Q2 2021 CNA Financial Corp Earnings Call
Please standby we're about to begin.
And welcome to Cna's discussion of its 2021 second quarter financial results.
CNA second quarter earnings release presentation, and financial supplement were released this morning and are available via its website at www Dot CNA Dot com.
Speaking today will be Dino Robusto, Cna's, Chairman and Chief Executive Officer, and Al morality, Cna's Chief Financial Officer. Following their prepared remarks, we will open the line for questions.
Today's call May include forward looking statements and references to non-GAAP financial measures any forward looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the call.
Information concerning those risks is contained in the earnings release and in Cna's. Most recent SEC filings. In addition, the forward looking statements speak only as of today Monday August <unk> 2021, CNA expressly disclaims any obligation to update or revise any forward looking statements.
Made during the call regarding non-GAAP measures reconciliations to most comparable GAAP measures and other information have been provided in the financial statements.
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This call is being recorded and webcast. During the next week the call may be accessed on Cna's website, if you're reading the transcript of the call. Please note that the transcript may not be reviewed for accuracy. Thus it may contain transcription errors that could materially alter the intent or meaning of the statements.
With that I will turn the call over to Cna's, Chairman and CEO Dino Robusto. Please go ahead Sir.
Thank you Rochelle and good morning, everyone.
The second quarter, we produced a record core income.
<unk> from improvement in our underlying combined ratio.
With strong investment income and a much lower level of catastrophe losses.
To the prior year quarter.
Core income was 341 million or $1.25 per share.
Net income for the quarter was 368 million or $1.35 per share.
As we reported last quarter, we sustained the sophisticated cyber security incident in late March.
Outstanding debt. This resulted in a complete shutdown of our systems for the early part of the quarter.
And impacted our transactional capability, we could quickly regained momentum and finished the quarter with a very strong June.
This in turn allowed us to achieve gross written premium growth ex captives of 8% in the quarter.
Consistent with the first quarter.
In addition, new business grew 10% to 393 million consistent with the first quarter.
And amongst the highest quarterly new business volume since 2004.
Of particular note.
<unk> plus 10% rate increase for the quarter, only 1 point lower than the prior quarter and the fifth consecutive quarter of double digit rate increase and.
And importantly earned rate is now just shy of 12%.
Long run loss cost trend is running about 4.5%. After we increased at roughly a half a point in the first quarter, which portends a meaningful margin growth.
And based on 4 quarters of double digit rate on rate increases.
Margins should continue to build into 2022 all else equal.
The all in combined ratio was 94% 15.2 points lower than the second quarter a year ago.
The improvement is largely due to a significant reduction in cat losses.
In the second quarter of 2021 pre tax catastrophe losses were 54 million.
Our 2.8 points of the combined ratio.
During the second quarter of 2020 pre tax catastrophe losses were $301 million or.
Our $17.5 points.
The P&C underlying combined ratio was 91, 4%.
A 1.8 point improvement over last year's second quarter result.
Adjusted for the impacts of Covid in last year's second quarter. The improvement is 2.2 points.
And the loan loss ratio improved 2.7 points.
On the expense ratio improved 1.5 points.
Importantly, <unk>.
Each of our 3 business units improved their underlying performance in the quarter.
As we have articulated repeatedly over the last 4 and a half years.
We have been laser focused on improving our underlying combined ratio.
My institutionalizing, an expert underwriting culture throughout the organization.
Which included shedding business, when we could not achieve an excellent path and expedient path to profitability.
This included the re underwriting of our Lloyd's portfolio over the last 18 months.
It also involves the building our talent base increase.
Increasingly specializing our target market focus on commercial as we had historically done in specialty.
<unk>, our expense management and building an optimal reinsurance program to allow us to be increasingly opportunistic in the marketplace, while reducing volatility.
This quarter, we took another step in optimizing our reinsurance program and strengthen our overall property protection by adding a property quota share treaty.
On leased property lines represent less than 20% of our overall portfolio.
Because of our heavy concentration in professional liability and other casualty lines.
After multiple years of strong rate increases there is an opportunity for us to further grow the property portfolio at very favorable terms and conditions and like we have done before when we opportunistically expanded lines of business like management liability and umbrella.
We do so initially with some proportional reinsurance and then over time as the book matures we.
We revisit our reinsurance structures.
In addition to sharing dollar 1 protection for Attritional losses, we achieved the same for both critical cat barrels.
Other cats created by convective storms and wildfires.
And given the average catastrophe levels in the last 4 years do not appear to be reverting to historical means.
Additional protection allows us to maximize underwriting returns and reduce volatility.
As we grow the portfolio.
All of the efforts to improve our underwriting under underwriting performance is steadily paid off our underlying combined ratio has decreased in each of the last 4 years from 97, 9% at year end 2016.
So our current 91, 4%, which includes a relatively modest benefit from our implied margin build through this hard and market.
The underlying loss ratio on the second quarter of 2021 was 59, 5% representing <unk> 6 points of improvement.
From the first quarter of this year.
The underlying loss ratio was 0.2 points higher than the second quarter of 2020. However, the prior year loss ratio reflected a COVID-19 frequency benefit.
<unk> 9 points.
The improvement in our underlying loss ratio this quarter, excluding the Covid impact is due to earned premium growth and recognizing some modest earned rate above our long run loss cost trend assumptions.
The underlying combined ratio for specialty was 89, 2%.
A 2.9 point improvement compared to last year.
This is the lowest underlying combined ratio in 3 years.
The expense ratio improved by 2 points year over year to 30%.
And the loss ratio improved by <unk> 9 points to 59%.
The underlying combined ratio for commercial was 93% comparable to last year, but favorable by almost a point, excluding the COVID-19 impacts that lowered the loss ratio in 2020.
The loss ratio on expense ratio each improved about a half point year over year excluding.
Excluding the Covid impacts.
The underlying combined ratio for international was 92, 5% this quarter, which is the lowest since international was first presented as a separate segment in 2014.
The expense ratio dropped to 33, 5% from 36, 7% last year due to significant earned premium growth and our strategies to reduce some poor performing Lloyds program business, which carried higher acquisition costs.
The loss ratio of 59% is down <unk> 9 points compared to last year.
I am, particularly pleased with our re underwriting execution.
It has generated these improved results.
Which now allows us to turn our focus to growing the international portfolio.
And you can see this in the quarter as well as the first half of this year with gross written premium growth of 22% in the quarter.
And 17% year to date or 13% excluding currency fluctuation in the quarter.
And 9% year to date.
In specialty we also had strong growth in the quarter gross written premium excluding our captive business grew by 11%.
Business was up 26%.
Retention dropped slightly in our medical malpractice business as we continue to impose the necessary terms and conditions to.
To achieve our required rates of return and as you have evidenced us consistently doing if we can achieve the proper terms and conditions, we will walk away.
We have made a lot of progress, but additional rate is still needed and in the quarter. We achieved 13 points of rate and we believe that med Mal price increases will persist at the double digit level.
Through year end.
Turning to commercial gross written premium ex captives grew plus 2% in the quarter.
Which was disproportionately impacted by the cyber incident that began on March 21st.
Through the tremendous work of our employees and their steadfast support of our agents and brokers, we continue to underwrite and pay our claims throughout the incident.
But the limited transactional capability slowed down our production in the early part of the quarter.
The impact was most notable in commercial in particular middle market.
On the underwriters are primarily based in our branch offices, where they focus on local agent and broker relationships and typically handle.
A high volume of smaller and mid sized accounts as well as the smaller end of our construction business segment.
This is in contrast to public D&O underwriters are large national account underwriters that are more centralized in key cities like New York dealing with fewer.
The larger accounts.
In middle market retention, and new business levels were both impacted which lowered growth.
In addition, middle market and National accounts retention were also impacted by some targeted re underwriting in the quarter.
Importantly, however.
We saw significant increases in momentum throughout the quarter and retention for the month of June increased to 82% for middle market.
Broadly during the month of May we pivoted from using transactional workarounds to an increasingly normal state of technology and operations.
Which allowed us to improve our production statistics.
Our overall P&C gross written premium growth in June jumped.
The 13% fueled by new business growth of 32%.
And overall retention of 82%.
This momentum has continued into the month of July.
So we are confident that we can continue to leverage the favorable marketplace in the latter half of the year as.
As we have effectively done since the start of the hardening market.
Overall for the quarter net written premium growth for PNC was down 1%, which was distorted by the 1 time on earned premium catch up associated with the new property quota share Treaty we purchased.
June 1 excluding the effect of the onetime catch up net written premiums grew 5%.
For P&C overall prior period development was favorable in the quarter by <unk> 2 points on the combined ratio will provide more detail later.
Before I turn it over to al.
I'll make a few comments on how I think about the pricing environment at this point in the cycle.
As I mentioned last quarter written rate changes began to exceed long run loss cost trends 8 quarters ago and earn rates have exceeded our long run loss cost trends for 6 quarters after being below.
Long run loss cost trends for 5 straight years.
More rate is therefore still needed notwithstanding.
The 1 point moderation in price increases in the first and second quarters.
We are securing strong written rate increases where needed most.
By way of example in the quarter.
<unk> services professional liability pricing was up 23%.
Umbrella was up 16%.
Financial and management liability was up 17%.
<unk> was up 13% and property up 11%.
Importantly earned rate changes in 2021 are running close to 12% and our long run loss cost trend assumption is about 4.5% in the aggregate with variations by class.
That portends well for meaningful underlying margin improvement on.
All else equal.
Of course.
Things are rarely equal.
Recall that we increased our long run loss cost trends by about 2 points over the last couple of years in response to clear increases due to social inflation.
And we won't know the true impact of social inflation on these accident years until they develop over time.
For now we.
We're not allowing that perceived margins will have a significant impact on our accident year loss ratio picks.
Or it overly benefiting prior year reserves until we have greater clarity on the impacts of social inflation in light of the shelter in place mandates obfuscating those trends.
Of course.
This is all playing out against the substantial GAAP of roughly 7 points between earned rates in long run loss cost trends.
So even if we assume an increase in long run loss cost trends have another half a point at year end.
And rates moderate as they did across the last 2 quarters, roughly a point a quarter.
Strong growth rate in the last year will continue.
To generate earned rate increases around 8% to 9%.
At year end, 2021, still well above even potentially elevated long run loss cost trends.
And likely still fueling some margin expansion into the first half of 2022 all else equal.
Just as important to the favorable pricing environment or.
Are the improved terms and conditions, we have been able to achieve over the last couple of years.
Which as I have mentioned before tend to persist longer than the end of the favorable pricing environment.
And when you combine that with the.
Strong improvement in our portfolio from our re underwriting actions over the last several years as.
As evidenced in our international portfolio. It should further serve to stave off upward pressure on the loss ratio.
Even when rates eventually fall below law loss cost trends sometime in the future.
And why does a disproportionate number of years rates tend to fall below long run loss cost trends versus the years it exceed them across an underwriting cycle.
Combined with the very real headwinds that persist such as social inflation low interest rate environment.
And elevated catastrophe activity that hasn't reverted to the 10 year mean I.
I believe price increase disciplined will persist for several more quarters.
This is appropriate because determining what these headwinds will do and when.
In terms of improving or deteriorating is difficult to predict.
And makes the conversation on rate adequacy less certain in my opinion.
I believe discipline and prudence remain the order of the day and with that I'll turn it over to low.
Thanks, Dino and good morning to everyone starting with the financial results core income for the quarter was $341 million compared to $99 million from the prior year quarter.
With a core ROE of 11, 3% the period.
We continue to make great progress.
A meaningful component of our underwriting progress comes from our expense ratio.
To that end, our second quarter expense ratio of 31, 6% reflects 2 points of improvement versus the prior year quarter and 4 tenths of improvement from the fourth quarter of 2020.
As you will recall the prior year quarter reflected a half point adverse impact associated with COVID-19.
The expense ratio improvement was again achieved in all 3 of our P&C business segments.
As I have said previously the expectation was that written premium growth would ultimately translate into earned growth and the expense ratio would benefit from this as we maintained discipline in our expense spend.
And while the timing of our discretionary investments in talent technology and analytics.
Lead to some volatility in our expense ratio from quarter to quarter over time, we would expect to sustain our progress.
Turning to net prior period development on reserves for the second quarter overall P&C net prior period development with 2 tenths of a point favorable compared to 1.5 points favorable on the prior year quarter.
Favorable development, especially during the quarter was driven by the security business somewhat offset by management and professional liability.
In the commercial segment favorable development on Workers' compensation was offset by unfavorable development in commercial auto.
In terms of our Covid reserves, we made no changes to our catastrophe loss estimates during the quarter.
We continually review our Covid reserves and our previously established estimate of ultimate loss remains appropriate.
And our loss estimate is still virtually all niv NR.
As Dino mentioned on June 1st we renewed several treaties associated with our property reinsurance program.
As part of this effort, we added a quota share treaty, which covers policies written during the training treaty term as well as policies that were in force as of June 1st.
As a result of our decision to have all in force policies benefit from this new treaty and from the onset of Hurricane season, we ceded $122 million of premium as a 1 time catch up of unearned premium on policies previously written as of the treaty inception.
This directly impacted net written premium for the quarter.
Specifically P&C net written premium was down 1% relative to the second quarter of 2020 X.
Excluding the effect of the on earned premium 1 time catch up net written premiums grew 5% relative to the prior year period.
Specific to commercial net written premium was down 12% relative to the second quarter of 2020.
Excluding the effect of the unearned premium 1 time catch up net written premiums contracted 1% relative to the prior year period.
As this treaty was effective 6.1 the impact on earned premium for the quarter was modest.
Now turning to life and group.
The segment produced core income of $43 million in the quarter.
This compares to Q2.2020 income of $14 million.
Core income for the life and group segment in the quarter was largely driven by favorable net investment income free.
Predominantly from the performance of our limited partnership investments.
In addition, morbidity experience was moderately favorable for the quarter, while persistency experience was slightly unfavorable.
As a reminder, we will perform our life and group annual reserve reviews in the third quarter of this year.
As always we will take a close look at all of our reserving assumptions, including critical factors related to my grid morbidity persistency rate increases and our discount rate.
Please recall last year, we moved meaningfully on our discount rate assumption setting the normative rate for the 10 year Treasury at 275% with a 10 year grade in period.
While current interest rates are higher than 1 year today, they remain low on an absolute basis further validating the prudent actions we took last year.
Our corporate segment produced a core loss of $53 million from the second quarter compared to a 40 million dollar loss in the prior year.
We conducted a review of our legacy mass tort reserves during the second quarter.
As a result of this review this segment includes a $40 million pre tax charge related to unfavorable prior period development.
The increase in reserves largely is associated with abuse claims.
Turning to investments total pre tax net investment income was $591 million in the second quarter compared with $534 million on the prior year quarter.
The results included income of $156 million from our limited partnership and common stock portfolios as compared to $84 million on these investments from the prior year quarter.
The strong limited partnership returns for the quarter across both the P&C and life and group segments were significantly driven by private equity investments and the effect of lag results from the first quarter.
As a reminder, our private equity funds, primarily report results on a 3 month or greater greater lagged basis, whereas our hedge funds primarily reported results on a real time basis.
Our fixed income portfolio continues to provide consistent net investment earnings.
Stable relative to the last few quarters and modestly down relative to the prior year quarter.
The year over year decrease reflects the effect of lower reinvestment yields substantially offset by the favorable effect of a higher investment base, our strong operating cash flows of the fuel portfolio growth.
The pre tax effective yield on our fixed income holdings was 4.3% Q2.2021, compared with 4.6% as of Q2.2020.
The decline in our portfolio yield over this time reflects the cumulative effect of the persistently low interest rate environment, which continues to be a headwind.
At the same time the book value of our fixed income portfolio has grown by $1.6 billion over the last year mitigating the decline in the reinvestment yields.
From a balance sheet perspective, the recent decline in interest rates during the quarter resulted in the increase in the unrealized gain position of our fixed income portfolio to $5.1 billion at quarter end up from $4.3 billion at first quarter.
Fixed income invested assets that support our P&C liabilities had an effective duration of 4 point year for 9 years at quarter end.
The effective duration of the fixed income assets that support our life <unk> group liabilities was $9.3 years at quarter end.
As usual slides from our earnings presentation will provide you with additional details of the investment result, and the composition of our investment portfolio.
Our balance sheet continues to be very solid at quarter end shareholders equity rose to $12.7 billion or $46.69 per share reflective of our net income and the increase in our unrealized gain position during the quarter.
Shareholders' equity excluding accumulated other comprehensive income was $12 not $12.2 billion or $44.81 per share.
We have a conservative capital structure with a leverage ratio of 18% and continue to maintain capital above target levels and support on our ratings.
In the second quarter operating cash flow was strong at $603 million compared with $438 million in Q2, 2020, and driven by the improvement in our current accident year underwriting profitability and a lower level of paid losses.
This lower level of paid losses is also reflected in our lower P&C paid to incurred ratio ratio, which was 73% for the quarter.
In addition to consistent net operating cash flows we continue to maintain liquidity in the form of cash and short term investments and have sufficient liquidity holdings to meet obligations and withstand significant business variability.
Finally, we are pleased to announce our regularly quarterly dividend of <unk> 38.
And with that I will turn it back to Dino.
Thanks Al.
We are pleased with our production execution, especially considering the transactional challenges we experienced early in the quarter.
We produced the lowest quarterly underlying combined ratio and record quarter income.
Price increases our earnings grew at a double digit level and we continue to opportunistically grow our new business at record levels.
We believe the favorable market conditions will persist throughout the year.
We are well positioned to capitalize on the many opportunities in with that.
We are ready to take your questions.
Thank you.
Asking a question. Please press star followed by the digit 1.
You are using a speaker phone. Please make sure your mute function is turned off.
Military correctly.
Once again star 1 on we'll pause for just a moment.
On our first question, we'll hear from Gary Ransom with Dowling and partners.
Okay.
I. Thank you for the comments on the market do you know that was helpful. But I wanted to do.
Talk about that a little bit more I was just thinking about the impact of inflation generally and granted C. P. I doesn't really correlate with social inflation, but it might indirectly overtime and you mentioned that the.
You're a lot your long term loss cost trend is 4 and a half maybe it'll be 5 but I look at all these inflation.
Larry pressures and wonder if it might.
It turned out to be 6 or 7.
We don't really realize it for a while and.
And I I wondered if you could just comment on that kind of scenario or how the how the market might react to that.
The emergence of a worst trend.
Yeah.
Thanks, Gary clearly.
The important let's say important question I mean can it go up higher than a half a point and it is possible.
And it is mainly the social inflation as you indicated right CPI.
It does impact that we see it a little bit on the property, obviously, you'll probably see it in demand surge if you have a large cat.
But you know it reveal is it reveals itself quickly you put it in your loss picks quickly.
And in your reserving the medical inflation you know typically.
Been or at least for the last several years.
Really hasnt impacted work comp.
The reforms you know continue to play out so it's mainly the other casualty lines its social inflation. It has gone up as I indicated over 2 points in the last couple of years and we are have been quite transparent in what lines. It was obviously the medical malpractice. It was commercial auto liability and excess.
Umbrella so.
That's why I think we continue to be.
On prudent both in the accident year pick and and how we look at our reserves in prior.
Accident years. So you know I was playing out some math.
1 point a quarter coming down on on on rates.
It goes up another half a point it might go up higher in 2022 and I think this is why you still see the difference in pricing in these lines still in big double digit and I think they'll stay up there.
Is the <unk>.
Shelter in place.
Lays out.
And or diminishes.
And are you starting to see the trends I think the market.
We will have those rates persist so maybe the math still plays out the way I suggested but it is possible, it's why a little bit.
Yes.
Definitive AR on the issue of rate adequacy and it being.
You know sort of a moving target somewhat so it's possible, we'll keep an eye on it and I think you can use the math and if you play a different number.
And it will then depend whether the rate continues to moderate and those lines or it stays flatter so.
That's really all I can say Gerry I wish I had.
You know a better a better insight. So we just monitor it and stay because I say disciplined and prudent.
Just 1 more level of that and when I think about what happens in court, sometimes medical cost trends are the baseline for pain and suffering additions or multipliers and have you seen you mentioned you haven't seen it very much in.
Workers comp, but has that played any role so far that has been visible in any of the liability lines for the injury cases.
I mean, clearly injury cases that are you know in pack individual.
And the health of individuals.
<unk> are going to have some impact, but if you look at the medical trends.
Outside of work comp.
We really.
Haven't seen it it's been it's still fairly stable there hasnt big the gyrations.
That's are more representative of the overall social inflation. So it's more than the medical it's all of the things that people comment on relative to the social inflation and send to make corporate and <unk> corporate sentiment et cetera et cetera.
Okay.
Thank you for that if I can just change subjects to I wanted to ask about the cyber.
Packed it.
I'm just wondering if you're in hindsight was there anything.
That you're now doing differently or you know just from a high level things that you may have changed that.
Either help or.
<unk>.
Future things like that.
Yeah, I mean I think.
Ah you're going on you know, it's a little bit.
Akin to an arms race.
Whether it happens to us.
Or whether you see it happening the ransomware across the industry.
Youre going to react as they get more sophisticated.
Going to elevate.
You're on security, we clearly are elevating our security I'd like to believe we brought on.
Continued had it not been directly impacted.
You know.
As a function of what happens to us about what's happening out there and it's getting.
Clearly much better publicized and so you just got to keep on going with it and you'll I'll, probably say the same thing a year from now and probably say the same thing 5 years from now.
Our GAAP results.
Clearly.
You know we have made.
Additional changes in investments.
Has this affected how you might underwrite cyber exposure as well.
Yeah, that's right.
Yeah that does.
That's a great point.
I don't know if its really because of our own other than when you look at our portfolio and you look at the frequency of ransomware in particular claims over the last 24 months right. When you are we have to take substantial action now okay. Our book it only represents a.
Little less than 5% of our specialty book, but Nevertheless, you know we have taken substantial action and.
It's much more strict underwriting controls now both on new business and renewals.
With respect to the security protocols that our Insureds have and then like many others have commented we've.
Clearly lowered our average limits, we've increased our deductibles and coinsurance, we got about 50.960 points of rate.
In the second quarter, but also.
We have good reinsurance right. So we have a quota share treaty on individual cases.
Cases, Gary individual losses, rather and we have an aggregate stop loss.
The protect us against a more catastrophic type a scenario where it hits multiple insured. So I think we're doing all the right things a lot more.
If you take out rate a lot less growth.
And so we're going to continue to be stringent in our underwriting in light of the activity.
Thank you very much.
Okay.
And next day.
Josh.
Thank you Kevin.
Thank you for taking my question.
So I really don't want to have with us.
Production numbers.
Net.
Premium written.
Okay.
Okay.
Just to understand how.
How the attack on <unk>.
Good day.
And then I guess.
For a sense of how we can purchase price.
And maybe it's too late.
Let's talk about <unk>, 20, which obviously got depressed writings because of the.
Pandemic and maybe there was a boost here in Q.
<unk> 'twenty, 1 because of easy comps I guess theres a lot of them there, but maybe there's a there's a bit more detail that we can get.
Understand better your trend.
Well that's all.
Josh I think you know.
Do you think about the trend as the cyber incident is behind US right. So it happened on March 21st our systems were totally locked down for 3 weeks and so on.
Obviously that limits your transactional.
Get up and running.
It takes a little bit of time to do some on the catch up so we said it was.
Gross written premium was 13 percentage.
8 for the quarter. So you do the math, it's pretty simple.
What sort of April and May.
It was considerably lower and not surprising. The question is is that you know.
It's sort of a disjointed right in defense of that now we are back up and running and our we had a good June and continuing sort of along the path that we had before.
The cyber incident and as I said it continued in July so I think it's behind us and.
And then they'll move forward as it did in the absence of the cyber event.
I don't know if that helps Josh I mean, I don't know yeah. I mean on terms of can we say that the first 2 weeks of April.
Your production was down 40% I mean like just trying to understand.
How can we win.
I mean did it did it cut things off to zero.
I know you had workarounds and whatnot, but in the peak of the cyber attack.
What was what was happening with production.
I think I think the way to think about it.
Adjusted.
It's hard to know exactly.
Exactly what you say what it would have been had it had it not.
Not not been there I think well the way, they're simply think about it is that.
The number of submissions you know had been down in.
In in April and parts of May maybe about 20%, but those are submissions right. You then have a quote ratio. You then have a hit ratio. What you would have gotten had you didn't have adverse since you had a difficult to say right. So we wanted to be as transparent as we can be by sort of telling you what the quarter is what June is.
And the net effect of April and May and that's about the best detail honestly I could provide and be accurate at the same time.
Oh, absolutely fair absolutely fair.
And just you know you made the very smart comments about not wanting to interpret late a pandemic your frequency into your loss picks yet because you still don't know what's going to happen maybe down the line that is going to be a great windfall for the insurance companies, maybe it's not free can you talk.
But the law in the context.
How much conservatism.
But with these fears from burgers in broader inflation theme and then there's the pandemic frequency.
To what extent when would we see you'd be more comfortable making a decision on how would you interpret the law.
Based on your current concerns about.
Nation and whatnot are we going on after waiting a number of years before you'd be willing to interpret current information into your offering.
Yeah, that's that's such a great. That's a great question, Josh and and and hard you know as you can tell by the way.
You know I I commented in the prepared remarks, along the issue of rate adequacy right. In my opinion. It just remains I remain you know a little bit uncertain about it and so I think.
It depends on how this evolves right now.
Covid.
How the Delta Varian plays out whether it protract, the obfuscation or not hopefully not listen on.
I think in 3 to 4 quarters, you know you'll have a better sense unless of course.
The situation.
Guests are worse.
And then it might protract it a little bit longer so what we are.
Try to do is move when we actually no wait and see it and are comfortable with it and if we're not we'll just tell you. We're not we'll tell you what the spread is and and and then you can interpret it.
You know as you like Josh, but I mean that is okay. That's the bottom line. That's that's what we're trying to figure out and I understand your question.
Alright.
And 1 more if I can.
Can we talk about the how hotly competitive the market is obviously you lost some business because of the cyber attack.
Yeah.
This production was good that means you took the business from somebody else.
I assume there's also some business from you and so where rates are right now is the Margaret additive is there anybody who's willing to.
Underpricing in this moment happening I know I know, there's a lot of them, saying, Hey, we think on price increases are going to be sustained at the same time.
Retention isn't as strong in this environment.
Yeah. So when you were talking about like what's the competitive environment.
Yeah, Yeah, okay.
All that there's a there's a lot there.
The way I would describe the marketplace I still think it's discipline. So if you take the lines subject at the largest you know or most pronounced our long run loss cost trends I think they're still strong great hey, tomato market.
Our middle market, which in our portfolio Josh is much more more than half of it is professional services financial institutions Tech life Sciences as opposed to heavy manufacturing very profitable business.
Middle market at the high watermark, let's say the high Watermark was Q4 I think everyone is solidifying around Q4, we never got over 8% a year ago. It was only 7 and so.
So that has always aimed at all a little bit more competitive what maybe happening a little bit now is.
It appears insurance companies are at different positions in their rate adequacy, some suggesting they are there. So they may a want to be a little bit more aggressive and so I think in general though.
I consider it to be and remain a disciplined market. That's the way I would categorize it is.
Hotly competitive for many many many years in a cycle and that's that's not what I would suggest at this point.
Thank you for all the detail very much appreciate it.
Thanks, Josh.
And as a reminder, its star 1 to ask a question next we'll move to Meyer shields with <unk>.
Thanks.
I'm pretty sure about the question in the past, but Al mentioned continued adverse reserve development in commercial auto and I wanted to dig into that a little bit because it just seems like the industry continues to struggle with a line of business, where there's not that much innovation.
Cyber where the nature of losses should be shocking and it was up and get your thoughts on.
What's driving that sort of difficulty in terms of getting ahead of the losses.
And what your outlook is in line over the next year or so.
That's a.
Great question on why are there isn't you know theres no doubt.
That you know we are chasing increase.
Increasing long run loss cost trends you know in auto.
Even though you know the book overall.
Maybe a little over 4 and a half the reality is auto.
Uh huh.
Closer to sort of 8% and that has been consistently.
On a going up and you think you have a good handle on it and then you know the effects of social inflation are really bearing down on auto now you know the good news is our now our rate rather than high single digits. We saw last year you know we're at.
13 points of rate on the commercial obviously cause a commercial fleets. We have you know on ability.
To impact the pricing more in the short term, but this this has been a little bit of chasing the long run loss cost trends and I think sometimes auto a gas.
Packaged in and you look at it overall the reality is this is a line of business that continues to need a lot of pricing focus.
And if you were to remove.
The price increases from our portfolio you'd see relatively flat slightly negative growth.
Okay. No. That's helpful. Switching gears just in terms of understanding things to be transfer of earned premiums under the property quota share have any impact on the loss ratio in the quarter.
In other words is there an adjustment to prior periods.
Hey, Meyer this is al no. It would not have had a material impact remember as I said the effective date for this was 6.1 so I talked about that unearned adjustment, that's really a reflection of looking back at written policies and the unearned components of that but given the effective.
Date of 6.1 no really meaningful impact on earned expense ratio or loss ratio.
Okay excellent. Thanks, so much.
And there are no further questions at this time I will turn the call back over to Dino.
So for any additional growth.
Thank you everyone. We look forward to our next quarter and chatting with you by now.
And that will conclude today's call. We thank you for your participation.
Okay.
[music].
Yeah.