Bob Huang: Got it. Thank you very much.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Josh Shanker from Bank of America. Your question please.
Josh Shanker: Yeah. Thank you for taking my question. Once upon a time you think about combined ratio guidance and now you talk more about ROE guidance, which is sensible. But I look at the results in homeowners and they are quite volatile and good this quarter. I want to know where we stand in terms of pricing adequacy broadly for the homeowners’ line. But more importantly, I want to see pricing adequacy for bundlers, I assume that you have a pricing adequacy for monoline drivers and it’s different for the bundlers. Are we at a point where you are very happy to take unbundles at a nice level of profitability today?
Tom Wilson: I will let Mario take on the bundling question, because we are really happy about that. Let me just — in terms of the homeowners’ business, we really like the business. It’s — you see — look at our six-year combined ratio before this year, it was 92 and so really high return on equity, it’s a great combined ratio. If you look at our underlying combined ratio this year, which excludes catastrophes, it’s come down from last year. Obviously, we had a bad two quarters — bad two quarters doesn’t make a bad business. So we still really like the business, we have raised prices in the low-teens this year from a variety of different ways. So we like that business. If cats is the first two quarters are indicative of where we go in the future, our cats were up $2.5 billion this year versus the prior year.
So if that’s the case. I am confident we have the business model, which will adapt to it. We might not catch it before it, you won’t catch it before it happens, but we haven’t really great go-to-market business, so we are really happy with the homeowners’ business. Mario, do you want to talk about returns in the homeowners’ business and then the bundling question.
Mario Rizzo: Yes. So, Josh. On — in terms of overall rate adequacy. Obviously, through the combination of the rates we have taken over the last couple of years, plus the inflation and replacement values in homes, that’s really fueling a pretty consistent and significant low-teens increase in average premiums. So this quarter that was about 12.5%, so we are seeing price flow through the system. And that doesn’t include, because as you know, with a 12-month policy, it takes 24 months to earn it all that rate. So a lot of the rate we took in 2023 we have yet to earn and we are going to we are going to keep at it in terms of staying on top of loss cost. The underlying combined ratio for the year was 67 improved by about 3 points, mid 60s is where we would like that number to be.
So we are getting closer to that, we have more rate that’s going to earn in, and as Tom mentioned, we feel really good about our capabilities in homeowners and we are going to continue to lean-in and look to grow that business. From a bundling perspective, just 80% of our homeowners’ customers have a supporting line are bundled. That’s a pretty meaningful number and it happens at discount, it’s upwards of 15%. And again, what we think with that pricing the lifetime value of that bundled segment is substantial and we will write bundled customers all day long. Our agents are writing bundled business at an all-time high level north of 70% of new business we are incenting agents to write that, we are seeing more bundled business come through our call centers and our direct business.
And as I talked earlier Custom 360 going up market is both in auto and home offering. So we think we are well-positioned across all three channels to continue to attract bundled business that we can be even more competitively priced and because of the discounting element, but also it’s a segment that we think generates substantial lifetime value and we are good at it, so we are going to keep that.
Tom Wilson: Hey, Josh. I know you are a student of our competitors. So you see both GEICO and Progressive talking more about bundling in their advertising. They obviously see also good customers there. Our difference is we expect to make money in homeowners.
Josh Shanker: And if I just close upon that, even though we are going to see some modest decline in auto policy count due to price increases and turning the book a little bit, are you net growing bundlers every day?
Tom Wilson: I think we probably don’t give that number out, but let’s just say, we have a high focus on bundling, our agents are doing more bundling these days because we changed the way in which we reward and compensate them. So we are continuing to hunt down.
Brent Vandermause: I think we have time for one more question, is that.
Operator: Certainly. One moment for our final question then. And our final question for today comes from the line of Andrew Kligerman from TD Cowen. Your question please.
Andrew Kligerman: Hey. Thanks for sweeping me in at the end. Quick — maybe some quick questions here. With regard to the impacts of unwinding the restrictions and increasing advertising, could you give us a sense of the impacts of each on the combined ratio?
Tom Wilson: Well, I think, the first — the principal impact of unwinding underwriting restrictions will be to kind of increase the aperture of the types of risks that we will be willing to write. Again, now that in the states that we are going to do that, we feel better and good about our rate adequacy and that’s true across segments. So we have a pretty sophisticated approach to pricing where the prices accurately reflect the specific risks of each individual segment. So as we write more business, it’s going to be written at what we believe to be a rate adequate level. Now, from a new business perspective, as we increase the volume of new business, that does tend to write or run a higher loss ratio due to renewal relativity going forward.
So it will have some impact on our overall combined ratio going forward. But we take that into account in terms of how we manage the business. But we don’t open the underwriting restrictions until we are comfortable with the rate level we are at. We price each risk according to its unique characteristics. Having said that, there is a new business penalty associated with higher new business volume. But again, we factor that in in terms of how we manage the overall combined ratio in the business.
Andrew Kligerman: Got it. And then with regard to severity, just to make sure I am clear on it, you talked about 8% to 9% in 2023. Is that what you are anticipating for 2024 and how are you thinking about frequency as well going into the year?
Mario Rizzo: We don’t do a forecast for either frequency or severity on a go-forward basis. I would say it’s whatever it is, we will make sure we get priced for it.
Andrew Kligerman: Okay. Thank you.
Tom Wilson: Okay. Thank you all for spending time with us this quarter. Obviously, with the sun shining a little bit and a few less cats, it gave you the opportunity to see the benefits of all the hard work the team’s been doing to improve profitability in auto insurance and making sure we keep our homeowner business strong. We didn’t really get to our other businesses, but they also continue to do quite well and our investment portfolio and team had a great year when you look at our total returns. So we feel good about where we are going forward. Thank you and we will see you next quarter.
Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
