Q1 2024 Earnings Summary
- Underwriting Excellence: The specialty P&C segment delivered an underlying combined ratio of 93.6%, well below the target of 96%, demonstrating strong profit margins and efficient underwriting performance.
- Robust New Business Expansion: New business applications surged to over 2.6x the fourth quarter’s volume, with April’s volume matching the full first-quarter level and a second-quarter run rate anticipated to reach about 3x Q1 volumes. This momentum supports the expectation of stabilizing policies in force by midyear.
- Proactive Pricing Discipline: The management is actively filing for rate increases as needed, aligning earned rate with loss trends and mitigating potential new business penalties. Their methodical approach in rate actions helps maintain sustainable margins while expanding the business.
- Underwriting Margin Pressure from New Business Expansion: The management acknowledged that the benefit of reduced new business was around 3–4 points improvement in the combined ratio, suggesting that as they re‐expand new business, a roughly similar penalty could reverse those gains, potentially pressuring overall profitability.
- Risks from Elevated Severity Trends: Executives noted that severities are increasing on an annualized basis in the high single digits, which, if persistent, could adversely impact underwriting margins and further stress profitability.
- Operational and Seasonality Challenges in Policy Stabilization: The transition to increased new business is occurring amid seasonality and geographic “lumpiness” in production, which could lead to volatility in stabilizing policies in force and create execution risks as market dynamics adjust.
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Rate Action
Q: Rate points and upcoming filings?
A: Management explained they earned 9 points this quarter with 15 points remaining to earn across the year—about half in Q2—with planned filings to keep margins aligned. -
New Business PIF
Q: How do new apps affect PIF?
A: Although new business apps surged—Q1 apps roughly doubled Q4 and Q2 expected to be 3x Q1—they expect seasonal factors to balance elevated production with midyear PIF stabilization. -
New Biz Penalty
Q: Any issues from new business penalties?
A: Management reported no negative surprises; the trade-off is about a 3–4 point hit on the combined ratio, which is fully accounted for in their profit planning. -
Runoff/Alt Inv
Q: How are runoff and alternative investments?
A: The $130M runoff preferred business is on track with $85M remaining, while the alternative investment portfolio’s modest decline is offset by a stable core of about $98–$99M per quarter. -
Geo Diversification
Q: Will geography mix change?
A: They expect a gradual geographic rebalancing, projecting California to represent about 30–35% of the portfolio as growth in other states accelerates to diversify the mix. -
Reciprocals
Q: Can reciprocals boost business growth?
A: Management is cautiously adding new business to the reciprocal, preferring a gradual approach rather than an aggressive acceleration, to avoid undue risks. -
Retention
Q: Why is retention stable?
A: They noted retention remains steady due to a balanced mix of short- and long-term policies and favorable hard-market dynamics, consistent with long-run expectations. -
Severity/Pricing
Q: How are severities affecting pricing?
A: Management observed annualized severity increases in the high single digits and indicated that while their pricing targets hover near 96%, adjustments will be made as operational needs dictate.
Research analysts covering KEMPER.