Earnings Call: Q1 2020

May 7, 2020

Good afternoon, ladies and gentlemen, and welcome to Kemper's First Quarter twenty twenty Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, the conference is being recorded for replay purposes. I would now like to introduce your host for today's call, Christine Patrick, Kemper's Vice President of Investor Relations. Mrs. Patrick, you may begin. Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our first quarter twenty twenty results. This afternoon, you'll hear from Joe Locker, Kemper's President and Chief Executive Officer Jim McKinney, Kemper's Executive Vice President and Chief Financial Officer and Duane Sanders, Kemper's Executive Vice President and the Property and Casualty Division President. We'll make a few opening remarks to provide context around our first quarter results and then open up the call for a question and answer session. During the interactive portion of the call, our presenters will be joined by John Bischelli, Kemper's Executive Vice President and Chief Investment Officer and Eric Sternberg, Kemper's Executive Vice President and Life and Health Division President. After the market closed this afternoon, we issued our earnings release and published our first quarter earnings presentation, financial supplement and Form 10 Q. You can find these documents on the Investors section of our website at kemper.com. Our discussion today may contain forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook and its future results of operations and financial condition. These statements may also include the impacts related to the COVID-nineteen pandemic. Our actual future results and financial condition may differ materially from these statements. For information on potential risks associated with relying on forward looking statements, please refer to our 2019 Form 10 ks, our first quarter twenty twenty Form 10 Q as well as our first quarter earnings release. This afternoon's discussion also includes non GAAP financial measures we believe are meaningful to investors. One such measure I would like to highlight again is as adjusted for acquisition. It is clearly important understand our reported results, including the impact the Infinity acquisition has to Kemper overall. However, investors have also expressed an interest in understanding the underlying organic performance of the combined businesses. Since our as reported financials don't include Infinity's historical information prior to the closing of the acquisition and our current results include the impact of purchase accounting, the underlying trends are not easily visible. In an effort to provide insight into the underlying performance of the combined businesses, we also display our financials as adjusted for acquisition. This view removes the impact of purchase accounting and includes historical Infinity information for periods prior to the closing of the acquisition to more easily provide a meaningful year over year comparison. In our financial supplement, presentation and earnings release, we have defined and reconciled all of the non GAAP financial measures to GAAP, where required in accordance with SEC rules. You can find each of these documents on the Investors section of our website at kemper.com. All comparative references will be made to the corresponding 2019 period unless otherwise stated. Finally, I would like to note that due to the social distancing practices that Kemper enacted in response to the COVID nineteen crisis, our call participants are not in the same location. This may cause the question and answer section of our call to feel disjointed at times. We apologize in advance and ask for understanding from our listeners. I will now turn the call over to Joe. Thank you, Christine. Good afternoon, everyone, and thanks for joining us today. Before beginning our usual discussion, let's take a few minutes to recognize these unusual times. I'd first like to acknowledge the human toll this pandemic is taking, and express our thoughts and compassion for the individuals and families that have been impacted, whether through illness, death, unemployment, or those working on the front lines. As we continue to move through the dynamic circumstances of the COVID-nineteen crisis, I want to acknowledge the efforts of our 9,100 employees. I'm very proud of the way our team has risen to the challenge and focused on supporting the well-being of all of our stakeholders. On Page three, I'd like to highlight a few of the ways Kemper is responding to the current situation. Our first priority continues to be the health and safety of our customers, employees and partners, as well as their families. In the early phase of this crisis, the focus is on doing our part to help flatten the curve and protect the healthcare systems availability for those who might need it. We acted quickly to engage in social distancing practices. We have nearly 95% of our employees working remotely, while continuing to meet the needs of our customers at normal service levels. For our employees in the office, we're maintaining appropriate social distancing to keep everyone safe and healthy. We announced a 15% credit for our auto policyholders towards their April and May premiums, and we're extending grace periods for any of our customers experiencing financial strain. We've instituted a commission stabilization program for our Kemper Life employee agents who were forced to temporarily suspend new business sales due to the crisis. We're also providing assistance to enable our communities to meet the urgent needs created by the COVID nineteen crisis. The company recently announced a commitment of $1,000,000 to support organizations focused on critical issues, including food insecurity and supporting frontline medical personnel. These types of organizations are doing extraordinary work. We're proud to support our customers, employees, and communities. At the same time, we maintain a strong focus on effective execution and continue to grow our business to meet the needs of all our stakeholders. Now let's turn to Page five to discuss our quarterly results. This was a unique quarter with January and February continuing the solid top line growth we experienced throughout 2019 before the impacts of the COVID-nineteen crisis started to appear in March. Overall, earned premiums grew 9% in the first quarter, in line with growth rates we experienced in 2019. First quarter net income was $64,000,000 or $0.95 per share. Adjusted consolidated net operating earnings were $163,000,000 or 2.43 per share. We generated a rolling fourth quarter return on tangible equity, excluding unrealized gains of 20%. Our ability to generate that level of return through this environment speaks to the strength and performance of our model through the ups and downs of business cycle. Our Specialty business saw top line growth of 13%, driven by broad growth across all geographies, continued geographic expansion and enhanced new business opportunities in Florida resulting from the exit of a competitor. We were able to maintain solid top line growth at attractive margins with an underlying as adjusted combined ratio of 93%. Operating results from our Preferred Insurance segment improved this quarter as underwriting actions and the repositioning of our book continued in earnest. Given the modest size of the business and efforts to enhance and refine products we offer, we continue to expect a higher level of volatility in quarterly results. That said, we are pleased with the progress reflected in this quarter's financials. In our Life and Health segment, we welcomed Eric Sternberg as the division's new President. Eric's breadth and depth of experience within Life and Health will help us to continue to thoughtfully grow these businesses. From a financial standpoint, given the backdrop of the current environment, the segment delivered another quarter of solid earnings and continues to provide diversifying cash flows to the organization. Now let's turn to Kemper's financial strength. Over the past few years, Kemper has developed into a strong and stable organization that is a source of security for our stakeholders in uncertain times like the one we currently face. We continue to be recognized by rating agencies for our improved performance. I'm pleased that during the quarter, S and P upgraded our key financial strength rating to A and the holding company senior debt ratings to BBB. This follows the positive rating actions of Fitch and A. M. Best that I noted on our fourth quarter earnings call. Our balance sheet is strong with a low debt to capital ratio of 17%, no near term debt maturities, a diversified investment portfolio and significant committed contingent capital by institutions classified as SIFIs. Through April 1, we repurchased $110,000,000 of Kemper stock. Roughly equates to both the shares issued in conjunction with the redemption of the hybrid notes in 2019 and the after tax net amount of the CSE judgment of which we received the remaining balance this quarter. With that, I'll turn the call over to Jim to discuss our consolidated financial results in more detail. Thank you, Joe, and good afternoon to everyone on the call. I'd first like to echo Joe's comments acknowledging the human toll this pandemic continues to take and express my sympathy for the many individuals and families that have been affected. Turning to the results for the quarter on Page six, net income was $64,000,000 compared with $155,000,000 in the prior year. Excluding the impact of purchase accounting, adjusted consolidated net income grew to $163,000,000 Net results this quarter were heavily impacted by the decline in fair value of equity and convertible securities driven by the global financial market sell off. On Page seven, we isolate the key sources of volatility, including $89,000,000 we received as satisfaction of the remaining balance of the CSC judgment. Our results in the quarter demonstrate that our business is strong and continues to perform well with solid financial results. Turning to Page eight. In this challenging time, I'd like to take a moment to remind individuals of our ongoing focus on risk management. Big picture, we strive to maintain capital and liquidity sufficient to sustain target ratings using the greater of two risk tests. To be clear, the capital and liquidity levels referenced here are to uphold target credit ratings versus solvency, a much more conservative framework to manage risk. The first test is an annual stress simulation to ensure the entity has sufficient capital and liquidity to meet the needs of our operations through a one and two hundred year event. The second stress simulation is an over the life of the liability assessment that is intended to capture the liquidity and capital needs through a one in fifty year event. Like the Federal Reserve stress test, our one in 201 in 50 events include a broad range of stress events, including market setbacks, operational challenges, regulatory uncertainties, and catastrophes. This approach helps ensure we are a strong company through challenging economic periods. As Joe touched on, our focus on strengthening the Kemper franchise and our risk management capabilities over the past few years have been recognized in recent months through ratings upgrades from S and P and Fitch and an improved outlook from AM Best. With those reference points, I would like to start by reviewing some of the key financial data points that highlight the strength of our balance sheet. First, we have over eight seventy one million dollars in liquidity, many multiples of our fixed costs. Second, our diversified model is designed to produce positive cash flow through volatile economic periods. In the quarter, operating cash flow was $62,000,000 A final item is our attractive capital stack. It is highlighted by strong capitalization of our insurance entities, a debt to capital ratio of 17% and no near term debt maturities. Our balance sheet is strong with significant financial flexibility. An important item to note is our recent stock repurchases. Through April 1, we repurchased $110,000,000 of Kemper stock. 101,000,000 of these repurchases occurred during the first quarter. As Joe mentioned in his comments, this amount roughly equates to the after tax amount of the CSC payment and the shares issued in conjunction with the redemption of the hybrid notes in 2019. When we issued those shares, we were seeing expected to continue to see tremendous growth and momentum in our specialty auto business. And there was uncertainty around the timing and amount of the proceeds from the CSC judgment that could help fund this growth. With the proceeds in hand, we felt the right thing to do for our long term shareholders was to repurchase these shares. We did so at an 18% discount to issuance price. We have not repurchased any shares since April 1. We have roughly $130,000,000 remaining on our $300,000,000 share repurchase authorization from August 2014. This quarter, the Board expanded this authorization by $200,000,000 providing roughly $330,000,000 in repurchase capacity. While we do not have near term plans to repurchase additional shares, if Kemper trades significantly below what we believe the company's intrinsic value is, we have the capacity and capabilities to capture this value for our long term shareholders. Turning to Page nine. I again want to highlight some of the capital metrics we track closely, including tangible book value per share, tangible return on equity and cash generation, which together reveal the efficiency of our capital deployment decisions and intrinsic value creation. In the quarter, tangible book value per share, excluding unrealized gains, was flat compared with the fourth quarter. Solid operating performance was offset by mark to market impacts from market volatility. That said, our returns remain strong with an industry leading four quarter rolling return on tangible equity, excluding unrealized gains of 20%. Turning to Page 10. Net investment income grew slightly over the 2019 to $86,000,000 as our investment portfolio continues to grow. In the first quarter, we began including income from our COLI investments in our core portfolio net investment income. This is reflected on a historical basis in the charts on this page. We made this presentation change as a result of the increased allocations we have made to the investment class. The annualized book yield of the portfolio decrease was largely a result of this quarter's global market movements. Movements. Similar to many of our peers, given the current market volatility, we believe it would be helpful to expand our discussion to provide additional transparency into our investment portfolio. Page 11 offers more detail on the fixed income categories of our portfolio that are most exposed to the economic impact of COVID-nineteen. We've identified these areas as retail, energy, transportation, and leisure. As you can see from the slide, our exposure to these sectors is less than 1% of our total investment portfolio. It is well diversified and concentrated in above investment grade assets. Turning to Page 12, you can see more detail on our below investment grade portfolio. It is diversified across different asset types and at 5% of our fixed income investments is a relatively small portion of our overall portfolio. Page 13 gives more detail on our CLO exposure. The majority of the portfolio is invested in highly rated assets with 83% rated A or higher. Finally, on Page 14, we break down the largest components of our alternative holdings. The primary focus of our alternative portfolio is current income generation. It is diversified across strategies focused on private credit, private equity and hedge funds. Similar to others, roughly 95% of this portfolio has a reporting lag. This means that a portion of this quarter's global market disruption will bleed into next quarter's investment results. In closing, we are well positioned to be a source of strength for our stakeholders through this environment. And with that, I'll turn the call over to Duane to discuss the results of our P and C segments. Thank you, Jim, and good afternoon, everyone. Let's begin with the Specialty segment on Page 15. The Specialty segment was highlighted by another quarter of strong growth. Segment income of $60,000,000 was driven by net earned premiums of $823,000,000 an increase of 13% from the prior year's quarter. Policies in force increased 10% excluding the sale of classic car. As you can see in the chart on the top right of the slide, we continue to experience strong growth across all significant geographies. Our trailing twelve month growth was 6% in California, 23% in Florida and Texas, and 42% in our expansion states. As previously noted, Florida has been a robust growth market for us. It was further amplified in the quarter by the exit of a competitor. Growth in the first two months of the quarter was robust and in line with our recent results. This growth rate slowed in March as stay at home orders related to the COVID-nineteen crisis were implemented. As part of our response to the crisis, we have provided a 15% credit to our auto customers towards their April and May premiums totaling roughly 100,000,000 reflecting fewer miles driven and the resulting decline in frequency. We continue to experience growth at attractive margins with an as is adjusted underlying combined ratio in the quarter of 93%. During the quarter, losses in this segment were impacted by three items. First, in anticipation of increased volumes of new business, we increased headcount with our claims staff to support this plan growth. We expect this to normalize throughout the year. Second, we recognize a loss severity development due to the changing in macroeconomic environment. This includes, among other things, changes in used car values, changes in salvage values, and the related impacts around repair cost. Lastly, we recognized a legal item related to Florida PEP. The long term growth outlook for the specialty segment remains strong. The tailwinds we have experienced over the past few quarters are intact. But the COVID-nineteen situation has created some near term watch items. Turning to the Preferred Insurance segment on Page 16, segment income was $18,000,000 for the quarter with an underlying combined ratio of 92% compared with the segment income of $3,000,000 with an underlying combined ratio of 96% in the 2019. Segment income increased due to a broad array of profit improvement actions taken in our auto and home books that have resulted in lower overall loss activity. While we continue to make strides towards reaching our preferred insurance segment profitability targets, Given the relative size of the book, we expect results to remain volatile for a period of time. I'll now turn the call back to Joe. Thank you, Duane. Turning to our Life and Health results on Page 17. In the first quarter, the segment produced pretax income of $27,000,000 reflects pressure in global economic markets impacting net investment income and a couple of onetime items. In the quarter, there was a $3,000,000 impact from new sales disruption and employee agent commission stabilization as a result of COVID-nineteen. This was offset by the refinement of CEI. Earnings increased 2% reflecting our focus on growing platform as the diversification benefits for the combination of the Life and P and C businesses continue to provide strategic value through enhanced capital efficiency. Turning to Page eighteen, I'd like to spend a few minutes walking through key areas of our business that have been impacted by the COVID-nineteen pandemic. It's still too early to determine how long the crisis will last and the potential outcome. We will learn more in the coming months. Turning to our Specialty and Preferred segments, the stay at home actions put in place towards the end of the first quarter have had an adverse impact on new business written as shopping behavior significantly decreased in the March. The decrease in miles driven as COVID-nineteen restrictions were put in place has resulted in a decrease in auto accident frequency. This has been somewhat offset by an increase in severity. We reflected the drop in frequency with a 15% premium credit for our auto policyholders in April and May. Given the market dynamics currently in place, it is reasonable to expect modest expense ratio pressure driven by increases in bad debt and lower premium and fee volumes. There's a significant amount of opportunity for Kemper in our Specialty Auto segment. Growth prospects remain in both existing and expanding geographies where competition is fragmented. We continue to believe this provides a growth tailwind, although current social and economic environment makes the near term timing around this less certain. Turning to our Life business, we temporarily suspended new business sales in late March with a gradual resumption expected in the second quarter. At this point in the crisis, we have no meaningful information to communicate on COVID related changes to the mortality and morbidity expectations of our book. In closing, Kemper is well positioned to perform through this environment with a strong capital and liquidity position. We have a balance sheet highlighted by a low debt to capital ratio, no near term debt maturities and significant committed contingent capital. In addition, the mix of our underwriting businesses provides strong cash flow diversification and added financial flexibility. I'm proud we have the ability to continue to serve our customers and act as a source of strength for all our stakeholders through the COVID-nineteen crisis. Insurance is an essential function in crisis situations. We're here to deliver on our promise to our customers when they need it the most. And now I'll turn the call back to the operator to take your questions. We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. And our first question today comes from Greg Peters with Raymond James. Please go ahead. Hey. Good afternoon. Hey, Joe. Can we just go back to Slide 18 where you're walking through the COVID considerations? First of all, can you walk us through the mechanics of how the 15% credit are going to flow through the financials? And will it be spread across specialty auto, preferred auto, commercial auto, or just specialty auto? Or give us some further color on that, please. Sure. Happy to, Greg. We anticipate accounting for this as a premium credit. And it will go through the lines that it impacts. So the auto lines where appropriate. Preferred auto, specialty auto, and commercial auto. We may get guidance from individual states that they, you know, we have to file these items. Again, we have filed it as a premium, a return of premium. If we get a particular state that has some objection that may move the number a little bit. But that is what we expect. And in most cases the states have acknowledged that was okay. So I guess another way to look at this is the ordinary acquisition cost or ordinary loss ratios won't change. It's just the numerator that's changing, correct? What expect is it's a return of premium for the month of April and the month of May. So the premium that You would have been charged in that will still get the losses that we We'll still get the commissions, the expenses. We're reducing commissions as a result. So you're correct. The premium number will change and that will cause the ratios to change. Greg, if you think about it, we've historically provided in the past to help you get to normalization. While we certainly haven't teed up all of those items at this stage as we continue to kind of firm things out, my guess is that we'll, similar to what we do with purchase accounting and other elements, try to give you the pieces so that you've got kind of a normalized view and can appropriately assess the business. Got it. Thanks for that. Thanks for the color. You also said in your prepared remarks that you're doing something for your life agents. Can you spend a minute on that? Sure. In our life business, we have employee agents. As you'd imagine, there's a fairly complex compensation program for those folks. It's a combination of new business and retention measurements. And are in a business where they're collecting premiums as well. So all of those things go together. There's differences in some cases by product and nuances under there. Since we suspended new business sales starting in late March, that causes a significant compensation drop for them from a timing perspective. And we put in some commission stabilization programs. We've done this in the past with smaller groups of agents. We never had to do it countrywide. But if a hurricane came through a geography and we might have that group of agents shut down from a new business perspective for some period of time, we've done it there before. And we're sort of running things through that way again. Got it. So let's pivot just to the sales trends. We're hearing across the board that there's pressure on new sales. And maybe you can comment how the current or add additional color. I know you did provide some initial comments on it, but provide some additional color on how new business trends are working through April and May and maybe tie that in with retention? Sure. We I think as virtually everybody in the industry has seen or commented, we saw a slowdown of new business sales. Starting at the March, it worked its way into April. Folks were staying at home. They weren't shopping for new cars. They were focused on other things. In many cases, agents may not have been ready, to figure out from a service perspective how to deal with those calls or they were dealing with their own issues. As we've gotten through April and into May, we're starting to see the economy start to in different geographies pick back up. We're seeing people engage in more miles driven, a little bit more shopping. Agents have adjusted their operational capabilities. So we're starting to see a gradual increase in that shopping. During that time period, we've seen modest changes in retention. But nothing I would have brought to an attention that thought was worth note around retention. And again, expect them to largely operate similarly as we look at the second quarter. Got it. All right. My last question will be the last page of your presentation. Is slide 32. And I'm going to focus on the specialty personal auto slide and the bottom line there, which is the as adjusted underlying combined ratio. Can you walk us through where the trends why we're seeing an upward trend in the adjusted? Is that expected to stabilize? Give us some color on what's going on there, please. Yeah, no, happy to, Greg. What I think is helpful is also to think about this page in relation also to pages thirty seven and thirty eight of the supplement. What you're going to get at or what you're going to see there is about 60 to 70 basis points of it is just related to last quarter or last year's quarter had with favorable purchase accounting and development of 20 basis points when you're looking through there on the combined ratio. And then this quarter, it's minus 0.7. So basically, that 90 basis point change is one element that's rolling through that makes those things a little bit confusing from a surface level. The bigger elements that you're seeing is really just a change in a little bit of the development more one time in nature than others. If you look at the quarter, you know, you've got a one point change in the overall underlying combined ratio for the versus last year for the private passenger auto businesses coming through. And you saw where last year we had some favorable development issue, you've got a little bit of unfavorable. That unfavorable is primarily driven by three things, as Duane had mentioned. With all of the growth that we've been experiencing as well as what we planned would continue to kind of be that way for the remainder of the year, we wanted to get ahead of that growth to make sure that we had our training and other elements. That's resulted in a little bit of A and O pressure that's inside of there that will normalize throughout the year. And again, was related to what we thought would be total new business volumes throughout the year and what would be the best way for us to have our claims department prepared for that and get the best outcome for shareholders? Again, item will normalize. I would think about that in totality of kind of being where you're looking at maybe less than zero five point as you're going across. You had some other elements that are out there. One was essentially related to an environmental factor in our picks, as Duane mentioned, on total losses in the salvage value that we saw in conjunction with this environment. You've had a tremendous slowdown, obviously, in the used car market, part demand, other elements from that. We thought it was prudent, at this stage to refine and enhance our estimates in terms of what we thought was the likely recoverability or our assumptions around that. And you saw that roll through this quarter. That was one of the bigger drivers. Then the other item that was going through there that Duane had mentioned as part of his comments was some development as it related to a Florida PIP legal case and a change in interpretation. Again, really a one time item that would be out there and again, kind of affecting the prior year. In summary, what you're looking at is that annual pick that you're seeing in FedRA financials, that 93.1, that should be a good number. That's how I would think about it. I'd think about us stabilizing around that. Now, we'll see what the environment brings. Certainly don't have anything that would update our numbers from that point. But again, if I were doing the comparison, I'd be doing the 93.1 over the prior year's 92.1. And I'd be looking at, you know, kind of a one point difference in total, you know, kind of year over year, which we feel pretty good about giving both our growth and other underlying assumptions that are coming through. Excellent. Thanks for the answers. I'll let someone else ask questions. Thanks for reading the appendix. And our next question comes from Matt Carletti with JMP. Please go ahead. Hey, thanks. Good afternoon. So just two questions. One is just a clarification on Greg's just on his first question about the $100,000,000 coming back April and May. So just the bottom line is we'll see that come out of both written and earned in the quarter, you know, spread across the auto lines. Is that how we'll see it presented in the financials? That's how I expect it to be presented in the financials. There are a few areas, Matt, where we're making sure and confirming that, you know, a state perspective and other that it won't be an expense type item. You've seen obviously a diversity of practice in terms of how this has been handled for others. Either way, we'll make sure that it's called out so that you can get to what effectively will be a normalized number, so you can tell what's happening from both the rational perspective and other business. But if I were modeling and if I was starting, I would be starting with the assumption that Joe said that is coming through the premium. We think that's the right place for it, kind of given the research and that that we've done today. But again, items are still developing. And if there's something that is different, could it come in, on expenses? Sure. But we would call it out if that that's the case. And it would go through both written and earned in the quarter. Right. Perfect. Wonderful. My other question, I just wanted to go back to, I guess, some of your comments, Joe, on slide 18 and specifically on the comment about the bad debt expense. I was hoping you could go into that a little bit further and just kinda walk us through kind of the puts and takes and how we should think about, you know, insurance commissioner mandates to not, you know, cancel anybody for nonpayment, you know, how you guys manage credit in terms of how much premium you might collect upfront, how much cash you might be holding versus particularly in specialty auto versus maybe, more preferred where I'm guessing there might be a little more pay as you go? Anything you just help us there on how we should think about that. Sure. And I'll go in sort of reverse order on those. From a preferred perspective, we have billing plans and processes that are generally consistent with most preferred carriers. While we do typically expect folks to make down payments, there is a greater percentage of folks who are pay as you go. The billing periods often will have or the billing process will often allow a grace period to occur there where somebody might be out of equity. We don't tend to find that to be a large credit risk business. There's some very low level of bad debt that's running through on a regular basis, you know, a percent or so. And we would not expect a very large change. We expect some change, but not a very large change inside of that preferred, you know, environment. Maybe it's, you know, 50 basis points or something like that, not an up front. Inside of the specialty auto, that business is characterized typically by more credit challenged customers or customers who are more price sensitive. As a general rule, we work to not be out of equity inside of that business, and try to avoid letting that happen. Because states have required or encouraged carriers to be more responsive to customers if they are having some financial difficulty and allowing grace periods to occur, we are recognizing the difficult economic times and the crisis nature of this pandemic and are responding appropriately. That will cause us to extend more credit than we traditionally would have in our specialty auto business. As a group, that population tends to be less credit worthy. And we would expect more bad debt to run through as a result. Okay. And then just a follow on to that question. Whatever the impact on the expense ratio was in the quarter, should we think about that as you guys put up an accrual this quarter for what you think the whether it's for the year or some amount of time beyond just the quarter is and we'll see as we go forward? Or is it more of you know, that's what you think it is for this quarter and we as long as this goes on, we might have to live with that higher level of provision, you know, next quarter, quarter after. As things get better, it'll come back down to normal? Yeah. You know, being good accountants, Matt, we can't actually write off premium that more than the credit we've extended. So all you can do in the quarter is what we had in the quarter. So we did ramp up our provisions for bad debt to some degree knowing that we were getting out of equity. But it was not the full impact that we would expect to see in the second quarter. And we would expect it to occur only in the quarters where it occurs. If those grace periods are extended beyond the second quarter, we might see that bad debt go up for some period of time. If we really have a sixty day window or ninety day window that states are asking for this and we're executing on it, you'll see all the bad debt in that time period. And then we'll move back to our normal practice of looking to be in equity and being very time sensitive and responsive. So long answer there. The short answer is you're going see a little bit of it in the first quarter. You'll see some bad debt spike in the second. And I would imagine we'll go back to more normal levels in the third and fourth. All right. Very helpful. Thank you and best of luck. Thank you. Appreciate it, Matt. And our next question comes from Paul Newsome with Piper Sandler. Please go ahead. Afternoon. Nice to hear you guys are safe and healthy. Matt and Greg got most of my questions. But the only one I have left is whether you could talk a little bit about the March frequency differences between nonstandard, the preferred or standard business and the commercial business. If there was really much difference in your books experience amongst those three classes of auto. Yeah. You know, through through March, we saw frequency declines in all of the businesses. We saw a greater frequency decline in preferred than we did non standard auto. I think commercial fell somewhere in between those two. They were significant in all cases. But again, significant in preferred. Great. Thanks, guys. Appreciate it. Have a great night. Terrific. Thanks, Paul. And our next question comes from Seth Rosenberg from UBS. Please go ahead. Hey, guys. Thanks. And likewise, I think most of my questions have been answered here. But I guess one, thinking about you mentioned the benefit from the carrier in Florida and able to pick up that business. Do do you have a sense for how much of that business you were able to acquire? And, you know, kinda looking ahead, is there if there's still more, tailwind from that, or is that kinda behind us now? You cut out a tiny bit. This was the the Windhaven question on Florida? Yes. Yeah. How much of that business do you think you were able to pick up? And is that sort of now behind us, or is there still some benefit to see there? I think that the there's still probably some more kicking around in the marketplace. But the bulk of it would have been behind us just because those folks were non renewed and had to go somewhere and move again somewhere where they're uninsured. So we would expect the bulk of it has worked its way through the system. We might see a little bit more running through an April time period. But the bulk of the eggs through the snake. Got you. And it's hard to tell exactly what it was. We might have had a good shot at telling you if it was sort of a normal quarter. Things just got wacky from a new business volume perspective. And it's a little hard to tell what its exact impact was in the quarter. Understandable. I guess, sticking on the top line there, thinking about sort of your geographic expansion strategy, is there an impact? Have you changed sort of your perspective on various states given COVID? And maybe just your ability to work with regulators at this point, is there anything that we kind of should be thinking about there in terms of your expansion? Yes. No, we're seeing no impact at all on our view of appetite of geographies. No impact at all on our relationship with regulators or their thought processes. The only impact is just a general market environment item where there's just a slowdown in new business and a change in activities. Those states will all as I'm sure all of us have read, will restart at slightly different rates and reemerge. So, you know, we get back to sort of a normal health is not clear. But in all of the cases, you know, our core states, California, Florida, Texas, and our expansion states, we're growing in all of them. It's just at a slower rate. We ultimately think the tailwind that we've got behind us in this business is still there. We just think that the entire environment will slow down for a little while. Got it. Okay. And then shifting to so you gave a good context on what's going on with salvage in personal lines, I guess. But you had a lot of favorable development in commercial auto. I think you attributed it in the in the queue to liability trend. Could you help us maybe think about what's going on there? Is that more of a propensity to settle or something we've heard from others? Or or or, I guess, what's the sustainability of what you're seeing there? No. I mean, just to give an idea, the same row development, you know, we had certain expectations both from a number of claims and other that we would would come in. The reality is we've if you look at this business line for the last two or three years, we've overpicked to some degree. There's no real difference here other than we're winding up in a favorable position there. But there's not yes, there's been some frequency improvement in that. But I think that's more driven just by overall underwriting practices, other things than it really being a market trend per se that's flowing through the book. Yes, when look at commercial vehicle it's a smaller book of business. So when you try to just pick the reserves and the development on those it just gets a tiny bit more volatile from that perspective. You know, we've had time periods where there's been a little pressure. We've seen some favorable development there. You know, as most of us know, actuaries are generally quick to spot trouble and react quickly. And they're a little hesitant to see favorability come through because they really want to prove it. So that just works its way out a little slower. And again, we're always making our best estimate. But anybody who's spent any time working on claims knows they're more likely to get worse than they already get better. So that just slows itself a little bit. So it's just the normal ordinary course stuff. Sure. Got it. Makes sense. Just last quickly, last one. Jim, think you mentioned in your remarks, you guys report probably your alts on on the lag, and there's still some to to roll through next quarter. Any kind of size you can give to us is how we should be thinking about that for 2Q? You know, it's a little bit hard to, you know, fully pick that. You know, it's gonna end up being some combination of kind of equity market performance. You know, if you look at the equities, you might think a little bit about a Russell two thousand and use that as a proxy. You know, for the private credit high yield debt markets, I think you can use that as a proxy. And that'll give you a range. A little hard to tell. I think we're in a favorable potential position relative to other alternative equities in certain cases. And others, we may some unusual economic conditions. So it's a little hard that we actually have the data to be more specific to that. I don't mean to be wishy washy on that. I just I think we're going to have very much industry like performance going through there. And I think it's going to be pretty close to those indexes. But until I actually see the data come in, I hesitate to give you a specific answer given sometimes there's a disconnect between those things. Sure. Okay. That's that's helpful color. Thanks, guys. And this will conclude our question and answer session. I'd like to turn the conference back over to Christine Patrick for any closing remarks. Again, this is Joe Locker. Thank you all for your time and attention today. We appreciate it and stay healthy. Thanks. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.