Q2 2022 Chubb Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to the Chubb Limited second quarter 2020 earnings Conference call. Today's call is being recorded after the prepared remarks, there will be a question and answer session. You may enter the queue by simply press star one on your telephone keypad and if your question has to be done.
Or you wish to revoke your stack from the queue.
Talk a little bit the number two for opening remarks, and introduction I would like to turn the call over to Karen <unk>. Please go ahead ma'am.
Thank you and welcome to our June 32022 second quarter earnings Conference call.
Our report today will contain forward looking statements, including statements relating to company performance pricing and business mix gross opportunities and economic and market conditions, which are subject to risks.
And actual results may differ materially. Please see our recent SEC filings earnings release, and financial supplement which are available on our website at investors Dot shop Dot com for more information on factors that could affect these matters. We will also refer today to non-GAAP measures financial measures.
Issues of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplement.
Now I would like to introduce our speakers first we have Evan Greenberg, Chairman and Chief Executive Officer.
Followed by Peter <unk>, our Chief Financial Officer.
And then we'll take your questions also with us to assist with your questions are several members of our management team.
And now it's my pleasure to turn the call over to Evan.
Good morning.
We had a very strong quarter with record operating income driven by outstanding underwriting and investment results as well as double digit constant dollar P&C premium growth.
Pricing was strong and exceeded loss cost in commercial lines.
Even as we increase the inflation deflation factors, we are using in our loss ratios in anticipation of future increases to loss cost.
Meanwhile growth in our consumer businesses continued to accelerate.
Core operating income in the quarter was a record $1 8 billion or $4 20 per share up 16% over prior year.
For the year, we have produced over $8 per share up nearly 31%.
Our second quarter underwriting results were simply lights out.
One 4 billion of underwriting income, which was up 21% over prior with the published combined ratio of 84% both record results catastrophe losses in the quarter were reasonably right light relative to our expected losses and virtually flat with last.
<unk> second quarter.
The P&C current accident year combined ratio, excluding cats was 83 and a half a nearly two point improvement over prior year.
On the other side of the balance sheet adjusted net investment income was a record $950 million for the quarter.
You know we are predominantly a buy and hold fixed income investor.
Given rising interest rates and widening spreads investment income is and will continue to rise.
Our reinvestment rate is now averaging 4.7% against a portfolio yield of three point too.
We've begun to thoughtfully and meaningfully accelerate the turnover of our portfolio in a targeted manner. So that we can put cash to work more quickly at higher yields spreads have moved to more historical averages among the various fixed income classes and the wind.
Q, we could create more volatility and put more pressure on spreads in the future, which would benefit us Peter will have more to say about these and other financial items.
As you saw we completed the acquisition of the Sigma business.
As we had previously announced the addition of sickness A&H and life business in Asia will be immediately accretive to core operating income per share in a row.
We have spent the past six to eight months planning the integration to generate the revenue and earning power.
The combination of our businesses together and each country should achieve.
We are off to a rapid start and are beginning to execute having.
Having just come back from Asia and met with the teams in Korea, and Thailand morale, among our new and existing colleagues is quite high and there's a great sense of optimism in what the future holds for our business in the region.
Our Cigna colleagues, who are joining us starting with the leadership are a great fit with job and our culture.
Now turning to growth in the rate environment total P&C premiums globally increased 9% in the quarter on a published basis or 11% in constant dollars with commercial up 12% and consumer base.
Growth in the quarter remains broad based with contributions from virtually all commercial businesses globally from large corporate middle market to small from traditional to specialty and most all regions of the world.
Commercial P&C premiums for North America were up 12, 5%.
Eight seven excluding agriculture, well in overseas General commercial lines grew 13% in constant dollar.
And we then scrubbed six points of FX to arrive at the published result.
Agriculture premiums were up 44% in the quarter driven overwhelmingly by crop insurance growth commodity prices plus growth in market share produce this result.
Looking forward, we will have a very strong crop insurance revenue growth in the third quarter as well.
In terms of the commercial P&C rate environment.
Market conditions overall remain favorable while the level of rate increases is moderating.
The vast majority of our portfolio was achieving favorable risk adjusted returns and additional rate is therefore required primarily to keep pace with loss cost, which are hardly benign the rate environment is naturally becoming a bit more competitive particularly in search.
Casualty related classes as more carriers seek to now grow.
The market is reasonably disciplined and I expect it will remain so given not only the specter of loss cost inflation, but the presence of other risk exposures such as climate change the war in Ukraine, The litigation environment, cyber and the overall cost of reinsurance.
Plenty of reminders to managements to get paid for the exposure underwritten.
In the quarter in North America total commercial P&C premiums, excluding agriculture grew eight 7%.
Growth this quarter in commercial lines was led by our major accounts and specialty division, which grew about 10.5%.
Followed by our middle market and small commercial business, which grew about six and a half.
Renewal retention for our retail commercial businesses was a very strong wondering 101% on a premium basis.
Overall rates increased in North America commercial lines, 7%, while total pricing, which includes rate and exposure increased over 205%.
Remember, most but not all of the exposure change helps to ameliorate loss costs.
In major accounts, which serves the largest companies in America rates increased over 8% with pricing up 11.6 general casualty rates were up nearly 13%.
<unk> by class of casualty, while risk management related comp and GL were up about 4%.
Pretty rates were up around nine and financial lines rates were up nearly seven 5%.
And our E&S wholesale business Ray.
It's increased by just under 10% with pricing up over 14 property rates were up over 13% casualty was up 8.5% and financial lines rates were up nine and a half.
In our middle market business rates.
Rates increased nearly 7% excluding comp with pricing up about 9%.
Rates were for property were up five casualty rates were up over seven and comp rates were down 4.3, however comp pricing was up over 5% when taking into account exposure change.
And finally financial lines rates were up over 10%.
Turning to loss costs for a minute.
We increased our loss cost trends in North America to six 5% in anticipation of rising costs.
The actual trends we are observing at this time are lower.
Yeah.
Six 5% as compared to pricing that was up over 205%.
In general we are trending loss cost for short tail classes.
Close to 7%.
From six and a half last quarter and long tail, excluding workers' comp, we're trending at six and a half up from six.
And our first dollar comp book is trending between four and four and a half.
These trend factors are contemplated in both our pricing and in our accident year loss picks in the quarter.
Turning to our international General insurance operations retail commercial P&C premiums grew 12, 5% in constant dollars, while our London wholesale business grew over 10%.
Retail commercial growth varied by region with premiums up 14% in Asia Pacific.
Followed by growth of over 13% in Latin America, our U K and Europe Division was up nearly 12%.
Internationally like in the U S. We continued to achieve improved rate to exposure across our commercial portfolio.
In our international business rates increased in the quarter about nine 5%, while we estimate pricing was up about 12%.
Rates varied by class and by region as well as country within reach it.
Outside North America, we are currently trending loss costs at about six 5% up from four though that varies by class of business in country.
Loss cost factors, we are using for short tail are now running over seven at end.
Long tail, we're trending at about six again. These factors are contemplated in both our pricing and in our accident year loss picks in the quarter.
And like in North America are higher than actual observed trends.
International consumer lines growth in the quarter continued to pick up momentum as premiums increased over 12%, though FX, then scrubbed about seven and a half points off the growth.
Premiums in our international A&H business grew over 12% in constant dollar with Latin America up over 19% and Asia Pacific up 13%.
While our international personal lines grew 12%.
Net premiums in our North America high net worth personal lines business were up 4.7% on the back of record new business activity.
Our true high net worth client segment grew 12, while overall retention was very strong at nearly 98%.
Our homeowners business, we achieved pricing of about 10, while the homeowners loss cost trend is running about 10 as well.
To sum it all up we had simply an excellent quarter.
As I look ahead, I am mindful of the world and the conditions in which we operate.
<unk> inflation.
Specter of recession, the war and energy and food security problems globally.
With all that we have a lot of broad based momentum in earning power in our organization that gives me confidence commercial P&C growth and pricing are favorable our consumer lines business growth is accelerating.
Our life company revenue and earnings will accelerate with the addition of the Sigma business in Asia Asia is now seven and a half billion dollar region for our company our underwriting margins are excellent.
Our investment income will grow nicely due to rising rates and strong cash flow. We are well positioned for continued excellent EPS growth well into the future I will turn the call over to Peter and then we'll come back and take your questions.
Good morning, everyone. As you just heard from Evan we had another excellent quarter. In addition to the record results. We ended the second quarter in a position of exceptional financial strength.
Our strong underlying performance produced operating cash flow of $2 7 billion for the quarter and $5 2 billion for the first six months.
Our balance sheet remains strong we have $68 billion in total capital we continue to receive extremely liquid with cash and short term investments of $10 6 billion at quarter end or 522 billion. After accounting for the cash that was paid on July one for the Cigna deal.
Among the capital related actions in the quarter, we returned $1 5 billion to shareholders, including $1 1 billion in share repurchases and $348 million of dividends.
Through the six months ended June 30, we have returned $2 8 billion to shareholders.
The current quarter included after tax realized mark to market losses on our private and public equities are $489 million compared to gains of $794 million last year.
Also included our after tax loss after tax losses on sales of fixed maturities of $279 million in part to advance our portfolio turnover strategy.
Book and tangible book value per share decreased seven 7% and 11, 6% respectively from last quarter driven by the continuing impact of rising interest rates are on our investment portfolio and unfavorable foreign currency movements.
Net realized and unrealized losses for the quarter were $5 4 billion after tax.
In the quarter adjusted net investment income of 950 million was above the top end of our estimated range and benefited from higher interest income from floating rate securities and higher reinvestment yields resulting from portfolio turnover in this more attractive interest rate environment.
We are remaining consistent and conservative in our investment strategy with 82% of our fixed income portfolio rated investment grade and we intend to maintain our historical allocation allocation across investment assets.
As Evan noted with rising rates, our portfolios reinvestment rate has increased year to date from two 3% in December to four 7% at June 30.
Current book yield is three 2% versus 3% in the first quarter.
As a reminder, every 100 basis point increase in our investment yield generates approximately $1 2 billion pretax of net investment income.
Updating our quarterly guidance, we now anticipate adjusted net investment income over the next quarter to be in the range of $980 billion to $1 billion and we.
We expect the quality of this income to be high as the vast majority of that will be predictable yield oriented income and very little for more volatile sources like pay distributions and call premiums.
Our reported ROE for the quarter was 9% and our core operating return on tangible equity was 18, 6% our core operating ROE was 12, 4%.
Pre tax catastrophe losses for the quarter were $291 million from weather related events globally with approximately 79% in the U S and 21% internationally.
We had favorable prior period development of $247 million pretax in the quarter split approximately one third in long tail lines, principally from accident years, 2017, and prior and two thirds in short tail lines.
The current period included a charge for molestation claims related to revive or statutes of $155 million.
Our paid to incurred ratio for the quarter was 83%.
Our core operating effective tax rate for the quarter was 17, 7%, which is slightly above the high end of our previously guided 2022 annual range of 15, 5% to 17, 5%.
This was due primarily to growth in higher tax jurisdictions, and the negative impact of adverse market conditions on asset supporting certain employee benefit programs with an updated forecast of income jurisdiction along with the closing of the acquisition of Cigna business. We now expect our annual core operating effective tax rate for the full year 2000.
'twenty two to be in the range of 16, 5% to 18, 5%.
As you saw we completed the purchase of Cigna's A&H and life businesses in Asia, our expectations regarding the earnings and expense synergies from Cigna remained consistent with or better than previous disclosures. As a reminder, we reported an expected $450 million of core operating income assuming a close date of January <unk>.
One 2022 with the acquisition completed July 1st we will have a full quarter of earnings in the third quarter.
We now expect our expense synergies to reach a run rate of about $100 million pre tax which is higher than our initial estimate.
To achieve the run rate savings, we expect one time integration cost over the next two years to be about $140 million I'll now turn the call back over to Karen.
Thank you at this point, we'll be happy to take your questions.
Yeah.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please see note by pressing star one on your telephone keypad that is star one to ask the question. We take Ahlquist question from Michael Schmitz Morgan.
Stan Your line is open. Please go ahead.
Thank you and good morning, and congrats on a solid quarter again, guys. First question is on particular around accident years, 2020, one what's the nuances from Covid.
Any concerns there of <unk>.
More a higher than average I guess late reported claims coming in down the Pike later than you otherwise would expect for the extraction of yours.
I'm, sorry accident year, 2021, but related to <unk>.
Those two accident years because of Covid.
Maybe impacting late reported claims and so are you did you have any concerns that that might be we might be seeing some more claims reported later than otherwise would be the case for those two years.
No no not at all.
I'll remind you.
Quite the quite the opposite when we.
Booked the 2020 one accident years.
We imagined that those years would remain on trend as we trend years forward with inflation costs et cetera. We didn't we just expected that the reporting pattern of claims and therefore, the payments of claims might come later, but that though.
Zacks and eight years would behave reasonably normally we just didn't come off trend. So our reserves reflect all of that.
Okay.
Thanks.
I've been saying that for the last couple of years.
Yes, okay.
And then just a particular question on the segments, if I could in overseas general.
Their production in Europe seems to be down a bit and I'm. Just wondering if there's any particular nuances there in the quarter or maybe just some outlook in Europe for Oversea General. Thank you Yeah, Europe Europe grew Oh I'm sorry.
We might see it a little different in Europe grew 12% on a constant dollar basis.
You then have foreign exchange of course, the impact of the euro and the pound.
Pound.
But the underlying health and growth.
Very strong.
Okay. So underlying underlying is still strong in Europe and more just the FX impact that's why the way you can see it all you can see it all in the supplement Luke on the overseas General page I can't recall the page number but you can look in the lower left hand corner and you'll see by region growth.
Okay. Thank you I appreciate it.
I can't remember kids birthdays, but I can remember and stuff like that.
[laughter].
Thank you.
Yes.
Thank you we are moving forward to David went to Megan Evercore ICI.
Hi, Thanks, good morning.
Just a question on North America commercial.
The underlying loss ratio there very strong improvement.
Was most of that pricing coming in above the new loss trend assumption or.
Was there anything else in there related to structured transactions Ah or our non cat property losses that impacted that ratio.
Yeah, and remember you are looking on an earned basis not a written basis. So I just wanted to give you a nuance that when you talk about you know coming in above the new loss cost trends in all of that.
This is the earned not the written we're talking about when you get to loss ratio.
All right.
It's broad based it's.
Across most all product lines.
<unk> contributed to the improvement.
And.
The difference in structured transactions with its impact was really de Minimis tiny.
Tiny.
This was just.
Broad based improvement of rate that exceeded trend across our portfolio.
And as it earns in.
Got it thanks.
And then I guess, just maybe hoping maybe to get.
And thanks for the color on the loss ratio or I'm, sorry on the loss cost trend changes.
I was just wondering on the long tail lines, you know changes in both North America, and then overseas General was there anything specific in the environment outside of G. O just general inflation and the environment.
Such as CT reopening or any sort of anything youre seeing in the legal environment that led to that change.
No.
None just.
Just our judgment around the general loss cost environment.
Both the trend we have observed been observing.
In legal and in non legal and then you have inflation in wages and medical costs.
All of the inputs that would that would go into this and again it's not.
It's not what we're observing today, but we're just looking ahead.
Try and anticipating staying on top of it.
Got it and then a follow up I guess is is.
Is it a wide difference between what you're observing in and what the the new trend is or any sort of any sort of quantification on that on how big the differences between observed an actual or I'm, sorry, actual and projected.
No.
It really varies by line of business.
Have both frequency and severity inputs into loss cost trends.
And in any one line of business and it does just very so.
But overall what for proprietary reasons I'm not going to go into the actual that we are experiencing but I'm, giving you what were using as trend.
So I think better than youre getting anywhere else.
Okay.
Great. Thank you.
You can walk.
We take our next question from Elyse Greenspan with Wells Fargo.
Alright. Thanks.
And then I was hoping to.
Get some forward.
On the pricing environment.
Loss trend around 6.5%.
On your pricing right is still.
That trend level.
And you pointed to concerns about inflation. We also came with courts reopening Ukraine listed.
If you're concerned about.
As you think out how long do you think on.
Hi, thank momentum in <unk>.
And stay on top of that loss trend.
Well you know look at least if I had a perfect crystal ball I wouldn't be in this business I go do something else.
I can't predict the future, but you know my sense.
When I look at the tone of the market.
And the kind of indicators my colleagues look at in that I look at.
You know the market.
Think there and I said it in my commentary I think the market is.
On one hand, becoming more competitive is it.
As companies rationally want to grow and what is inadequately rated environment.
On the other hand.
I see the ore.
It can have a sense of the kind of.
Reactions companies are having themselves to.
Loss cost and inflation.
It's very transparent reasonably transparent and pricing in in values selected and short tail classes that they apply price against so inflation factors in property values et cetera. In the market. You know is reasonably right. It's rational to me at this time.
<unk>.
Even though it's becoming more competitive.
<unk> rates naturally like than anything else.
Trees don't grow to the Sky.
So.
They they they've achieved adequacy in most all of our portfolio.
So rates need to fundamentally right and an exposure together pricing needs to keep pace with that.
And I see the market at this time rational that way.
And I and I don't see signs that that it's going the other way.
I see rates people are charging are reasonably.
We sure to put produce reasonable result on the margin there's no.
There are people doing dumb things.
And you'll see it but its anecdotal and you always see dumb things.
So you know I.
I feel reasonably confident but that's as far as I can give you.
That's helpful.
And then on.
Now that you guys have closed with the cygnet deal.
Can we get a sense of what the excess capital.
On your own.
Following that transaction.
You know at least we're not going to update it every everybody quarter. It doesn't it doesn't move around that much we gave you.
In the first quarter. We gave you a number we also said that it contemplated the cigna deal.
Okay, and then one last one on.
Any COVID-19 reserves this quarter I don't think you called that out here.
No.
Okay. Thank you.
Well take our next question from Greg <unk>.
Raymond James.
Good morning, everyone.
I guess I'm going to.
Pivot to the investment income commentary.
Yeah, Evan in your comments you talked about.
Being largely a hold to maturity investor or having that strategy and then you also highlighted.
Highlighted the sale of some fixed maturity securities to take advantage of the new yields you talk about the book yield being at three two.
If I were to infer from your commentary it sounds like you might be accelerating the sales shifting your strategy from the hold the maturity and more like a trading just to upgrade on the yields but I don't want to put words in your mouth, maybe you can give us some color on that.
I'm going to turn it over to Tim boroughs in a second.
And Peter but I want to straighten out one thing in your mind that I've also read that one or two of your road.
Held to maturity, if youre going to use that term.
Is a is a very specific accounting.
GAAP accounting term and their rules around it.
If you have something in the held to maturity portfolio, which we have a held to maturity portfolio.
That is a security that is it designated will not be sold.
And you can only sell it under very prescriptive circumstances, I E an impairment avoiding at around managing impairment.
And I'm looking at my Chief Accounting Officer was surprised I can recall those rules, but that held to mature.
We're a buy and hold portfolio predominantly with that says is our intention.
All things being equal as we hold to maturity, but we have the ability to trade and by the way we do trade.
And to take advantage of yields but overall the portfolio is held in so losses will amortize back to par.
Over time on that.
That's the overall portfolio statement now about where we are beyond that I'm going to turn it over to Tim and Peter.
Yeah. This is Tim Tim boroughs.
In this environment with rates rising first of all as evident Peter mentioned, we have a gap of about 150 basis points between our book market yield.
This is like Nirvana provide investors were happy campus right.
New cash flow as maturities come in.
First time in almost 10 years, we're actually picking up yield so that's a good thing.
Think of this environment, we're going to focus on.
Want to emphasize we are focused on risk adjusted returns, we're not going to reach for yield.
We're going to maintain a very high quality bias when we talk about accelerating that turnover is.
Emphasize this is going to take place in the same sectors for which those securities are sold.
So.
These tactical moves are incorporated in the <unk>.
The net investment income guidance provided and they're not going to have any material impact on the average credit quality of the portfolio and obviously they will help to accelerate the ryzen mobile.
Got it.
Thanks for the color I guess.
As a follow up on that on that answer just trying to understand the magnitude and the timing I'm not sure you're prepared to give us much on that but.
Out there.
Okay.
The magnitude youre talking about.
I would say as I said anything that we now contemplate.
Incorporated in the guidance that Peter gave.
Yeah.
Got it.
The increase in the the preponderance of the increase in the guidance Greg comes from net interest income.
So I think that's the point.
Got it okay.
My second question I had.
The only other thing I'll add is it will continue to accelerate from there.
Thank you alright, the second question will be on Cigna in Asia.
We've observed some other large public.
Public companies in the insurance market either accident health supplemental health struggled to generate growth in Asia in the last several quarters, if not the last couple of years.
So.
You've talked about the return factors for the Cigna transaction can you talk about how you think about growth of that business.
Over the intermediate term.
Yeah first of all.
I think what we just told you is our A&H business, which is not a small business in Asia.
The Chubb A&H business is close to $1 billion business that business grew.
Healthy double digit in the in the second quarter. We just gave you the number so.
You know.
Let me start with that perspective.
Secondly.
<unk>.
Our.
Strategy for.
Sure.
Signet Chubb together.
The value creation is going to come from.
Two things the efficiencies.
Expense.
Or just one part that's not them interesting part to me.
It's the ability to.
Create revenue.
And therefore earnings growth.
From the combination of the two companies.
Ed.
It's the.
We're the only company I know of in Asia.
It has a unified life and non life.
<unk> approach that is going to together and it's a country by country.
Strategy.
Pretty granular.
Now, we're going to accelerate growth faster than either one would have been standalone.
The combined companies.
Customer database remember these are direct marketing companies.
The customer database of each together is an asset for cros.
The ability to approach to develop new product approach of unified life and non life products.
Which will be unique in the marketplace and we're already planning.
Is.
As another source.
Our ability to approach more sponsors and get more share of marketing space.
Cause of our life and non life together.
So our plans are whatever each one was naturally growing.
Growth is going to accelerate and it takes a little time, we will see it in a modest way in 'twenty three we're going to see much more in 'twenty four 'twenty five as we go out.
Finally.
Beyond what has been predominantly telemarketing and an independent agent in the Cigna side.
Like with the Chubb side.
A greater emphasis on the mixing and matching now which is the Asia thread of digital and telemarketing.
<unk> <unk>.
You know this goes across Korea.
Thailand, Taiwan.
In particular.
To a degree Hong Kong and.
And I just came back from the region.
And plans are granular and people are off to the races and execution.
So there you go.
Thank you for the detail there was some feedback at the beginning of your comments. It may be the moderator has some mic open it wasn't on my end stuff.
Yes, I think theres some window washers actually outside my window, which you know really you can't make this stuff up.
[laughter] perfect timing on that Evan [laughter], Oh, I didn't know if I can.
Was garbled you just tell me what I didn't get no no no.
I heard you find I just heard the not the window washers and the background and I didn't know.
Alright.
I gotcha.
You just can't get any respect to arrive here okay.
Thanks, Thank you.
Thanks.
Thank you.
Question from Jan.
Jeffrey.
Thanks, Good morning, and thanks for clarifying the window washers I actually thought you were on a train.
I guess.
My first question.
I don't think you mentioned any Russia, Ukraine related losses are you seeing any of those and Theyre just not large enough to call out or are you just waiting to see kind of how the situation develops before putting up a lot.
They're not large enough to call out to year to date, there, they're just it's a de minimis amount.
And that's the losses that we have enough information to judge as as incurred and put a dollar amount of course, we have more exposure than that that we're watching and observing but.
<unk>.
Comfortable that.
Our loss picks.
We will contemplate those.
Okay.
And then with regards to raising the loss trends. It seems to me and I don't know if thats for a fact, but it seems to me like you were actually ahead of a lot of your peers with raising the trends to where you took them two.
Does that challenge your ability to grow at the piece that you want to grow.
Well you know.
First of all I don't know what my peers are raising their loss trends too so.
No.
I don't know.
I don't know that.
Theyre not raising them and have them in the same levels.
So I can't speculate that way.
What I do know.
No.
<unk>.
No different than any other period, we've ever been out we're going to charge. What we think is the right rate.
To produce a reasonable risk adjusted return.
If we can't get paid we don't write the business.
I feel like that's going to put me at a competitive disadvantage.
Not at this point in the cycle I don't see it.
Got it as you go forward and things become.
Competitive again, when and if that happens in the future but of course, you know all trade growth all day long to to be sure that underwriting continues to grow book value.
I have not changed in 45 years.
Thank you.
Youre welcome.
Yeah.
We take our next question from Meyer Shields with BW.
Thanks, two quick questions first and then in your prepared comments, you mentioned food and energy security and I'm, hoping you can give us a little bit more.
Commentary on maybe the regions, where that represents an underwriting risk.
Well I don't know that it presents an exact.
Underwriting risk.
It's not a one for one direct relationship.
But it all feeds the backdrop of the environment, we're in where the reduce inflation, whether Rudy is recession, because how it impacts people, whether it is social and political strains.
That that lead to that lead to instability.
Whether it is the.
The political strains that lead to geopolitical instability.
Instead of raw that it's the.
It's part of the it all feeds into the background noise.
Although risk environment.
And so you got to put a broader lens on it when you start.
When you come down to the very specific correlations when youre thinking about individual risk.
And I was at also in context of.
It's hardly that were pollyannish when we're bullish about the future of the company and as we look forward we're.
We're.
We're bullish about the things we can control and that we see in our sites. We try to put all of that and remain bullish in context of the external environment as we see it today.
And that's my point.
No understood. That's very helpful. Thanks second question just in terms of.
Reserving process for recent accident years how.
How much of the loss trend that you talked about is still on.
The current valuation of those accident year reserves.
Could you repeat that I'm, a little I'm not sure I got exactly what you said.
Yes no.
Garbled it a little bit.
You talked about including the newer loss trend and pricing and accident year results.
Does the reserving process also tweaked up accident years 2021, when the line loss trends are right.
Well you know as we do individual reserves studies.
On each line of business everything comes to play.
So you first start with you know how is it how is it performing against.
In frequency and severity et cetera against what you expected when you put it up.
And also your future loss cost on that accident year.
What are the trends you used versus your view of trends today. So all of it gets mixed into.
An analysis when you're looking at.
The study of any one.
Cohort of business as we review them.
I say it to you that way because you can't Spike one thing out.
And then use some simplistic way to imagine.
Because you're trying to get this adequacy versus inadequacy or any of that.
And I'm trying to pierce through to that.
That thought if you're if you're following me.
Yes, no absolutely that's very helpful. Thank you.
Youre welcome.
Yes.
Well take our next question from Brian Meredith.
UBS.
Yes, Thanks, two of them here for you first one hopefully pretty quick for Peter I'm just curious.
<unk> had a little bit of a headwind here from an earnings perspective also should we expect something similar here in the third quarter, given where FX rates are.
Very hard to say, Brian just because of the volatility around it. We obviously have a substantial international operation and you saw that in the revenue and the operating income numbers I really can't judge we don't we don't hedge the operating businesses for FX. So what happens happens we do do some hedging around.
That and some of the other aspects.
Got you. Thanks, and then Evan I was hoping to dig in a little bit into the whole loss trend situation. You were talking about the increase here is there any specific area that you're more concerned about I mean, if I think about it there's been conversations did that medical cost inflation ticking up.
Tort inflation as the court systems reopen any kind of signs that youre seeing you just say while this this is an area that that were concerned about and why we increased our trend assumptions more.
Yeah, Brian .
I'll repeat myself.
We're not seeing.
Across our business.
We're not seeing the trends.
But we're actually using we're anticipating an increased those in anticipation.
Of.
While our future because of our business the insurance business classically lags.
And rather than be lagging.
<unk> get caught we try to.
We've all been through this.
<unk> of times and inflationary periods and so.
It's to anticipate ahead.
And.
You know what there are no areas that.
Concern me.
I don't think of it that way.
As vigilant about everything.
What we try to be.
Gotcha. So does that mean that your business today, you would kind of use rate adequate, but you still want to kind of be careful about whats going going forward.
Yes.
And I said it in the commentary.
And I know you listen.
Right.
Our.
Our debt.
Rates were charging.
Our our business.
As.
The vast majority of it is achieving.
Quit risk adjusted return.
That means that pricing.
Right is adequate.
All you need what you really need in particular, and it's not true of the whole portfolio, but the vast majority.
You need rate yet.
We will keep pace with loss cost.
Got you.
Thank you were anticipating about loss cost not trying to anticipate.
Not simply use lagging of what we see.
Because what we see is a combination of frequency and severity and it varies by line.
And that is a bit of a lagging indicator.
Thank you I appreciate it.
Youre welcome.
We'll take our next question from trace <unk>.
From.
Barclays. Thank you.
Good morning could you walk us through your process of setting combined ratio target here underwriter.
Thinking at some derivatives of ROE and.
So when you are coming up with these target are you basing that on new money yield or portfolio yield.
The portfolio takes a long time to turn it over.
So you know.
What it's based on portfolio.
Okay got it through.
Okay. No. That's very helpful. I mean, this is where I was going with it according to broker pricing surveys and your own but you called out the salaried Sunni casualty related classes. So I was just trying to get a sense yes.
Yes, part of the equation of casualty deceleration is because maybe others are pricing.
Based on new money and Theyre waiting more in future investment income, but it sounds like you're taking a more measured approach looking at the portfolio yield is that fair.
No.
I think you are way over thinking this I think that's an academic approach not a practitioners approach if you think the marketplace today.
Is is pricing underwriters in the day to day trades, our pricing based upon some view of combined ratios, where its been calculated with new money versus portfolio yield.
Let me Disabuse you of that it is not that finally or or or.
Hum.
Disciplined in the way that the marketplace actually works in pricing.
And how long it takes for others to review portfolios see results make judgments doesn't have that passed down to the trading level of how does it impact how we see rates.
Well that's all.
Always out there and it doesn't really work and not buttoned up way in most of the world. The vast majority of the world of insurance.
Okay.
Some conversations that.
Sounds like a mix.
But you guys are definitely thinking about it.
The right way.
Kevin.
Everything that you just mentioned I appreciate you providing that color.
Well.
It's interesting people say one thing and then you observe something else, but anyway.
Thanks, Tracy Thank you.
We take next question from Alan Carr.
Goldman Sachs.
Hey, Good morning, first one I had is on personal lines.
The underwriting has been holding up quite well relative to what we're seeing across the industry. So I was just interested if you provided any color on what.
Are you doing that's allowed that to happen and.
<unk>.
Maybe better price adequacy than some of your peers have will allow you do a pivot harder to growth.
Well first of all we have a different kind of portfolio.
We're not.
General market homeowners or auto.
It's high net worth as you know and so it's a segment of the marketplace.
Number one number two.
Look we took a lot of pain in the last couple of years and in adjusting how we price in the absolute rate we charge.
And how we think about it by Pearl how we think about it by territory.
It's a never ending but it.
It's gotten.
The company in total have gotten behind a few years ago.
In overall pricing and price adequacy, and so we took pain in terms of growth.
For that.
And.
My own sense.
You've seen it in the high net worth category.
It's not just rate, but price how you view the values of individual homes and the inflation factors you use how you do that and fine arts and and other valuables.
Within homes, we've been very disciplined to adjust.
To inflation that has been running hot in that area for a while.
Competition.
Competitors have been slow to do that.
And again, we gave up we gave up some business at times for that I think it serves us well at this time.
I'd.
We're just steady as she goes.
Got it.
Second question I had a few is on capital management.
I know you guys just closed the Cigna deal. So maybe a little early for me to be asking this type of question, but you know in this environment. It seems like the returns are quite strong you're generating a lot of capital.
I was just interested if you could update us on capital deployment priorities.
Capital deployment is.
Steady as she goes.
We will retain capital for both we run a conservative balance sheet.
We're in a balance sheet business, we're in a risk business, we will retain capital.
For.
For risk.
And volatility and we will retain capital for.
Growth opportunities.
Organic and inorganic.
And on the money doesn't burn a hole in our pocket and we've been awfully good stewards of capital.
I think our history shows that.
Got it thank you.
No change to policy.
Thank you Alex.
Yes.
Yeah.
Okay.
Okay.
Okay.
Yes.
Hello.
We went blank.
Yes, we have.
We have time for one more.
Okay well. Thank you at this point, we wanted to thank everyone for joining US today. If you have any follow up questions, we'll be around to take your calls.
Your day thank you.
And this concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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