Q2 2022 Hanover Insurance Group Inc Earnings Call
Good day, and welcome Hanover Insurance quarter Earnings Conference call. My name is at me and I'll be your operator for today's call.
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I would like to turn the call over to Oksana Welcome trouble. Please go ahead.
Thank you operator, good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, Our President and Chief Executive Officer, and Jeff Farber, Our Chief Financial Officer available to answer your questions. After our prepared remarks are <expletive> Lavey President of agency markets.
And Bryan Salvatore President of specialty lines before I turn the call over to Jack Let me note that our earnings press release financial supplement and a complete slide presentation for today's call are available on the investors section of our website at Www Dot Hanover dotcom.
After the presentation, we will answer questions in the Q&A session, our prepared remarks and responses to your questions today other than statements of historical fact include forward looking statements as defined under the private Securities Litigation Reform Act of 1995 regarding among other things our outlook.
And guidance for 2020 to economic conditions and related impacts, including installation and other risks and uncertainties that could affect the company's performance and or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward looking statements and in this.
Respect refer you to the forward looking statements section in our press release, the presentation deck and our filings with the FCC. Today's discussion will also reference certain non-GAAP financial measures such as operating income and a loss and combined ratios excluding catastrophes among others a reconciliation of these non-GAAP .
GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement which are posted on our website as I mentioned earlier with those comments I will turn the call over to Jack. Thank you Oksana good morning, everyone and thank you for joining us all.
Begin by discussing our second quarter financial highlights in the context of the current business and economic environment.
I'll then provide an update on each of our business segments and put our results in perspective for you.
Jeff will review our financial results in more detail provide an update to our 2022 guidance and then we'll open the line to take your questions.
We are pleased to report strong second quarter highlighted by an 11.1% operating return on equity and 10.4% net written premium growth.
Year to date, we have achieved an operating return on equity of 13, 4%, while operating earnings per share increased 24% from the prior year.
These results underscore the effectiveness of our business strategy and the strength of our agency partnerships.
While our business is subject to a wide range of variable and challenging conditions, including the continuing macroeconomic pressures we experienced in our personal lines business this quarter.
Our well balanced portfolio and disciplined underwriting minimises the adverse impact of volatility in any one area of the business.
With another strong quarter, two our credit we continue to drive our business forward confident we have the financial wherewithal business strategy products and services distribution capability and team necessary to achieve our long term financial and strategic goals.
I'm excited to share our results with you today, starting with a review of our core commercial business.
This segment delivered topline growth of seven 7% in the quarter with a combined ratio of 92, 6%. We continued to drive healthy rate increases of 6.9% across our core commercial book up.
Up 60 basis points from the first quarter and backed by solid retention.
The increase in economic activity and increases in insured values continue to provide a meaningful lift to the exposure component of renewal premiums driving the core commercial renewal pricing increase to 11%.
Within the core commercial business, our small commercial book generated excellent results delivering 10.5% growth with strong retention rate and premium audit activity.
New business, which increased relative to the prior year quarter remains an important focus area for small commercial, particularly given the town strain impact on agent capacity in the current environment.
We're committed to helping our agent partners in the small commercial market by providing innovative tools such as our market, leading tap sales platform, which further expanded during the quarter and is now available in 44 states.
The value of this platform to agents is underscored by the year over year increase of approximately 20% and business owners policy, new business submissions as well as approximately 15% in additional registered users exceeding our initial expectations.
The increased utilization of our tap platform spurred strong new business generation in the second quarter and going forward. We expect that it will continue to be a critical driver of growth.
Drawing pricing was the key metric for the middle market portion of core commercial with positive exposure activity being a meaningful driver of performance.
We're leveraging enhanced pricing tools and analytics to optimize rate and retention with an emphasis on improving transactional pricing ease of use and portfolio mix in view of rising property loss costs.
Our granular pricing capabilities combined with the continued lift from exposures should support ongoing price increases in core commercial.
Advanced technology underwriting discipline and talent management are all key levers, we are working to our advantage to drive growth and augment profitability.
Our specialty segment delivered exceptional underwriting profitability and high single digit normalized growth, which was highlighted by continued strong renewals and robust rate.
The momentum we've established in specialty over the past year further underscores the potential of this business to be a pivotal growth driver in the quarters and years ahead.
The rate environment and specialty remains firm renewal price changes continued on a positive trajectory coming in at 12% in Q2 closely in line with the first quarter. We're also making great progress in developing and further enhancing our growing specialty portfolio and capabilities.
Following a successful launch of our specialty general liability product in 2021, we expect to complete the nationwide rollout in the fourth quarter.
Strong growth in other new products, including retail E&S and financial institutions combined with very positive feedback from our agent partners highlights the successful investments we've made in our specialty capabilities and our enhanced relevancy.
This is one of the many ways in which we have further diversified our specialty capabilities as we strive to achieve an optimal balance between property and casualty risks.
Turning to personal lines.
In the second quarter, we took extensive action to temper the impact of environmental headwinds facing the personal lines industry.
In response, we implemented more robust rate increases than initially planned and achieved increased renewal price changes in both auto and homeowners.
In personal auto we've observed the market firming in response to continued inflationary pressure.
Insistent with that we're accelerating rate filings with a clear line of sight into additional increases in the next couple of quarters. Furthermore, the persistence of our auto frequency benefit continues to track favorably to pre pandemic levels and slightly ahead of expectations, helping to offset severity.
In homeowners, we experienced an increase of large loss activity non cat weather and increased inflationary impact during the quarter.
While a portion of the large loss experience appears to be aberrant. We believe further inflationary pressure and the impact of weather have longer term implications and need to be priced for.
Gross in the homeowners line was primarily a product of the significant pricing increases we have implemented and achieved over 9% as well as high retention of 89% based on market firming, we expect new business accounts to likely decline in the second half of the year as we adjust our tiered pricing and execute on.
Margin improvement in this business.
At the same time, we'll continue to manage our homeowners business with rigorous focus as we drive appropriate initiatives across the various territories.
This includes implementing further pricing increases through multiple levers that Jeff will discuss in more detail shortly.
While we anticipate a certain level of short term pressure, we have line of sight and confidence in our ability to bring this book of business back to target profitability relatively quickly.
Overall, our personal lines business has a long track record of delivering very strong above industry returns.
Additionally, we maintained prudent pricing discipline through the pandemic, giving us a favorable starting point in this challenging environment.
With our account mix and our high quality book, where certain weaken appropriately align pricing to recent loss dynamics and grow and desired segments that leverage our differentiated product offerings.
This strategy should continue to drive our superior performance regardless of market conditions.
Today's macro environment is the most dynamic I've seen in the 36 years I've been in this business. It is an environment that presents both challenges and opportunities and while many uncertainties remain we have the experienced team deep analytical skills and sophisticated technology tools to navigate.
Again, the complexities of the current landscape.
And reflecting on our performance over the past several quarters, an important key takeaway is the increasing role talent and by extension innovation have played in contributing to the Hanover sustained profitable growth.
One of my most critical priorities is to ensure that we continue to apply these strengths. So that Hanover is positioned to win in the future market environment.
Attracting and retaining talent have long been core to our mission.
As analytics, driven processes and digital tools continue to transform our industry, we're focused on making our talent strategy and even stronger advantage.
We're achieving that goal in several ways.
First by helping our employees broadened their skills beyond their immediate areas of responsibility through interactive seminars education and peer mentoring with a key focus on the capabilities needed to thrive in a rapidly transforming industry.
Second by training, a new generation of leaders within our organization empowering them to help transform our business models and shape the long term direction of our company.
And third by leveraging the strong culture, we built to create a vibrant and progressive work environment.
Together these strategies culminate create a workplace where innovation can continue to flourish.
With most of our systems re platforms, we are directing even more technology investment resources to improve efficiency and provide a superior customer experience.
Our agility and proficiency to develop new innovative products and services based on customer preferences and demands has proven to be the smart way to win market share with our best agents and going forward, we'll continue to be a vital ingredient for long term profitable growth.
Overall, we're very pleased with the strong results delivered in the first half of 2022.
Backed by our experienced team and exceptional agency partnerships. We are equipped with all the right tools to embrace new opportunities and navigate the complexities of our industry.
We head into the second half of the year with tremendous momentum and excitement about our prospects.
With that I will turn the call over to Jeff.
Good morning, everyone.
For the second quarter after tax operating income was $83 9 million or $2 32 per share.
Our combined ratio was 96, 2% compared with 94.4% in the second quarter of 2021.
Primarily reflecting higher ex cat current accident year losses in personal lines, which I will address shortly.
Second quarter current year catastrophe losses were $89 4 million or six 9% of net earned premium higher than our second quarter cat load due to a few midwest storms as well as several smaller events.
Offsetting the elevated current year catastrophes was favorable prior year catastrophe development of 0.9 points, reflecting our prudent reserving.
Prior year Reserve development, excluding catastrophes was favorable in the quarter by $9 2 million or 70 basis points of the combined ratio and stem from workers' compensation surety management liability personal auto and homeowners lines.
Our expense ratio for the quarter decreased 40 basis points to 30.8% compared to 31.2% in the second quarter of 2021, yeah.
Year to date the expense ratio was in line with our full year target and we remain on track to deliver a 20 basis point improvement in the full year expense ratio.
I'll now discuss the recent performance of each of our segments in greater detail.
Starting with core commercial the combined ratio, excluding catastrophes was 88.9% in line with the prior year quarter.
The core commercial current accident year loss ratio, excluding catastrophes improved 0.6 points to 57% helped by the benefit of earned in rate above loss trends.
Improved underlying performance was driven by favorable loss experienced in workers' comp and to a lesser extent commercial multiple peril, partially offset by commercial auto.
Overall, each major line of business performed quite well.
Turning to specialty we achieved a combined ratio excluding catastrophes of 87.2% an improvement of 3.4 points from the prior year.
Specialty current accident year loss ratio, excluding catastrophes improved four points seven points to 52.3%.
We're very pleased with this result, which was driven by earned rate above loss cost across the book.
The comparison also benefited from a large loss and associated reinstatement premium we paid in our specialty industrial book in the second quarter of last year.
Specialty net written premium increased high single digits in the current quarter on an adjusted basis.
We are remaining prudent as we set our liability reserves working with the view that social inflation has not abated.
But rather the process was temporarily slowed during the pandemic we.
We anticipate social inflation to reemerge fully and liability coverages and as such our team continues to Vigilantly monitor the litigation and medical cost environment. The.
The personal lines business delivered a combined ratio, excluding catastrophes of 93% above our profitability target.
Personal lines auto current accident year loss ratio, excluding catastrophes increased to 72% from 62.2% in the prior year quarter.
The performance in our personal auto book is reasonably consistent with the expectations. We provided on the first quarter call.
We continue to experience elevated loss costs in particular on new and used cars parts labor and delayed repairs.
Frequency was also higher in the quarter compared to the unusually low level experienced in the second quarter of 2021, however frequency remains below pre pandemic levels and consistent with Q1.
We are taking a thoughtful approach to renewals, while more aggressively increasing new business pricing.
Renewal price change in personal auto was two 9% in the second quarter up 50 basis points from Q1, we are targeting renewal pricing to increase by between 6% to 7% in the fourth quarter and further increase to at least 8% in 2023.
Since the fourth quarter of 2021 auto rate filings with rate increases have taken effect in two thirds of the states in which we do business. We expect filings in most of the remaining states by the end of the fourth quarter.
We're also actively increasing new business rates, which approached double digits during the second quarter and.
And are expected to trend higher through the second half of the year.
In home and other the current accident year loss ratio, excluding catastrophes increased to 62% from 51, 7% in the prior year.
As Jack noted the results reflected a confluence of factors, including higher than usual large loss activity and non cat weather combined with higher material and labor costs.
Approximately half of the loss ratio increase in the quarter was driven by the unusual large loss activity.
We have scrutinized each large loss and believe there is no discernible pattern as it relates to cause of loss geography or customer type.
We remain comfortable with the quality of our products and underwriting.
Weather losses, particularly wind and hail events, which didn't rise to the level of catastrophes represent another 25% of the homeowners loss ratio deterioration in the quarter.
We continue to leverage sophisticated data and analytical tools to analyze weather trends and adjust pricing accordingly.
In addition, and consistent with the rest of the industry and economy higher inflation and supply chain issues resulted in repair delays and a significant increase in the cost of materials.
In response to these dynamics, we have and will continue to implement robust pricing increases through rate and other mechanisms.
Home renewal price increase of 9.3% in the second quarter reflects a strong acceleration beyond what we had expected in Q1.
Our preliminary read for July suggest an increase of approximately 11%, which further supports our ability to achieve 12% to 13% renewal price change by Q4.
Through Q2, we have filed rate increases in 11 states, representing 70% of home premium.
We expect to file rate increases in the remaining nine states over the next two quarters.
Our ability to make quick adjustments by leveraging non rate mechanisms will supplement rate actions and support profitability improvement in the homeowners line.
First we routinely adjust home pricing to reflect prevailing inflation in addition to pure rate.
These factors have averaged 2% over the last several years. They are now up to 9% on average and reached 14% in some select states with an impact of 6% in the second quarter.
Second we are implementing tools to further surgically adjust coverage, a including leveraging a sophisticated model that provides guidance to agents and potentially under insured properties during the quoting and renewal process.
And third we are using a third party AI powered property intelligence tool based on aerial imagery to score roof condition quickly and accurately during the underwriting process.
This sophisticated fully automated technology also helps to recognize and evaluate exposure to risks such as pools trampolines or debris.
Premium growth during the quarter in particular home is a direct result of the pricing actions we are taking.
As well as strong retention and prior growths in our renewal base, new business had a negligible impact on the second quarter growth.
With respect to the second half of the year, we anticipate policy count growth to moderate from current levels as we push for even higher rate increases.
Both is secondary as our primary focus remains on achieving the pricing needed to drive target profitability.
We expect a certain level of short term pressure in homeowners, particularly as our rate actions take time to earn in however, we remain confident in the ability of the book to perform very well over time, given the many levers that we have at our disposal.
Moving onto our investment performance net investment income was $70 5 million for the quarter.
This result exceeded our original expectations helped by higher than planned new money yields and higher cash flows the.
The decrease in NII from the prior year quarter was driven by unusually high partnership income in the second quarter of last year. While partnership income remained in line with our expectations. In Q2, we expect partnership returns in Q3 to reflect lower equity multiples and wider credit spreads.
<unk> observed in public markets in Q2.
We also expect the rising interest rate environment will continue to be an overall net positive for net investment income in the long term as the portfolio turns over and is reinvested at higher interest rates.
We continue to see new money yields on purchases of fixed maturities well above total portfolio yield and also above what is rolling off of the portfolio as of today's call new money yields are trending 150 basis points higher than we originally expected for 2022, which if sustained.
Staying through the remainder of the year would have an incremental favorable impact on fixed income NII of nearly $10 million in 2022.
And $20 million to $25 million in 2023.
In terms of our fixed income portfolio valuations the interest rate environment resulted in an unfavorable change of about 256 million after tax in our net unrealized position because we typically hold fixed income securities to maturity, we are not overly concerned with the <unk>.
<unk> interest rate based movements in the market value of the portfolio. This is a high quality well ladder portfolio with a weighted average quality of a plus and we have full confidence in its ability to perform over the long term.
Turning to our reinsurance program, we successfully completed our July 1st property renewals and are pleased with the outcome. During the second quarter, we sponsored our first ever catastrophe bond securing an upsized $150 million in occurrence coverage for named storm events in the <unk>.
East attaching at 1.3 billion. This cat bond issuance leads to more diversification of our reinsurance capacity at attractive pricing terms with greater access to other pools of capital.
In addition, we strengthened our traditional reinsurance stack.
We filled out the remaining third of the occurrence layer attaching at $1.1 billion and bought the first third of the new additional layer attaching on top of the existing stack, including the cat bond.
Concurrently we removed our 75 million top an aggregate cover whose pricing had grown completely uneconomical and whose reinsurance coverage we have never triggered.
Taken all together. These changes have resulted in increased reinsurance limits and occurrence program that exhausts at $1 6 billion for our highest concentration states rather than the former 1.3 billion or.
Our successful reinsurance renewal is a testament to our effective cat aggregation management program and diversified book of business.
Looking at our equity and capital position book value per share decreased nine 3% from March 31 2022.
To $72 20, reflecting fixed income and equity investment marks.
We remain disciplined and balanced with our capital management priorities with a typical level of caution going into the cat season.
Overall, our capital prioritization remains intact with a focus on growth dividends and capital return.
Moving on to our outlook, we feel exceptionally good about our market position, our performance and our business management.
At the same time macroeconomic conditions impacting personal lines are proving to be more challenging for our industry than had been anticipated in January .
Therefore, we are increasing our full year 2022 combined ratio guidance, excluding catastrophes by one point to a range of 90.5 to 91, 5%.
This outlook incorporates our experience to date, including some outperformance in commercial businesses as well as higher than expected property loss severity in personal lines. We expect to see continued inflationary pressure in personal lines for the rest of the year as the rate increases earn into the book.
While our guidance range reflects favorable prior year development reported to date.
Looking forward the guidance assumes no prior year development for the balance of the year and our catastrophe load for the third quarter is five 2%.
Lastly, we also expect a lift from the improved interest rate environment likely somewhat offset by partnership performance in the third quarter for.
For the full year, we expect pre tax net investment income to be in the range of $2 $80 million to $285 million up approximately 5% from our original expectations.
Our strong overall performance in a very dynamic quarter in a challenging macroeconomic environment gives us confidence in our ability to continue delivering broad based profitability across our business.
Supporting our confidence is our solid track record of delivering consistent earnings and returns.
Using the sophisticated tools and robust financial levers at our disposal, we are well positioned to take advantage of the many opportunities ahead.
With that we will now open the line for questions operator.
Well now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
It's all your question. Please press Star then two.
Tom will pause momentarily to assemble our roster.
First question comes from Matt <unk> JMP. Please go ahead.
Hey, Thanks, good morning.
Good morning.
Just a couple of questions.
On personal lines I was hoping you talk a little bit some of your peers have.
With different footprints have expressed some concerns about getting rate increases through regulators and I'm, hoping you could talk a little bit about kind.
What your experience has been in your larger states, which I'm thinking like Michigan, Massachusetts, So forth.
Jeff from your comments, particularly on kind of what you've done in July it doesn't seem like there's any headwinds there, but just like to hear a little color I can provide it.
Yeah. Thanks, Matt This is Jack.
I think early on we did experience.
So a few states that were.
Treading water, if you will on rate increases.
Putting some additional process in place.
I think what Youll see from.
From our pricing trajectory is that that has been overwhelmed by the obvious need in every state for some personal lines rate increases both auto and home.
So we're confident that those initial.
Yes.
No.
<unk> blocks, if you will are already giving way and as you said, we're not in places like California, and others, where there is really substantial blocks.
Our allowing companies to get the appropriate rate.
Matt I would just add also we have as you probably would expect.
Very good tight relationships with the with the departments of insurance in Michigan, Massachusetts, and particularly where we have.
Scale with dedicated state management, and Axa Railroad resources that focus on that so.
Yes, I don't anticipate any problems going forward, particularly on the home side right. This is the home there's a clear acceptance of the rate that's being pushed through which is really an auto discussion.
Okay, great. Thank you and then just a follow up if I can shifting that specialty and commercial.
And Jack you've talked in the past about how your core commercial customers by a whole lot of specialty coverages than in the past that hasnt been for Hanover, and so I'm, hoping you can maybe update us on just kind of how that.
Over the past several quarters kind of how that cross sell initiative has gone and have you had much success at kind of garnering some of those lines of business kind of into the package. The Hanover provides.
Yes, Matt.
Particularly I appreciate that question, because we are gaining momentum both in terms of more and more.
Specialty business coming to us Monoline, if you will through some of the panels and and platforms that some of the larger and consolidating agents are putting together as well as more and more.
Filling out the package cross sell type opportunities that Brian has spoken to not only in terms of.
How we approach the agents, but the operating models that we've built to support that so Brian why don't I, let you elaborate on that.
Thanks, Matt.
And so earlier GAAP spoke about some of our new lines of business, our specialty general liability.
Financial institutions are special our Wechat rehash all of those.
A big part of our Fabless to drive cross sell.
Our agent and that's.
Switch coming through that's really supporting our growth.
Our broader business, we're seeing it as well I think that cross sell is having a material meaningful impact in our growth and we're really feeling pretty good about the growth and the performance is.
It has been added.
Yeah.
Great. Thanks, very much for the answers I appreciate it.
Thanks, Matt.
Thank you.
It will be from Meyer shields of <unk>. Please go ahead.
Thanks, Let me start with a modeling question if I can I'm sure that contemplated in your guidance, but when we look specifically at homeowners.
He is the increasing reinsurance spend going to impact the.
The.
Accident year loss ratio in the back half of this year.
Yes, I'll, let Jeff speak to the specifics of the reinsurance program, but I'll remind you that in our Cat program. If you will based on the retention levels that we have personal lines overall and homeowners in particular are really don't.
Reached reach those thresholds very easily so so Jeff do you want to address that more specifically nothing to add there with our retention.
Our losses would would hit the tower.
I'm, sorry, I didn't catch that.
There was somebody broke up with our retention levels in the property per risk that it would be very unusual for a home loss to approach the tower and so therefore, the allocation of reinsurance cost is not really relevant to the home or business.
Okay perfect that's very helpful.
Second this is more of that and add back theoretical question, but you are clearly seeing a benefit on the homeowners pricing.
From rising home values net flows through automatically is there any way of implementing something like that in personal auto. So when we go through these periods of inflation youre not subject to as much regular to potential regulatory friction.
Yes, Matt this is Jack listen overall it is a it is a challenge to to do something similar in terms of insurance to value on auto is you can't just go into the system and change the cost new ore or get the values in there, but there are a number of.
Levers that we pull.
Both on new business and renewal that are rate and non rate leverage so.
Nick why don't you maybe elaborate on how we adjust pricing beyond getting the cost new adjusted right. Yes. I mean, there are other levers that we look at like the account discount making sure that that is applied or not applied.
We look at violations.
We go back and scrubbed, our book to make sure that we're appropriately capturing violation. So there's things that you can look at from the performance of the book, which you can then turn into rate. The only thing that's even close to what you are asking is like assembling.
Newer vehicle. So if you can capture that properly the newer vehicles would capture at a higher rate, but there's not the equivalent of an ITV for coverage.
Okay. That's helpful. And then one final question if I can.
I think Jack you talked about slowing personal auto Pip growth.
Are you taking any actions or is it just an expectation as pricing.
Increases rolling.
Yes, it's actually a great question because no one knows how firm the market will get and how much your retention level will dip relative to the enhanced pricing that you're putting through <unk>.
Or even as you adjust your new business pricing, it's it's all relative our expectation going into the second half of the year is that will continue.
<unk> to retain a good portion.
<unk> of our book of business as we push aggressively on price.
The assumption we have made that we spoke to in our prepared remarks.
Adjusting the new business styles.
And <unk> the curing so that some of that new business.
Likely slows down, but again its all relative to the other markets that we compete against and all indications are is that people are are pushing pricing and changing their caring within their multi very product pretty aggressively right. So time will tell but where we're clearly not as Jeff said.
In his remarks, we're favoring margin improvement over growth.
We may get both right, yes, the only thing I'd add is we are seeing.
Kind of a new level of price elasticity, where there is where there are retentions are at the highest levels. We have experienced so as we push that growth I'm, sorry that right. Our customers are accepting it and that's likely due to what's what other players are doing in the marketplace.
And the okay.
Oh, sorry, so lower elasticity.
Lower elasticity, that's right correct. Okay. Thank you.
Sure.
Thank you. Our next question will be from Paul Newsome of Piper Sandler. Please go ahead.
I was wondering if you could talk a little bit again on the personal line side about.
Regional competition.
We just heard progressive talking this morning about trying to get out of Florida.
To the.
Northeast.
And whether or not youre seeing any sort of differentiations in.
The competitive environment.
Kind of state by state basis, just based upon your regional footprint.
Yes, Paul this is Jack.
Clearly the answer is yes, I think traditionally the national.
Kind of stock companies, if you will or.
Have a more sophisticated pricing.
Approach.
But also better analytics and more motivation, if you will to change pricing quicker.
And as.
As much as 60% to 65% of the business in the IAA channel is written by regional carriers. So that is a phenomenon that.
We constantly.
Deal with that said and I know <expletive> can elaborate on this is that this market is moving very very fast. We are there is no. One that is immune to the inflationary pressures that are coming upon them.
And so even.
Mutuals or regionals that are.
Less inclined to be early movers in pricing.
They're going to become fast followers and theres good indication of that right now.
You add to that just a little color in absolutely you called it right and it depends on the state your operate in the states you operate in.
And some of the states.
Ample, Michigan, we're up against more of that.
The regional players the Mutuals, where some of the national players are not as present in other states. That's a different story. So it's there.
There's no one kind of competitive environment that we can and we have to adjust ourselves based on the state I would also say that pricing sophistication and technology will become more and more important and some of these regional players and Mutuals haven't kept pace with some of the pricing sophistication and the engagement.
That they have the aerial imagery that Jeff mentioned in his commentary that's really important to understanding what your book looks like and how you're going to price. It. So.
We think we have some advantages against against those players I think net net what you should know is that we're going to have a real firm market and we're well on our way in personal lines across the country and I don't think Youll see any.
Sustainable differentiation between regionals and nationals, given how how strong the inflationary pressures have come on.
Great. My second question I was hoping to get some of your thoughts on the impact of exposure increases.
My personal view is that we're gonna have a debate in the future.
About how much of the exposure increase.
Taxes rate versus not rate.
Maybe you could just kind of talk about your opinion about that if it differs by.
Your major segment very much if it has any impact in personal lines. So just curious about your general view on that is.
Trying to think about.
Exposure improvements.
Pact of profitability prospectively.
Yes, Paul this is Jack again.
I think the topic is is important for us to continue to talk about as an industry.
And the answer is yes, there is a quite a variance in frontline and sector on how exposure translates into additional <unk>.
<unk> costs versus additional pricing over those loss costs, our loss trends we evaluate this.
Continuously and in a dynamic way as you can imagine in personal lines right now with the inflationary pressures that have come upon they come upon both homeowners and auto physical damage in very different ways.
And we have the best analytics, we've ever had.
To breakdown exactly what are the.
<unk>.
Exposure increases what are they coming from labor.
Labor how much of its parts how much of it's used car well that are replacing cars.
Versus in some of the liability lines.
Both personal lines and commercial lines, where where you have to evaluate how much of the additional exposure, whether its payroll or sales in commercial lines translates into it.
Additional loss costs, so we evaluate that by line by sector and develop an opinion.
Across that.
And we are applying.
As much insurance to value.
Into the system as we possibly can related to the property exposure increases and then evaluating kind of the broader analysis. So.
Anything else that you would add no I think you captured homeowners.
Really the Best example of where we are systematically increasing our <unk>.
Insurance coverage, which is a replacement cost as a reminder, and so thats across the entire book and it does capture of course.
The inflationary elements of repair but.
Only really comes into play in a total loss situation right. So youre getting this across your entire book, but obviously youre not having total losses, but only a small fraction of your book So it plays through.
Re lever.
Great. Thanks, so much I appreciate the help as always.
Thank you Paul.
Again, if we have a question. Please press star then one.
Next question comes from Greg Garner of Bank of America. Please go ahead.
Hi, everyone.
Good morning.
Kevin.
And core commercial rates and very modest downtick in specialty rate versus the first quarter.
Just wondering if you could give your take on the competitive environment.
Any.
So between those two segments and if you think that pricing remains rational across both of those segments.
Yes. This is Jack great. Thanks for the question I would answer the latter part of your question first I do think the market is behaving quite rational.
I'll remind you that both in core commercial and in specialty we play in the small to mid account space and that travels differently than some of the.
The sectors that surround us and particularly some of the larger accounts or more.
Severe severe.
Severity oriented specialty business, whether that be the upper end of E&S, our med mal or some of the high end employment or.
Management liability and professional liability lines so.
So because of that you saw we didn't get the dramatic price increases.
Over the last couple of years when people were having a real firm market and some of those sectors.
We got more gradual increases we think thats a big factor on why we're continuing to have sustainable price increases and then most recently, we think people are starting to acknowledge that the property not only inflation, but some of the volatility in the property lines.
Or is more right than was in the system.
Within the sectors previously a lot of that was driven by liability trends, we're anticipating liability trends so lot of moving parts here, but the short answer I believe is that we are anticipating a pretty firm market.
And our specialty and core line.
Teams are are seeing that pretty consistently across the country.
Thanks, and I was wondering if you had noticed any.
Pressure on loss cost trends for umbrella coverages here lately.
Yes.
I'll, let <unk>.
<expletive> elaborate but the short answer is no. We evaluate this regularly and we have not seen a material uptick in our.
Our umbrella loss experience, but we have been aggressively.
Changing some levers despite that we've been we've been managing our limits.
Our high hazard accounts, we've been pushing price aggressively, but our loss content in the commercial umbrella side as well.
That's nothing to nothing to speak of.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over Oksana <unk> for any closing remarks.
Thank you everybody for your participation. This morning and were looking forward to talk to you next quarter.
Okay.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.