are seeing an easing of inflationary pressures while prior rate increases are beginning to help drive improvement in our overall loss ratio.
Homeowners loss pressure is proving to be an ongoing challenge.
Having said that we are confident continued price increases on top of current increased earned rate in valuations will bend the curve starting next quarter.
Additionally, we are taking a more aggressive approach to homeowners non renewals based on specific underwriting criteria, including quality of roof score prior loss experience and age of construction.
Third quarter personal lines total price change in auto and home were up 14% and 23% respectively.
By the end of this year, we expect an average homeowner's renewal price change upwards of 28%.
Collectively we expect personal lines to experience a dramatic profit recovery next year and a return to our target profitability on a written basis at the end of 2024 based on a range of reasonable assumptions for loss trends.
We also continued to execute on our profit improvement plan in core commercial property lines in the quarter across all three focus areas pricing underwriting and risk prevention.
In terms of pricing our core commercial property renewal price increased by 14.7% in the third quarter up two points from 12, 6% in the prior quarter.
We've also made meaningful strides in addressing large loss volatility in middle market, completing non renewals and policy limit adjustments that have lowered our total property risks by 17% in constant dollars compared to 12 months ago.
We also engaged in a range of risk prevention and mitigation initiatives designed to reduce both cat and non cat losses in core commercial.
We are successfully expanding the number of accounts enrolled in our Iot sensor program.
We have increased the number of protected accounts by approximately 40% over the last three months and 175% since the end of 2022.
Additionally, through the end of September 30% of the 600 targeted middle market accounts had been addressed through underwriting actions or sensor deployment.
And we will continue to address additional accounts through the fourth quarter.
These actions are now delivering results, reducing large loss volatility in improving our core commercial current year loss ratio by over five points compared to the third quarter last year.
Turning to our specialty business, we are very pleased with the performance across our portfolio delivering a combined ratio of 83% for the quarter ahead of our expectations.
While market conditions in some of our segments are competitive in particular for sectors like management liability.
Our ability to deliver consistent profitability is a validation of our diversified specialty portfolio and disciplined underwriting and rate strategy.
Our specialty growth in the quarter was somewhat muted due to the temporary impact of Nonrenewals of a couple of underperforming programs. Despite ongoing excellent performance in specialty we expect all segments to contribute to the enterprise margin recapture plan and we are also being proactive on any lines and segments.
That are sensitive to social inflation.
Excluding programs specialty growth was 7.4% in the third quarter.
Longer term, however, specialty continues to represent a robust growth opportunity for our company.
This business provides important diversification for our overall portfolio and consequently reduces our property in cat exposures, all while providing our agent partners with robust comprehensive product offerings highly valued capabilities and additional growth prospects.
We fully expect our specialty portfolio to return to upper single digit growth starting in the first quarter next year as we benefit from increased market penetration in most segments and growth in newer product offerings, including specialty G L and E&S business.
We also expect additional lift from our newest initiatives, including expansion in the wholesale channel, which is already delivering solid growth.
Now turning to our efforts to manage our catastrophe exposures more effectively in personal lines we.
We made important progress on the cat exposure management actions, we discussed on our second quarter call. These actions include increasing all peril deductibles to specific minimum levels determined by cover J limits.
Implementing wind and hail deductibles in additional states.
And transitioning to an actual cash value schedule for roofs in certain states and on specific risks for new business policies.
As of September the defaults for all peril, and wind and hail deductibles in the comparative raters for new business have been updated and our agents are supporting our efforts.
These changes will be introduced in our tap sales platform as a requirement on transactional new business as soon as next week.
We also are advancing the technology and regulatory processes that enable us to expand these product changes to policy renewals starting in February with our key states starting with April effective dates.
We expect we will roll most of our homeowners business into new terms by the end of 2024 and.
In addition, we are planning to introduce actual cash value for roofs in the comparative raters, starting in 2024 for new business in certain geographies and types of risks, thereby further reducing claims costs for older roofs.
We expect these actions will enable us to better share loss costs with Insureds, which should support loss prevention decreased claims severity and minimize our exposure to aggressive roofer actions.
We expect to see significant improvements in our cat vulnerability and loss experience. Once these product changes are fully in place.
At an individual risk level, we could realize upwards of 30% to 50% reduction in Hale and roof claims payouts for example, a wind and hail deductible on a million dollar cover J, depending on the roof age will range between 10000 and $20000 against an average roof claim cost of 35.
5000 to $40000.
At the same time, we expect to see the benefit of reduced claims frequency has the higher deductibles will ensure that only legitimate claims are filed.
In addition to product and pricing changes. We are also reviewing our geographic exposures and reevaluating our property micro concentrations.
While we continue to believe some of the recent cat losses for personal lines in the Midwest, where aberrant, we are taking steps to reduce our property exposure in certain areas across these states, including but not limited to Michigan.
We have updated our models and are reassessing, our property aggregations to ensure we're not overly exposed in specific geographic areas in light of the increased property valuations and changing weather patterns.
Additionally, we are achieving substantial decreases in exposure beyond Pip production from the product changes and risk prevention actions we are implementing.
Longer term, we will continue our diversification efforts to emphasize personal lines growth in lower concentration states. We also expect small commercial and specialty exposure and policy counts to grow much faster than personal lines and ultimately to reduce the relative share of personal lines business and our overall mix.
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As we look ahead, we believe we have what it takes to succeed in a rapidly changing and challenging marketplace. We are very encouraged by our strong X cat performance and the progress we have made on our margin recovery plan during the year.
We look ahead with resolve and a high degree of conviction that we are executing the right set of initiatives to move our company forward.
We have a proven strategy one refine to meet the moment, one that will benefit our agent partners and customers and one that positions our company to deliver sustainable profitable growth and long term value creation for our shareholders and other stakeholders.
With that I will turn the call over to Jeff.
Thank you Jack and good morning, everyone I will start with a high level overview of our third quarter results, then review our segments and investment performance in more detail and finally provide some thoughts on our outlook.
We experienced elevated catastrophe losses of 196 million or 13.7%, resulting in an overall combined ratio of 104, 4% for the quarter.
Catastrophe losses in the quarter were primarily the result of severe convective storms concentrated in the northern Midwest, primarily in Michigan triggered by damaging hail severe wind and heavy rain.
Approximately 75% of all losses occurred in personal lines.
Outside of the Midwest, our cat experience was relatively benign across the rest of our geographies.
We are confident the broad range of pricing and underwriting actions, we're taking will reduce our cat exposure and optimize our portfolio in the long term.
Our cat experience in Q3, masked what was otherwise a very strong quarter for the Hanover.
We delivered improved combined ratio, excluding cats of 97%, that's slightly favorable to our expectations 3.5 points better than the third quarter of 2022, and an improvement of two points sequentially.
Current accident year loss ratio, excluding catastrophes improved one seven points on sequential basis, demonstrating the power of rate increases and underwriting actions underway in all three of our business segments.
We posted an expense ratio of 32% 20 basis points below 2022, third quarter and slightly better than our third quarter expectations.
Prior year development was slightly favorable overall and we continue to maintain a strong reserve position.
Finally, net investment income was slightly ahead of expectations for the quarter and year to date periods as higher interest rates continued to fuel our earnings power.
Turning now to our segment review, starting with personal lines. The X cat combined ratio was 96, 4% for the third quarter, improving 1.8 points over the third quarter last year.
The third quarter of 2022 included some year to date re estimations to the loss ratio in personal lines and therefore is not a very useful comparison.
Because there is a little less seasonality in the middle quarters of the year. We believe the more informative comparative is sequential which saw approximately 3.6 points of improvement in Q3, driven by both the underwriting loss ratio improvement as well as lower expenses.
Auto current accident year loss ratio, excluding catastrophes of 77, 5% in the third quarter improved one six points sequentially driven by the benefit of earned rates.
While loss severity in auto remained elevated we are seeing some signs it is beginning to ease.
We continue to be cognizant of potential severity increases in bodily injury coverages and are selecting our loss picks prudently.
Homeowners current accident year loss ratio, excluding catastrophes was 63% in the third quarter consistent with the second quarter as the benefit of earned pricing was offset by prudent ultimate severity assumptions due to the volatility of recent loss patterns in this line.
Personal lines generated net written premium growth of nine 5% in the third quarter driven by accelerating pricing increases renewal price change was 18% in the quarter versus 15.9% in Q2 or an improvement of over two points.
<unk> retention remains strong at 84, 6% despite the level of pricing increases.
Pip shrank slightly on a sequential basis, primarily driven by a slowdown in new business. We expect pith will continued to decline and retention will tick down slightly as we introduce even higher prices and increased deductibles. However, we fully expect our personal lines premium.
To continue to increase due to the substantial pricing increases.
Turning to our core commercial segment.
We delivered an X cat combined ratio of 91% in the third quarter, an improvement over the third quarter last year, and an improvement compared to our expectations.
The core commercial underlying current accident year loss ratio, excluding catastrophes improved by five four points year over year to 56, 3%.
And was consistent with the second quarter 2023.
Has large loss experience in middle market commercial multi peril remained stable for the third consecutive quarter.
This segment performance was a direct result of our strong execution against our margin recapture plan highlighting both accelerating pricing actions and effective underwriting actions in middle market property through the first nine months of 2023, our core commercial current year ex cat loss ratio.
Improved one eight points from the same period in 2022 with a reduction in CMP large losses in each of the last three quarters of this year.
CMP loss ratio year to date reflected 4.5 points of improvement over the first nine month period last year.
On the top line core commercial delivered net written premium growth of four 2%.
<unk> by small commercial partially offset by lower growth in middle market in line with our expectations and the result of targeted property Nonrenewals.
Retention of 83, 8% was down somewhat year over year, specifically as a result of middle market underwriting actions, while pricing increased to 11, 8% an increase of 50 basis points compared sequentially to Q2.
We delivered outstanding third quarter results in our specialty segment generating an X cat combined ratio of 81, 3%.
The underlying loss ratio improved five eight points year over year to 47, 8%, which included the benefit of earned price changes above loss trends and lower large losses in our property business.
We continue to target a low fifties loss ratio in the specialty business.
Specialty net written premium growth of 2.9% was right in line with our expectations.
Our specialty businesses are prioritizing margin improvement over growth.
Accordingly, while specialty has been posting strong profits overall, we have areas of underperformance, where we are non renewing specific programs, which impacted our growth for the quarter.
Retention across our specialty portfolio is very healthy at 79.7% considering deliberate non renewal actions.
Moving onto our investment performance net investment income was strong at $84 2 million for the third quarter driven by higher bond yields we expect that the interest rate environment will continue to provide an accumulating benefit to net investment income over the long term, allowing us to reinvest in high.
Quality fixed income assets at attractive yields.
Looking at our equity and capital position book value per share decreased five 4% on a sequential quarterly basis to $59 21 per share, reflecting an increase in unrealized losses.
And payment of a quarterly dividend.
We have a strong insurance company capital position with $2 5 billion of statutory surplus at the end of the third quarter.
This dynamic operating environment requires us to prioritize our capital uses to provide financial flexibility liquidity and the resources necessary to support business growth opportunities.
With strong pricing and growth continued volatility in interest rates and an active quarter for catastrophes. We remained on the sidelines for repurchases. This quarter. However, we have a long history of returning capital to shareholders through dividends and opportunistic share repurchases are.
Philosophy, Hasnt changed and both levers remain key tools for our future.
Turning to outlook, our full year 2023 guidance remains unchanged.
We continue to expect our ex cat combined ratio to be at the higher end of our original guidance range of 91% to 92%.
As I discussed on our Q2 call. We are deep in the process of conducting a comprehensive reevaluation of our modeled catastrophe losses, our historical experience and supplemental non modeled risks.
This will augment the detailed modeling and risk analysis process, we conduct each year.
We will discuss the results of that effort with you early next year.
But we would like to share the following three observations at this point.
First each point of cat load increase represents a much more substantial increase in catastrophe severity dollars.
For example, with the expected level of personal and commercial property earned price increase next year of around 15% each.
Each point of higher cat load allows for an approximate 37% increase in cat losses, or 37% implied loss trend.
Second given the pricing underwriting and terms and conditions work underway, we fully expect our cat load next year to be a high watermark from which we expect to decline somewhat as our cat resiliency actions are implemented.
Third considering the current interest rate environment, and the resulting increase in net investment income we can absorb a very substantial increase in planned cat severity and.
And continue to have full confidence in our ability to achieve our return on equity targets.
In conclusion, we have made substantial and measurable strides in executing on our margin improvement plan across all segments of our business and.
And we are seeing tangible improvements in our underlying performance as a result.
We have a very solid foundation to build on for the future supported by a well diversified enterprise strong market position and superior team, which will allow us to execute on our long term strategies.
Operator, please open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Sure.
Yes.
The first question comes from Paul Newman with Piper Sandler. Please go ahead.
Paul.
Paul Your line is now live.
Sorry about that.
Hopefully you can hear me.
I wanted to ask about.
Further lever you have yet to pull with respect to cap management in bulk.
All lines.
In commercial lines businesses.
And if there were pieces there that we still can pull if it turns out we need to do even more.
Yes, Paul this is Jack.
We obviously have continued to accelerate our evaluation of our cat.
Overall <unk> consistent with the increased models and some of the actions that we've already taken.
And I hope what you heard from our prepared remarks is that we've accelerated that further particularly in looking at where are the new or elevated micro concentrations presenting themselves.
Some of that is looking at the experience that we've had this year, but.
And our business, obviously, we have to depend on enhanced models to show us.
Where that catastrophe exposure as most likely to present itself.
So what we've already done is tried to move forward on adjusting our growth.
And in those.
Micro concentrations of particularly in the Midwest and in Michigan.
But I would say categorically. The next set of actions. If we believe that we need to go further would just be an acceleration of that and the forms work that we've done will have been in place.
Pricing, obviously will be earning in.
But we are going to be very agile in terms of new business growth.
And non rate actions, particularly in the Midwest and our teams are very much aligned around that.
And that would really be our primary focus.
I guess two really.
Questions.
Is there a potential reinsurance solution and I guess no.
<unk> that is there some issue with spread of risk given the concentration in Michigan or.
Is that not part of the issue.
I'll, let Jeff comment specific to some of the continued work we do too.
Look at reinsurance options. It is our hope over time that.
The pricing and terms and condition changes make some of the reinsurance options more.
Buyable and more available and we continue to look at whether it be aggregate covers are other ways to address kind.
Kind of caps below are our cap, our large cat threshold, but Jeff do you want to comment further about how we were pursuing that Paul as you know reinsurance does provide a useful solution, where you have situations in which the business is very profitable over a long period of time, but from.
Time to time you have.
Volatility and Thats, what we believe we have particularly as you review the pricing that we're getting and the terms and conditions. So as we always do and particularly the circumstances, we're actively looking at solutions, which would benefit us, particularly in those in those.
Heavy property cat locations.
I appreciate the help us as always with some other folks ask questions.
Thank you Paul Thanks, Paul.
The next question comes from Mike <unk> with BMO. Please go ahead.
Mike.
Hi, Mike Your line is now right.
Alright, Thanks, My first question.
I might shut down a few minutes late in Mississippi.
My remarks, but.
There has been.
Some.
Some.
I guess legislature legislation passed not fully passed on a rollback on some of the no fault.
Our laws.
In Michigan, I know you guys historically.
Little bit of a reserve release thereafter, the reforms, which have helped a lot any how should we think about what's.
What's going on there.
Yeah, Hey, Mike. This is <expletive> let me, let me maybe explain a little bit.
<unk>.
Situation is so the build that you're referencing in.
Question would amend parts of the medical fee schedule that was part of the key part of the 2019 no-fault reforms.
More specifically, it's pushing to increase the reimbursement to providers for the long term of care long term attendant care piece of it so really foresee catastrophically injured claimants. So mostly this impact of the claims that are bundled into the CCA.
Whereas there's still now it's passed by the Senate.
In mid October move to the house, which is now at recess without moving obviously, we can't predict the income the outcome excuse me.
I can share that the insurance Commissioner who's who was appointed by the Governor.
As written the letter opposition to the Bill in support of the merits of overall paper form which of course, we support two that's encouraging to us. So we can't say exactly when this will be settled but for us.
As we evaluated we don't anticipate.
You don't necessarily a big impact.
Okay, and then just as a follow up with this if it was Pat I appreciate all the color, but would it impact your.
Your your forward.
Thank you.
Materially our mortgage.
The prior year.
<unk>.
Mike This is Jack.
We obviously are constantly evaluating what the implications are of the reform itself and any possible retraction overt portions of that so it's hard to say exactly.
But the immediate implications would be some of that depends on how much of those claims are already above the threshold that we're responsible for and how much that ends up being just additional reimbursement through the CCA.
I think the biggest kind of issue that we believe is important is that we.
We have materially as an industry reduce the surcharges to policyholders, which was a big part of the intention I think the governor is still very much feels like thats important and it would be really politically.
Disappointing if you will if if this legislation was unwound in a way in which those surcharges needed to be reinvigorated.
So I think at the end of the day, you should have confidence that we know how to make money in Michigan and we know how to.
Work around this we made money back when Pip was not reformed and will make the appropriate adjustments.
But I think right now what you should see is that there is there is some real opposition to this.
The fee schedule reform in particular being modified.
Okay great.
Yes.
That's a tough question, Kevin uncertainty switching gears just to.
<unk>.
Prior year Reserve development.
Many of your peers have been including yourselves have been showing a little less.
Reserve development year over year.
Is that.
Has that is that changing here.
View of loss trend at all.
Considering you're obviously.
Pricing powers in a good spot.
So Mike we had overall favorable development, we have a very strong balance sheet. We did have some unfavorable development.
In core commercial it was limited largely to some commercial auto.
And CME.
CMP in total I think it was $2 $7 million. So it was really a drop in the bucket and importantly, the improvement in our core commercial last few quarters has really been around property. So we've been very prudent on our current loss picks and we've been thoughtful about prior year development to deal with things quickly. So I don't really.
See that as a <unk>.
Trend that I'm, particularly concerned about.
Okay, great, yes, it definitely wasn't just a drop in the bucket okay.
Lastly, I know you gave us a lot of great.
Data points on on how Youre thinking about the comprehensive reevaluation of.
Of that.
Your catastrophe profile in default you gave a lot of good data points, but just curious is.
Yeah.
The recent <unk>.
Wait to give us.
<unk>.
Catastrophe load guidance till till later, even though you've started this deep.
Deep dive.
Months ago is it is there anything to do with just you need to see how your your agent partners to kind of react Q2 to everything you are doing or is it just more of this is just this is just a comprehensive study and you just need more time.
Yes, I would tell you that the agent reaction is not unimportant, but is not an area that we're most concerned about I think.
We have the appropriate level of humility based on the way catastrophes have impacted our book of business. This year and so what we're trying to do in addition to our normal rigorous drill that frankly has served us well.
On particularly hurricane exposures and other catastrophe management areas.
We are spending more time.
Reevaluating and getting the updated RMS and air models.
Particularly for secondary perils, and convective storms and seeking some outside input to figure out how much we should consider.
Climate influence versus cyclical weather patterns. So I would think of it as more as we understand this is a really important issue for investors to believe that we know how to set those cat loads going forward.
And importantly, how we know how to reduce our cap vulnerability into the future based on what we've learned this year that's really the primary.
Reason for our timeline.
That's helpful. Thank you.
Our next question comes from Bob Farnam with Janney. Please go ahead.
Yes.
Continue that conversation with the agency reaction. So how are they reacting to the rate increases because that's that's kind of a big app, especially in the homeowners business when youre looking at 28% rate increases. So are you getting pushback from the agency for its just.
Their ability to push those off to customers.
Yeah. Bob This is Jack I want to say a couple of things and then let <expletive> give you. Some reaction because he has been on the road pretty regularly making sure that we have those conversations in person and make sure we.
Handle this appropriately, but I think the headline I would tell you is that just about everybody understands that the inflationary effects combined with the type of weather that we've experienced requires pretty dramatic action.
And the competitive landscape.
Is as firm as I've seen in my entire career at.
At least on the personal line side.
So I think the landscape is pretty firm.
And we're not really seeing a lot of pushback is their anxiety is their challenges in terms of delivering these messages to consumers in explaining it absolutely, but I can't tell you that we've experienced any material pushback at this point.
Well, yes, generally very supportive.
I've been out in six states in the last four weeks, including Michigan, we feel strongly that right out in front of this we think more so than any other market frankly being transparent in explaining giving good rationale.
There is anxiety no doubt they are working really hard and their customers are asking for choices.
We have done a great job with talking points videos that sort of help explain the environment.
Theyre, just theyre happy frankly that we're going to remain.
Available capacity so they accept the changes because as they go to market. Many there are in every state.
<unk> been taking by our mutual or regional where they are withdrawing or asking to stop all new business entirely. So the fact that we remain but.
Under different conditions and with higher prices frankly, there they are quite pleased with that.
Okay. Thanks, Thanks for the color on that and just to set expectations on the personal lines book Youre, saying Youre.
Youre going to get back to target profitability on a written basis by year end 2024.
That kind of means on an earned basis Youre looking.
Youre going through 2025 as it hits the bottom line.
So.
In reality, if you are looking at achieving your targeted ROE overall, you're probably looking more like 2026.
Is that the right way to think about it.
No I don't think so we can hit our target ROE for the whole firm without getting to target profitability fully in personal lines.
Bob I think youll see very rapid steady substantial improvement in personal lines.
Over the course of 'twenty four.
Earned basis of course, and when you couple that with where our core is performing and some potential improvement and where specialty is performing on a year to date basis, where the NII sits and where it goes for next year I think youre going to see a very very strong 2024 and.
I don't want to give guidance for 'twenty, five, but I think you'll see it you'll see an even stronger 2025.
Okay Alright.
And I guess a question for Brian on the specialty segment. So.
We are targeting a 50% loss ratio.
First off is that before paths are after catheter that accident year I'm trying to figure out what that 50% loss ratio target is.
And then I wanted to talk about the competitive environment there.
Based on Youre trying to grow that business by upper single digits. Next year are you seeing increased competition from E&S writers are admitted carriers just trying to I'm just trying to get a feel for the competitive environment, there and your ability to grow yes.
Yes, sure. Thanks, Bob so starting with need targeted loss ratio that is an accident year ex cat loss ratio.
And if you look at really the last two years right quarter over quarter and Youll see that were pretty much in that lower 50 level. This quarter. We had some very very good results overall, but especially in our marine and our HSI bulk.
That just push that number lower but we feel very good about that low on lower accident year loss ratio and Youll see two years 'twenty, two and year to date 23, Thats, where we are.
Yes.
That's really low accident your loss ratio in the third quarter and that's not going to that's kind of an abnormal in other words I'm not going to look at that as a go forward that's more than 50, but youre looking for going forward yes.
I'd like not to call it abnormal I would like to call. It just particularly good.
Hi, Brian.
But but yeah.
Yes, I just think the thing to focusing on into lower 50 type loss ratio for specialty overall, so lets okay, Bob let's try to address the competitive landscape question I'll just say one quick thing. This is Jack and then Brian you can elaborate on it I think I always remind myself and our investors.
We are very much excited about the specialty place.
Specialty sector, but we play in very specific areas within the specialty business across a number of products and sectors in lines, but still a small to first tier middle market player, which which impacts.
Price sensitivity.
And also accessibility and it it clearly affects who we compete against in that marketplace. So with that backdrop, maybe you can give your view of how the competitive landscape is affecting our yeah, maybe maybe I will just give you a couple of additional data points on what Jack was talking about the smaller to Netapp right. So if you think.
About <unk>.
Our policies right 70, 70% of our policies are with customers that have $5000 or less premium right. So these are smaller policies, which is really really good at servicing those policies and thats why were able to accomplish that that helps us a lot, but even helps us in the E&S space, we stay focus even in the E&S space.
Even with our wholesale business on middle to smaller accounts and the volatility there has not been as significant and the ability to achieve rate has been quite good. So when I think about our ability to achieve rate across our books.
Literally I think.
Almost every.
Business area that we have achieved rate at or above trend.
For the quarter for the year.
And frankly areas, obviously like sure you don't get rate right and.
Areas like Marine we measure it in terms of new money.
And that well exceeded our plans so in our space in this environment, we're still able to achieve that rate and we do see our growth next year.
Moving up into the higher single digits as the underwriting actions that we take lined out in this year and we just have really good momentum we have really good growth across our marine business, our healthcare business, our surety business and our E&S business too. So I think I think we're in a good place.
Terrific. Okay. Thanks for the color guys. Thanks.
Thanks, Bob.
The next question comes from Grace Carter with Bank of America. Please go ahead.
Hi, everyone.
Good morning, Chris.
Looking at the homeowners book, obviously had a.
A little bit more volatility in the past few quarters than historically.
But just kind of looking back over several years I mean in the mid 2010.
The core loss ratio around and kind of.
Low to mid forties.
And that's gradually increased over the past several years I guess I'm just kind of wondering how we should think about sort of the target run rate.
Underlying loss ratio for this line.
If we looked at.
Appear results, we would probably see a pretty similar trend and just kind of a slow increase over time and just your thoughts on whether the run rate earnings power of homeowners for the industry has changed over time.
Okay. Great. So this is Jack I'll, just make a couple of comments on that first of all youre right on top of this and thinking about it the same way we are.
This homeowners it used to be kind of the profit leader in our personal lines book and.
And as we addressed auto profitability and got that.
Into a much better place pre pandemic clearly there was some slippage in our home performance some of which was driven by the environment and some probably driven by some relative pricing, but going forward. Our expectation is is that we can particularly given the pricing environment get homeowners back into the.
The loss ratios that you're describing that wood wood with ideally make our account strategy really.
A true asset so you want to build on that.
Absolutely at an inflection point in this line of business.
Each price, it's getting price you can see.
'twenty three 'twenty four going to 2008.
We will start to see pretty significant improvement quickly it.
It does raise questions for us like Hey, how do we feel about the underlying book, we still feel very good about the quality of the high quality nature of the portfolio.
Really hasnt changed over time, and we're only going to get better with the actions that we're talking about it frankly need it needs the price that we're talking about.
And so we're working.
That said, we're still very careful about new business tightening our qualification criteria for acceptability reusing we use aerial imagery.
Extensively through the book to help us understand the risk.
And places, where we need price more potentially.
So we're getting out of it.
With.
In a multi pronged approach, but with this line of business will get back to its historic levels of profitability. Once this radar.
Thank you and I guess looking at core commercial.
The underlying loss ratio there has obviously improved quite a bit this year I was really good results in the middle of the year I mean, I'm wondering the extent to which kind of <unk> 23, <unk> hundred 23 results are sustainable and the extent to which kind of the ongoing remediation in the middle market book has yet to earn in and.
I guess, the degree to which we might even see some potential improvement there going forward. Thank you.
Yes, Chris This is Jack again, I think that the efforts that we've made particularly in middle market, we will continue to.
Yeah.
To help us improve that book of business. If you look at our growth patterns.
Our small commercial growth is twice, our middle market growth year to date.
Our underwriting actions that we took in 'twenty two and into 'twenty three are clearly showing benefits.
The pricing is still very firm I think one benefit we have that goes along with some of the pain that we've suffered is that the more property and your mix. The more likely you are to get sustainable price increases and deductible improvement changes. So we have a very deliberate plan to continue to improve that middle Mark.
Book of business and grow our very profitable small commercial book of business I think the combination of those two things.
<unk> very well into our projections that we'll obviously update after the Q on the Q4 call relative to guidance for.
For 2024, but very bullish on core commercial.
Into the future.
Thank you.
Our next question comes from Mayor Shields with K BW. Please go ahead.
Great. Thanks, so much so.
I wanted to sort of complement Duke of your reporting it's phenomenally detailed and it's really helpful.
And.
Under the principle that no. Good deed goes unpunished I am trying to understand the divergence between pricing increases and rate increases in personal auto.
The further incentive esports unit.
We've just hired a driver.
May or are you asking why the price is higher than the rate because of some.
Actions like tickets and things like that why we get more renewal price change then ray for auto.
Yes in other words, why it's been such a.
The significant gap over the last.
One or two quarters.
Yes, yes, yes. So just looking at this data I think that you are looking at so there would be things like.
Number of fractions.
Okay tickets.
Do you feel like things that would hit a driver a driver's record, which we would then in part.
Surcharges on that's one.
One way that that that plays through but also.
Simply years.
The.
Upgrades.
Losing my words.
Cards get older.
Your fleet.
Turns over youre buying newer vehicles, and so that will play into your your rate structure here too. So those are some things that we drive in it.
Okay.
Very helpful. Second question. This is sort of like a broad industry issues, we're asking everybody.
Are you seeing any inflection in actually in a paid medical claims for workers' compensation.
Not really.
At this point.
Medical inflation across the book and particularly in Workers' comp has been very benign.
And that really hasnt driven much increase in the paid so far we are watching it and as you know we've been very conservative in how we've.
Historically booked workers' comp and we've allowed that.
Our favorable development to come in slowly and I think that has served us well and will continue to service well as we go forward.
Yes, maybe 100% okay. Thank you so much.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Oksana <unk> for any closing remarks.
Thank you everybody for your participation today, we're looking forward to talking to you next quarter.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.