Q2 2022 CNA Financial Corp Earnings Call
Ladies and gentlemen, good day and welcome to the Cna's 2022 second quarter earnings Conference call.
If you would like to ask a question on the calculation of prepared remarks. Please press star one on your telephone keypad.
As a reminder, today's conference is being recorded.
I would like to turn the call over to relive some towards the Rosa AVP Investor Relations for opening remarks, and introduction of today's speakers.
Please go ahead.
Thank you Elaine good morning, and welcome to Cna's discussion of our second quarter 2022 financial results. Our second quarter earnings press release presentation and financial supplement were released this morning and are available on the Investor Relations section of our website Www Dot C. N. A dot com speaking today will be Dino Robusto chair.
<unk> and Chief Executive Officer, and Scott Lindquist, 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 press release and in Cna's. Most recent SEC filings. In addition, the forward looking statements speak only as of today Monday August 1st 2022.
<unk> expressly disclaims any obligation to update or revise any forward looking statements made during this call.
Regarding non-GAAP measures reconciliations to the most comparable GAAP measures and other information have been provided in our earnings press release financial supplement and other filings made with the SEC.
This call is being recorded and webcast a replay of the call may be accessed on our website. If you are reading a transcript of this 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 this statement.
With that I will turn the call over to our chairman and CEO Dino Robusto.
Thank you Rohit and good morning all.
We are very pleased with our second quarter results, because we had excellent production performance.
Including 17% gross written premium ex captives growth.
64% increase in underwriting gain.
Our core income declined by $96 million, driven by limited partnerships and common equity returns, which declined by $171 million, while income from our fixed income portfolio was up 16 million as we turned the corner in the second quarter with fixed income yields now increasing.
<unk> will provide more detail on investments in.
The second quarter the P&C all in combined ratio was 91%.
A three point improvement compared to the second quarter of 2021.
Reflecting a lower underlying combined ratio Inc.
Increased favorable prior period development and lower catastrophe losses.
Pre tax catastrophe losses were 37 million or 1.8 points of the combined ratio compared to 54 million or two eight points in the prior year period for.
For P&C overall prior period development was favorable by 1.6 points compared to two points favorable in the second quarter of 2021 our P&C underlying combined ratio was a record 98% this quarter, reflecting 0.6 points of improved.
Over the second quarter of 2021.
In the quarter, our corporate segment core loss was 25 million higher year over year.
These results include a 51 million after tax charge related to unfavorable prior period development largely associated with legacy mass tort abuse claims, including the recent diocese of Rochester proposed settlement, which occurred in the second quarter.
Drilling down on P&C production gross written premium growth, excluding captives was 17% and net written premium growth was 20%.
Excluding the impact of a one time catch up related to the addition of the property quota share reinsurance treaty in the prior year period net written premiums grew by 13%.
New business grew by 27% this quarter, which we are pleased with given that pricing and terms and conditions remained strong and consistent with our renewals.
Retention was up two points to 85% this quarter are strongest in nearly five years.
And they were up in each of our operating segments.
What was your change improved by a point.
Now, it's about plus 3% across our entire portfolio and plus 5% and our core middle market and construction business units.
The overall written rate increase was 6% in the second quarter down one point from last quarter.
With some exposures, we actually saw a modest upturn such as larger cat exposed property in national accounts and auto in our construction portfolio.
Overall for commercial rates have remained relatively stable at about 5% moderating only one point from the third quarter of 2021.
So pricing dynamics by and large continue to reflect rationality in the marketplace.
We see it is as we look across our lines of business and compare the results to our overall P&C increase of 6% in the quarter.
Way of example, within commercial auto rightfully continues to achieve rate increases above that overall average.
<unk> com continues to be below which is reasonable given the continued strong profitability.
Property is above and large national accounts property is low double digits.
In specialty medical malpractice continues to be above <unk>.
Do you know with a cumulative rate increase of over 100% since the start of 2019 is now below the overall average all the rest of the management liability is still above our cyber continues to be well above in high double digits.
And from a geography standpoint, our international book, which includes Canada, Europe , and our syndicate continues to be above the overall, 6% increase.
So we think that rates have been moderating in a measured way and we expect to see some up and down movements across the various lines influenced by how loss cost inflation cat exposure and overall economic conditions continue to play out.
We feel good about the return on the majority of our book, but as I have mentioned before we don't anchor rate adequacy to a point in time, but rather on a longer term basis, because it is a moving target first we don't assume we will cover a long run.
Loss cost trends every year going forward history from past underwriting cycles, clearly teaches us back in.
And second in periods when loss cost trends have been increasing essentially doubling to about 6% in the last four years in our portfolio the pace at which the rate adequacy target moves is also changing.
So we view this period in the cycle as a time to Opportunistically continue pushing very hard for rate in balancing the rate retention dynamic in ways that will grow our P&C profit dollars.
On an earned basis overall P&C rate in the quarter was 8%, which is still nicely above our long run loss cost trend assumptions.
But with the uncertainties regarding the various aspects of inflation in the broader market.
We remain prudent.
And acknowledging margin.
So let me add a little color on how we are considering inflation.
In a retrospective reserving and prospective pricing.
But first a comment on what inflation metrics, we focus on because the headline CPI inflation number.
Isn't necessarily the best proxy for the aggregate impact of economic inflation on loss costs in our portfolio.
When we think about economic inflation, we focus on three components that can impact our claim costs medical inflation non medical cost of goods sold inflation.
And wage inflation and how each impacts our portfolio, which often will not equate to the waiting ascribed in the CPI metric for example in our portfolio medical inflation is a much larger impact than the way. It has in the C. P I.
And within the non medical cost of goods sold inflation, we focus more on a few key items such as increases in construction materials and used car and truck prices rather than an overall average.
Wage inflation, obviously increases costs, but has a partial offset on the premium side. So we incorporated that dynamic.
The impact from these refinements are used in our reserving and pricing studies more so than the headline CPI number.
And importantly, these impacts are treated separately from the impacts of social inflation, which has become a prevalent liability loss cost inflation over the past several years.
When you think about social inflation is being driven by somewhat independent factors, we and others in the industry have spoken about at length, such as more aggressive plaintiffs' bar.
Your number of nuclear verdicts higher prevalence of litigation funding and <unk>.
<unk> jury attitudes, which are increasingly punitive regarding corporations.
And as we have previously noted and we continue to believe.
Social inflation may still be office gated somewhat because court dockets are still backlog.
So let me provide some examples of how we have and continue to incorporate these inflation pressures because together with our earned the pricing trends.
Into our assessment of prior and current accident years.
Our medical malpractice business has been impacted by social inflation and higher long run loss cost trends starting several years ago.
We saw that in the data.
And increased our accident year loss ratio picks considerably, which led us to start raising prices very early on at the expense of retention.
And we increased prior year reserves through unfavorable prior period development of $210 million from 2017 through 2021.
Which we have spoken about on prior calls.
And we continue to maintain ongoing loss cost trends for this class above our overall PNC average.
For commercial property, we reacted to increases in loss costs from inflation in the third quarter last year, and we increased our long run loss cost trend assumptions about two points in our property lines, which we also previously discussed.
These increases in fact impacted the pricing and reserving for our current and most recent accident years, given the short tail nature of the claim development patterns.
And the last example is workers' compensation.
We did not reduce our accident year picks to reflect the lower levels of benign medical trends over the last five plus years.
As we maintain the higher long run loss cost trends that were more evident prior to this period of benign medical trends.
In addition, we have only partially reacted to the favorable favorability in prior accident year reserves that the lower more benign trends would suggest.
Accordingly, we believe our current reserve position is strong.
And further that our prudence will allow us to withstand this period of higher medical inflation should the situation occur.
Where the rate environment remains slightly negative.
Medical inflation accelerates in the next 18 or 24 months of course.
And then keep increasing for several years, hence that will put pressure on our loss costs.
That situation, we will at least have ample time to thoughtfully react.
This general pattern of Prudence and reacting to prior year favorably and not reflecting the entire perceived the margin between lost cost trend and earned rate in recent accident year picks is evident across our entire portfolio and reflects our conservative underwriting company bias.
Even maintaining that prudence.
The P&C underlying combined ratio was a record 98% this quarter.
The expense ratio of 35% was lower by about a point.
And the underlying loss ratio of 60% was a half a point higher than the prior year quarter, but as I've mentioned in prior quarters.
Property quota share treaty that we purchased in June of last year lowered the net premium mix between property business and our other classes and since our property business is a lower underlying loss ratio. It's mixed effect increase the overall P&C underlying loss ratio by about a half a point.
We remain very pleased with the purchase of the quota share treaty as well as the additional cat cover in our property per risk Treaty and Cat Treaty all of which were successfully renewed last month at a modest mid single digit rate increase.
Now, let me provide a little more detail on the three business units.
The all in combined ratio for specialty was 88, 1% in the second quarter, which is now the eighth consecutive quarter below 90%.
The underlying combined ratio was 89, 2% a record low and consistent with last year.
The expense ratio of 34, 30.4% is up slightly from the second quarter of 2021, well the underlying loss ratio improved by <unk> four points to 58, 6%.
Gross written premium ex captives grew by 8% in the second quarter and net written premium growth was 6%.
We achieved rate increases of 7% in the quarter.
It's down three points from the first quarter, but it's still exceeding long run loss cost trends and earned rate.
A little over 10% is still well above long run loss cost trends retention was 85% consistent with last quarter and new business.
Grew 9%.
Turning to commercial.
The all in combined ratio was 93, 2% the lowest all in quarterly combined ratio since 2008.
Cats in the quarter were three points compared to our 10 year average and commercial of six points.
The underlying combined ratio was 92% a one point improvement over last year. The underlying loss ratio of 61.5 is 1.4 points higher than the prior year quarter. However, as I've mentioned earlier. This is largely due to the mix impact the property reinsurance program we purchase.
Last June .
The expense ratio improved by two points three points to 30% in the second quarter due primarily to strong growth.
Commercial gross written premium ex captives grew by 25% this quarter and the net written premium growth was 20%.
Excluding the impact of the onetime catch up related to the addition of the property quota share reinsurance treaty in the prior year quarter.
New business was up 39% in the quarter as several larger opportunities we had been courting for quite a while.
Successfully landed in the quarter.
For commercial the rate increase with plus 5% and excluding workers' compensation. The commercial rate increase was plus 6% and plus 7% on an earned basis.
With the modest moderation in pricing we are experience experiencing we continue to believe that our commercial earned rates ex workers' comp should remain at or above our long run loss cost trends through year end.
Commercial retention was strong again this quarter at 86%, which is higher than any quarter since prior to the pandemic.
We continue to see middle market digit exposure changes in lines.
Excuse me, we continue to see mid single digit exposure changes in lines of insurance with inflation sensitive exposure bases like work comp and general liability and we are clearly highly focused on valuation for a property.
And national accounts valuation increases were up nearly 10% prior to other account level changes like higher deductibles and movement within our property tower.
These various exposure increases are a good outcome and we estimate that up to half of the increase acts as additional weight in our portfolio over and above our 6% rate increase.
For international the all in combined ratio was 91, 6% this quarter.
The underlying combined ratio was 96%.
Reflecting 1.9 points of improvement from the prior year quarter. The underlying loss ratio of 58, 5% is lower by a half a point and the expense ratio of 32, 1% is down 1.4 points compared to last year.
In terms of our loss exposure to Russia, Ukraine and continues to be de Minimis.
International gross and net written premiums grew 13% or 18% excluding currency fluctuations.
Rates were up plus 7%.
Which is a one point decrease compared to last quarter, but remain above long run loss cost trends.
Retention in international was particularly strong at 85% and it was broad based including our Lloyds syndicate with the syndicate and European business re underwriting behind us.
International retention increases are meaningfully contributing to the profitable growth of our PNC operations.
There's no business, which grew by 24% and with that I will turn it over to Scott.
Thanks, Dino and good morning, everyone core income of $245 million is down 28% as compared to the second quarter, a year ago, leading to a current quarter core return on equity of eight 1%.
Our P&C operations produced core income of $317 million.
Underlying underwriting income of $191 million pretax was up 15% over the second quarter of 2021.
Overall underwriting gain in the quarter was up 64% year over year to $185 million.
Net investment income of $432 million pretax was up $16 million in our fixed income portfolio.
All set by a $171 million decline in our limited partnership and common stock investments, which we report in core income.
More on our investment results in a moment.
Our Q2 expense ratio of 35%, which is 1.1 points lower than last year's second quarter.
Lower acquisition expenses and higher net earned premiums drove the favorability. Despite continued strategic investments in technology analytics and talent.
Drill down a bit further specialty incurred higher underwriting expenses primarily related to technology.
Commercial benefited from lower acquisition costs and higher net earned premiums while international acquisition expenses continued to benefit from the repositioning of this portfolio over the last several years.
As I noted last quarter, there will be a certain amount of variability quarter to quarter. However, we continue to believe in expense ratio of 31% is a reasonable run rate.
For the second quarter overall P&C net prior periods relevant impact on the combined ratio was one 6.1 0.6 points favorable compared to 0.2, 0.0 0.2 points favorable in the prior year quarter.
In the commercial segment favorable development in Workers' compensation was partially offset by unfavorable development in general liability and auto.
In the specialty segment and favorable development in surety was partially offset by management and professional liability.
Favorable prior period development and international was driven by the commercial classes.
The paid to incurred ratio was 0.89 in the second quarter. This is up slightly from the first quarter and consistent with the fourth quarter of 2021.
0.89 ratio remains at the lower end of our pre pandemic range.
The ratio, which fluctuates quarter to quarter has been consistently lower over the past two years.
As Dino noted earlier, our corporate segment produced a core loss of $78 million in the second quarter compared to a $53 million loss in the prior year quarter.
Annually, we conduct a review of our mass tort reserves in the second quarter.
Specialist in environmental reserves are reviewed every fourth quarter.
As a result of this quarter's review the segment includes a $51 million after tax charge related to the unfavorable prior period development largely associated with legacy mass tort abuse claims, including the recent recent diocese of Rochester proposed settlement.
Yeah.
For life and group, we had core income of $6 million for Q2, 2022, which was $37 million lower than last year's second quarter, primarily from lower investment income from limited partnerships.
As a reminder, we will be conducting our annual gross premium valuation review during the third quarter.
While we're on the topic of life and group I'd like to give a brief update as to the approaching change in GAAP accounting methodology.
Waited too long duration targeted improvements otherwise known as L. D G I.
Apply to our long term care business.
We will be adopting this change effective January one 2023, but will apply it as of January one 2021.
Two years of adjusted financial results will therefore be included in our 2023 financial statements.
Recall in last quarter's call. We estimated the net impact of these changes will be a 2.2 to two 5 billion dollar decrease of stockholders' equity as of the transition date of January one 2021.
In a rising interest rate environment like we have seen over the last two years as the corporate single a rates increase the impact of adoption decreases.
As an example, assuming June 32022 interest rates were in place on January one 2021, we estimate the transition impact would have been significantly lower two a decrease of 400 million to $700 million to stockholders' equity.
As corporate single day rates are substantially higher at June 32022, then at January one 2021.
Finally, I want to emphasize this change in accounting has no impact to the underlying economics of Cna's business.
Turning to investments total pre tax net investment income was $432 million in the second quarter compared with $591 million in the prior year quarter.
The decrease was driven by our limited partnership and common stock results, which returned a $15 million loss in the current quarter compared to a $156 million gain in the prior year quarter.
The current quarter results reflect losses in our hedge fund limited partnerships of $35 million in common stock portfolio of $21 million.
Directionally in line with equity market performance during the quarter that were partially offset by positive returns of $41 million from our limited partnership private equity portfolio.
The gain in the prior year quarter reflected particularly strong results from all three portfolios.
As a reminder, private equity funds, which now represent approximately 75% of our limited partnership portfolio.
Generally report to us on a three month lag. So our results. This quarter were primarily reflective of performance from Q1 2022.
Given that broader public equity markets were notably down in the second quarter. It would be reasonable to expect pressure on private equity valuations in the near term.
Hedge funds now represent 25% of our limited partnership portfolio and predominantly report results on a real time basis.
If you prefer if you refer to pages 10 through 14 of our financial supplement you will find additional details of our limited partnership holdings and income are the private equity and hedge fund strategies.
Our fixed income portfolio continues to provide consistent net investment income, which has been steadily increasing over the last several quarters. We continue to benefit from the higher invested asset base driven by higher P&C underwriting income.
As a point of reference our average book value has increased 1.5 billion from the prior quarter.
Prior year quarter excuse me.
Additionally, I am pleased to note the average effective income yields in our P&C portfolio were higher in the current quarter relative to the first quarter.
Indicating that we have reached an inflection point, where reinvestment rates were about 100 basis points above our P&C effective yields.
Given the longer duration nature of our life and group portfolio, we have not yet reached an inflection point in this segment.
Fixed income assets that support our P&C liabilities in life and group liabilities had effective durations of five years and nine seven years, respectively at quarter end.
The increase in life and group duration from $8 nine to $9 seven years during the quarter it.
It is reflective of strategic actions taken simultaneously reduce reinvestment risk by selling short dated holdings projected to roll off in the near term, while also extending duration by redeploying the proceeds into longer dated high quality securities at yields exceeding our long term assumptions.
In total over $1.9 billion of long dated fixed income securities were acquired in the life and group portfolio during the quarter with an average yield of four 7% and an average rating of a plus.
Meanwhile, the $1 8 billion of mostly tax exempt securities sold in the quarter as part of this repositioning generated $19 million of pre tax investment gains.
While higher rates are positively impacting the outlook for investment income from a balance sheet perspective, they've continued to adversely impact our net unrealized investment position.
Which ended the quarter at a $1 $8 billion loss down from a $4 4 billion gain at the end of the fourth quarter 2021.
The investment portfolio credit quality remains strong with a weighted average rating of a with very little in impairments.
Ordinarily interest rate driven fluctuations in market values do not impact how we manage our investment portfolio.
As we generally hold our fixed income securities to maturity.
Notwithstanding the decrease in our net unrealized gain position our balance sheet continues to be very solid.
At quarter end stockholders' equity excluding accumulated other comprehensive income was $12 2 billion or $45.06 per share.
An increase of 4% from year and adjusting for dividends.
Stockholders equity, including a OCI, which reflects our investment portfolio moving into a net unrealized loss position position during the quarter was $9 $5 billion or $35 six per share.
We continue to maintain a conservative capital structure with a leverage ratio of 19% excluding a OCI.
And our capital remains above target levels required for our current ratings, while statutory surplus remained stable after dividends.
Finally, net investment losses were $40 million in the second quarter compared with a net investment gain of $27 million in the prior year quarter.
Current quarter results were driven by an unfavorable change in the fair value of our non redeemable preferred stock portfolio, reflecting the higher interest rate environment.
While the prior year gains were primarily the result of sales calls and exchanges.
Operating cash operating cash flow was strong once again this quarter at $608 million and was a result of solid underwriting and investment cash flows.
In addition to strong operating cash flows we continue to maintain liquidity in the form of cash and short term investments and together they provide ample liquidity to meet obligations and withstand significant significant business variability.
Finally, I am pleased to confirm our regular quarterly dividend of <unk> 40 per share, which will be payable on September one two share of the holders of record on August 15th.
With that I will turn it back to Dino.
Thanks Scott.
Our second quarter generated fantastic results across commercial specialty and international.
We have been clearly focused on accounting for social inflation for several years, both prospectively and retrospectively.
And we continue to be prudent in the face of uncertainty and Backlogged Court dockets.
More recently, we have similarly included the impacts of the rise in economic inflation.
Market pricing remains relatively rational and we are successfully optimizing the rate and retention dynamics across the board and effectively growing our new business, a strong terms and conditions.
Bottom line, we remain enthusiastic.
About our business opportunities going forward and with that will.
We'll be happy to take your questions.
Yeah.
Thank you, ladies and gentlemen, if you'd like to ask a question.
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We will take our first question today from Gary Ransom of Dowling and partners. Please go ahead.
Yeah.
Good morning.
I had a few questions. One was just on the catastrophes and the impact from the new quota share is it possible to quantify how much benefit you got in the quarter from that or.
How to think about where they.
Our run rate for your cat load might be going forward.
I think going forward.
Probably you know.
The more we can average make makes a lot more sense, but I'd say about a third.
Probably benefited from the quota share keep in mind also Gary that are obviously, all the re underwriting that we did on the a syndicate.
Which had a lot of our U S got exposure that was coastal also wildfire, we re underwrote all of that we also mentioned on several calls.
Some of our property re underwriting from the healthcare aging services coastal exposure is wildfire exposures and some of that probably benefited the cat ratio.
This quarter.
And then I guess, you know always probably appropriate to put a little luck in there.
Right.
Okay. That's helpful I.
I just also wanted to ask about the rate versus loss trend. I mean, you gave us a lot of material there and I.
If I think about what's going on we have rates gradually decelerating, but we also have.
The potential for inflation.
The accelerating loss cost trends perhaps.
It all seems to be bringing the point at which those two lines cross maybe a little bit closer.
It seemed like you were pre.
Preparing for that possibility, but.
Is the market or do you think theres any place where the market is prepared for that as the market reacting to that possibility or.
It just seems like there's the fact that there's so much uncertainty.
Isn't I don't see it from the outside is completely reflected in market behavior, but you might have a different viewpoint.
I mean, it's it's it's it's really it's hard to say I think it has been rational it's been moderating.
Quite slowly yeah, we did see.
On our larger property.
In national accounts.
In particular anything that cat exposed there the rate actually went up.
From probably high single digits of slightly over double digits. So that could be one would say irrational reaction clearly theres a lot of talk of that in large property now it's not a huge portfolio for us but clearly.
We do have a national accounts property strategy I mentioned before we are trying to balance the portfolio a little bit. So we are seeing that conversation on property commercial auto we saw it on a as I said in our construction.
And and it's high single digit in auto so that's good.
And the rest you know we just.
<unk> are going to be as prudent as we can be on the loss cost trend side and as I said.
Look I mean, we don't think about rate adequacy.
At any moment in time, and so we've got an opportunity to continue to push.
For rate and that's what we are doing and and I think you know the trade off at the underwriters are making our are good one it's harder to sort of incorporate more of a market overall their perspective, that's just you know the.
The way I see it and hence why I think.
In the end you get the gaps still persisting maybe through year end as I indicated and and we'll see you know you have a tough cat season.
That can turn around.
Because not only did the inflation is going to put a pretty big tool on if you have a large cat in addition to sort of demand surge.
Probably not.
Not enough from what you wanted but that's the best I can offer.
But that's that's great.
Yeah, it's always it's always difficult to see all the trajectories of these things.
Oh God I.
I also wanted to ask about the retention in international it's up 85% you did talk about it a little bit but yeah are there any particular.
You know classes or types of of a business, where it's a little more sticky for you know after all that re underwriting.
Yeah. So let me just parse out because you know we throw in Canada, Canada had always maintained a relatively stable and good retention ratio. It was more with respect as you pointed out Europe and the Lloyd's Syndicate and you know you had seen retention in the low sixty's for quite a few quarters and.
We re underwrote the portfolio what we did is just aligned it with our appetite in the United States and so what we do in commercial year and while we do in specialty here is it is what we are targeting we took down the portfolio substantially what we left that we really wanted to hang on to and I think you know we saw.
Some good increase on the retention, it's nothing more significant than that both Europe and Hardy.
Uh huh.
We're 80 or a little over so so so that you know what we had expected right. We went in through the renewal season expecting are expecting that after the re underwriting formerly quarters of it being down substantially.
Okay.
That's great in and.
Maybe just one more on the mass toward abuse claims.
You seem to be implying that there were other things besides rochester that might've been in the end the abuse claim category was there anything there you can.
You mentioned or talk about.
Yes.
Scott mentioned the way we do the mass tort review every every second quarter you know, we don't parse out all the all the components in there a lot of it has to do with abuse and the impact of revival statutes, but theres. Other you know all the mass towards and and based on that review.
You know, we think and all the information we have.
That we have it appropriately reserved and broadly across all of the you know all of the mass towards Ah Ah, but there's a you know a host of things in there.
I guess I was dancing a little bit around the boy Scouts too. If there's anything you can say I don't understand if there isn't anybody you're going for.
Yeah, Yeah, no I mean listen and that falls under the abuse, but at this point you know there isn't anything for us to comment as it's you know ongoing inactive as you saw and annualize it when the when and if warranted we will obviously comment on it like we always do.
Terrific. Thank you very much Dino.
Okay, you're welcome.
Thank you we take our next question from Meyer Shields of <unk>. Please go ahead.
Thanks, Dino I want to start if I can I'm trying to understand one of the comment that you made where you say we don't assume we will cover our long run loss cost trends every year going forward does that mean that when things are accelerating.
We should expect in the short term loss ratios to go up.
So this is this was more as I as I as I caveat at the end of that sentence with history has taught us that when in any underwriting cycle. Meyer you know if it plays over you know 15 16 years, you get I don't know 810 years of a soft cycle. You've got you know you've got pricing that will drop below.
All our long run loss cost trends. So you know that's why you know it was more just the fact the reality I've seen it happen over 40 years, it's going to continue to happen Now's. The time to continue to take advantage of all of.
The pricing in the marketplace and keep pushing hard it's nothing more sophisticated.
Then that it's just the reality that causes us not to talk about you know well where rate adequate now and so that's really all I was trying to get at.
Okay. That's helpful. Thanks for clarifying that within specialty I guess.
Both last quarter and this quarter, we've seen the.
Warranty expenses rise faster than the revenues and I was wondering whether there's anything material there.
And how that how.
How you're expecting that to play out going forward.
No theres nothing really there a little bit of a you know as we indicated some technology in and are a little bit of analytics. We also you know hired.
Some additional staffing.
Staff and talent as we sort of moved.
Away from.
From the shutdown periods at the pandemic, but it's nothing really significant.
Okay, and then final question.
Just wondering whether or what youre seeing with regard to your clients in terms of.
A possible economic slowdown going forward are you seeing any level of concern.
Well you know [laughter], yeah. So when you talk to a lot of the clients I think they still remain relatively optimistic and.
Yeah.
Yes.
I think the economy is going to be what it's going to be right. So we what we do is we pay close attention to exposures.
And the audit premiums now both of them were up.
Considerably.
In the quarter and so so far the signs continue.
<unk>.
So look good and we'll just keep tracking exposure, we keep tracking audit premiums are obviously, if you get into a deeper well.
Recession, you'll see it in the audit premiums and we'll be able to reflect that but right now.
Ah you know it continues.
To be a pretty good outlook.
Okay fantastic affinity to thank you.
Thanks.
Thank you. Our final question today comes from Josh Shanker of Bank of America. Please go ahead.
Thank you.
Disclosure on the calls and the excellent, but I'm going to go a little deeper.
And you know when you sat on the call that you weren't talking about both pricing and reserves for preparing for inflation.
You've been very fulsome on and please don't Wanna get anything wrong, if I say something wrong correct me. If I think about two years ago. You were estimates you and a half 3% long term cost inflation and now you're closer to five and a half sick.
Has have the reserves for 16, 17, 18 19, the unpaid losses.
Been revised up in all classes other than workers' comp over that time every time and you're not alone there.
Our loss pick.
And yet you're still release reserves and so I'm trying to figure out how you how.
When taking the long term so can you talk a little bit about that and what's that like nine months.
Sure. So let's look first of all if you look at the.
The open claims on quite a few of the line. So if you look at umbrella you'll look at medical malpractice, you'll look at auto all of those are unfavorable and you can see it of course, we had the offset on on comp, but don't forget we also had offset on surety.
And and and that's significant but if you look at the other lines as I gave you. So about 200 million just on medical malpractice, then you add commercial out of U and and and and umbrella, which you can obviously see a to a large extent and in our disclosures.
It's been substantial because it does to your point, Josh you're at a point you have been making effectively it does affect the path not only the future because of all of the open claims.
And so when you said you'd look we worked some I don't want to I read it was just rhetorical and somebody's in amerigon and toward a bit when you say that we're not always going to be a below we're not targeting.
A long term AR.
I guess, it's hard for me to parse that we're not targeting a long term inflation picking how we're pricing.
Acting as you know more organically.
Is there a confidence that those reserves are now being fixed.
At or above the long term loss cost inflation.
That you have in your assumptions.
Yeah. We clearly are we've increased those long run loss cost trends substantially right they've doubled as I said in four years and and we believe with the actions we have taken over this period end and in this quarter that the reserves do capture it now it's possible that.
That long run loss cost trends, which you are sitting at about 6% might go up my point on on on on the other aspect that my you're brought up of rate. It was a question of rate adequacy, because you hear conversation around rate adequate and what I would simply suggesting is that we don't focus on that.
As much because it is you know it has been increasing it can continue to increase and so you you know you might be rate adequacy in all at rate adequate and aligning quickly you're not anymore, because they have a long run loss cost trends and then the other component of that was just making as let's be realistic theirs.
So times in a soft cycle, well, you're not going to make it and so my point there was simply that hey.
Now the time to go get more weight and that's all I wasn't intending.
Okay that makes sense and then my other question on medical loss inflation.
To what extent is it just a lagging indicator of Medicare and the H M. O have a lot of bargaining power and so the the cost of medical services have been aim as were using pricing for medical services that was set in the past.
Should we expect that the input cost to hospitals are rising even if the cost of the patients haven't gone up yet.
Well first of all let's just put in context, you know the medical malpractice line and our actions on that medical malpractice line, which have been substantial both in terms of unfavorable prior period development and long run loss cost trends and of course, the consequence pricing et cetera.
<unk> was a function clearly a social inflation, we saw significant attorney representation increase on on on all of those cases, we saw emboldened plaintiffs we saw higher settlement the bank, even when the facts they didn't warranted that.
What drove that a lot hard for me to sort of then you know sift through all of that and say is there a is it a is it a is it an indicator for what our medical trends are going to do as we see it in a more calm not you know, it's not something that I can't can assess and I wanted to be clear on this.
Social inflation impact on professional or medical malpractice.
Help.
And what about on.
Our workers' compensation, where jobs has been very favorable some of that this is the medical in that.
Is it.
I, certainly expect that that workers' comp loss trends will rise in the future.
Is that it.
Medical costs a delayed.
A lagging indicator of inflation as opposed to a concurrent indicator.
Okay.
I'm not really sure how to you know you know when you look at the CPI medical inflation on the CPI. This this this quarter I think it changes every quarter went up to 4.5%.
You know our trends are showing less.
Uh huh.
I'll probably under 4%.
And a function of of.
Of you know some of the things that offset it you schedule, the opioid utilization, which has come down.
The fee schedule does you know those kinds of things that caused a like a and so you know some of that has a lag impact.
Okay.
Where would clearly I haven't got a handle on it as I was trying to point out on the work comp.
Because we've been so conservative.
That that if it goes up.
So we think we've got some room there of course.
If it really turns the corner a function of economic inflation goes up for a protracted period of time well. The good news is we'll have a little bit of time to react and we think we can based on our portfolio that we have which to a large extent is more sort of a white collar work comp.
Well I just wanted to say as usual disclosure the detailed in depth, it's all top tier and thank you for doing so much work on this.
Okay. Thanks, Josh.
Thank you, we'd now like to turn the call back go for Dino.
<unk> robusto for any additional or closing remarks.
Thank you very much everyone and we look forward to chatting with you next quarter.
Okay.
Thank you, ladies and gentlemen that will conclude today's conference call. Thank you for your participation you may now disconnect.
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Yeah.
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