Earnings Call Transcript - KMPR Q1 2020

Operator, Operator

Thank you, operator. Good afternoon, everyone and welcome to Kemper's discussion of our First Quarter 2020 Results. This afternoon, you'll hear from Joe Lacher, 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 & 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 Boschelli, Kemper's Executive Vice President and Chief Investment Officer; and Erich Sternberg, Kemper's Executive Vice President and Life & 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-19 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-K, our first quarter 2020 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 to 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-19 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.

Joe Lacher, CEO

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 frontlines. As we continue to move through the dynamic circumstances of the COVID-19 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 3, 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 health care systems' availability for those who might need it. We acted quickly to engage 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 premium 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 are 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-19 crisis. The company recently announced a commitment of $1 million 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 5 to discuss our quarterly results. This is a unique quarter with January and February continuing the solid top-line growth we experienced throughout 2019 before the impact of the COVID-19 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 million or $0.95 per share, adjusted consolidated net operating earnings were $163 million or $2.43 per share. We generated a rolling four-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 a 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 & Health segment, we welcome Erich Sternberg, as the division's new President. Erich's breadth and depth of experience within Life & Health will help us 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&P upgraded our key financial strength rating to A and the holding company's 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 million of Kemper stock. This 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 CSC 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.

Jim McKinney, CFO

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 6. Net income was $64 million compared with $155 million in the prior year. Excluding the impact of purchase accounting, adjusted consolidated net income grew to $163 million. 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 7, we isolate the key sources of volatility, including $89 million 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 8. 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 stimulation to ensure the entity has sufficient capital and liquidity to meet the needs of our operations through a one in 200-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 50-year event. Like the Federal Reserve stress test, our 1-in-200 and 1-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&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 $871 million 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 million. 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 million of Kemper stock. $101 million 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 and 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 the issuance price. We have not repurchased any shares since April 1. We have roughly $130 million remaining on our $300 million share repurchase authorization from August 2014. This quarter, the Board expanded this authorization by $200 million, providing roughly $330 million 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 9. 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 first quarter of 2019 to $86 million, 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 declined to 4%. The decrease was largely a result of this quarter's global market 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-19. 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 investment 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&C segments.

Duane Sanders, Executive VP, Property & Casualty Division President

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 million was driven by net earned premiums of $823 million, 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 12-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-19 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 million reflecting fewer miles driven and the resulting decline in frequency. We continue to experience growth at attractive margins, with an as adjusted underlying combined ratio in the quarter of 93%. During the quarter, losses in the segment were impacted by three items. First, in anticipation of increased volumes of new business, we increased head count with our claim staff to support this planned growth. We expect this to normalize throughout the year. Second, we recognized a loss severity development due to the changing 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 PIP. The long-term growth outlook for the Specialty segment remained strong. The tailwinds, we have experienced over the past few quarters are intact, but the COVID-19 situation has created some near-term watch items. Turning to the preferred insurance segment on page 16. Segment income was $18 million for the quarter with an underlying combined ratio of 92% compared with the segment income of $3 million with an underlying combined ratio of 96% in the first quarter of 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.

Joe Lacher, CEO

Thank you, Duane. Turning to our Life & Health results on page 17. In the first quarter, the segment produced pretax income of $27 million, which reflects pressure in global economic markets, impacting net investment income, and a couple of one-time items. In the quarter, there was a $3 million impact from new sales disruption and employee agent commission stabilization as a result of COVID-19. This was offset by a refinement in our CEI estimate. Earned premiums increased 2%, reflecting our focus on growing the platform as the diversification benefits from the combination of the Life and P&C businesses continue to provide strategic value through enhanced capital efficiency. Turning to page 18 I'd like to spend a few minutes walking through key areas of our business that have been impacted by the COVID-19 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; shopping behavior significantly decreased in the second half of March. The decrease in miles driven as COVID-19 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 make 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-19 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.

Operator, Operator

We will now begin the question and answer session. Our first question today comes from Greg Peters with Raymond James. Please go ahead.

Greg Peters, Analyst

Hey, good afternoon. 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% credits are going to flow through the financials? And will it be spread across specialty auto, preferred auto and commercial auto or just specialty auto or give us some further color on that please?

Joe Lacher, CEO

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 were appropriate preferred auto, specialty auto and commercial auto. Now, we may get guidance from individual states that we have to file these items. Again, we have filed it as a return to 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.

Greg Peters, Analyst

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?

Joe Lacher, CEO

What we expect is it's a return of premium for the month of April and the month of May, so the premium that would have been charged in that month. You will still get the losses that we get through. We'll still get the commissions, the expenses. We're not 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 kind of information in the past to help you get to normalization. While we certainly haven't teed up all of those items at this age, as we continue to kind of firm things out my guess is that will – similar to what we did 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.

Greg Peters, Analyst

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?

Joe Lacher, CEO

Sure. In our life business, we have employee agents. As you can imagine, there's a fairly complex compensation program for those folks. It's a combination of new business and retention measurements and they 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 a 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.

Greg Peters, Analyst

Got it. So let's pivot just to your 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?

Joe Lacher, CEO

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 tail end of 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. 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 I thought was worth noting around retentions. And again, expect them to largely operate similarly as we look at the second quarter.

Greg Peters, Analyst

Got it. All right. My last question will be the last page of your presentation is in 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? What – give us some color on what's going on there please?

Joe Lacher, CEO

Happy to Greg. What I think is helpful is also to think about this page in relation also to pages 37 and 38 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 year’s quarter had favorable purchase accounting and development of 20 basis points when you're looking through there on a 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 service 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 and others. If you look at the quarter, 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. This year you've got a little bit of unfavorable. That unfavorable is primarily driven by three things as Duane had mentioned. We – with all of the growth that we have been experiencing as well as, what we plan 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&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, that item will normalize. I would think about that, in totality of kind of being where you're looking at maybe less than 0.5 point-ish 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, 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 inside our 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, kind of a one-point difference in total year-over-year, which we feel pretty good about giving both our growth and other underlying assumptions that are coming through.

Greg Peters, Analyst

Excellent. Thanks for the answers. I'll let someone else ask questions.

Joe Lacher, CEO

Thanks for reading the Appendix.

Operator, Operator

And our next question comes from Matt Carletti with JMP. Please go ahead.

Matt Carletti, Analyst

Hey, thanks. Good afternoon. I have two questions. One is for clarification on Greg’s earlier point about the $100 million expected in April and May. Will that be reflected in both written and earned revenue for the quarter across the auto lines? Is that how it will appear in the financials?

Joe Lacher, CEO

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 from 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 a rational perspective and other in business. But if I were modeling and if I were 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 in 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's the case.

Jim McKinney, CFO

And it would go through both written and earned in the quarter.

Matt Carletti, Analyst

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 kind of walk us through kind of the puts and takes and how we should think about insurance commissioner mandates to not cancel anybody for non-payment. 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 it might be a little more pay as you go? Anything you can just help us there and how we should think about that?

Joe Lacher, CEO

Sure. I'll address your points in reverse order. From a preferred perspective, our billing plans and processes align closely with most preferred carriers. While we generally expect customers to make down payments, a larger proportion of customers opt for pay-as-you-go options. The billing process often includes a grace period for those who might be out of equity. We do not consider this to be a significant credit risk; our bad debt levels are quite low, around 1%, and we do not anticipate a substantial change—perhaps a shift of about 50 basis points, but nothing major. In the specialty auto sector, we typically cater to more credit-challenged customers or those who are sensitive to pricing. We strive to avoid situations where customers are out of equity, and due to regulatory encouragement for carriers to be responsive to customers facing financial difficulties, we implement grace periods when necessary. In light of the challenging economic environment during the pandemic, we are more inclined to extend credit in our specialty auto business, which tends to involve a less credit-worthy customer base. Consequently, we expect to see an increase in bad debt.

Matt Carletti, Analyst

Okay. Following up on that question, should we consider the impact on the expense ratio this quarter as an estimate for the year or for a specific period beyond just this quarter? Will we see adjustments as we move forward, or should we regard this as the expected level for this quarter, with a possibility of maintaining that higher provision in the next quarter unless conditions improve?

Joe Lacher, CEO

Yes. As good accountants, we can't write off more premium than the credit we've extended. In the quarter, we can only address what we have at that time. We did increase our provisions for bad debt, knowing we were phasing out equity, but it was not the full impact we expect to see in the second quarter, which we anticipate will occur only in specific quarters. If the grace periods extend beyond the second quarter, we might see a rise in bad debt for a while. If states request a 60-day or 90-day window and we comply, you'll see the bad debt during that period, and then we will return to our usual practice of being in equity and acting quickly. In summary, you will notice some bad debt in the first quarter and an increase in the second. I expect we will return to more normal levels in the third and fourth quarters.

Matt Carletti, Analyst

Right. Very helpful. Thank you and best of luck.

Joe Lacher, CEO

Thank you. Appreciate it, Matt.

Operator, Operator

And our next question comes from Paul Newsome with Piper Sandler. Please go ahead.

Paul Newsome, Analyst

Good afternoon. Nice to see 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 non-standard, the preferred or really standard business and the commercial business if there was really much difference in your books experience amongst those three classes of auto?

Joe Lacher, CEO

Yes. Through March we saw frequencies decline in all of the businesses. We saw a greater frequency decline in preferred than we did in non-standard auto. I think commercial fell somewhere in between those two. They were significant in all cases but again more significant in preferred.

Paul Newsome, Analyst

Great. Thanks guys. Appreciate it. Have a great day.

Joe Lacher, CEO

Terrific. Thanks Paul.

Operator, Operator

And our next question comes from Seth Rosenberg from UBS. Please go ahead.

Seth Rosenberg, Analyst

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 you have a sense for how much of that business you were able to acquire? And kind of looking ahead is there still more tailwind from that, or is that kind of behind us now?

Joe Lacher, CEO

You cut out a tiny bit Seth. This was the Windhaven question on Florida? Yes. 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 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 drew the snake.

Seth Rosenberg, Analyst

Got you.

Joe Lacher, CEO

It's difficult to pinpoint exactly what happened. We might have been able to give you more clarity if it had been a typical quarter. However, things became quite unusual regarding new business volume, making it challenging to determine its precise impact for the quarter.

Seth Rosenberg, Analyst

Understandable. I guess thinking on the topline 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?

Joe Lacher, CEO

Yes, we are not seeing any effects on our view of geographical appetite or our relationships with regulators. The only effect is a general market condition leading to a slowdown in new business and changes in activities. The states will reopen at slightly different rates. It's uncertain when we will return to a normal state of health. However, in all our core states—California, Florida, Texas—as well as our expansion states, we are experiencing growth, albeit at a slower rate. We believe the positive momentum we have in this business remains intact, but we anticipate a temporary slowdown in the overall environment.

Seth Rosenberg, Analyst

Got it. Okay. You provided good insight into the situation with salvage in personal lines, but there was significant favorable development in commercial auto, which you attributed to the liability trend. Can you help us understand what’s happening there? Is it more about a tendency to settle, as we've heard from others, or what is the sustainability of what you're observing?

Joe Lacher, CEO

No, I mean Seth just to give you an idea the favorable development we had certain expectations both from a number of claims and other that would come in. The reality is we've if you look at this business line for the last two or three years, we've over-picked 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 that but I think that's more driven just by our overall underwriting practices and other things than it really being a market trend per se that's flowing through the book. Yes, when you 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. We've had time periods where there's been a little pressure. We've seen some favorable development there. As most of us knows 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 spent any time working on claims knows they're more likely to get worse than they are to get better. So, that just slows itself a little bit. So, it's just the normal ordinary course stuff.

Seth Rosenberg, Analyst

Sure, I understand. Just one last question. Jim, I think you mentioned in your comments that you will report on the lag, and there are still some items to process for the next quarter. Can you provide any insights on how we should approach this for the second quarter?

Jim McKinney, CFO

It's somewhat challenging to provide a definitive answer. Ultimately, it will be influenced by a mix of equity market performance. If you examine the equities, considering the Russell 2000 as a benchmark may be helpful. For the private credit high-yield debt markets, that could serve as an indicator as well. This will offer a range for you. It's difficult to pinpoint specifics. I believe we are in a potentially advantageous position compared to other alternative equities in some situations, while in others, we could encounter unusual economic conditions. Therefore, it's tough to provide precise data at this time. I don't intend to be vague; rather, I anticipate that our performance will align closely with industry standards and those indexes. However, until we see the actual data, I am cautious about giving you a specific answer since there can sometimes be discrepancies between these measures.

Seth Rosenberg, Analyst

Sure. That's helpful color. Thank you.

Operator, Operator

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.

Joe Lacher, CEO

Again this is Joe Lacher. Thank you all for your time and attention today. We appreciate it and stay healthy. Thanks.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.