I’d like to begin this Lumber Memo with a financial update on where we currently stand. Our total year-to-date production numbers are below plan, although new business is on target from both a unit and premium perspective. When looking at renewals, 92% of our customers chose to renew their insurance with PLM, which is well above the industry average. This reflects what I believe is the true value our customers place on their relationship with PLM.
Rate increases across our book of business are, on average, lower than last year, though still continue to trend upward. This is true not only in lumber, but across the insurance industry, due to deteriorating losses—particularly in the general liability, automobile, and umbrella lines of business. We expected our clients would experience muted growth this year due to the projected slowdown in the housing sector. In fact, the impact has been greater than expected with declining rating bases or exposures (sales, values, and vehicles) falling below our projections.
The reality is that our production shortfall is primarily driven by our strategic decision to walk away from, or non-renew, a small number of large accounts. In most of these cases, our decision reflected concerns about the insured’s approach to loss control and risk management or the presence of a naïve competitor pricing the account below a level that could sustain profitability. Those markets will soon come to understand the cost of those decisions.
A Look at Profitability
Our property results look relatively good at this point in the year, although we’re seeing some rather large losses that, in our estimation, were avoidable. We are addressing these unfortunate occurrences and are trying to heighten awareness through articles, direct marketing materials, commentary in various trade journals, and specific loss control recommendations.
The most significant challenge facing both PLM and the broader insurance industry lies on the casualty side of our business, which includes general liability, auto, and umbrella coverages. We have spoken a lot about the auto issues over the years and have seen some improvement there. But the main source of the problem stems from the U.S. legal system and society’s evolving attitudes toward litigation. Issues such as nuclear verdicts, social inflation, and litigation funding are exerting a traumatic impact on the general liability and umbrella lines of business.
Reasonable loss reserve expectations are increasingly proving to be inadequate, driven by the magnitude of settlements being handed down by the courts, in addition to a host of other issues that confront the U.S. economy and insurance industry. To address these challenges, PLM will need to respond on several fronts. As a result, we will be tightening our underwriting standards to ensure we are appropriately managing risk in this evolving environment.
Last month, for example, Lindsey DiGangi, our VP of Field Operations, authored an article outlining general liability loss trends. We have since developed targeted initiatives and controls to address each of the identified loss drivers. From a financial perspective, we are reviewing all open claim files and increasing reserves where appropriate. At the same time, we’re adding bulk (but not reported) reserves by nearly $35 million this year, and I fully expect that figure to approach $50 million by year-end.
The culmination of these actions has resulted in a significant reported loss of $22 million as of the end of September. Were it not for these prudent and necessary steps to fortify our reserves, we would be having an exceptionally strong year. Even so, it’s important to note that we continue to report net income after taxes through September, and our balance sheet remains strong.
Addressing our Service Standards
When reviewing our Net Promotor Scores (NPS), we continue to see extremely high results. Our scores average in the mid-70s, which is 25 points or more than the industry benchmark. While I am certainly pleased with these numbers, I admit I’m somewhat puzzled given the operational challenges we’ve faced since returning employees to the office in early September. The transition was smooth overall, though some expected turnover has begun to surface.
Although turnover was less than 10% of our staff, it was concentrated in a few departments, which has led to some issues. More specifically, policy processing activities including endorsements, renewal quotes, and policy issuance have not met our standards. We are working diligently to resolve these issues, and I am confident that our VP of Operations, Traci Barber, and our VP of Underwriting, Stephen Hicks, will have us back on track shortly.
On the other hand, the problem we have in the claims department is more expansive. It’s best to look at this issue from three angles. First, our property claims unit continues to operate with relatively minimal disruption. Second, we have been experiencing difficulties with our auto physical damage claims. To address this, we moved our fast-track unit to Customer Service under the oversight of Traci Barber where we have already seen a marked improvement in the short term under her leadership. More importantly, this change will allow John Kennealy, our VP of Claims, to focus on the more significant area of concern, our litigation claims.
Finally, to support our improvement efforts, we’ve brought in a third-party administrator (an eight-person team) to provide additional capacity and focus. Based on current progress, I anticipate that it will take us at least until year-end to be fully current. I also recognize the difficulties many of you are experiencing trying to reach our staff and, in some cases, in receiving timely return calls.
Never, in my 23 years as CEO, have we been confronted with this level of unacceptable service. You have my commitment, and of my entire management team, that we will resolve these issues as quickly and professionally as possible. I hope that the trust and goodwill we have built over the years affords us your patience as we take the necessary corrective actions.
In writing these commentaries over the years, I’ve always tried to be candid and transparent. In this issue, I especially wanted to articulate the current problems we are experiencing along with the plans and timelines we have developed towards a resolution. On behalf of the entire PLM team, I want to offer my sincere apologies. This level of service falls short of what you rightfully expect from us, and it is not reflective of the standards we hold ourselves to. I am truly sorry for the inconvenience and frustration this may have caused.
As always, please do not hesitate to reach out to me directly with your thoughts and comments.
