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Text: Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios excluding catastrophes among others.
I will begin by discussing our third quarter financial highlights in the context of the current business and economic environment.
We are pleased with our third quarter financial performance, especially given it was a particularly active catastrophe quarter across the industry.
We reported earnings per share of $2.46 and an operating return on equity of 13.8% for the quarter.
Our results reflect strong execution on the strategic tenants that drive our business forward.
Our company and earnings stream are well-diversified and position us well to withstand environmental challenges, including weather volatility and the ups and downs of the economy and market.
We remain steadfastly focused on the hallmarks of our company.
Our unique distribution strategy and approach, broad-based profitability, disciplined underwriting, effective expense management and a thoughtful capital allocation strategy that includes returning excess capital to our shareholders.
Turning to our third quarter highlights, first, we are very pleased with the trajectory of our growth and the consistent signs of building momentum in our top-line.
We achieved 2.1% growth in the third quarter, which represents a significant and expected recovery from the 2.3% premium decline we reported in the second quarter normalized for one-time premium returns.
Our leading production indicators are quickly improving and we are encouraged by agency support and commitments, which once again validate the strength of our differentiated strategy and our broad and relevant product offering.
Looking ahead, we are confident in our ability to drive growth across our portfolio and continue to build on the strong pre-pandemic momentum we had established.
Second, as noted in our pre-release on October 13th, our cat losses were slightly elevated in the quarter as a result of tropical storm systems, in particular, Hurricane Isaias and to a lesser extent, wildfires in California, and Oregon.
Our ability to mitigate the impact of weather events in the quarter is a reflection of the concerted, proactive efforts we have made over the past decade to prudently refine our mix of business.
To this end, we have expanded our specialty capabilities and struck the right balance between property and liability risks, while continuing to diligently manage our geographic concentrations and proactively adjusting our business mix.
We counted the increasing frequency of weather losses, we reduced our exposures in vulnerable regions of the Southeast, Gulf Coast and West Coast, while reducing micro-concentrations and enhancing our reinsurance protections.
These and other actions have enabled us to address potentially increasing weather-related property risks as we grow.
Going forward, we are confident these actions along with our increasing use of advanced tools and analytics will position us to continue to deliver consistently strong results across our business.
Third, we continue to benefit from lower claim frequency in the quarter, particularly in personal auto.
While frequency declined year-over-year, it is beginning to trend toward pre-pandemic levels as the economy reopens.
At the same time, we also experienced several large property losses in commercial multi-peril, which occurred in our book of business from time-to-time.
After carefully reviewing the causes of loss and related circumstances, we found no clear correlation between the losses themselves or the prevailing economic environment.
Given our strong underwriting guidelines and risk management practices, we have confidence in our ability to manage such risks while continuing to drive profitability through rate increases and prudent mix management.
Lastly, the third quarter was a very active one for us from a capital management perspective.
As announced last night, we entered into a $100 million accelerated share repurchase agreement, reflecting the strong excess capital we have generated so far this year from earnings.
This decision further demonstrates our commitment to deliver value to our shareholders and the confidence we have in our strong prospects moving forward.
Jeff will provide more details on these items shortly.
Moving on to review our business highlights, starting with Personal Lines.
We delivered net written premium growth of 2.3% in the third quarter compared to a decline of 5.5% in the second quarter or flat excluding premium return.
New business submissions in the third quarter were consistent with the third quarter of last year across most territories.
Contributions from renewal premiums continued to fuel growth, although retention was somewhat impacted from the backlog created by the lifting of cancellation and non-renewal moratoriums over the summer.
Our disciplined account strategy enabled us to effectively manage our business in a highly competitive environment and to drive profitability.
Our performance reflects a focus on striking the right balance between rate and retention, while achieving price increases where we need them the most.
Overall, Personal Lines rate increases of 4.7% in the quarter were fairly consistent with prior trends and we are satisfied with the underlying retention when adjusted for the temporary increase in cancellations and non-renewals, following the temporary second quarter increases.
Our Personal Lines year-to-date retention of 82% is a more indicative measure of our persistency, and should move back to the mid-80s over time.
Additionally, we are encouraged by the continued success of our Prestige offering, which is adding 600 new accounts each month.
Book consolidation activity also is continuing at an accelerated pace, with $71 million signed through the first nine months of the year, exceeding our expectations for the full year.
This level of activity further validates our unique approach to cultivating deep partnerships across the independent agency channel.
We continue to broaden and enhance those relationships by expanding our geographic reach and introducing product capabilities to address unmet customer needs across our footprint.
From a strategic and operational standpoint, we made significant progress during the quarter.
Earlier this week, we announced the expansion of our Personal Lines business in Maryland, further diversifying our book of business and expanding our Personal Lines presence to 20 states.
We also are expanding our product capabilities in Personal Lines.
We recently launched a new suite of products, home business solutions to cover home-based businesses.
Entrepreneurs throughout the country are starting home-based businesses in record numbers, yet, nearly 60% of these businesses lack adequate insurance.
To address that gap, our product provides ala carte options that could be bundled with the existing homeowner policies, including our Prestige offering.
As importantly, our Personal Lines team continues to execute exceptionally well in a new regulatory environment in Michigan, following personal auto reform, which went into effect in July.
As a top insurer and an industry thought leader in Michigan with 12% of our overall premiums in Michigan personal auto, we advocated for auto reform for more than a decade and it was essential that we excel in our implementation.
The reform provides Michigan consumers with the ability to save money on premiums in exchange for a reduced personal injury protection limit.
Cost control measures such as fee schedules and utilization controls should substantially reduce the severity of claims and increase the efficiency of the system once implemented mid-next year.
At the beginning of last year, we laid the foundation for the transition with a proactive plan that included operational, educational and self-service tools for agents and consumers.
Our third quarter Michigan auto premium grew approximately 4%, while average net premium per customer for us remain relatively consistent.
In summary, we remain confident that we will maintain our underwriting profitability in Michigan, while we gain share of the high-quality risks in the state outperforming the market over time.
Overall, we are very pleased with our Personal Lines performance and how we are navigating the market.
Our predominantly full account and more complex customer profile position us well in the competitive environment.
We are closely watching the competitiveness of our products and adjusting our rates to strike the right balance between growth and profit.
We are keeping an eye on frequency in anticipation of it returning to more normal levels.
Our unique agency inside tool coupled with comparative rate monitoring provides great transparency within our distribution and allows us to navigate the market successfully.
Turning to Commercial Lines.
We are very pleased with the growth momentum in our business.
We delivered net written premium growth of 1.9%, up from a decline of 4.6% in the second quarter.
We are encouraged by the accelerated pace in most production metrics, including renewal premiums, which are trending higher than historical averages and new business which has rebounded from a low point in the second quarter, but still remain subdued compared to pre-pandemic levels.
In Small Commercial, we are pleased with policy exposure levels, which turned positive for the quarter.
Although still slightly negative, middle-market exposures have come back significantly from the second quarter.
Notably, the growth momentum in our specialty businesses has almost returned to pre-pandemic levels.
We have rebounded to our 2020 direct written premium plan on a year-to-date basis with robust new business and renewals.
Our management liability, healthcare, E&S and specialty property businesses have posted growth in the double-digits in the quarter, while Specialty overall growth was 5%.
The success of our Specialty business goes back to our value proposition of providing a broad set of relevant and distinctive products and capabilities that are delivered to customers exclusively through high-quality independent agents.
Rate continues to accelerate in our core Commercial Lines book, now standing at 5.7% while Specialty rates are meaningfully higher led by management and professional liability, healthcare and specialty property.
In Core Commercial, we are seeing significant rate firming in Property Lines, while we continue to push double-digit rate in commercial auto.
Over the last several quarters, we and others have commented on the need for rate across the commercial insurance space.
The cumulative impact of rising social inflation, severe weather and continued lower interest rates should help continue to push commercial rates up in the near-term.
While our social inflation was less obvious during the height of the pandemic with the backlog of court dockets and overall economic distress, we fully expect it to reemerge and perhaps even exceed previous levels.
On the basis of focusing on these long-term loss trends, we believe that the rate we are achieving currently is meaningfully in excess of loss trend.
We are very optimistic that Commercial Lines upward rate trajectory will continue.
On the technology and innovation front, our newer product launches continue to expand with E&S growth accelerating and growing double digits with our best agents in our target markets.
We continue to broadly leverage our core commercial infrastructure and relationships to drive Specialty growth.
As a logical and important step in this evolution, we've recently expanded our TAP sales online quote and issuance capability to include management liability and miscellaneous professional liability products, enabling our agent partners to easily quote, rate, buy and issue stand-alone Small Business Specialty policies.
The investments we are making in technology and innovation leverage our broad account base focus and drive meaningful efficiency solutions.
Most importantly, with all of our businesses, we continue to execute on our differentiated agency centric strategy enabling our future growth.
We remain incredibly committed to staying connected with our distribution partners.
To that end, this quarter, for example, we conducted over 50 virtual CIAB executive meetings with many of the top 100 agents around the country, during which we discussed how we can enhance our capabilities to help all of us grow and better serve our customers.
In addition, we are in the process of holding virtual roadshows with our agents in our key markets across the country.
To-date, members of our senior management team have connected with over 500 of our agents, these engagements have been extremely fruitful.
In response to these distribution touchpoints, our efforts to enhance our digital marketing capabilities are front and center.
As is our next generation of our proprietary analytics tool, The Agency Insight.
We pride ourselves on having our finger on the pulse of the market and on bringing contemporary capabilities forward to meet the needs of our agents.
Our agents are responding very favorably and we expect these efforts will contribute to our accelerated growth trajectory going forward.
I am very proud of our team and our outstanding performance in the face of so much adversity this year.
I am excited about the opportunities we have as we build on the solid foundation we have established to drive our company forward.
Over the next several quarters, we will continue to invest heavily in digital capabilities, finalize new product launches and advance underwriting capabilities across the portfolio as we position our firm for long-term success.
We are better positioned today than ever to take our company to the next level, delivering for all of our stakeholders and achieving our goal to be the premier property and casualty franchise in the independent agency channel.
I want to reiterate Jack's comments about the strength of our book of business, which is reflected in our terrific bottom-line performance.
For the third quarter, we reported net income of $118.9 million, or $3.13 per fully diluted share compared with net income of $118.9 million or $2.96 per fully diluted share for the same period last year.
After-tax operating income was $93.5 million or $2.46 per diluted share compared with $93.0 million or $2.31 per diluted share in the prior-year quarter.
We recorded an all-in combined ratio of 94.2% compared with 94.4% a year earlier.
Our ex-cat combined ratio was 88.4%, an excellent result compared to the 91.3% in the prior-year quarter.
The improvement reflects the continued benefit of favorable frequency primarily in personal auto.
While frequency continues to be lower across several lines in our portfolio, we are seeing signs that it's returning to more normal levels as economic activity resumes.
At the same time, we continue to maintain a prudent reserving approach in longer-tail liability lines, given the continued uncertainty and the potential impact of increasing social inflation, as well as the potential for increased claim severity.
We believe our balance sheet has never been in better shape.
Catastrophe losses at $65.9 million, or 5.8% of net earned premiums came in slightly above our expectation for the quarter, but we were much more benign than the industry experience.
Our performance is a testament to proactive actions taken over the past decade to better manage our exposures by line of business and geography to maintain our disciplined approach to underwriting and to diversify our footprint.
In addition, in the quarter, we benefited from favorable prior year cat development of $9.6 million, which stems from a variety of events from recent accident years as well as to a much lesser extent, a small remaining favorable settlement from the 2018 wildfires.
Turning to our ex-cat prior-year development, we reported net favorable development of $2.6 million with strong favorability in workers' compensation in other Commercial Lines, partially offset by additions in home, commercial auto and CMP.
Commercial auto continues to be a focus area for us and a concern for the industry.
Over the past couple of years, we have consistently achieved rate increases around 10% and executed on a variety of underwriting actions to better position our portfolio.
We will continue to stay firm on rate to overcome the effects of continuing social inflation in this line.
Our CMP business experienced unusual adverse development related to three large losses from recent accident years.
Coincidently, this quarter, we incurred about $6.5 million of favorable development from a few large CMP property claims that stemmed from prior-year catastrophe events.
There is a certain level of randomness we expect from property losses in our portfolio and this quarter results are a good example of this.
I'm pleased to report that our loss activity related to the $19 million in COVID reserves we held at the end of the second quarter remains limited.
We continue to hold these reserves in the event they are needed to pay COVID-19 related claims, including those related to sub-limited business interruption endorsements and workers' comp resumption orders.
We continue to monitor the ongoing legislated and regulatory environment very closely.
We believe recent court activity and recent pronouncements in the U.S. have been favorable and supportive of the sanctity of contracts.
Turning now to expenses.
Our expenses ticked up 10 basis points in the quarter due to the timing of certain agent and employee incentive costs.
Year-to-date, our expense ratio is consistent with our original budget of 31.5% and we have a clear line of sight to the expected 10 basis point expense ratio improvement for full-year 2020.
In a year of subdued growth, our deliberate business investment planning and expense discipline is serving us extremely well.
We expect to continue delivering a 20 basis point improvement in the expense ratio going forward.
Additionally, we recorded a non-ratio bad debt expense of approximately $3.6 million, which continues to gradually decline from the highs, we recorded in the first and second quarters.
Consolidated net premiums written grew 2.1% in the third quarter, as we continue to see increasing momentum from the low point from the second quarter.
Our trajectory was fueled by strong renewals and increasingly robust new business and agency book consolidation activity, all of this with a backdrop of continued lower economic activity.
We have confidence that this momentum will continue over the coming quarters.
Moving to a review of underwriting performance by segment.
In Personal Lines, we delivered a combined ratio, excluding catastrophes of 83.5%, representing an improvement of 6.9 points from the prior-year quarter.
This improvement was almost entirely driven by the temporary frequency benefit in personal auto.
While such frequency continues to be lower, it is trending back toward historical averages.
We continue to be especially prudent in reserving for potential liability exposures from delayed reporting, legal costs or social inflation.
We are also monitoring our book carefully, remaining vigilant for increased severity from accidents at higher speeds.
Homeowners current accident year loss ratio, excluding cats was 48.2%, essentially flat from the prior-year period.
Turning to Commercial Lines, we reported a combined ratio, excluding catastrophes of 91.8%, relatively consistent with the prior-year quarter.
Commercial Lines ex-cat current accident year loss ratio was also in line with prior-year.
The temporary frequency benefit in certain property coverages was offset by elevated large property loss activity in CMP.
CMP, current accident year loss ratio, ex-cat was 59.1%, up 2.7 points from the prior-year quarter, driven by several large property losses.
We reviewed our underwriting and causes of loss and did not find any correlation to the current challenging environment or underwriting issues.
These types of losses occur from time-to-time, we feel comfortable with our overall pricing as we continue to achieve rate above long-term loss trends in this line, including an increase in rate in the quarter.
Commercial auto ex-cat loss ratio improved 3.2 points to 64.4%, reflecting temporary lower frequency in physical damage claims, although, not to the extent we reported in personal auto.
Given the trends we are seeing in prior accident years, we are particularly focused on ensuring that we have a more conservative approach for liability effects.
Workers' comp loss ratio was flat at 61.2% with some diminishing, but still favorable frequency of losses in the quarter.
While underlying trends continue to be favorable, we remain prudent in our reserve decisions.
Other commercial lines improved 1.4 percentage points to 54.1% due to slightly lower losses in short-tail property lines.
Overall, we are very pleased with our underwriting performance and improved growth dynamics in the third quarter.
Now moving on to investments.
Net investment income of $67.6 million was down slightly from the same period of last year as we continued to experience pressure from lower new money yields.
Our partnerships portfolio performed well, contributing $6 million to NII in the quarter.
Barring any unusual market volatility moving forward, we expect partnership income to be consistent with pre-pandemic levels.
With that said, we will continue to see some impact of the low-interest rate environment earn in increasingly over time.
Cash and invested assets were $9 billion at the end of the third quarter, with fixed income securities and cash representing 86% of the total.
Our fixed maturity investment portfolio has a duration of 4.7 years and is 96% investment grade.
The well-laddered and diversified portfolio remains high quality with a weighted average of A plus.
Turning now to our equity and capital position.
We delivered a strong operating return on equity of 13.8% in the quarter and 12.1% on a year-to-date basis, despite elevated cash, particularly in the second quarter.
Our book value per share of $84.32 increased 4% during the quarter, driven by operating income and both realized and unrealized gains in our investment portfolio, partially offset by the payment of our regular quarterly dividend.
From a capital management perspective, this was a very active period.
One of the strategic strengths Jack talked about earlier, is our capital allocation strategy.
This year has highlighted the quality of our earnings as well as our ability to consistently generate excess capital.
With this in mind and considering current market levels, we have entered into a $100 million accelerated share repurchase agreement.
We expect to receive 80% of the total shares on October 29th and anticipate receiving the final delivery of the remaining shares no later than early February 2021.
After the final delivery of all shares under the ASR agreement, we will have repurchased approximately 2.2 million shares or 6% of the outstanding shares from the beginning of 2020.
We will have approximately $122 million remaining under the existing share repurchase authorization.
In August, we issued a 10-year $300 million senior unsecured note at a very attractive annual coupon of 2.5%.
We used a portion of the proceeds to retire $175 million of subordinate debentures with a 6.35% coupon, improving our capital cost and overall capital structure.
The strong investor support we received for this issuance underscores the confidence they have in our strategy and future growth prospects.
As we move into 2021, this transaction further enhances our financial flexibility and will support organic growth opportunities across our business, as well as other capital uses.
We are confident in our earnings trajectory, growth prospects and earnings resilience going forward and we remain fully committed to our stated return on equity targets.
We generate ample capital to support future growth and believe that the best use of excess capital is often to return it to shareholders, especially at such valuations.
We take seriously our mandate to serve as stewards of our investors' capital and we're continuing to demonstrate that commitment, not only with words, but with actions that we believe are in the best interest of our shareholders.
Turning to guidance, we expect full-year 2020 net premiums written growth to be slightly positive compared to 2019.
We are increasing our full-year 2020 net investment income target to $260 million to reflect performance in the third quarter.
Our fourth quarter ex-cat combined ratio expectation has improved to around 91%.
As I mentioned earlier, we are maintaining our expectation of a 10 basis point expense ratio improvement in 2020 from full-year 2019 and then returning to 20 basis points improvement in 2021 forward.
We have a fourth quarter cat load of 3.8% of net premiums earned and assume an effective tax rate to roughly equal the statutory rate of 21%.
Given where we are in our corporate wide financial planning process, it is still too early to comment on most guidance items related to 2021, but we are confident in the improving top-line trajectory and our profitability moving forward, despite the many challenges and headwinds we have faced this year.
In closing, we are pleased with our performance in the third quarter.
While the market always presents challenges, our team continues to successfully deliver on our strategic imperatives, remaining agile and opportunistic as we advance our goals and those of our agents and customers.
We enter the whole stretch of 2020 in a strong financial position with a unique and proven strategy, a strong and committed team more focused than ever on the opportunities that will enable us to continue growing profitability in the year ahead.

user
compname reports third quarter net income and operating income of $3.13 and $2.46 per diluted share, respectively.
combined ratio of 94.2%.
combined ratio, excluding catastrophes, of 88.4%; enters into a $100 million accelerated share repurchase agreem.
q3 operating earnings per share $2.46.
q3 earnings per share $3.13.
entered into a $100 million accelerated share repurchase agreement.

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