Q2 2023 Travelers Companies Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the second quarter results teleconference for travelers, we ask that you hold all questions until the completion of the formal remarks at which time you will be given instructions for the question and answer session.
As a reminder, this conference is being recorded on July 20th 2023 at this time I would like to turn the conference over to MS. Abbe Goldstein Senior Vice President of Investor Relations Ms. Goldstein you may begin.
Thank you good morning, and welcome to travelers discussion of our second quarter 2023 result.
Released our press release financial supplement and webcast presentation earlier. This morning, all of these materials can be found on our website at travelers dot com under the investors section.
Today will be Alan Schnitzer, Chairman and CEO , Dan Frey CFO and our three segment President Greg cause Lasky of business insurance, just claim to bond and specialty insurance and Michael Klein of personal insurance they will do.
Discuss the financial results of our business and the current market environment.
Her to the webcast presentation as they go through prepared remarks, and then we will take questions.
Before I turn the call over to Alan I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation. Today includes forward looking statements. The company caution caution cautions investors that any forward looking statements involve risks and uncertainties and is not a guarantee of future performance actual.
<unk> results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors are described under forward looking statements in our earnings press release and in our most recent 10-Q and 10-K filed with the SEC, we do not undertake any obligation to update forward looking statements.
Also in our remarks or responses to questions. We may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release financial supplement and other materials available in the investors section on our website and now I'd like to turn the call over to Alan Thank.
Thank you Abby good morning, everyone and thank you for joining us today.
In the face of an historic cat quarter, our top and bottom line results demonstrate the strength of our franchise and the resilience of our business model.
This quarter, we reported strong underlying results in investment returns as well as net favorable prior year reserve development, which were essentially offset by an historic level of industry wide catastrophe losses.
There were Pcs designated catastrophe events, taking place on 88 of the 91 days of the quarter.
Despite pre tax catastrophe losses of 1 billion and a half dollars, we generated slightly positive core income for the quarter.
We are very pleased with the underlying fundamentals of our business.
Pre tax underlying underwriting income of $781 million for the quarter was up nearly 40% driven.
Driven by record net earned premiums of $9 $2 billion and the consolidated underlying combined ratio, which improved one seven points to an excellent 91, 1%.
Earned premiums were higher in all three of our business segments.
Underlying profitability in our business insurance segment was particularly strong.
The underlying combined ratio improved by three points to an excellent 89, 4%.
The underlying combined ratio in a bond and specialty business was higher year over year, but at 87, 8% still generated a very attractive return.
In our personal insurance segment, the underlying combined ratio improved by two points, reflecting the actions we have taken to improve profitability.
Turning to investments our high quality investment portfolio generated net investment income of $594 million after tax for the quarter.
Reflecting stronger and reliable returns from our fixed income portfolio.
Solid returns from our non fixed income portfolio.
Given our confidence in the strength of our business, we returned $633 million of excess capital to shareholders during the quarter.
Including $400 million of share repurchases.
Turning to production. Thanks, once again to excellent execution by our colleagues in the field. We grew net written premiums by $1 $3 billion or 14% to a record $10 $3 billion.
In business insurance, we grew net written premiums by 18% to $5 $2 billion.
Renewal premium change in this segment was a record high at 12, 8% driven.
Driven by renewal rate change, which accelerated two and a half point sequentially to seven 2%.
The renewal premium change we achieved this quarter was broad based.
P C was double digit or near double digit in every line other than workers' compensation and it was higher sequentially in every line, including workers' compensation.
Even with strong pricing retention, an important indicator of marketplace stability remains very strong at 88%.
New business increased 36% to $671 million led by the property line.
In bond <unk> specialty insurance record net written premiums were about even with the prior year quarter.
Retention in our management liability business was an excellent 91% and new business increased 11%.
<unk> net written premiums were also once again strong.
Given the attractive returns we are very pleased with the strong production results in both of our commercial business segments.
The growth, we're putting on the books is from geographies products and distribution partners that we know well.
In personal insurance topline growth of 13% was driven by higher pricing.
Premium change was 19, 2% in our homeowners and other business and increased to a record high of 16, 1% in our auto business.
Another quarter of terrific production across the board positions us well for the rest of the year and into 2024.
You'll hear more shortly from Greg, Jeff and Michael about our segment results.
Before I turn the call over to Dan I'd like to spend a few minutes on what travelers is doing in an important area for us artificial.
Intelligence.
We subscribe to the view that over time, the impact of AI across the economy is going to be profound.
So what's the opportunity for travelers.
With our performance transform mindset and our disciplined framework for assessing our investment priorities. We've been focused for years on responsibly developing differentiating AI capabilities across our three innovation priorities.
Standing our lead in risk expertise providing.
Providing great experiences for our customers agents brokers and employees.
And optimizing productivity and efficiency.
Between our colleagues, who are dedicated to AI, specifically and others and enabling disciplines.
Have a very significant number of our employees engaged on the objective of making sure that we're leading when it comes to AI.
As we've shared before and as you can see on slide 23 of the webcast presentation.
For some time, we've been steadily increasing our technology spend.
This year, we'll spend more than a 1 billion and a half dollars on technology.
As this slide demonstrates we've also been improving the strategic mix of our tech spend.
That includes a meaningful increase in investments to develop or acquire cutting edge AI capabilities built on modern cloud technology.
Importantly, we've done all of that while significantly improving our expense ratio and.
In no small part thanks to the success of our technology investments.
The quantity and quality of data are key differentiators when it comes to AI.
For more than a decade, we've been investing in datasets data quality and data accessibility.
Between submissions in our commercial businesses and quotes in Pi.
We intake millions of business opportunities each year.
We also take in adjust and adjudicate millions of claims.
One of the largest risk control organizations in the industry, we provide risk mitigation to our commercial customers compete.
Completing more than 100000 risk control consultations annually.
We captured a valuable data from virtually all of those interactions.
Our data also include decades of curated institutional knowledge in the forms of policies procedures guidelines forensic investigations and so on.
All of that creates an excellent foundation for the next iteration of generative AI.
In addition to our extensive proprietary data we've been assembling actionable third party data for years.
Fact, we have more than 2000 datasets from hundreds of third parties.
All in we believe that we have a significant and hard to replicate data advantage.
Given the competitive advantages that will come from deploying AI across the insurance value chain.
And the expertise resources and data required to get there.
Gil will increasingly be a differentiator in our industry.
As well the ability to execute complex initiatives effectively and efficiently.
Expertise resources data scale and execution excellence all favorite travelers.
The potential use cases for AI in our industry are many and varied.
We pursue very focused opportunities that are consistent with our innovation priorities.
And will create meaningful and sustainable competitive advantages.
All with an eye towards leveraging strategic capabilities across our organization.
AI capabilities that we currently have in production span the spectrum from those driving efficiency through automation to more advanced generative AI and large language models.
More advanced models augment various aspects of our underwriting claim handling service delivery and other work.
We use intelligent process automation broadly throughout our business to handle hundreds of routine workflows.
Automation and AI, even meaningful drivers of our expense ratio improvement over the past seven years or so.
A key success driver in insurance is segmenting risk is finally as possible to achieve pricing that is accurately calibrated to the risk.
Deep learning models have significantly improved our ability to classify and segment risk in our flow businesses.
For example in personal insurance, we leverage proprietary AI and aerial imagery to assess roof and other site related conditions at the parcel level.
Parcel level risk assessment at scale was practically unimaginable until several years ago.
And that type of information is very difficult to obtain from the insured with a reliable degree of accuracy.
In our select accounts business, we estimate that AI is improved business classification, a critical underwriting input by more than 30%.
In our middle market business, we have developed a suite of sophisticated AI models.
Facilitate targeted cross selling.
Supporting our effort to sell more products to more customers.
We're also using AI to better understand our customers and their needs.
This improved customer segmentation, we can better align new product development and generate insights that improve the customer experience.
Enhancing our industry, leading analytics, we're using machine learning models to deliver sophisticated actuarial insights into loss cost trends and development.
Which improve our already strong pricing and product monitoring capabilities.
On the most advanced and <unk>.
We're leveraging generative AI enlarge language models and we've been doing so for several years.
For example, in our bond <unk> specialty business, our proprietary large language models have processed hundreds of thousands of brokers submissions as we work toward improving intake time from hours to minutes.
This will improve our responsiveness to our customers and distribution partners and contribute to our productivity.
And our claim organization, our proprietary large language model Ingests legal complaints filed against our Insureds and then highlights key liability and coverage issues assists in routing the cases to the best suited defense Council and provides risk related insights that can be incorporated back into our underwriting process.
We've also developed and are piloting a travelers claim knowledge assistant agenda.
Generative AI tool trained on many thousands of pages of proprietary technical source material that was previously only accessible to thousands of different documents.
The model provides claim professionals with the ability to easily access accurate actionable information on.
Technical and procedural claim matters increase.
Increasing speed accuracy and consistency in various workflows.
<unk> and interactions with our customers and distribution partners.
So in terms of AI, we're investing with speed and the strategic direction consistent.
Consistent with our stated objective of delivering industry leading returns.
Only showed some of whats in flight and the capabilities that we've developed are in various phases of adoption.
The full impact of the capabilities, we're developing and others on a roadmap are still ahead of us.
To sum things up we are very confident in the outlook for our business, we have terrific underlying fundamentals in our commercial businesses improving underlying results in our personal insurance business and steadily rising investment returns in our fixed income portfolio.
As you've heard we're also investing in impactful new capabilities to advance our ambitious innovation agenda.
With that momentum and the best talent in the industry, we are well positioned to continue to deliver meaningful shareholder value over time.
And with that I'm pleased to turn the call over to Dan.
Yes.
Thank you Alan.
Pleased to have generated record levels of earned premium this quarter and an underlying combined ratio of 91, 1%.
170 basis point improvement from last year's strong results.
This led to a very strong underlying underwriting gain of $615 million after tax up $171 million or 39% from the prior year quarter.
The expense ratio for the second quarter improved 40 basis points from last year to 28, 6%.
Once again benefiting from the combination of our focus on productivity and efficiency, coupled with strong topline growth.
As Alan mentioned the industry experienced a very active cat quarter in <unk>.
Our second quarter results include $1 5 billion of pre tax catastrophe losses, our second largest ever catamount for a second quarter.
As disclosed in the significant events table in our 10-Q, we had six events surpassed the 100 million dollar Mark in Q2.
The most ever for a single quarter since we began disclosing the table in 2013.
Turning to prior year Reserve development, we had total net favorable development of $60 million pre tax and.
In business insurance net unfavorable <unk> of $101 million was the result of better than expected loss experience in workers' comp across a number of accident years.
Being more than offset by an increase in some of our other casualty reserves as well as for runoff operations.
In bond and specialty net favorable <unk> of $119 million was driven by better than expected results in management liability and surety.
Personal insurance had $42 million of net favorable driven.
Driven by homeowners and other.
After tax net investment income of $594 million was in line with the prior year quarter.
Fixed maturity NII was again higher than the prior year quarter, reflecting both the benefit of higher average yields and higher invested assets.
Returns in the non fixed income portfolio were solid but as expected were not as strong as the double digit yield we experienced in the prior year quarter.
With interest rates, having moved higher during the second quarter, we are raising our outlook for fixed income NII, including earnings from short term securities by $35 million after tax for the back half of the year.
We now expect approximately $570 million after tax in the third quarter and $595 million after tax in the fourth quarter.
New money rates as of June 30th are about 140 basis points higher than what's embedded in the portfolio. So fixed income NII should continue to improve as the portfolio gradually turns over and continues to grow.
Turning to capital management operating cash flows for the quarter of $1 $5 billion were again very strong.
Our capital ratios were at or better than target levels, and we ended the quarter with holding company liquidity of approximately $2 billion.
Yeah.
In late May we issued $750 million of 30 year debt in order to maintain a debt to capital ratio in line with our target range as our premium volume has continued to grow.
Interest rates increased and spreads widened during the quarter and as a result, our net unrealized investment loss increased from $3 $9 billion. After tax at March 31 to $4 $6 billion after tax at June 30th.
As we've discussed in prior quarters, the changes in unrealized investment gains and losses generally do not impact how we manage our investment portfolio, we generally hold fixed income investments to maturity.
Quality of our fixed income portfolio remains very high.
And changes in unrealized gains and losses have little impact on our cash flows statutory surplus or regulatory capital requirements.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $115 45 at quarter end up 1% from year end and up 3% from a year ago.
We returned $633 million of capital to our shareholders this quarter comprising share repurchases of $400 million and dividends of $233 million.
We have approximately $6 2 billion of capacity <unk>.
Remaining under the share repurchase authorization from our board of directors.
Since the significant level of cat losses in late June resulted in lower earnings for the quarter than we had anticipated we expect the level of share repurchases over the back half of the year to be lower than the level of share repurchases in the first half of the year.
Turning to the topic of reinsurance page 20 of the webcast presentation shows a summary of our July one reinsurance placements.
While we did see some meaningful price increases on our reinsurance renewals.
These increases were broadly in line with the price increases we are obtaining on the direct property premiums were writing so theres little or no impact expected on margins.
Let me take another moment to highlight a few items on page 20.
First we renewed our main cat reinsurance program at terms that were generally consistent with the expiring program.
Second we increased the coverage under our northeast property treaty by fully placing the $850 million layer above the attachment point of $2 $5 billion, a year ago, we placed $750 million of that 850 million layer and the attachment point was 225.
Billion.
This treaty remains pretty far out on the tail for us.
Finally, as part of our ongoing management of tail risk exposure for the enterprise.
And in response to inflation driven growth in insured values in our personal insurance property book, we added a new hurricane cat excess of loss reinsurance program specific to personal insurance coastal exposure.
Providing 50% coverage for the $1 billion layer above an attachment point of $1 $75 billion.
Again far out on the tail.
Any margin impact from this new program will be de Minimis, given both the size of RPI property book and the level of price increases we are obtaining on that book.
To sum up the quarter our.
Our ability to absorb $1 $5 billion of pre tax cat losses, and still reported slightly positive core income for the quarter is a testament to the overall strength of our franchise and the underlying fundamentals of our business.
Q2 was another quarter of double digit premium growth improved underlying profitability and further improvement in our outlook for fixed income NII, all of which bodes well for our future returns.
And with that I'll turn the call over to Greg for a discussion of business insurance.
Thanks, Dan business insurance produced $402 million of segment income for the second quarter down from the prior year quarter, driven by prior year Reserve development and higher cats as Dan mentioned.
Underlying underwriting results continue to be exceptional with underlying underwriting income up more than 50% from the prior year quarter.
We're once again, particularly pleased with the quarter's underlying combined ratio of 89, 4%.
Which improved by three points from the prior year quarter.
The loss ratio benefited from prop losses.
We're about a point and a half better than our expectations for the current year quarter.
The loss ratio also improved due to earned pricing.
The expense ratio remained strong at 31%.
Net written premiums increased 18% to a quarterly record of $5 $2 billion.
Driven by renewal premium change of 12, 8%.
Retention of 88%.
And new business of $671 million all record highs.
Underneath RPC renewal rate change accelerated sequentially from the first quarter by two five points to seven 2%.
We're thrilled with these production results in the superior execution by our field team in the marketplace.
In terms of pricing, we're pleased with our response to the persistent environmental headwinds in both the property and liability lines.
And each of our product lines renewal premium change was higher than the first quarter.
Beyond pricing, we continue to improve terms and conditions to ensure we are achieving an appropriate risk reward trade off on the business we write.
As we always say, we execute in a granular manner deal by deal class by class.
And to that point, we're thrilled with our execution.
Demonstrated by record retention of 88% on our very high quality book of business and rate that is thoughtfully segmented by return profile.
New business as a percentage of the book return to pre pandemic levels led by the property line.
We're pleased with new business dollars at an all time high and as always when it comes to new business. We remain focused on risk selection underwriting terms and conditions and pricing.
We're also very pleased with the impact that our strategic investments are having on our production results.
As for the individual businesses in select renewal premium change was up a point from the first quarter to a strong 10, 6%.
While retention also remained historically high at 84%.
New business increased $30 million or 28% from the prior year quarter, driven by the continued success of our BOP to point oil product.
In middle market renewal premium change was up more than two points sequentially from the first quarter to a historically high 10, 5% with.
With renewal rate change increasing sequentially by a point and a half to five 9% and continued strong exposure growth.
Retention was once again exceptional at 90%, while new business was up 32% from the prior year quarter with increases across all account sizes and most markets.
To sum up business insurance had another strong quarter and continued to execute on the fundamentals to drive profitable growth.
With that I'll turn the call over to Jeff.
Thanks, Greg.
Bond and specialty posted strong top and bottom line results for the quarter.
Segment income of $230 million was up slightly from the very strong prior year quarter.
Combined ratio was a terrific 77, 1%.
The underlying combined ratio was a solid 87, 8% for the quarter.
A small number of surety losses drove the roughly four point increase in the underlying loss ratio year over year.
As we've said before surety losses can be a bit lumpy.
Even with the incremental losses this quarter our returns in the surety line remain excellent.
Turning to the top line, we delivered record net written premiums this quarter.
Domestic management liability, we are pleased that we drove record retention of 91% in the quarter.
Up two points sequentially and three points from the second quarter of 2022.
While continuing to achieve solid renewal premium change.
This result reflects our team's deliberate execution to retain our high quality book of business in light of the very strong returns.
We're also pleased that we increased new business, 11% from the prior year quarter.
That's a reflection of the strong franchise value, we offer to our customers and distribution partners and a lot of hard work by our team in the field.
Additionally, we're pleased to report record surety net written premiums in the quarter.
So both top and bottom line results for bond and specialty were once again strong this quarter driven.
Driven by our continued underwriting and risk management diligence excellent execution by our field organization and the benefits from our ongoing strategic investments to extend our market leading competitive advantages.
And now I'll turn the call over to Michael.
Thanks, Jeff and good morning, everyone.
In personal insurance, the second quarter segment loss of $538 million and a combined ratio of 122% were significantly impacted by catastrophes.
While it is not unusual for us to have a loss in the second quarter given its typically the quarter with the highest weather related losses.
<unk> losses, this quarter for both us and the industry were significantly elevated compared to historical results.
Net written premiums for the quarter grew 13% driven by double digit renewal premium change in both domestic automobile in homeowners and other.
The underlying combined ratio of 94, 1% improved two points from the prior year quarter, reflecting an improvement in the underlying combined ratio in homeowners and other partially offset by an increase in automobile.
Okay.
In automobile the second quarter combined ratio was 108, 4% with an underlying combined ratio of 101 point 103, 5%.
The underlying combined ratio increased one seven points from the prior year quarter due to higher severity driven by increased vehicle replacement and repair costs and a mix shift from collision only claims towards claims with bodily injury and third party property damage, which is more consistent with more cars on the road leading to more multi car accidents.
These increases were partially offset by the growing benefit of earned pricing and a lower expense ratio.
While some of the inflationary pressures in auto are beginning to show signs of easing they are not improving at the rate we expected.
Consequently, we are not yet achieving the written rate adequacy levels, we had anticipated.
We continue to make progress and expect to get there in the coming quarters.
<unk> one will depend on a few things for example, how quickly inflation comes down how quickly we can get additional rate through the regulatory process and our actual loss experience.
In homeowners and other the second quarter combined ratio of 135, 1% increased 17, one points due to significantly higher catastrophe losses.
The underlying combined ratio of 85, 2% improved five one points.
Primarily driven by non cat weather losses that were lower than in the prior year quarter.
Non cat weather losses in the quarter were also better than our expectation as more events reached our catastrophe threshold.
Turning to production our results continue to demonstrate disciplined market execution of rate and non rate actions in both lines as we remain focused on improving profitability and managing growth in response to continued inflationary pressures in the environment.
In domestic automobile renewal premium change of 16, 1% increased two one points from the first quarter of 2023.
We expect renewal premium change to continue to increase from current levels throughout the second half of this year.
And domestic homeowners and other renewal premium change of 19, 2% was broadly consistent with the first quarter.
We expect renewal premium change to remain in the high teens through the end of the year.
Before I conclude I just wanted to take a minute to thank our claim partners for responding to our customers when it matters most.
Behind the aggregate statistics of catastrophe events are occurring virtually every day of the quarter.
Our tens of thousands of individual customers, whose homes and vehicles are damaged or destroyed and whose lives are disrupted.
In each case, our quant team is responding helping those customers get their homes repaired and their cars back on the road continuing to deliver high quality customer service. Despite the high volume of claims.
Both the loss environment in the personal insurance marketplace remain dynamic we continue to respond to the changing environment with a steadfast focus on execution.
Quickly addressing changes in loss experience with targeted pricing underwriting and other non rate actions.
Meaning disciplined in writing business that is consistent with our appetite.
And making thoughtful and impactful investments for the future.
We're confident that the actions we've taken and will continue to take will improve profitability as we move through 2023 and beyond.
Now I'll turn the call back over to Abbe.
Thanks, Michael and we're ready to open up for questions.
Sure.
Thank you for your question and any follow up question. Please.
Please press star one on your telephone keypad, if you wish to remove yourself from Q simply press Star One again, one moment for your first question.
Yeah.
Yes.
Okay.
Okay.
Your first question comes from the line of Greg Peters of Raymond James. Please go ahead.
Well good morning, everyone.
I guess notwithstanding Michael's comments.
Hey.
Just curious about.
If theres going to be any shift in the strategy on property, considering what's gone on with catastrophe losses and I'm also trying to.
Trying to triangulate.
Our bridge the difference between personal lines, which clearly was a negative surprise and I think Greg in your comments, you said property actually was better.
Net gain for you guys relative to expectations. So any broad comments on your views on property in light of the cats in the different segments too. Please.
Sure. So I can start on the on the on the property side Greg.
Certainly the catastrophe experience in the quarter was significantly worse than prior year and worse than our expectations.
In terms of a shift in strategy, what I would say is we continue to execute.
A series of actions in the property line to manage growth and improve profitability and again first and foremost you see that in the pricing and the production statistics.
That we share with you on the webcast.
But beyond that we're managing terms and conditions.
No think deductibles thing Frank roof age eligibility think.
Coverage levels on roof replacement.
And in a variety of actions that we look at very Granularly state by state market by market account by account.
And then one of the other things we're really encouraged by Alan had mentioned in his discussion around artificial intelligence is our aerial imagery and the artificial intelligence abled enabled capability, we have there to refine our underwriting and our risk selection. So.
Less the shift in strategy and more a continuation of.
So really broad array of profit management and profit improvement efforts in the personal lines property space.
Hey, Greg This is Greg just to follow up on the commercial side of it. So many times the catastrophes the split between personal and commercial can be it really depends on the concentration of where the catastrophes hit in terms of where our commercial businesses are.
In terms of your comment I think your referenced in my prepared comments when I was explaining the underlying combined ratio and I mentioned that prop.
Property was better than expectation and that really was non cat property.
Got it alright. Thank you for the answers and then I guess I'll pivot Greg also during your comments you talked about.
Reserve development.
Maybe maybe spend a minute.
Let me touch upon workers comp, but the adverse development in their lives.
Hey, Greg It's Dan Frey.
I'll take the <unk> comments so.
The quarter for business insurance, as we said overall unfavorable $101 million.
Comp continues to be favorable the comp favorable was very strong this quarter more than $250 million of.
But the good news so that leaves us with the other liability lines, including run off being unfavorable and.
And Thats really led by umbrella, which is sort of the poster child for.
Perpetual.
Core levels of inflation, just compounding and pushing more claims up into the umbrella layer.
But a couple of things to put to put that in context, I guess, we're making a relatively small adjustment.
To those liability lines given the fact that there are more than $15 billion worth of reserves in those lines.
The returns and be I continue to remain excellent.
And across the company and just remind us including.
Good news coming out of bond and specialty which is also a liability type coverage, we had net favorable $60 million for the quarter.
Got it thanks for the answers.
Okay.
Thank you. Your next question comes from the line of David.
Most embedded of Evercore ISI. Please go ahead.
Hi, Thanks, Good morning, I had a just a follow up question just on the the adverse prior year development.
I guess, what does that do to your view of future loss cost trends.
It sounds like some of it is run off but also some of it is more business that you're obviously still writing so I'd be interested in how you've changed your five 5% to 6% loss trend assumption.
Yes, David Good morning, it's Alan Thank you two things in response to that one I would say that.
I would just point you to the combined ratio and underlying combined in <unk> in the quarter and obviously, we think about how prior year development influences that through.
Base year changes and you can see a pretty solid result.
And as we've shared with you before I always I always want to just preface this by saying, it's a very blunt instrument to try to capture what's going on across billions of dollars of premiums in a in a single loss trend metric every line has its own dynamics.
The question usually comes in in terms of loss trend, but of course, there is base year changes. There is exposure changes there's other adjustments to loss activity. So always puts and takes in all of those and all of those measures, but but all in I would say there really hasn't been much significant change.
And I would go back to a comment that Dan made.
On $59 billion of reserves. This is a relatively small adjustment and.
We're always every quarter looking at all our reserves and sometimes they go up sometimes they go down but relatively small and you know us.
As Dan said, the returns and by continued to be exceptional.
Yes.
Got it thanks.
<unk>.
And I guess I should I should just take that I mean, it's obviously a very fluid environment.
But I.
Yes. It would you would you know.
Fluid macro environment. It would it would seem that just given the reacceleration in renewal rate change you know the gap between written rate and loss trend has been expanding.
I guess is that the right take or.
Is there anything else that I'm missing there obviously, we have to take catastrophes into account, but yeah. There I know for Dallas has come in I'm, just wondering if theres anything else I'm missing on the underlying loss ratio.
No I mean other than Greg mentioned in his script that the non <unk>.
Non cat property losses came in a little better than we thought but.
But for the most part I think the way you saw.
Is it up is about right, yes, and David as Dan I'll, just you mentioned fidelity, we said at the beginning of the year that Dallas was not going to be big enough to have a meaningful impact on the underlying combined ratio and thats and thats still the case, including Q2.
But I think you've got it right David.
Thank you.
Thank you.
Your next question comes from the line of Ryan Tunis of Autonomous Research. Please go ahead.
Hey, Thanks, good morning.
So, yes, I hear you that.
You've got $15 million reserve, sometimes they go up sometimes they go down.
I guess I would say they don't usually.
I'll provide as much in a given quarter, especially when there's so much workers' comp reserve releases.
And I mean, there is also like a pretty sharp acceleration in pricing.
It does look from the outside lights.
I don't know maybe you guys are seeing something new or you've identified something from a trend perspective.
I guess just if anything.
In this review.
What have you learned this year that I guess, you might not have known a year ago.
Let me start Ryan and then I'll turn it over to Dan, but we're squaring triangles and we're doing we're planning actuarial analytics to a series of triangles and historical losses.
And that's really how we're coming up with this means that the overwhelming thing that all of US are looking at is is higher level of economic inflation and so that that is no doubt a contributor here.
Yeah, Ryan the only thing I think I'd add to Alan's comments, which I agree with what we've said as people have asked over the last several quarters and pricing has continued to be strong for for quite a while now is that sustainable and here you see it ticking up and I think we just keep going through the litany of what pricing is going to be a reaction to what your.
What's your turn target and what's happening in the loss environment and so we talk about continued increased frequency and severity of weather losses, and you see that certainly this quarter <unk>.
Headline inflation, social inflation that we said never when it never went away.
And in uncertain overall macro environment and so those those things continue to factor into our pricing those things also get evaluated every quarter and every year in terms of our view of loss trend in prior year Reserve development. So what youre seeing here again across the place net favorable prior year Reserve development I get the focus on.
The liability lines, so, but but really what youre seeing there is a degree of difference as opposed to some surprise we've been talking about inflation for a long time and we were the first people to be talking about social inflation and never thought that one anywhere. So directionally. It's not a surprise is just an adjustment to the order of magnitude.
Got it and then.
For Michael and maybe Greg.
Yes on the on the Cat front.
Guys were highlighting.
The frequency of events and it seems like to me that the severity.
Must be at least as big of a contributor.
Could you maybe I guess talk about yes in other words, I don't think I would've beverage.
In personal lines.
Six Bcf.
So from a severity perspective like what's weighing wanted here or is it like the size of the hail in other words like the nature of the weather or how much of these elevated repair costs demand surge like that type of thing.
Sure Ryan its Michael.
Yes.
All of that so.
So I think I think your point's a good one so if you look at the quarter.
The number of events Pcs designated events was 19 that is above the long term average. So there is a frequency of events that's higher.
And Thats, a relatively high number for Q2.
But actually the majority of it really is severity and now.
Some of that severity to your point is the underlying weather activity itself I think on average.
The events in this second quarter impacted about eight states a piece as opposed to six states a piece. So they were a little broader.
And more all encompassing.
And then again historical averages so you've got the number of events and then the size and magnitude.
There certainly are and Theres.
Total evidence of more severe larger hail those types of things, but the other item that you mentioned.
It really is as big if not a bigger factor than sort of the frequency on the.
And the magnitude of the events and Thats, just insured values and cost of repair and the severity pressures that we've been talking about across both auto and property and frankly any first party coverages that that we offer as an organization really exacerbating that so.
I think it's I think it's all of those things, but it's at least as much a severity issue.
And at least as much driven by economic inflation as it is the weather activity itself.
Yes.
And Ryan from from our business insurance or a commercial point of view, we weren't immune from some of the same dynamics that Michael just articulated I think we just have a broader array of products that you get a little more diversification when you add the workers' comp GL and all the other products on top of that.
Okay.
Thank you. Your next question comes from the line of Alex Scott of Goldman Sachs. Please go ahead.
Hi, good morning.
First one I have views on the business insurance the underlying loss ratio improvement I was hoping you could help us unpack it a little in terms of workers' comp versus maybe the other products certainly.
The reserve developments sort of in a good indication of our healthy things are on workers comp, but pricing is down I mean is that.
Our business line.
It's helping the underlying improvement year over year or is it detracting from it could you kind of dimension that and help us think through.
Some of the underlying drivers.
Yes, Alex it's Dan we're really we don't do profitability by line, where we're not going to go into that level of detail.
Call out comp has been a good line for US. It continues to be continues to be a good line for us, but really the way to think about.
<unk> is the blend of the products and that's the level at which we'll talk about the underlying.
Okay.
Second question I had is on pricing there is I'd say more reacceleration in your pricing than we're hearing from I guess Marshall every day and some of them.
Parameters that are out there and so forth.
Thing.
Nique around the way you are approaching the market there and could you help dimension at all how much of that Reacceleration of pricing is necessary for the reinsurance costs you mentioned.
It sounds like maybe lost cost trend hasn't moved that much but.
Help us think a little bit about how much of that.
Can help you to tread water versus first of all I'll know more underlying improvement.
Yeah.
<unk>.
I think we're going to try to stay away from forecasting margins and I think I think it may have been David who went to this question earlier.
And just said.
We are a premium changes close to 13, and Youre, saying theres not a lot of movement in loss trend is sort of should we take that on face value I think I think broadly the answer is yes, but.
Really I think what's going on here is is there are some headwinds there as their reinsurance costs are higher inflation is higher we're in a tight labor market. There is weather and so on so so we're reacting to all of those things and on the other hand after years of pretty good pricing return shown a pretty good place and so.
Hats off to our field organization, they are threading that needle incredibly well.
And returns are were excellent and.
We're pricing to continue to maintain and maybe even improve proved the returns.
Okay.
Thank you. Your next question comes from the line of Elyse Greenspan of Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, My first question within Gi.
Hi.
Underlying loss ratio improved.
When we look at the quarter right improve the improvement year over year was about 300 basis points and I know you guys said that there was 150 basis points from better property results I think that was one point negative last year or so if we're looking year over year is it right to say it was two five.
Better on property and then the remainder like 50 basis points is on rate over trend.
Is there something else going on and I know Thats, just kind of looking all in but something else going on with the margins in the quarter.
Yes, Lee substantial I think youre thinking about the property piece the right way.
And then there's 50 basis points left over and Greg mentioned the <unk>.
<unk> benefit of of earned pricing that is not the only thing going on in there as always there are there are pluses and minuses were trying to call out. The main drivers for you and those are those are the two main drivers. If there was anything else real significance I think we do a pretty good job of trying to make sure. We include that in the commentary.
Thanks, and then my second question the RSC improved a good amount sequentially. It sounds like that was.
Broad based and property and liability lines I know this is obviously a bigger quarter.
For property in terms of business mix I, just wanted to get a sense of just confirm that I'm thinking about that right that was more than just property that drove the improvement in the RSC and how should we think about any any color you could just give in terms of.
As we think about the Q3 and beyond.
Are you talking about renewal price change lease is that.
Well I was talking about the renewal rate.
Our renewal ratio yeah.
Hi.
Yes, yes, you're right.
Clearly, we had a real strong quarter in terms of both rate and exposure in property, but we also had significant movement across the rest of the portfolio also again in both rate and exposure I'd say at least if you are asking whether it was broad based or narrow I think the answer to that it was broad based.
Okay.
Okay.
Okay.
Okay.
Thank you. Your next question comes from the line of Brian Meredith of UBS. Please go ahead.
Yes. Thanks, a couple here first for Jeff I know you talked about the surety losses, just being a couple and they can be lumpy, but are we seeing any signs of maybe some pressures in that line from a loss cost perspective, given what's going on with commercial real estate and other things that are happening right now.
Hey, Brian it's Jeff Thanks.
I would say that we're watching inflation in materials and labor costs relative to construction.
But honestly really I think the prepared remarks really summed it up for you right. We had a couple of losses.
That drove the underlying loss ratio change and ultimately.
This can be a lumpy line and we feel really good about our market leading surety book.
The higher interest rates matter also.
Okay.
I mean, when you get a big big Big jump in financing cost rate first for for contractors and stuff.
The the credit availability for our contractors is absolutely an issue we take that into account with our high credit quality book of business. The way we underwrite this book we.
We got a high quality book of contractors that we focus on there and so your point is well taken it's a part of the underwriting process.
That's where I'd leave it thanks for the question.
Thanks, Jeff and then Michael I'm, just curious can you talk a little bit about kind of the regulatory environment right now in personal lines. Obviously, some some states are getting a little more economy, even right, but are we seeing any pushback kind of starting to emerge from certain states as far as the level of rate going through.
Yes, Brian Thanks for thanks for the question and I think it's a I think it's an astute observation as.
As we talk about pretty consistently we feel pretty good about our relationships with the departments of insurance.
Are we really endeavor to make sure they have all the information necessary to evaluate and approve our rate increase requests.
And starting with US we continue to file for increases that align with our most recent experience on our indicated rate needs.
That said we.
We're seeing and you're seeing in the headlines some news about increased scrutiny and or.
States considering are proposing changes to the way that they regulate pricing in response to the continued parade of increases necessary to keep up with loss costs and.
And so I would say on the margin. There's a couple of places where it's getting a little more challenging but broadly speaking we have still been able to file and get approved the rate. We think we need in response to increased costs.
Okay.
Thank you. Your next question comes from the line of Josh Shanker of Bank of America. Please go ahead.
<unk>.
Yes. Thank you Alan you began the conference call with the preamble on artificial intelligence and <unk>.
In analytics.
It's been an unusual three years in terms of interpreting loss cost trends with courts being opened and closed her in cogan.
Very wildly changing conditions under loss trend is the data quality that you are looking at right now any less reliable in your mind. When you think that normal years, where are we in a state where extra caution needs to be placed on all on being comfortable with those numbers that you're using.
Our reserving practices.
I would say the answer to that Josh is yes, and I think we've said pretty consistently over the last few years that we have been cautious and reflecting that level of uncertainty into the way, we think about loss costs and reserves.
I think the answer is yes, and we've been doing exactly that.
And then I mean.
We're all just throwing shelves from the cheap seats, a little bit can you talk a little bit about some of that.
How you get more conservative or are you in a time of uncertainty how you get.
Better for what Youre doing in order to offset the risks associated with bad data and whatnot.
Yes.
It's probably a longer conversation Josh we can follow up it but let me just give you. One example, and I think we've said this over the last couple of years. If you were just looking at the data you might have assumed that some aspects of loss trend had improved over the last couple of years and.
And whether that's true in personal insurance and you see the lack of negative <unk> in personal auto for example.
Or if you look at social inflation, we said, it's a quartz were closed it.
That data could have been misinterpreted to mean things were getting better. If you look at that data and use I don't believe it and we understand that it's distorted and that there are other things that could be impacting it and and so we're going to do the best we can to try to understand where the uncertainty is coming from and to make sure that we're.
That we're reflecting our view of uncertainty as we're thinking about either.
Our prior year reserves or managing our current loss picks.
Okay.
Yeah.
Thank you. Your next question comes from the line of Mayor Shields of <unk>. Please go ahead.
Thanks, I'll start with a question on personal lines, Michael mentioned that the deceleration in claim cost inflation.
Wasn't as strong as <unk> anticipated I was hoping you could give us some color on what.
I guess the indicators that you've previously used what they're suggesting for personal loss cost inflation in the back half of the year.
Sure Meyer I don't I don't know that.
Okay.
The external indicators that we look at are significantly different than the ones you look at our or do have available what I can say is you know.
Auto severity has sort of remained stubbornly in the low double digits.
And we had not anticipated that it would remain in double digit territory for this launch.
I think the other thing I commented on in my prepared remarks was that we are seeing some signs of easing the predominant thing I'm talking about there is the Mannheim wholesale index.
And again.
An update just came out this week on that and I believe Manheim estimate now is that used car prices will end 2023 below 2022 levels.
But importantly, that's just one element of our loss cost right. So.
Wholesale car prices impact retail card prices, which impact our total loss settlement values, which is a portion of our loss costs are I think one of the reasons you continue to see double digit pressure on severity is continued elevation in repair costs labor and materials.
Et cetera.
And then again we've talked about.
Just broad based severity pressure I think what we are seeing is some of the potential good news that we're starting to see in the.
Physical damage coverages as being offset a little bit by this shift in mix to more claims with bodily injury and property damage and so on it on our mix.
That mix impact impacts those loss costs as well, but.
Again, the short answer is we are still seeing low double digit trends.
In auto severity and we hadn't anticipated that they would last this long.
Okay perfect Thats helpful.
Bar question, when we look at I guess, whether it's.
Possibly changing weather patterns or the mix shift within by slightly towards property or just inflation pushing more weather losses above the cat threshold.
How do you think about sort of the magnitude.
Coming years catastrophe load compared to where you've been recently.
Hi.
I'm not I'm not sure we're quite ready to talk about that or certainly give.
On outlook for that obviously as we start to.
But our views together for 2024 and beyond we will think about the experience that we've had this year and in recent years and and other factors whether that's the changes in exposure in our book or others.
Other things and we'll come up with a view that we hope will be.
Bob Poland inappropriate.
Yeah.
Thank you we have time for one more question. Your next question comes from the line of Tracy.
<unk> <unk> of Barclays. Please go ahead.
Thank you good morning.
Focus these days is on late and liabilities and I, especially appreciate your legal perspective, given your background Alan I'm not sure. If he is on the call or not but last quarter. You indulge me talking about this and this quarter I'm wondering if you can indulge me again and talk about P. Fast sorry in advance my questions quite meaty.
Is <unk> a chemically chemical explicitly excluded from GL like concluded in a pollution exclusion and for pre 1986 exposure does the statute of limitations apply.
Yes.
Tracy it's hard to answer a question like that without it without a claim and our policies. So I'm going to I'm going to avoid that and we're happy to take this offline with you and talk a little bit more about it if we can do that consistent with Reg FD at about <unk>.
What I would say about that is this issue has now been around for a while what we know about it as is reflected in our reserves and I am not sure. There is a lot more to say about it at this point.
Okay. So you said reflection reserve so the adverse.
Let me touch on the quarter again reflects an update to be fast.
Okay.
I didn't say that Tracy, but we're not really go into the drivers. We gave you the big drivers of the <unk>, we're not going to go into the specific coverage issues and BYD.
Thank you there are no further questions at this time I would like to turn the call over to Mr. Abbe Goldstein.
Thank you very much we appreciate everyone's time and as always if there's any follow up please feel free to reach out directly. Thank you.
Okay.
Today's conference call you may now disconnect.
Okay.
Yeah.
Thank you.