Q4 2023 The Hanover Insurance Group Inc Earnings Call
Good day and welcome to the Hanover insurance group's fourth quarter earnings Conference call.
Dave: My name is Dave and I'll be your operator for today's call at this time all participants are in listen only mode.
Dave: Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Dave: After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to its draw. Your question. Please press Star then two.
Dave: Please note. This event is being recorded I would now like to turn the conference over to Oksana <unk>.
Oksana: Lucas show. Please go ahead thank.
Oksana: 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 of agency markets and Bryan Salvatore.
Oksana: Our 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 at AD com. After the presentation, we will answer questions in the Q&A session.
Oksana: 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 can relate to among other things our outlook and guidance for 2020 for economic conditions and related effects, including <unk>.
Oksana: Economic and social inflation potential recessionary impacts as well as other risks and uncertainties, such as severe 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.
Oksana: We 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 year loss and combined ratio excluding catastrophes among others. A reconciliation of these non-GAAP financial measures to the closest GAAP.
Oksana: 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.
John Conner Roche: The fourth quarter represented a strong finish to a very dynamic but productive year for our company.
John Conner Roche: Catastrophes proved to be very challenging for us in the first three quarters of the year. However.
John Conner Roche: However, cats aside we achieved all major objectives of our business plan in 2023.
John Conner Roche: Additionally, we made important progress on many fronts strengthening our company and enhancing our competitive position and prospects moving forward.
John Conner Roche: Importantly, we took significant steps to enhance our catastrophe management and we advanced our capability to anticipate and address emerging and future trends as an organization.
John Conner Roche: We also repositioned our portfolio to more effectively respond to evolving industry issues.
John Conner Roche: As a result, we now have even more confidence in our ability to rapidly improve our earnings trajectory and to deliver that top tier returns you expect from us.
John Conner Roche: On today's call I'll share my perspective on our fourth quarter and full year results and I'll put our topline performance in the context of our margin improvement trajectory.
Jeff will review, our financial and operating results in more detail.
John Conner Roche: And he will provide annual guidance for 2024, we will then open the line for your questions.
John Conner Roche: Appropriately our primary focus in 2023 was to drive critical margin recovery.
Operator: Good day, and welcome to the Hanover Insurance Group's 4th Quarter Earnings Conference Call. My name is Dave, and I'll be your operator for today's call. At this time, all participants are in listen-only mode.
John Conner Roche: With intense determination, we believe we did just that.
John Conner Roche: We focused on the many areas of our business that were within our control developing and implementing a multifaceted margin recapture plan.
Operator: Should 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 the star key, then one on your touchtone phone.
Driving significant increases in pricing and policy terms and conditions to address new market realities.
John Conner Roche: Taking underwriting actions in our property lines across the enterprise.
John Conner Roche: And mitigating risks by implementing new and proactive loss control and preventative measures.
Operator: To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva.
John Conner Roche: Our fourth quarter performance reflects the strong progress we've made towards our goals of regaining positive earnings momentum and delivering strong sustainable profitable growth.
Oksana Lukasheva: 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 Dick Lavey, President of Agency Markets, and Bryan Salvatore, President of Specialty Lines.
John Conner Roche: In the quarter, we improved our ex cat combined ratio year over year by nearly four points to 92%.
Driven by great execution across all segments of our business with improved margins in personal lines, continuing low property large losses in core commercial and really strong profitability in specialty.
Oksana Lukasheva: 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 investor section of our website at www.hanover.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 can relate to, among other things, our outlook and guidance for 2024, economic conditions and related effects, including economic and social inflation, potential recessionary impacts, as well as other risks and uncertainties, such as severe weather and catastrophes that could affect the company's performance and or cause actual results to differ materially from those anticipated.
John Conner Roche: Our reserves remain strong.
John Conner Roche: Positioning us well as the industry faces emerging liability trends in this dynamic market.
John Conner Roche: We maintained our expense discipline and kept our overall position in check and we continued to benefit from higher net investment income.
John Conner Roche: Our work continues but we are very pleased with the progress we have made over the course of the year.
John Conner Roche: Most importantly, we believe our fourth quarter results represent a critical inflection point to deliver improved returns in 2024 and on a go forward basis.
John Conner Roche: Looking at our segment highlights we continued to see the benefits of our margin recapture plan in core commercial.
John Conner Roche: Reducing our current accident year ex cat loss ratio by about two points for the quarter and the year demonstrating the success of our rate and property exposure initiatives and we posted another quarter of strong renewal pricing gains with 12, 4% increase in core commercial overall and 13.1% in our <unk>.
Oksana Lukasheva: We caution you with respect to reliance on forward-looking statements, and in this respect, we refer you to the forward-looking statement section in our press release, the presentation deck, and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures, such as operating income and accident year loss and combined ratio, excluding catastrophes, 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.
John Conner Roche: Market business.
John Conner Roche: We implemented additional cat mitigation measures to address evolving weather patterns, including underwriting actions on business with outsized catastrophe exposure, primarily in the middle market segment.
And some in small commercial as well.
Additionally, we accelerated risk prevention and mitigation actions in our middle market segment, resulting in 60% of the targeted 600 middle market accounts, either mitigating risks by joining our Iot sensor program or non renewing their coverage with us.
John Conner Roche: The fourth quarter represented a strong finish to a very dynamic but productive year for our company. However, the catastrophes proved to be very challenging for us in the first three quarters of the year. However, cats aside, we achieved all the major objectives of our business plan in 2023. Additionally, we made important progress on many fronts. Strengthening our company and enhancing our competitive position and prospects moving forward. Importantly, we took significant steps to enhance our catastrophe management, and we advanced our capability to anticipate and address emerging and future trends as an organization. We have also repositioned our portfolio to more effectively respond to evolving industry issues.
John Conner Roche: The early results of these efforts are very encouraging.
John Conner Roche: During the latter half of 2023, we believe the sensor program resulted in more than 100 instances of successful damage prevention.
John Conner Roche: While growth in our middle market segment was intentionally restrained in 2023, we are confident we made the right trade offs positioning our business for a strong performance in 2024 and beyond <unk>.
John Conner Roche: Small commercial growth was approximately 6% in the fourth quarter and just over 7% for the year and we expect this business to drive overall growth in core commercial in 2024, despite continuing our targeted property underwriting actions in middle market.
John Conner Roche: As a result, we now have even more confidence in our ability to rapidly improve our earnings trajectory and to deliver the top-tier returns you expect. On today's call, I'll share my perspective on our fourth quarter and full year results, and I'll put our top line performance in the context of our margin improvement trajectory. Jeff will review our financial and operating results in more detail, and he will provide annual guidance for 2025. We will then open the line for your questions.
John Conner Roche: Our small commercial business production indicators remain robust with increased new business double digit renewal pricing and retention within historical norms tap sales, our industry, leading quote and issue platform.
John Conner Roche: <unk> continues to generate strong new business momentum as we continue the rollout in the remaining states.
John Conner Roche: This state of the art point of sale system represents a significant competitive advantage in the marketplace and positions us well as more agents consolidate small commercial business with strategic partners and we plan to expand our tap sales platform to include Workers' comp this year.
John Conner Roche: Appropriately, our primary focus in 2023 was to drive critical margin recovery. With intense determination, we believe we did just that. We focused on the many areas of our business that were within our control, developing and implementing a multifaceted margin recapture, driving significant increases in pricing and policy terms and conditions to address new market realities, taking underwriting actions in our property lines across the enterprise, and mitigating risks by implementing new and proactive loss control and preventative measures. Our fourth quarter performance reflects the strong progress we've made towards our goals of regaining positive earnings momentum and delivering strong In the quarter, we improved our XCAT combined ratio year over year by nearly 4 points, to 90.2%, driven by great execution across all segments of our business, with improved margins and personal lines, continuing low property large losses in core commercial, and really strong profitability in special.
John Conner Roche: Turning to specialty we achieved excellent profitability in the quarter, beating our low fifties target for ex cat current accident year loss ratio again, while implementing healthy rate increases and delivering lower than usual large losses.
John Conner Roche: In 2023 specialty increased earnings for the fourth consecutive year, while delivering its highest ever pre tax operating income results.
John Conner Roche: This business achieved especially strong performance in management liability marine and excess and surplus lines with combined ratios in the high seventy's to low eighty's for the year.
John Conner Roche: Renewal price increases for the quarter totaled 11.6% primarily attributable to specialty property lines.
John Conner Roche: Specialty net written premiums declined modestly quarter over quarter and retention declined slightly the result of strategic underwriting actions as we increased non renewals on specific underperforming programs.
John Conner Roche: Excluding program business specialty net written premium growth was approximately 6% in the quarter and retention remained stable.
John Conner Roche: Our reserves remain strong, positioning us well as the industry faces emerging liability trends in this dynamic market. We maintained our expense discipline and kept our overall position in check, and we continued to benefit from higher net investment income. Our work continues, but we are very pleased with the progress we have made over the course of the year. Most importantly, we believe our fourth-quarter results represent a critical inflection point to deliver improved returns in 2024 and on a go-forward basis. Looking at our segment highlights.
John Conner Roche: Graham Nonrenewals were largely completed during 2023.
John Conner Roche: We expect net written premiums growth in the specialty segment to ramp up throughout 2024.
With a return to mid single digit growth in the first quarter and upper single digit growth for the year.
John Conner Roche: As we look ahead, we have visibility to improve growth opportunities and executive lines in particular in our management liability and healthcare lines.
John Conner Roche: We are well positioned to continue to capitalize on market opportunities in marine enabling us to build on what today already has one of the largest in the marine franchises in the U S specialty market.
John Conner Roche: We continue to see the benefits of our Margin Recapture Plan in core commercials, reducing our current accident year XCAT loss ratio by about two points for the quarter and the year. This is demonstrating the success of our rate and property exposure, and we posted another quarter of strong renewal pricing gains with a 12.4% increase in core commercial overall and 13.1% in our middle market. We implemented additional CAT mitigation measures to address evolving weather patterns, including underwriting actions on businesses with outsized catastrophe exposure, primarily in the middle market segment and some in small commercial as well. Additionally, we accelerated risk prevention and mitigation actions in our middle market segment, resulting in 60% of the targeted 600 middle market accounts either mitigating risks by joining our IoT sensor program or non-renewing their coverage with us. The early results of these efforts are very encouraging. During the latter half of 2023, we believe the sensor program resulted in more than 100 instances of successful damage prevention.
John Conner Roche: And we are excited about the growth opportunities within our newer offerings.
A N S wholesale and small specialty.
John Conner Roche: We expect the launch of our new E&S policy administration platform in April of this year will enable us to more efficiently capture increasing opportunities with our agents and brokers at.
John Conner Roche: At attractive rates and profitability profiles.
John Conner Roche: Specialty continues to represent a powerful growth engine, one that we anticipate will serve to profitably strengthen our consolidated top line.
John Conner Roche: While providing important diversification to our overall mix of business.
John Conner Roche: Looking now at our personal lines business, we improved profitability in this segment by more than five points in the quarter due in large part to the effectiveness of our margin recapture plan.
John Conner Roche: We continued to achieve higher renewal price increases in both auto and home up approximately 15% and 29% respectively.
John Conner Roche: We also intentionally narrowed our new business appetite in particular in areas of higher concentration, which given the current market disruption is the best way for us to ensure the underlying profitability of our coveted high quality personal lines portfolio.
John Conner Roche: While growth in our middle market segment was intentionally restrained in 2023, we are confident we made the right trade-off, positioning our business for strong performance in 2024 and beyond. Small commercial growth was approximately 6% in the fourth quarter and just over 7% for the year, and we expect this business to drive overall growth in core commercial in 2024, despite continuing our targeted property underwriting actions in the middle market. Our small commercial business production indicators remain robust, with Increased New Business, Double-Digit Renewal Pricing, and Retention Within Historical Norms. TAP Sales, our industry-leading quote-and-issue platform, continues to generate strong new business momentum as we continue the rollout in the remaining states.
John Conner Roche: Additionally, we continued to execute on other levers of our margin recapture in catastrophe resiliency plan in personal lines as we strive for further diversification of our property exposures.
John Conner Roche: For example, we are rolling out all peril wind and hail deductibles on new business in targeted states. We're implementing these deductibles on renewals starting in February in Wisconsin with multiple states to file in April.
John Conner Roche: As a result of pricing and new business actions, along with increased non renewals our growth slowed to 2.1% in the fourth quarter.
John Conner Roche: Our retention in Pip levels also declined as expected in the fourth quarter in particular in our Midwest region as we address areas of micro concentrations Pip.
John Conner Roche: This state-of-the-art point-of-sale system represents a significant competitive advantage in the marketplace and positions us well as more agents consolidate small commercial business with strategic partners, and we plan to expand our TAP sales platform to include workers comp this year. Turning to specialty, we achieved excellent profitability in the quarter, beating our low 50s target for XCAT's current accident year loss ratio again while implementing healthy rate increases and delivering lower- In 2023, Specialty increased earnings for the fourth consecutive year while delivering its highest ever pre-tax operating income result. This business achieved especially strong performance in management liability, marine, and excess and surplus lines, achieving combined ratios in the high 70s to low 80s for the year. Renewal price increases for the quarter totaled 11.6%, primarily attributable to specialty property losses.
John Conner Roche: <unk> in the Midwest shrunk approximately two to three times the rate of Pip reductions in other regions.
John Conner Roche: We are comfortable with this trade off which we expect will enable us to improve our overall business mix and catastrophe resiliency.
John Conner Roche: That said, we are already starting to make adjustments to our new business funnel in select states and we are positioning ourselves to take advantage of growth opportunities in geographies, where pricing is adequate.
John Conner Roche: We anticipate measured price driven growth and a meaningful profit recovery in personal lines. This year, and we expect to achieve our target personal lines, our ROE in 2025.
John Conner Roche: Overall, we are encouraged by our strong fourth quarter performance and we are pleased to begin the new year with positive operational and financial momentum.
John Conner Roche: Due to the introduction of enhanced products and technology disciplined pricing and risk prevention measures. We further strengthened our business in 2023 adapting to the rapidly changing dynamics of our industry as well as the economic social and weather changes that impacted the broader marketplace.
John Conner Roche: Specialty net written premiums declined modestly quarter over quarter and retention declined slightly, the result of strategic underwriting actions as we increased non-renewals on specific underperforming programs. Excluding program business, specialty net written premium growth was approximately 6% in the quarter, and retention remains stable. Program non-renewals were largely completed during 2026.
John Conner Roche: We begin 2024 with a renewed sense of optimism a determined focus and confidence knowing we have a proven strategy the capabilities the distribution distinctiveness and the talented and committed team necessary to deliver strong sustainable longer term value for our.
John Conner Roche: We expect net written premium growth in the specialty segment to ramp up throughout 2024, with a return to mid-single-digit growth in the first quarter and upper single-digit growth for the year. As we look ahead, we have visibility to improve growth opportunities in executive lines, in particular in our management liability and healthcare lines. We are well-positioned to continue to capitalize on market opportunities in marine, enabling us to build on what today already is one of the largest marine franchises in the U.S. specialty market, and we are excited about the growth opportunities within our newer office: E&S, Wholesale, and Small Specialists.
John Conner Roche: Shareholders and all of our stakeholders.
John Conner Roche: With that let me turn the call over to Jeff.
Jeffrey Mark Farber: Thank you Jack and good morning, everyone.
Jeffrey Mark Farber: I'll begin with an overview of our fourth quarter results, then I'll discuss our segment results and our investment performance and share our consolidated 2024 guidance.
Jeffrey Mark Farber: We closed out 2023, with a strong and very profitable fourth quarter reporting an all in combined ratio of 94, 2% outperforming our original expectations.
Jeffrey Mark Farber: With the accelerating momentum of our margin recapture plan year over year margins improved in each segment in the quarter.
John Conner Roche: We expect the launch of our new E&S policy administration platform in April of this year will enable us to more efficiently capture increasing opportunities with our agents and brokers at attractive rates and profitability. Specialty continues to represent a powerful growth engine, one that we anticipate will serve to profitably strengthen our consolidated top line while providing important diversification to our overall mix of business. Looking now at our personal lines business, we improved profitability in this segment by more than five points in the quarter, due in large part to the effectiveness of our margin recapture program. We continue to achieve higher renewal price increases in both auto and home, up approximately 15% and 29%, respectively.
Jeffrey Mark Farber: Our cat loss experience in Q4 was comparatively benign, resulting in 4% of net earned premium.
Jeffrey Mark Farber: 2.8 points related to fourth quarter events with 1.2 points, representing prior quarter catastrophe true ups.
Jeffrey Mark Farber: We delivered a combined ratio excluding cats of 92% in the fourth quarter.
Jeffrey Mark Farber: 3.9 points better than the prior year period.
Jeffrey Mark Farber: On a full year basis, our ex cat combined ratio of 91, 3% is consistent with our original guidance of 91% to 92%.
Jeffrey Mark Farber: Our consolidated current accident year loss ratio, excluding catastrophes improved by approximately three points in the quarter to 62%, reflecting the earning in of our pricing increases and execution of profitability measures. We introduced in 2022 and 'twenty three.
At 35% for the full year, the expense ratio was better than expectations and our full year guidance of 38% the.
John Conner Roche: We also intentionally narrowed our new business appetite, in particular in areas of higher concentration, which, given the current market disruption, is the best way for us to ensure the underlying profitability of our coveted high-quality personalized portfolio. Additionally, we continue to execute on other levers of our Margin Recapture and Catastrophe Resiliency Plan and personal lines as we strive for further diversification of our business. For example, we are rolling out all peril, wind, and hail deductibles on new business in targeted states. We are implementing these deductibles on renewals starting in February in Wisconsin, with multiple states to follow in April.
Jeffrey Mark Farber: The improvements were attributable primarily to reduced variable compensation items in 2023.
Jeffrey Mark Farber: Prior year development was slightly favorable for the quarter in specialty we saw continued favorability in our claims made professional and executive lines, primarily management liability.
Jeffrey Mark Farber: Prior year development in personal lines was unfavorable driven by umbrella coverages reported in home and other as we increased our prior year loss expectations on auto related umbrella losses.
We increased current year umbrella picks to address the trend.
Speaker Change: Now I'll review our segment results.
Speaker Change: Starting with our core commercial segment, we delivered a current accident year ex cat combined ratio of 91, 4% a one seven point improvement over the fourth quarter of 2022.
John Conner Roche: As a result of pricing and new business actions, along with increased non-renewals, our growth slowed to 2.1 percent in the fourth quarter. Our retention and PIF levels also declined as expected in the fourth quarter, in particular in our Midwest region, as we address areas of microconcentration. PIF in the Midwest shrunk approximately two to three times the rate of PIF reductions in other regions.
Speaker Change: The core commercial current accident year loss ratio, excluding catastrophes improved two four points to 57, 8% strong.
Speaker Change: Long improvement in commercial multi peril was partially offset by prudent loss picks in workers' comp and commercial auto.
Speaker Change: The key takeaway here is the success of our commercial property margin improvement initiatives as evidenced by a more consistent pattern of lower large loss activity in middle market and small commercial multiple peril lines.
John Conner Roche: We are comfortable with this trade-off, which we expect will enable us to improve our overall business mix and catastrophe resilience. That said, we are already starting to make adjustments to our new business funnel in select states, and we are positioning ourselves to take advantage of growth opportunities in geographies where pricing is adequate.
Speaker Change: Looking ahead, we expect the loss ratio in core commercial to remain stable as we continue our property work take rate and address potential increases in liability trends, including increased medical costs and social inflation.
Jeffrey Mark Farber: We anticipate measured price-driven growth and a meaningful profit recovery in purse lines this year, and we expect to achieve our target purse lines ROE in 2025. Overall, we are encouraged by our strong fourth quarter performance, and we are pleased to begin the new year with positive operational and financial momentum. Through the introduction of enhanced products and technology, disciplined pricing, and risk prevention measures, we further strengthened our business in 2023, adapting to the rapidly changing dynamics of our industry, as well as the economic, social, and weather changes that impacted the broader marketplace. We begin 2024 with a renewed sense of optimism. A Determined Focus and Confidence, knowing we have a proven strategy, the capabilities, the distribution distinctiveness, and the talented and committed team necessary to deliver strong, sustainable, longer-term value for our shareholders and all of our stakeholders. With that, let me turn the call over to Jeff. Thank you, Jack, and good morning, everyone.
Speaker Change: Our specialty segment reported another exceptionally strong quarter.
Speaker Change: As the current accident year ex cat combined ratio improved one four points compared to the fourth quarter of 2022 to <unk> 85, 9% driven by lower large loss activity and property lines.
Speaker Change: The underlying loss ratio improved two points to 49, 5%, which was below our expectation for the quarter.
Speaker Change: Although we expect to continue to benefit from rate increases in the specialty book, we are embedding more conservatism for loss inflation and liability lines.
Speaker Change: As well as a return to more normal level of large losses in our 2020 for loss ratio expectations.
Speaker Change: Turning to personal lines. The current accident year ex cat combined ratio was 93% for the fourth quarter, improving nearly six points from the same period of 2022.
Speaker Change: Auto current accident year loss ratio, excluding catastrophes of 78, 5% in the fourth quarter improved seven one points year over year.
Speaker Change: This result reflected the benefit of earned rates and milder than normal weather in the northeast and Midwest, which favorably impacted claims frequency.
Jeffrey Mark Farber: I'll begin with an overview of our fourth-quarter results. Then I'll discuss our segment results and our investment performance and share our consolidated 2024 guidance. We closed out 2023 with a strong and very profitable 4th quarter, reporting an all-in combined ratio of 94.2%, outperforming our original expectations. With the accelerating momentum of our Margin Recapture Plan, year-over-year margins improved in each segment during the quarter. Our cat loss experience in Q4 was comparatively benign, resulting in 4% of net earned premium.
Speaker Change: Additionally, although collision loss severity remains elevated compared to our original expectations.
Speaker Change: Our data indicates that severity is easing in particular used car prices.
Speaker Change: We are also experiencing some deceleration in the cost of parts as well as rental costs due to shorter repair cycle times.
Speaker Change: At the same time, we remain cautious about liability coverages in auto and reflected an elevated loss expectation in both prior and current accident year picks in bodily injury. However.
Speaker Change: However, as the benefit of rate continues to earn in and property loss trends ease. We expect this will drive significant loss ratio improvement for auto in 2024.
Jeffrey Mark Farber: 2.8 points related to fourth quarter events, with 1.2 points representing prior quarter catastrophe true-odds. We delivered a combined ratio excluding cats of 90.2% in the fourth quarter, 3.9 points better than the prior year period. On a full year basis, our XCAT combined ratio of 91.3% is consistent with our original guidance of 91 to 92%. Our consolidated current accident year loss ratio, excluding catastrophes, improved by approximately 3 points in the quarter to 60.2%, reflecting the accretion of our pricing increases and the execution of profitability measures we introduced in 2022 and 2023. At 30.5% for the full year, the expense ratio is better than expectations and our full year guidance of 30.8%. The improvements were attributable primarily to reduced variable compensation items in 2023.
Speaker Change: Coleman other current accident year loss ratio, excluding catastrophes improved 0.7 points to 53, 2% driven by rate and exposure adjustments earn again, partially offset by prudently increased 2023 loss ratio expectations for umbrella coverage.
Speaker Change: In response to prior year development.
Speaker Change: Looking ahead, we expect the benefit of earned pricing building in and moderating property loss trend to drive a meaningfully improved personal lines current accident year ex cat loss ratio in 2020 for.
Speaker Change: Furthermore, we anticipate some additional improvements as the result of increased home inspections, and new business rigor in homeowners implemented in 2023.
Speaker Change: We expect significant margin improvement in auto and home to pace of return to target profitability by the end of this year on a written basis and in 2025 on an earned basis.
Speaker Change: Turning to reinsurance on January 1st we successfully completed our multi line casualty reinsurance renewals securing a similar structure to expiring agreements with reduced co participation and a slightly lower than expected price increase.
Jeffrey Mark Farber: Prior year development was slightly favorable for the quarter. In specialty, we saw continued favorability in our claims-made professional and executive lines, primarily management liability. Prior year development in personal lines was unfavorable, driven by umbrella coverages reported in Home and Other, as we increased our prior year loss expectations on auto-related umbrella losses. We increased current year umbrella picks to address the trend. Now I'll review our segment results. Starting with our core commercial segment, we delivered a current accident year XCAT combined ratio of 91.4%, a 1.7 point improvement over the fourth quarter of 2022. The core commercial current accident or loss ratio, excluding catastrophes, improved 2.4 points to 57.8%.
Speaker Change: As a reminder, for most casualty risks are per loss reinsurance attaches at $2 5 million.
Speaker Change: We've worked to establish robust relationships with our reinsurers, who recognize the strength of our recent liability rates very selective umbrella appetite and prudent casualty and umbrella rating structures. Additionally, our insurers appreciate our diversified state specific casual.
Speaker Change: Tea growth strategy.
Speaker Change: Moving on to investment performance net investment income increased $5 7 million to $81 6 million for the fourth quarter, primarily driven by strong fixed income results from higher bond investment rates.
Speaker Change: Net investment income came in slightly below our expectations in part due to lower investment partnership income, which is on a one quarter lag and can be lumpy.
Speaker Change: However, net investment income annual growth of 12, 1% for 2023 exceeded our original guidance and we believe that the current rate environment will continue to provide an accumulating benefit to NII next year and over the next few years.
Jeffrey Mark Farber: Strong improvement in commercial multi-peril was partially offset by prudent loss picks in workers' comp and commercial auto. The key takeaway here is the success of our commercial property margin improvement initiatives as evidenced by a more consistent pattern of lower large loss activity in middle market and small commercial multiple peril lines. Looking ahead, we expect the loss ratio in core commercial to remain stable as we continue our property work, take rate, and address potential increases in liability trends, including increased medical costs and social inflation. Our specialty segment reported another exceptionally strong quarter, as the current accident year XCAT combined ratio improved 1.4 points compared to the fourth quarter of 2022 to 85.9%. Driven by lower large loss activity in property loss
Speaker Change: Book value per share increased 16, 4% in the fourth quarter to $68 93 drew.
Speaker Change: Driven by an improvement in unrealized loss position on the fixed income portfolio and strong earnings.
Speaker Change: With continued volatility in interest rates and weather uncertainty we remained on the sidelines for repurchases. This quarter. However, we have a long history of returning capital to shareholders through dividends and share repurchases, our philosophy hasn't changed and we expect both levers to remain key tool.
Speaker Change: <unk> for our future.
Now I'll turn to our catastrophe ratio guidance.
Speaker Change: To provide some context, we recently completed a comprehensive reevaluation of our modeled catastrophe losses, our historical experience and non modeled risks.
Jeffrey Mark Farber: The underlying loss ratio improved two points to 49.5%, which was below our expectation for the quarter. Although we expect to continue to benefit from rate increases in the specialty book, we are embedding more conservatism for loss inflation and liability lines, as well as a return to a more normal level of large losses in our 2024 loss ratio expectation. Turning to personal lines, the current accident year XCAT combined ratio was 93% for the fourth quarter, improving nearly six points from the same period of 2022. The auto current accident year loss ratio excluding catastrophes of 78.5% in the fourth quarter improved 7.1 points year over year.
Speaker Change: A reevaluation this year augmented the detailed modeling and risk analysis process that we conduct each year.
Speaker Change: As we usually do we use the prevailing hurricane and other apparel models.
Speaker Change: Additionally, the reevaluation of our view of catastrophe risk includes the results from the recently updated severe convective storm and winter storm models.
Speaker Change: We also expanded our assumptions for non modeled cat perils and allowed for additional prudence to account for items not fully contemplated in cat models, including recent experience social inflationary impacts and contractor behavior.
Mcgrath <unk> trends and risks associated with an aging public infrastructure.
Speaker Change: Candidly this year, we picked higher on the probability curve.
Speaker Change: There is a page in our earnings presentation deck that outlines the changes.
Jeffrey Mark Farber: This result reflected the benefit of earned rates and milder-than-normal weather in the Northeast and Midwest, which favorably impacted claims for equipment. Additionally, although collision loss severity remains elevated compared to our original expectation, our data indicates that severity is easing, in particular used car prices. We are also experiencing some deceleration in the cost of parts, as well as rental costs due to shorter repair cycle time.
Speaker Change: As a result of this comprehensive analysis, we have determined the cat load to be 7% in 2024 with an expectation for it to decrease in 2025.
Speaker Change: The nearly two point increase in cat load combined with 15% property earned price in 2020 for amounts to an increase of approximately 60% in cat loss dollars between 2023 and 2024 excluding growth.
Jeffrey Mark Farber: At the same time, we remain cautious about liability coverages in auto and reflected an elevated loss expectation in both prior and current accident year picks for bodily injury. However, as the benefit of rate continues to gain traction and property loss trends ease, we expect this will drive significant loss ratio improvement for auto in 2024. Home and other current accident year loss ratio, excluding catastrophes, improved 0.7 points to 53.2%, driven by rate and exposure adjustments earning in partially offset by prudently increased 2023 loss ratio expectations for umbrella coverage in response to prior year development. Looking ahead, we expect the benefit of earned pricing building in and moderating property loss trends to drive a meaningfully improved personal lines current accident year XCAT loss ratio in 2024.
Speaker Change: The process for 2024 did not meaningfully contemplate the impact of homeowners deductibles or other changes in terms and conditions. We expect these factors to have a more substantial impact beyond 2024 and be contemplated in cat loads for 2025 and future.
Speaker Change: For years we.
Speaker Change: We also expect that property exposure reductions in certain geographic concentrations in the Midwest as well as a gradual change in business mix toward profitable liability lines will reduce cat loads over time.
Speaker Change: Accordingly, we believe that the 2020 for cat load will be the high watermark for our planned cat percentage.
Turning to the rest of guidance based on current and anticipated business conditions. We expect operating return on equity to be strong in 2024, and consistent with our long term targets in 2025.
Jeffrey Mark Farber: Furthermore, we anticipate some additional improvements as the result of increased home inspections and new business rigor among homeowners implemented in 2023. We expect significant margin improvement in auto and home to pace a return to target profitability by the end of this year on a written basis and in 2025 on an earned basis. Turning to reinsurance, on January 1st, we successfully completed our multi-line casualty reinsurance renewals, securing a similar structure to expiring agreements with reduced co-participation and a slightly lower than expected price increase. As a reminder, for most casualty risks, our per-loss reinsurance attaches at $2.5 million.
Net written premium growth is expected to be in the mid single digits with specialty in the upper single digits, we anticipate that targeted underwriting actions will reduce personal lines growth to the lower single digits.
Speaker Change: Our full year combined ratio, excluding catastrophes is expected to be in the range of 90% to 91%, which represents about one point of improvement from 2023 investor guidance.
Speaker Change: We expect to achieve an expense ratio of 37% equating to 10 basis points of improvement from the 2023 ratio when normalized for variable compensation payouts commensurate with target profitability.
Speaker Change: Recall 2023 target with 38%.
Jeffrey Mark Farber: We've worked to establish robust relationships with our reinsurers who recognize the strength of our recent liability rates, our very selective umbrella appetite, and prudent casualty and umbrella rating structure. Additionally, our insurers appreciate our diversified, state-specific casualty growth strategy. Moving on to investment performance, net investment income increased $5.7 million to $81.6 million for the fourth quarter, primarily driven by strong fixed income results from higher bond investment rates.
Speaker Change: Again, our cat load is 7% for the full year 2024, and six 5% for the first quarter net investment income is expected to increase by approximately 10% for the year driven by higher fixed maturity yields and higher cash flows.
Speaker Change: We expect an operating tax rate to approximate the statutory rate of 21%.
Speaker Change: To sum up we continue to make excellent progress on our margin recapture initiatives as we focus on delivering sustained profitable growth for our shareholders and we have a healthy balance sheet that allows us to deliver on our strategic priorities in the year ahead, we are very optimistic about our positioning.
Jeffrey Mark Farber: Net investment income came in slightly below our expectations, in part due to lower investment partnership income, which is on a one-quarter lag and can be lumpy. However, net investment income, annual growth of 12.1% for 2023 exceeded our original guidance, and we believe that the current rate environment will continue to provide an accumulating benefit to NII next year and over the next few years. Book value per share increased 16.4% in the fourth quarter to $68.93, driven by an improvement in the unrealized loss position on the fixed income portfolio and strong earnings.
Speaker Change: As we head into the next few years.
Speaker Change: Operator, please open the line for questions.
Speaker Change: 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.
Speaker Change: Our first question comes from Michael Phillips with Oppenheimer. Please go ahead.
Michael Phillips: Hey, Thanks, good morning, everybody.
Michael Phillips: I guess first question is on the payroll development of core commercial where you had some continued benefits and workers comp.
Michael Phillips: I guess was there anything behind the scenes there that maybe offset that a bit and then talk about if you could talk about what we're seeing for the industry in terms of the casualty issues for the older accident years, and how you think you might be immune from that thanks.
Jeffrey Mark Farber: With continued volatility in interest rates and weather uncertainty, we remained on the sidelines for repurchases this quarter. However, we have a long history of returning capital to shareholders through dividends and share repurchases. Our philosophy hasn't changed, and we expect both levers to remain key tools for our future. Now, I'll turn to our catastrophe ratio guidance. To provide some context, we recently completed a comprehensive re-evaluation of our model catastrophe losses, our historical experience, and non-model risk. This re-evaluation this year augmented the detailed modeling and risk analysis process that we conduct each year. As we usually do, we use the prevailing hurricane and other peril models.
Speaker Change: Thanks, Mike we did have favorable development in core commercial and that consisted of workers' comp favorability offset by a relatively small amount of our liability unfavorably between commercial auto and some umbrella and that's been a relatively.
<unk> pattern across the year as we have done our best to be proactive in addressing the liability trends as we see them as we've been worried about them we've been talking about it all year and also last year.
Speaker Change: Okay. Thank you you mentioned in your presentation.
Jeffrey Mark Farber: Additionally, the reevaluation of our view of catastrophe risk includes the results from the recently updated Severe Convective Storm and Winter Storm models. We also expanded our assumptions for non-modeled cat perils and allowed for additional prudence to account for items not fully contemplated in cat models, including recent experience, Social Inflationary Impacts on Contractor Behavior, demographic trends, and risks associated with an aging public infrastructure. Candidly, this year we picked higher on the probability curve. There is a page in our earnings presentation deck that outlines the changes. As a result of this comprehensive analysis, we have determined the cat load to be 7% in 2024, with an expectation for it to decrease in 2025. The nearly two point increase in the cat load, combined with the 15% property earned price in 2024, amounts to an increase of approximately 60% in cat loss dollars between 2023 and 2024, excluding growth. The process for 2024 did not meaningfully contemplate the impact of homeowners deductibles or other changes in terms and conditions.
Speaker Change: It was on the cat load.
Speaker Change: A shift toward more liability lines can you maybe kind of put some time frame around that and maybe the magnitude of it.
Speaker Change: Yes, Mike This is Jack listen I think you know as a company we've worked hard over the last decade to try to diversify the firm both geographically and from a line of business mix standpoint.
Speaker Change: As the weather.
John Conner Roche: <unk> really were pronounced in 2023 were even more motivated to accelerate the property and liability property and casualty mix, but do so in a very thoughtful manner. So I think what way we'll lay this out for you over time is that it'll be something north of incremental but it won't be seismic.
John Conner Roche: We still like our book of business, we have a great.
John Conner Roche: Well package.
John Conner Roche: Our approach in the core lines.
John Conner Roche: Much of our specialty business.
John Conner Roche: Is is kind of lower limits casualty business thats pretty distributed across some targeted favorable areas.
John Conner Roche: But because of the nature of the account size.
John Conner Roche: You know it is the growth rates are more measured than they would be if you were going into brand new categories or writing larger accounts. So I think what I would say to you is that where we're going to continue to move our mix.
Jeffrey Mark Farber: We expect these factors to have a more substantial impact beyond 2024 and be contemplated in catalogs for 2025 and future years. We also expect that property exposure reductions in certain geographic concentrations in the Midwest, as well as a gradual change in business mix toward profitable liability lines, will reduce cat loads over time. Accordingly, we believe that the 2024 cat load will be the high-water mark for our planned cat percent. Turning to the rest of guidance, based on current and anticipated business conditions, we expect operating return on equity to be strong in 2024 and consistent with our long-term targets in 2025. Net written premium growth is expected to be in the mid-single digits, with specialty in the upper single digits. We anticipate that targeted underwriting actions will reduce PersonalLine's growth to the lower single digits.
John Conner Roche: In the right direction, but I suspect what youll see over the next 12 to 18 months is that our book mix, which has clearly been.
John Conner Roche: Challenged by the weather patterns and hyperinflation.
Will become a little less disadvantaged there may be even advantaged as some of the liability trends present themselves. So so we're trying to keep that in mind as we move our book mix forward.
Speaker Change: Okay very helpful. Thanks, Chuck and just last one real quick I guess, maybe a quick numbers question, but can you just give a sense of the size of your personal umbrella book.
Speaker Change: Personal umbrella marella, yes.
Speaker Change: In the range of $68 million.
Speaker Change: Six zero you said.
Speaker Change: Yes.
Speaker Change: Yeah, Okay cool. Thank you guys I appreciate it.
Speaker Change: Thanks, Mike.
Meyer Shields: The next question comes from Mayor Shields with K BW. Please go ahead.
Jeffrey Mark Farber: Our full-year combined ratio, excluding catastrophes, is expected to be in the range of 90 to 91%, which represents about one point of improvement from 2023 investor guidance. We expect to achieve an expense ratio of 30.7%, equating to 10 basis points of improvement from the 2023 ratio when normalized for variable compensation payouts commensurate with target profitability. Recall, the 2023 target was 30.8. Again, our cat load is 7% for the full year 2024 and 6.5% for the first quarter. Net investment income is expected to increase by approximately 10% for the year, driven by higher fixed maturity yields and higher cash flows. We expect an operating tax rate to approximate the statutory rate of 21%.
Meyer Shields: Hi.
Meyer Shields: Yeah.
Meyer Shields: Thank you for taking my question.
Meyer Shields: My first question is on <unk>.
Meyer Shields: <unk> initial reserves.
Meyer Shields: I'll.
Meyer Shields: Follow up on that Kinder.
Kinder: Okay great.
But thats a point here.
Kinder: Between what is common liabilities.
Speaker Change: Yes, we don't have all that detail right in front of us but at year end, we will obviously publish those but they werent very significant there was no piece that was particularly large there.
Speaker Change: Okay got it thanks.
Speaker Change: My second question is on this.
Speaker Change: Specialty growth.
Speaker Change: Can you please provide more details on that.
Offset in programs.
Speaker Change: Yeah, I would just say a couple of comments and then let Brian speaks very specifically to that I think as we said in previous calls that.
Speaker Change: I ask <expletive> and Bryan to accelerate our profit improvement really across the enterprise.
Speaker Change: And even though that we have really outstanding margins in the specialty business like any book of business. There is opportunity for improvement and there is areas, where a little bit of addition by subtraction makes sense. So I have a lot of confidence in our ability to restore our growth, but Brian can speak to you a little bit more about what we did in 'twenty three.
Jeffrey Mark Farber: To sum up, we continue to make excellent progress on our margin recapture initiatives as we focus on delivering sustained, profitable growth for our shareholders, and we have a healthy balance sheet that allows us to deliver on our strategic priorities in the year ahead. We are very optimistic about our positioning as we head into the next few years. Operator, please open the line for questions. We will now begin the question and answer session. To ask a question, you may press the star, then 1 on your touch-tone phone.
Brian: And our trajectory for 'twenty for sure and just following what Jack said.
Brian: Really the activity was really focused on too.
Brian: Fairly large casualty oriented programs.
Speaker Change: The margins, we just felt was no longer acceptable. So we thought it was best to take action.
Operator: If you're using a speakerphone, please pick up your handset before pressing. To withdraw your question, please press star then 2. Our first question comes from Michael Phillips with Oppenheimer. Please go ahead. Hey, thanks. Good morning, everybody.
Speaker Change: Impact to net written premium from those programs.
Speaker Change: Pronounced in Q3 and Q4.
Speaker Change: And so as we look towards this year, we see that impact really.
Michael Phillips: Um, I guess the first question is on the favorable development and core commercial where you have some community benefits and workers' comp. Was there anything behind the scenes there that maybe offset that a bit and then talk about what we're seeing from the industry in terms of the casualty issues for the older accident years and how you think you might be immune from that? Thanks. Thanks, Mike. We did have favorable developments in core commercial, and that consisted of workers' comp favorability offset by a relatively small amount of liability, unfavorability between commercial, auto, and some umbrella. And that's been a relatively consistent pattern across the year, as we have done our best to be proactive in addressing the liability trends as we see them and as we've been worried about them. We've been talking about it all year and also last year.
Speaker Change: Moderating, we don't see it having a significant effect and we actually see ourselves returning to growth this quarter and frankly, delivering upper single digit growth for 'twenty four.
Speaker Change: Got it thanks.
Speaker Change: Al.
al: Hello Christian.
Speaker Change: Just on Cat I don't like target this beginning of this year.
Speaker Change: That sounds good.
Speaker Change: The storms. So how is it looking for where you guys are seeing right.
Speaker Change: Bye now.
Speaker Change: I'm, sorry, you're talking about.
Speaker Change: In Q1.
Speaker Change: Yes.
Speaker Change: We usually don't disclose cats intra quarter.
Speaker Change: That said.
Speaker Change: We do believe based on what we observed and I think what the industry is observed talking to others that these were a different set of storms that came upon us in the first quarter not as prolonged.
Speaker Change: In terms of the freeze the temperature swings were a little bit less dramatic in terms of intense up and down.
Unnamed Speaker: Okay, thank you. You mentioned in your presentation, I think it was in the catalog, a shift towards liability lines. Can you maybe kind of put some timeframe around that and maybe the magnitude of that? Yeah, Mike, this is Jack.
Speaker Change: Particularly against a winter storm Elliot.
Speaker Change: And obviously it didn't happen over a holiday long weekend when when many of our customers were caught off guard timing wise. So so.
Jack: Listen, I think, you know, as a company, we've worked hard over the last decade to try to diversify the firm both geographically and from a line of business mix standpoint. As the weather challenges really were pronounced in 2023, we're even more motivated to accelerate the property and liability, property, and casualty mix, but do so in a very thoughtful manner. So I think the way we'll lay this out for you over time is that it'll be something north of incremental, but it won't be seismic, right? We still like our book of business.
Speaker Change: Even since last year, we believe that our book of business is much better position. Many large properties are now equipped with temperature and water sensors and we have a robust customer notification protocol in place. So I think the way I would.
Speaker Change: Specifically answering first quarter oriented cat losses, I can tell you that.
Speaker Change: These were different types of storms in our the work we did I think will serve us well in the first quarter.
Jack: We have a great package approach in the core lines. Much of our specialty business is kind of lower limits, casual business that's pretty distributed across some targeted, favorable areas, but because of the nature of the account size, you know, it is, the growth rates are more measured than they would be if you were going into brand new categories or writing larger accounts. So I think what I would say to you is that we're going to continue to move our mix in the right direction, but I suspect what you'll see over the next 12 to 18 months is that our book mix, which has clearly been challenged by the weather patterns and hyperinflation, will become a little less disadvantaged and maybe even advantaged as some of the liability trends present themselves. So we're trying to, you know, keep that in mind as we Very helpful. Thanks, Jack. And just last one real quick, I guess, maybe a quick numbers question. Can you just give a sense of the size of your personal envelope? A personal umbrella.
Speaker Change: Got it. Thank you so much appreciate it.
Speaker Change: The next question comes from Mike Zaremski with BMO. Please go ahead.
Mike Zaremski: Hey, great good morning.
Mike Zaremski: And back to personal lines.
Mike Zaremski: Obviously, good to see the progress on the price increases.
Mike Zaremski: It looks like you're pushing that.
Mike Zaremski: Terms and conditions.
Mike Zaremski: Changes fairly successfully.
Mike Zaremski: When you said.
Expect to achieve target Roe.
Speaker Change: In 25, just wanted to make sure Youre you don't mean by run rate by the end of the year, you mean, the full year and I guess.
Speaker Change: When we think about ROE should we think about kind of your historical combined ratio over long periods of time kind of in the <unk>.
Speaker Change: Hi, 90 is because you'd have more operating leverage that there's any kind of guidance.
Speaker Change: If you can help us with on.
Speaker Change: Slide <unk>.
Speaker Change: Bond ratio is there any I mean, if you don't want to give the explicit some kind of.
Speaker Change: Triangulation that might help.
Unnamed Speaker: 6-0, you said? 6-0. Yeah, okay, cool. Thank you guys. Appreciate it. Thanks, Mike. The next question comes from Mayor Shields with KBW. Please go ahead. Hi, hi, it's Dean from Yale.
Speaker Change: So we leave 2024 at target profitability and written basis and for the full year 25 on an earned basis. I think you should think mid ninety's combined ratio for personal lines as being what we think about our long term investment ROE targets Mike.
Dean: Um, thank you for taking my question. My first question is on core commercial reserves, just a follow-up on that, can you guys break down the numbers for the 2.2 reserve releases between workers' common liabilities? Yeah, we don't have all that detail right in front of us, but at year-end, we'll obviously publish those, but they weren't very significant. There was no piece that was particularly large there.
Mike Zaremski: Okay got it.
Speaker Change: That's helpful and.
Mike Zaremski: On the.
Investment income I might give a lot of good.
Mike Zaremski: Disclosure in the prepared remarks, so maybe I missed some of it but.
Mike Zaremski: Can you remind us what your new money rate is.
Believe.
Speaker Change: I don't believe I can see that.
Speaker Change: You have a larger gap between your new money rate and your current fixed maturity yield because I believe you have less you had less floaters that many of your peers. So what is your new money rate I don't know if youre able to give what your assumption is on your on your portfolio yield on our fixed income portfolio within your guidance for <unk>.
Unnamed Speaker: Okay, got it. My second question is on specialty growth; can you please provide more details on the non-renewal of certain programs? Yeah, I will just make a couple of comments and then let Bryan speak very specifically to that. I think, as we said on previous calls, that, you know, I asked Dick and Bryan to accelerate our profit improvement really across the enterprise. And even though we have really outstanding margins in specialty business, like any book of business, there's opportunity for improvement, and there's areas where a little bit of addition by subtraction makes sense. So I have a lot of confidence in our ability to restore our growth, but Bryan can speak to you a little bit more about what we did in 23 and our trajectory for 24. Yeah, sure.
Speaker Change: <unk> four because I think there's maybe some upside to 25 Q4, if im thinking about the dynamics correctly.
So we've been buying fixed income in recent days in recent weeks.
Speaker Change: 5% or so on double a high quality seven year type fixed income. So we're very comfortable there is as you said, there's a very large spread between either the yield in the portfolio on an NII basis, or what's what's expiring on a daily basis and that bodes very well.
Speaker Change: Well for 2000 and for growth.
Speaker Change: And even better candidly for 25%.
Speaker Change: 24 <unk>.
Speaker Change: Growth hindered by the lack of cash flow this past year and I guess, you'll get you get more there's maybe more upside in 25, I guess, we can do the math using the curve just I wanted to just I guess you could give specific guidance I just wanted to make sure we're not missing anything beyond 24.
Given the gap thanks.
Speaker Change: Yes, So 23 was clearly hindered as much as we grew 12% it was hindered by the lack of cash flow because up until this quarter, we hadn't made money for the last four quarters. So.
Jack: And just following what Jack said, really, the activity was really focused on two fairly large casualty-oriented programs in which the margins we just felt were no longer acceptable. So we thought it was best to take action. The impact of net written premium from those programs was most pronounced in Q3 and Q4.
Speaker Change: We would have benefited greatly from that extra cash flow that does have some impact on 2024, but by the time you get to 2025 much much less than we really could come out of it with with a mature level of cash flow.
Bryan J. Salvatore: And so, you know, as we look towards this year, we see that impact really moderating. We don't see it having a significant effect, and we actually see ourselves returning to growth this quarter and frankly delivering upper single-digit growth for 24. Thanks all. And I'll shoot one more question, if I can. My question is on CAP. I know that as part of this, the beginning of this year, there are some severe convective storms.
Speaker Change: Okay got it and maybe I'll sneak one last one in.
Speaker Change: Specialty.
Speaker Change: <unk> had excellent results.
Speaker Change: Over time there.
Speaker Change: I believe you had kind of talked about taking some more conservative loss picks.
Speaker Change: I believe what you're alluding to on a go forward basis that we should be making sure we think about our.
Unnamed Speaker: So how are they looking from what you guys are seeing right now? I'm sorry and you were talking about into Q1, Yeah, so we usually don't disclose, you know, cats intra-quarter. That said, based on what we observed, and I think what the industry has observed, talking to others, that these were a different set of storms that came upon us in the first quarter, not as prolonged in terms of the freeze, and the temperature swings were a little bit less dramatic in terms of intense up and down, you know, particularly against winter storm Elliot.
Speaker Change: The loss ratio embedding some some forward looking conservatism I don't want to give any.
Speaker Change: Further color on pack that comment thanks.
Speaker Change: Even with conservative liability loss picks we're guiding towards the low fifty's loss ratio for specialty over a long term basis, notwithstanding the 2023 being better than that.
Speaker Change: Okay. That's clear thank you.
Speaker Change: The next question comes from Grace Carter with Bank of America. Please go ahead.
Grace Carter: Hi, everyone.
Grace Carter: Good morning, Doug mentioned that the 7% cat load for this year should be a high watermark I'm just curious about kind of the magnitude of the incremental benefit that you're expecting in 2025 just from the.
Unnamed Speaker: And obviously, it didn't happen over a holiday long weekend when many of our customers were caught off guard timing-wise. So even since last year, we believe that our book of business is in a much better position. Many large properties are now equipped with temperature and water sensors, and we have a robust customer notification protocol in place.
Grace Carter: Additional actions that youre not really.
Grace Carter: Fully contemplating in the 7% number and if we should think about the 2025 cat load is being pretty set over a long term basis or if just given the ongoing mix shift efforts that you've mentioned, we should expect kind of a downward drift from those levels as well.
Unnamed Speaker: So I think the way I would, you know, without specifically answering first quarter-oriented cap losses, I can tell you that these were different types of storms, and the work we did, I think, will serve us well in the first quarter. Thank you so much. The next question comes from Mike Zaremsky with BMO. Please go ahead. Hey Craig, good morning.
Speaker Change: Great. So I know you have to model 'twenty five as your customers expect it but we're really not prepared to give a 2025 guidance at this point, having said that I.
Speaker Change: I think the amount of.
Craig: On back to personal lines, you know, obviously good to see the progress. Pricing increases, and it looks like you're pushing the terms and conditions changes fairly successfully. But, you know, when you said you expected to achieve target ROEs in 25, just wanted to make sure you weren't, you didn't mean by like the run rate by the end of the year; you meant the full year. And I guess, you know, you don't, when we think about ROE, should we think about kind of your historical combined ratio over long periods of time, kind of in the, Thank you! what the implied bond ratio is or any, any, if you don't want to give the explicit, just some kind of triangulation that might help.
Speaker Change: Written rate that we've been getting in late 'twenty, three and into 'twenty four and the impact that that earned rate has on 24, and even 25 is meaningful and will be helpful. Beyond loss trend that coupled with all of the terms and conditions changes that we articulated in the press.
Speaker Change: Paired remarks, I think we will have.
Speaker Change: A decent impact on that but it's a little early to a little early for us to declare a sizing.
Speaker Change: Thanks, and I guess back to the specialty book I mean, you've obviously called out that the results were a little bit favorable versus expectations. This year, but I guess taking into account the nonrenewals in the book as well as ongoing strength in pricing.
Speaker Change: How should we think about any potential incremental sort of margin benefits versus original expectations for this year for that book going forward and I guess, that's the tradeoff between the unit growth opportunities in that business.
Unnamed Speaker: So we leave 2024 at target profitability on a written basis, and for the full year 25 on an earned basis, I think you should think about a mid-90s combined ratio for personal lines as being what we think about our long-term investment ROE targets, Mike. Okay, got it. That's helpful, on the Investments Income. Do you remind us what your new money rate is? And I believe, you know, I don't believe I can see that you have a larger gap between your new money rate and your current fixed rate. Maturity, and Yield, because I believe you had fewer voters than many of your peers. So what is your new money rate, and I don't know if you're able to give what your assumption is on your portfolio yield on a fixed income portfolio within your guidance for 24.
Speaker Change: Reaching these these margin expectations that you have.
John Conner Roche: Great. This is Jack.
John Conner Roche: I think anybody that's in this business right now has.
John Conner Roche: Our newfound respect for the changes in loss trends in <unk> and the level of uncertainty that we have to adjust to so the way I think about it and I think the way we are operating.
John Conner Roche: Where we are trying to get double digit growth and better in the businesses that not only are producing good margins, but we have the most confidence in.
Unnamed Speaker: I think there's maybe some upside to 25, too, if I'm thinking about the dynamics correctly. So, we've been buying fixed income in recent days or recent weeks at 5% or so on, you know, double A, high quality, you know, seven-year type fixed income. So we're very comfortable. There's, as you said, a very large spread between either the yield in the portfolio on an NII basis or what's expiring on a daily basis. And that bodes very well for 24 growth and, even better, candidly, for 25. So if it is the 24... Microsoft Office Word Document MSWordDoc Word.
John Conner Roche: And that is accentuated by where we think social inflation and litigation trends are likely to be less pronounced or impactful.
John Conner Roche: On the other end of the spectrum.
John Conner Roche: As Brian articulated with a couple of the programs when we have.
Areas of the portfolio that are not meeting our hurdle rates and pose potentially an outsized exposure to those same trends.
John Conner Roche: Not afraid to take some pretty aggressive action.
So Jeff guided you on some low <unk> loss ratio was overall, which I think.
John Conner Roche: Kind of is where we'd prefer to stay in terms of our guidance.
John Conner Roche: And upper single digit growth for next year.
Unnamed Speaker: Document.8, Yeah, so 23 was clearly hindered as much as we grew 12%. It was hindered by the lack of cash flow because, up until this quarter, we hadn't made money for the last four quarters. So we would have benefited greatly from that extra cash flow. But that does have some impact on 2024. But by the time you get to 2025, much, much less, and we could really come out of it with a mature level of cash flow. Okay. Maybe I'll sneak one last one in.
John Conner Roche: And frankly, if we see the environment.
John Conner Roche: <unk> beneficial will will push harder than that but right now based on our outlook that feels like the right.
John Conner Roche: <unk> guidance.
Speaker Change: Thank you.
Speaker Change: Thank you Chris.
Speaker Change: The next question comes from Paul Newsome with Piper Sandler. Please go ahead.
Paul Newsome: Good morning.
Paul Newsome: For the help.
Paul Newsome: First question I was hoping you could just give us a little bit more details on the.
Paul Newsome: Or even reminders.
Paul Newsome: Swings in the expense ratio.
Unnamed Speaker: You know, specialty, you've had excellent results, you know, over time there. I believe you kind of talked about taking some more conservative loss picks on, I believe, you were alluding to on a go forward basis. So we should be, you know, making sure we think about our loss ratio embedding some forward looking conservatism. I don't know if you want to give any further color to unpack that comment.
Paul Newsome: It's obviously it looks like it's going up.
Paul Newsome: This year versus last but there were some pieces in there that would probably not sustainable.
Paul Newsome: If you could unpack that a little bit just to give us a better understanding of whats.
Paul Newsome: What is the return to normal.
Paul Newsome: Even potential new investments.
Speaker Change: Thank you Paul So 35% was the actual 2023 expense ratio.
Paul Newsome: 38% was our original guidance for 2023.
Unnamed Speaker: Even with conservative liability loss picks, we're guiding toward a low 50s loss ratio for specialty over a long-term basis, notwithstanding 2023 being better than that. That's clear. Thank you. The next question comes from Grace Carter with Bank of America. Please go ahead.
Paul Newsome: And if you normalize for the.
Paul Newsome: The agent reduced agent comp and to some degree reduced employee variable compensation.
Paul Newsome: Sure essentially cats during the year, you would get right back to the 38%.
Paul Newsome: Going forward, we've guided to 37% and this is the first time that we've guided to only a 10 point reduction. So I think what we're doing is asking for your patience for this one year to only go down 10 points.
Grace Carter: Hi, everyone. I think I've mentioned that the 7% cat load for this year should be a high water mark. I'm just curious about the kind of the incremental benefit that you're expecting in 2025 just from the additional actions that you're not really fully contemplating in this 7% number.
Paul Newsome: 10 basis points and what we're really trying to do is we've had some expense pressures.
Unnamed Speaker: And whether we should think about the 2025 cat load as being pretty set over a long-term basis, or if just given the ongoing mixed shift efforts that you've mentioned, you should expect kind of a downward drift from those levels as well. Grace, I know you have to model 25 as your customers expect it, but we're really not prepared to give 2025 guidance at this point.
Paul Newsome: Largely around and including doing everything we can on margin recovery. So we're focused on the loss ratio, which is hundreds of basis points versus the 10 basis points and we're focused overall on the combined ratio.
Great that's great. Thank you.
Paul Newsome: And.
Speaker Change: Separate question, maybe a few additional thoughts on the Pip growth.
Unnamed Speaker: Having said that, I think the amount of written rate that we've been getting in late 23 and into 24 and the impact that that earned rate has on 24 and even 25 is meaningful and will be helpful beyond the loss trend. That coupled with all of the terms and conditions changes that we articulated in the prepared remarks, I think we'll have a decent impact on that, but it's a little early to a little early for us to declare a size. Thanks.
Speaker Change: <unk> shrinkage.
Speaker Change: And personalize it seems to be the thing that I'm getting the most questions of this morning from investors is if.
Tim: This is Tim.
Tim: <unk>.
Tim: Logical from what you're trying to do but I guess, there's some.
Tim: Turns out there.
Tim: <unk>.
Tim: Never stops.
Tim: So any thoughts on sort of when do you think that might.
Tim: Just sort of how the waterfall would work through.
Tim: Policy in force.
Tim: In changes on the personal line side as you work your way through the recovery.
Tim: Yes, Paul this is Jack I really appreciate that question, because we want to be able to express kind of where we are in that journey.
Jack: And I guess back to the specialty book, I mean, I've obviously called out that the results are a little bit favorable versus expectations this year, but I guess taking into account the non-renewals in the book as well as ongoing strength in pricing, how should we think about any potential incremental sort of margin benefits versus original expectations for this year for that book going forward? And I guess just the tradeoff between the unit growth opportunities in that business versus reaching these margin expectations that you have. Hey, Grace, this is Jack.
John Conner Roche: First off I would start off by saying that we are really right on our targeted outcomes that we put in front of ourselves when we when we realized that we needed to show tremendous agility in terms of adjusting our pricing looking at our cat exposures more assertively and so.
John Conner Roche: I couldnt be happier with where we are coming out of the year in terms of adjusting our.
John Conner Roche: Our growth slowing down new business, particularly where we have the most concentrations and allowing the.
Jack: You know, I think anybody that's in this business right now has a newfound respect for the changes and lost trends and the level of uncertainty that we have to adjust to. So the way I think about it, and I think the way we are operating, is where we are trying to get double-digit growth and better in the businesses that not only are producing good margins but that we have the most confidence in, and that is accentuated by where we think social inflation and litigation trends are likely to be least pronounced or impactful. On the other end of the spectrum, as Bryan articulated with a couple of the programs, when we have, you know, areas of the portfolio that are not meeting our hurdle rate and pose potentially an outsized exposure to those same trends, we're not afraid to take some pretty aggressive action. So, Jeff guided you on some low 50s loss ratios overall, which I think kind of is where we'd prefer to stay in terms of our guidance and upper single digit growth for next year. And frankly, if we see the environment prove beneficial, we'll push harder than that.
John Conner Roche: Earned pricing to catch up and for us to start initiating our deductible approaches.
John Conner Roche: The renewal book, So I'll turn it over to <expletive> but I have a lot of confidence that the personal lines team does not only performing well in this very dynamic environment, but has all the right levers and controls in place to optimize in 'twenty four.
Thanks, Jack So just maybe a couple of other comments and then I'll get to your question of sort of what's the future look like in terms of.
John Conner Roche: Shrinkage.
John Conner Roche: <unk>.
Speaker Change: Yes, we couldnt be happier with the way.
Speaker Change: Our results came through in the fourth quarter based on what we had architected as our plan specifically shrinking in the Midwest three times as much as the rest of the country that was a really important outcome for us, but also keeping profitable business. We have sophisticated segmentation. So keeping the tenured business the customers that have been with us.
Speaker Change: Longer.
Speaker Change: Versus those that just came on the books. Most recently, so very kind of complex set of.
Speaker Change: Kpis.
Speaker Change: Tradeoffs that we make we put guardrails in place to your point, we wanted to make sure we continue to achieve those.
Speaker Change: Targeted outcomes.
Speaker Change: And we're already sort of tweaking the dial so to speak.
Speaker Change: Turning either new business guidelines.
Speaker Change: Off that we might have turned on adjusting new business rates adjusting renewal rates to accomplish the kind of <unk>.
Speaker Change: In the right places there isn't a single answer there is a very nuanced response that we're seeing from competitors. We're all using the same levers but to different degrees.
Unnamed Speaker: But right now, based on our outlook, that feels like the right guidance. Thank you. The next question comes from Paul Newsome with Piper Sandler. Please go ahead.
Speaker Change: With either rate or terms and conditions. So.
Speaker Change: I'm really happy with the outcomes, we're going to watch it carefully, but we will we will see.
Paul Newsome: Good morning. Thanks for the help, as always. First question, I was hoping you could just give us a little bit more details on the, or even reminders on the swings in the expense ratio. You know, it obviously looks like it's going up this year versus last, but there were some pieces in there that were probably not sustainable. If you could unpack that a little bit, just to give us a better understanding of what's a return to normal and what is even potentially new investment. Thank you, Paul. So 30.5% was the actual 2023 expense ratio, while 30.8% was our original guidance for 2023. And if you normalize for the reduced agent comp and, to some degree, reduced employee variable compensation for, essentially, cats during the year, you'd get right back to 30.8%.
Speaker Change: Shrinkage throughout 2024, as we execute this plan.
Speaker Change: Okay. Thank you I appreciate the help as always.
Speaker Change: Thanks, Paul.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Oksana Luka <unk> for any closing remarks.
Oksana Lukasheva: Thank you and appreciate your participation today, we're looking forward to talking to you next quarter.
Oksana Lukasheva: Okay.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Unnamed Speaker: So, going forward, we've guided to 30.7%, and this is the first time that we've guided to only a 10-point reduction. So, I think what we're doing is asking for your patience for this one year to only go down 10 points. And what we're really trying to do is we've had some expense pressures, largely around and including doing everything we can on margin recovery. So we're focused on the loss ratio, which is hundreds of basis points versus ten basis points, and we're focused overall on the combined ratio.
Unnamed Speaker: Great, that's great. Thank you. And separate question, maybe a few additional thoughts on the PIF growth, or lack thereof, the shrinkage, and personalization. It seems to be the thing that I'm getting the most questions about this morning from investors is if, You know, this is to me, it seems logical from what you're trying to do. But I guess there's some concerns out there that it never stops. So any thoughts on sort of when you think that might just sort of how the waterfall would work for policy enforcement? It changes on the personalized side as you work your way through recovery. Yeah, Paul, this is Jack.
Jack: I really appreciate that question because we want to be able to express kind of where we are on that journey. And first off, I would start off by saying that we are really right on the targeted outcomes that we put in front of ourselves when we realized that we needed to show tremendous agility in terms of adjusting our pricing, and looking at our CAD exposures more assertively. And so I couldn't be happier with where we are coming out of the year in terms of adjusting, our growth, slowing down new business, particularly where we have the most concentrations, and allowing the earned pricing to catch up and for us to start initiating our deductible approaches into the renewal book. So I'll turn it over to Dick, but I have a lot of confidence that the Personal Alliance team is not only performing well in this very dynamic environment but Yeah, great.
Dick: Thanks, Jack. So just maybe a couple other comments, and then I'll get to your question of just sort of what the future looks like in terms of PIF shrinkage. So yeah, we couldn't be happier with the way our results came through in the fourth quarter, based on what we had architected as our plan, specifically shrinking in the Midwest three times as much as the rest of the country. That was a really important outcome for us. But also keeping profitable business. We have sophisticated segmentation, so keeping the tenured business, the customers that have been with us longer versus those that just came on the books most recently. So, very kind of a complex set of KPIs and trade-offs that we make. We put guardrails in place, to your point.
Dick: We want to make sure we continue to achieve those targeted outcomes, and we're already sort of tweaking the dial, so to speak, and turning either new business guidelines off that we might have turned on, adjusting new business rates, and adjusting renewal rates to accomplish the kind of growth in the right places. There isn't a single answer. There is a very nuanced response that we're seeing from competitors. We're all using the same levers, but to different degrees, with either rates or terms and conditions.
Dick: So I'm really happy with the outcomes. We're going to watch it carefully, but we will see PIP shrinkage throughout 2024 as we execute this plan. Thank you. I appreciate the help, as always.
Oksana Lukasheva: Thanks, Paul. This concludes our question and answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks. Thank you and appreciate your participation today. We're looking forward to talking to you next quarter. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.