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spk00: Stand by, we're about to begin. Good morning and welcome to CNA's discussion of its 2021 second quarter financial results. CNA's second quarter earnings release, presentation, and financial supplement were released this morning and are available via its website at www.cna.com. Speaking today will be Dino Robusto, CNA's Chairman and Chief Executive Officer, and Al Morales, CNA's Chief financial officer. Following their prepared remarks, we will open the line for questions. Today's call may include forward-looking statements and references to non-GAAP financial measures. Any forward-looking statements involve risk and uncertainties that may cause actual results to differ materially from the statements made during the call. Information concerning those risks is contained in the earnings release and in CNA's most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, August 2, 2021. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during the call. Regarding non-GAAP measures, reconciliations to most comparable GAAP measures and other information have been provided in the financial statement supplement. This call is being recorded and webcast. During the next week, the call may be accessed on CNA's website. If you are reading the transcript of the call, please note that the transcript may not be reviewed for accuracy. Thus, it may contain transcription errors that could materially alter the intent or meaning of the statement. With that, I will turn the call over to CNA's chairman and CEO, Dino Robusto. Please go ahead, sir.
spk03: Thank you, Rochelle. Good morning, everyone. In the second quarter, we produced record core income. resulting from improvement in our underlying combined ratio, along with strong investment income and a much lower level of catastrophe losses compared to the prior year quarter. Core income was $341 million or $1.25 per share. Net income for the quarter was $368 million or $1.35 per share. As we reported last quarter, we sustained a sophisticated cybersecurity incident in late March. Notwithstanding that this resulted in a complete shutdown of our systems for the early part of the quarter and impacted our transactional capability, we quickly regained momentum and finished the quarter with a very strong June. This, in turn, allowed us to achieve gross written premium growth ex-captives of 8% in the quarter, which was consistent with the first quarter. In addition, new business grew 10% to 393 million, consistent with the first quarter, and amongst the highest quarterly new business volume since 2004. Of particular note, we achieved a plus 10% rate increase for the quarter, only one point lower in the prior quarter than the fifth consecutive quarter of double-digit rate increase. And importantly, earned rate is now just shy of 12%, and long-run loss cost trend is running about 4.5% after we increased it roughly a half a point in the first quarter, which portends a meaningful margin growth. And based on four quarters of double-digit rate increases, margins should continue to build into 2022, all else equal. The all-in combined ratio was 94%, 15.2 points lower than the second quarter a year ago. The improvement is largely due to a significant reduction in CAT losses, In the second quarter of 2021, pre-tax catastrophe losses were 54 million or 2.8 points of the combined ratio. During the second quarter of 2020, pre-tax catastrophe losses were 301 million or 17.5 points. The P&T underlying combined ratio was 91.4%, a 1.8 point improvement over last year's second quarter result. Adjusted for the impacts of COVID in last year's second quarter, the improvement is 2.2 points. The underlying loss ratio improved 0.7 points, and the expense ratio improved 1.5 points. Importantly, each of our three business units improved their underlying performance in the quarter. As we have articulated repeatedly over the last four and a half years, we have been laser focused on improving our underlying combined ratio by institutionalizing an expert underwriting culture throughout the organization, which included shedding business when we could not achieve an excellent path, an expedient path to profitability. This included the re-underwriting of our Lloyd's portfolio over the last 18 months. It also involved building our talent base, increasingly specializing our target market focus in commercial, as we had historically done in specialty, sharpening our expense management and building an optimal reinsurance program to allow us to be increasingly opportunistic in the marketplace while reducing volatility. This quarter, we took another step in optimizing our reinsurance program and strengthen our overall property protection by adding a property quarter share treaty. Currently, property lines represent less than 20% of our overall portfolio. because of our heavy concentration in professional liability and other casualty lines. After multiple years of strong rate increases, there is an opportunity for us to further grow the property portfolio at very favorable terms and conditions. And like we have done before, when we opportunistically expanded lines of business like management liability and umbrella, we do so initially with some proportional reinsurance, and then over time, as the book matures, we revisit our reinsurance structures. In addition to sharing dollar one protection for attritional losses, we achieve the same for both critical cat perils and other cats created by convective storms and wildfires. And given the average catastrophe levels in the last four years do not appear to be reverting to historical means, the additional protection allows us to maximize underwriting returns and reduce volatility as we grow the portfolio. All of the efforts to improve our underwriting performance have steadily paid off. Our underlying combined ratio has decreased in each of the last four years from 97.9% at year-end 2016 to our current 91.4%, which includes a relatively modest benefit from our implied margin build through this hardened market. The underlying loss ratio in the second quarter of 2021 was 59.5%, representing .6 points of improvement from the first quarter of this year. The underlying loss ratio was .2 points higher than the second quarter of 2020. However, the prior year loss ratio reflected a COVID frequency benefit of .9 points. The improvement in our underlying loss ratio this quarter, excluding the COVID impacts, is due to earned premium growth and recognizing some modest earned rate above our long-run loss cost trend assumptions. The underlying combined ratio for specialty was 89.2%, a 2.9-point improvement compared to last year. This is the lowest underlying combined ratio in three years. The expense ratio improved by two points year-over-year to 30%, and the loss ratio improved by 0.9 points to 59%. The underlying combined ratio for commercial was 93%, comparable to last year, but favorable by almost a point, excluding the COVID impacts that lowered the loss ratio in 2020. The loss ratio and expense ratio each improved about a half point year over year, excluding the COVID impacts. The underlying combined ratio for international was 92.5% this quarter, which is the lowest since international was first presented as a separate segment in 2014. The expense ratio dropped to 33.5% from 36.7% last year due to significant earned premium growth and our strategies to reduce some poor-performing Lloyd's program business, which carried higher acquisition costs. The loss ratio of 59% is down 0.9 points compared to last year. I am particularly pleased with our re-underwriting execution that has generated these improved results, which now allows us to turn our focus to growing the international portfolio. And you can see this in the quarter, as well as the first half of this year, with growths written premium growth of 22% in the quarter and 17% year to date, or 13% excluding currency fluctuation in the quarter, and 9% year-to-date. In specialty, we also had strong growth. In the quarter, growth in premium excluding our captive business grew by 11%, and new business was up 26%. Retention dropped slightly in our medical malpractice business as we continue to impose the necessary terms and conditions to achieve our required rates of return. as you have evidenced us consistently doing. If we can't achieve the proper terms and conditions, we will walk away. We have made a lot of progress, but additional rate is still needed. And in the quarter, we achieved 13 points of rate. And we believe that men-mow price increases will persist at the double-digit level through year end. Turning to commercial, gross written premium, ex-captives grew plus 2% in the quarter. which was disproportionately impacted by the cyber incident that began on March 21st. Through the tremendous work of our employees and the steadfast support of our agents and brokers, we continued to underwrite and pay our claims throughout the incident. But the limited transactional capabilities slowed down our production in the early part of the quarter. The impact was most notable in commercial, in particular middle market, because the underwriters are primarily based in our branch offices where they focus on local agent and broker relationships and typically handle a high volume of smaller and mid-sized accounts as well as the smaller end of our construction business segment. This is in contrast to public B&O underwriters or large national account underwriters that are more centralized in key cities like New York dealing with fewer but larger accounts. Middle market retention and new business levels were both impacted, which lowered growth. In addition, middle market and national accounts retention were also impacted by some targeted re-underwriting in the quarter. Importantly, however, we saw significant increases in momentum throughout the quarter, and retention for the month of June increased 82% for middle market. Broadly, during the month of May, we pivoted. from using transactional workarounds to an increasingly normal state of technology and operations, which allowed us to improve our production statistics. Our overall PNC gross written premium growth in June jumped to 13%, fueled by new business growth of 32% and overall retention of 82%. And this momentum has continued into the month of July. So we are confident that we can continue to leverage the favorable marketplace in the latter half of the year, as we have effectively done since the start of the hardening market. Overall, for the quarter, net written premium growth for PNC was down 1%, which was distorted by the one-time unearned premium catch-up associated with the new property quota share treaty we purchased effective June 1. Excluding the effect of the one-time catch-up, net written premiums grew 5%. For P&T overall, prior period development was favorable in the quarter by 0.2 points on the combined ratio. Al will provide more detail later. But before I turn it over to Al, I'll make a few comments on how I think about the pricing environment at this point in the cycle. As I mentioned last quarter, written rate changes began to exceed long run loss cost trends eight quarters ago. Earned rates have exceeded long-run loss cost trends for six quarters after being below long-run loss cost trends for five straight years. More rate is therefore still needed, and notwithstanding the one-point moderation in price increases in the first and second quarters, we are securing strong written rate increases where needed most. By way of example, in the quarter, aging services professional liability pricing was up 23%. Umbrella was up 16%, financial and management liability was up 17%, auto was up 13%, and property up 11%. Importantly, earned rate changes in 2021 are running close to 12%, and our long run loss cost trend assumption is about 4.5% in the aggregate with variations by class. That portends well for meaningful underlying margin improvement all else equal. Of course, things are rarely equal. Recall that we increased our long run loss cost trends by about two points over the last couple of years in response to clear increases due to social inflation. And we won't know the true impact of social inflation on these accident years until they develop over time. For now, we are not allowing that perceived margin to have a significant impact on our accident year loss ratio picks or it overly benefiting prior year reserves until we have greater clarity on the impacts of social inflation in light of the shelter-in-place mandates obfuscating those trends. Of course, this is all playing out against a substantial gap of roughly seven points between earned rates and long-run loss cost trends. So even if we assume an increase in long-run loss cost trends of another half a point at year end, And rates moderate as they did across the last two quarters, roughly 0.25. The strong written rate in the last year will continue to generate earned rate increases around 8% to 9% at year end 2021. Still well above even potentially elevated long run loss cost trends. And likely still fueling some margin expansion into the first half of 2022 all else equal. Just as important to the favorable pricing environment, are the improved terms and conditions we have been able to achieve over the last couple of years, which as I have mentioned before, tend to persist longer than the end of the favorable pricing environment. And when you combine that with the strong improvement in our portfolio from our re-underwriting actions over the last several years, as evidenced in our international portfolio, it should further serve to stave off upward pressure on the loss ratio, even when rates eventually fall below loss cost trends sometime in the future. In light of the disproportionate number of years rates tend to fall below long-run loss cost trends versus the years it exceeds them across an underwriting cycle, combined with the very real headwinds that persist, such as social inflation, low interest rate environment, and elevated catastrophe activity that hasn't reverted to the 10-year mean, I believe price increase discipline will persist for several more quarters. This is appropriate because determining what these headwinds will do and when in terms of improving or deteriorating is difficult to predict and makes the conversation on rate adequacy less certain, in my opinion. I believe discipline and prudence remain the order of the day. And with that, I'll turn it over to Al.
spk02: Thanks, Dino, and good morning to everyone. Starting with the financial results, core income for the quarter was $341 million, compared to $99 million for the prior year quarter. With a core ROE of 11.3% for the period, clearly we continue to make great progress. A meaningful component of our underwriting progress comes from our expense ratio. To that end, our second quarter expense ratio of 31.6% reflects two points of improvement versus the prior year quarter and four tenths of improvement from the fourth quarter of 2020. As you will recall, the prior year quarter reflected a half point adverse impact associated with COVID-19. The expense ratio improvement was again achieved in all three of our PNC business segments. As I've said previously, The expectation was that written premium growth would ultimately translate into earned growth, and the expense ratio would benefit from this as we maintain discipline in our expense spend. And while the timing of our discretionary investments in talent, technology, and analytics will lead to some volatility in our expense ratio from quarter to quarter, over time we would expect to sustain our progress. Turning to net prior period development and reserves. For the second quarter, overall P&C net prior period development was two-tenths of a point favorable, compared to 1.5 points favorable in the prior year quarter. Favorable development, especially during the quarter, was driven by the security business, somewhat offset by management and professional liability. In the commercial segment, favorable development and workers' compensation was offset by unfavorable development and commercial auto. In terms of our COVID reserves, we made no changes to our catastrophe loss estimates during the quarter. We continually review our COVID reserves and our previously established estimate of ultimate loss remains appropriate. And our loss estimate is still virtually all in IBNR. As Dino mentioned on June 1st, we renewed several treaties associated with our property reinsurance program. As part of this effort, we added a quarter share treaty which covers policies written during the treaty term, as well as policies that were enforced as of June 1st. As a result of our decision to have all enforced policies benefit from this new treaty and from the onset of hurricane season, we see that $122 million of premium as a one-time catch-up of unearned premium on policies previously written as of the treaty inception. This directly impacted net written premium for the quarter. Specifically, P&C net written premium was down 1% relative to the second quarter of 2020. Excluding the effect of the unearned premium one-time catch-up, net written premiums grew 5% relative to the prior year period. Specific to commercial, net written premium was down 12% relative to the second quarter of 2020. Excluding the effect of the unearned premium one-time catch-up, net written premiums contracted 1% relative to the prior year period. As this treaty was effective 6-1, the impact at earned premium for the quarter was modest. Now turning to life in group. The segment produced core income of $43 million in the quarter. This compares to Q2 2020 income of $14 million. The core income for the life in group segment in the quarter was largely driven by favorable net investment income. predominantly from the performance of our limited partnership investments. In addition, morbidity experience was moderately favorable for the quarter, while persistency experience was slightly unfavorable. As a reminder, we will perform our life and group annual reserve reviews in the third quarter of this year. As always, we will take a close look at all of our reserving assumptions, including critical factors related to morbidity, persistency, rate increases, and our discount rate. Please recall, last year we moved meaningfully on our discount rate assumption, setting the normative rate for the 10-year Treasury at 2.75%, with a 10-year grade-in period. While current interest rates are higher than one year today, they remain low on an absolute basis, further validating the prudent actions we took last year. Our corporate segment produced a core loss of $53 million in the second quarter. compared to a $40 million loss in the prior year. We conducted a review of our legacy mass tort reserves during the second quarter. As a result of this review, the segment includes a $40 million pre-tax charge related to unfavorable prior period development. The increase in reserves largely is associated with abuse claims. Turning to investments, total pre-tax net investment income was $591 million in the second quarter, compared with $534 million in the prior year quarter. The results included income of $156 million from our limited partnership and common stock portfolios, as compared to $84 million on these investments from the prior year quarter. The strong limited partnership returns of the quarter across both the P&C and life and group segments were significantly driven by private equity investments and the effective lag results from the first quarter. As a reminder, our private equity funds primarily report results on a three-month or greater lags basis, whereas our hedge funds primarily report results on a real-time basis. Our fixed income portfolio continues to provide consistent net investment earnings, stable relative to the last few quarters and modestly down relative to the prior year quarter. The year-over-year decrease reflects the effect of lower reinvestment yields substantially offset by the favorable effects of a higher investment base as strong operating cash flows have fueled portfolio growth. The pre-tax effective yield in our fixed income holdings is 4.3% at Q2 2021 compared to 4.6% as of Q2 2020. The decline in our portfolio yield over this time reflects the cumulative effect of the persistently low interest rate environment, which continues to be a headwind. At the same time, the book value of our fixed income portfolio has grown by $1.6 billion over the last year, mitigating the decline in the reinvestment yields. From a balance sheet perspective, the recent decline in interest rates during the quarter resulted in the increase in the unrealized gain position of our fixed income portfolio to $5.1 billion at quarter end, up from $4.3 billion at first quarter. Fixed income invested assets that support our PNC liabilities had an effective duration of 4.9 years at quarter end. The effective duration of the fixed income assets that support our life in group liabilities was 9.3 years at quarter end. As usual, slides from our earnings presentation will provide you with additional details of the investment results and the composition of our investment portfolio. Our balance sheet continues to be very solid. At quarter end, shareholders' equity rose to $12.7 billion, or $46.69 per share, reflective of our net income and the increase in our unrealized gain position during the quarter. Shareholders' equity excluding accumulated other comprehensive income was $12.2 billion, or $44.81 per share. We have a conservative capital structure with a leverage ratio of 18%, and continue to maintain capital above target levels in support of our ratings. In the second quarter, operating cash flow was strong at $603 million compared to $438 million at Q2 2020, and driven by the improvement in our current Accent-EAR underwriting profitability and a lower level of paid losses. This lower level of paid losses is also reflected in our lower P&C, paid-to-incurred ratio, which was 73% for the quarter. In addition to consistent net operating cash flows, we continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity holdings to meet obligations and withstand significant business variability. Finally, we are pleased to announce our regularly quarterly dividend of $0.38. And with that, we'll turn it back to Dino.
spk03: Thanks, Al. We are pleased with our production execution, especially considering the transactional challenges we experienced early in the quarter. We produced the lowest quarterly underlying combined ratio and record core income. Price increases are earning through at a double digit level, and we continue to opportunistically grow our new business at record levels. We believe the favorable market conditions will persist throughout the year. We are well positioned to capitalize on the many opportunities, and with that, We are ready to take your questions.
spk00: Thank you. If you would like to ask your question, please press star followed by the digit 1. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star 1, and we'll pause for just a moment. And our first question we'll hear from Gary Ransom with Dowling and Partners. Good morning.
spk04: I thank you for the comments on the market, Dino. That was helpful. But I wanted to talk about that a little bit more. I was just thinking about the impact of inflation generally. And granted, the CPI doesn't really correlate with social inflation, but it might indirectly over time. And you mentioned that the your long-term loss-cost trend is four and a half, maybe it'll be five. But I look at all these inflationary pressures and wonder if it might turn out to be six or seven. And we don't really realize it for a while. And I wondered if you could just comment on that kind of scenario or how the market might react to that emergence of a worse trend.
spk03: Thanks, Gary. Clearly, that's the important question. I mean, can it go up higher than a half a point? It's possible. And it is mainly the social inflation, as you indicated, right? CPI does impact it. We see it a little bit on the property, obviously. You probably see it in demand surge if you have a large cat. But, you know, it reveals itself quickly. You put it in your loss picks quickly and in your reserving. Medical inflation, you know, typically been, or at least for the last several years, really hasn't impacted work comp. The reforms, you know, continue to play out. So it's mainly the other casualty lines. It's social inflation. It has gone up. as I indicated, over two points in the last couple of years, and we have been quite transparent in what lines. It was obviously the medical malpractice. It was commercial auto liability and excess umbrella. So that's why I think we continue to be prudent, both in the accident year pick and how we look at reserves in prior years. accident years. So, you know, I was playing out some math at one point a quarter coming down on rates and say it goes up another half a point. It might go up higher in 2022. And I think this is why you still see the difference in pricing in these lines still in big double digit. And I think they'll stay up there. As the you know, shelter-in-place plays out or diminishes and you start to see the trends, I think the market will have those rates persist. So maybe the math still plays out the way I suggested. But it is possible. It's why I'm a little bit less definitive on the issue of rate adequacy and it being, you know, sort of a moving target somewhat. So it's possible we'll keep an eye on it, and I think you can use the map, and if you play a different number, and it'll then depend whether the rate continues to moderate in those lines or it stays flatter. So that's Really, all I can say, Gary, I wish I had a better insight. We just monitor it and stay disciplined and prudent.
spk04: Just one more level of that. When I think about what happens in court, sometimes medical cost trends are the baseline for pain and suffering additions or multipliers. You mentioned you haven't seen it very much in workers' comp, but has that played any role so far that has been visible in any of the liability lines or the injury cases?
spk03: I mean, clearly injury cases that impact individuals and the health of individuals are going to have But if you look at the medical trends outside of work comp, we really haven't seen it. It's been still fairly stable. There hasn't been the gyrations that are more representative of the overall social inflation. So it's more than the medical. It's all of the things that people comment on relative to social inflation and sentiment, anti-corporate sentiment, et cetera, et cetera.
spk04: Thank you for that. If I could just change subjects, too. I wanted to ask about the cyber impact. Just wondering if you, in hindsight, was there anything – that you're now doing differently or, you know, just from a high level, things that you may have changed that will either help or prevent future things like that?
spk03: Yeah, I mean, I think you're going to, you know, it's a little bit akin to an arms race. Whether it happened to us or whether you see it happening, the ransomware across the industry, you're going to react as they get more sophisticated, you're going to elevate your own security. We clearly are elevating our own security. I'd like to believe we would have continued had it not been directly impacting us, because it's just, you know, it's a function of what happens to us, but what's happening out there, and it's getting clearly much better publicized, and so You just got to keep on going with it, and I'll probably say the same thing a year from now and probably say the same thing five years from now, Gary. But clearly, you know, we have made additional changes and investments.
spk04: Has this affected how you might underwrite? cyber exposure as well, just your experience with it?
spk03: Yeah, that's a great point. I don't know if it's really because of our own other than when you look at our portfolio and you look at the frequency of ransomware in particular claims over the last 24 months, we knew we had to take substantial action. Now, In our book, it only represents a little less than 5% of our specialty book. But nevertheless, we have taken substantial action, and it's much more strict underwriting controls, now both on new business and renewals, with respect to the security protocols that our insureds have. And then, like many others have commented, we've clearly lowered our average limits, We've increased our deductibles and coinsurance. We've got about 59, 60 points of rate in the second quarter, but also we have good reinsurance, right? So we have a quarter share treaty on individual cases, Gary, individual losses rather, and we have an aggregate stop loss to protect us against a more catastrophic type scenario where it hits multiple insured. So I think, you know, we're doing all the right things, a lot more if you take out rate, a lot less growth. And so we're going to continue to be stringent in our underwriting in light of the activity.
spk04: Thank you very much, Dino. Thanks, Gary.
spk00: And next, we'll move to Josh Shanker with Bank of America.
spk05: Yeah, thank you for taking my question. So I really don't want to get in the habit of this, but you did talk about June production numbers on, I think it was net or maybe it was gross premium written. Can we talk a little about maybe March, April, May, June, just to understand the trajectory of how the attack suppressed your underwriting and give us, I guess, a better sense of how we can protect project that and maybe if you can layer in on that to talk about uh 2q20 which obviously had depressed writings because of the uh pandemic and and maybe there was a boost here in 2q21 because of easy comps i guess there's a lot in there but maybe there's there's a bit more detail that we can get to and understand better your trend well so uh uh josh i think you know um
spk03: you think about the trend as the cyber incident is behind us, right? So it happened on March 21st. Our systems were totally locked down for three weeks. And so obviously that limits your transactional ability. And even when you get up and running, you know, it takes a little bit of time to, you know, do some of the catch-ups. So we said it was gross written premium was 13% in June. eight for the quarter. So, you know, you do the math. It's pretty simple what sort of April and May was considerably lower and not surprising. The question is, is that, you know, it's sort of disjointed, right, in the sense that now we are back up and running and we had a good June and continuing sort of along the path that we had before the cyber incident, and as I said, it continued in July. So I think it's behind us, and it'll move forward as it did in the absence of the cyber event. I don't know if that helps, Josh.
spk05: I mean, I'm not... Yeah, I mean, I'm trying to... Can we say that the first two weeks of April, your production was down 40%? I mean, like, just trying to understand just how... When the cyber attack happened, did it cut things off to zero? I mean, I know you had workarounds and whatnot, but in the peak of the cyber attack, what was happening with production?
spk03: I think the way to think about it, I mean, Josh, you know, it's hard to know exactly what you say, what it would have been had it not been there. I think, look, the way to simply think about it is that, you know, the number of submissions, you know, had been down in April and parts of May, maybe about 20%. But those are submissions, right? You then have a quote ratio. You then have a hit ratio, what you would have gotten had you didn't have it versus you had it. You know, it's difficult to say, right? So we want it to be as transparent as we can be by sort of telling you what the quarter is, what June is, and the net effect of April and May. And that's about... you know, the best detail, honestly, I could provide and be accurate at the same time.
spk05: Absolutely fair, absolutely fair. And just, you know, you made this very smart comment about not wanting to interpolate pandemic-era frequency into your loss fix yet because you still don't know what's going to happen. Maybe down the line it is going to be a great windfall for the insurance companies. Maybe it's not. But can you talk about the loss pick in the context of how much conservatism, you know, with these fears, there's the broader inflation theme, and then there's the pandemic frequency. To what extent, when would we see you be more comfortable making a decision on how to interpret the loss pick based on your current concerns about inflation and whatnot, are we going to have to wait a number of years before you'd be willing to interpolate current information into your law fix?
spk03: Yeah, that's such a great question, Josh. And hard, you know, as you can tell by the way, you know, I commented in the prepared remarks along the issue of rate adequacy, right? In my opinion, it just remains I remain a little bit uncertain about it. And so I think it depends how this evolves right now. COVID, how the Delta variant plays out, whether it protracts the obfuscation or not, hopefully not. Listen, I think in three to four quarters, you'll have a better sense unless of course the situation gets worse and then it might protract it a little bit longer so what we are trying to do is move when we actually know it and see it and are comfortable with it And if we're not, we'll just tell you we're not. We'll tell you what the spread is, and then you can interpret it, you know, as you like, Josh. But, I mean, that is, okay, that's the bottom line. That's what, you know, we're trying to figure out, and I understand your question.
spk05: All right. And one more, if I can. Can we talk about how hotly competitive the market is? Obviously, you lost some business because of the cyber attack. But your new business production was good. That means you took business from somebody else. But I assume others also have taken some business from you. And so where rates are right now, is the market competitive? Is there anybody who's willing to... Is underpricing in this moment happening? I know there's a lot of saying, hey, we think price increases are going to be sustained. But at the same time, your retention isn't as strong in this environment as it's sometimes been. Can you talk about what does that mean for the competitive environment?
spk03: There's a lot there. The way I would describe the marketplace, I still think it's discipline. If you take the lines subjected to the largest or most pronounced long run lost cost trends, I think they're still strong, great. Take middle market, in our middle market, which in our portfolio, Josh, more than half of it is professional services, financial institutions, tech, life sciences, as opposed to heavy manufacturing. Very profitable business. Middle market, at the high watermark, let's say the high watermark was Q4, I think everyone is solidifying around Q4, We never got over 8%. A year ago, it was only 7%. And so that has always stayed a little bit more competitive. What may be happening a little bit now is it appears insurance companies are at different positions in their rate adequacy. Some suggesting they are there, so they may want to be a little bit more aggressive. And so I think in general, though, I consider it to be and remain a disciplined market. That's the way I categorize it. It is hotly competitive for many, many, many years in a cycle, and that's not what I would suggest at this point.
spk05: Thank you for all the detail. Very much appreciated. Thanks, Josh.
spk00: And as a reminder, it's Star 1 to ask your question. Next, I'll move to Meyer Shields with KBW.
spk01: Thanks. I'm pretty sure I've asked this question in the past, but Al mentioned continued adverse reserve development in commercial auto. And I wanted to dig into that a little bit because it just seems like the industry continues to struggle with a line of business where there's not that much innovation. I mean, this isn't cyber where the nature of losses should be shocking. And I was hoping to get your thoughts on What's driving that sort of difficulty in terms of getting ahead of the losses and what your outlook is for the line over the next year or so?
spk03: That's a great question, Meyer. There's no doubt that we are chasing increasing long-run loss cost trends. In auto, even though the book overall may be a little over four and a half, the reality is auto it's closer to sort of 8%. And that has been consistently going up. And you think you have a good handle on it, and then, you know, the effects of social inflation are really bearing down on auto. Now, you know, the good news is now our rate, rather than high single digits, what we saw last year, you know, we're at 13 points of rate. On the commercial, obviously, because of commercial fleets, we have an ability to impact the pricing more in the short term. But this has been a little bit of chasing the long run loss cost trends. And I think sometimes auto gets packaged in and you look at it overall, the reality is this is a line of business that continues to need a lot of pricing focus. And if you were to remove the price increases from our portfolio, you'd see relatively flat, slightly negative growth.
spk01: Okay, no, that's helpful. Just in terms of understanding things, did the transfer of earned premiums under the property quota share have any impact on the loss ratio in the quarter? In other words, is there an adjustment to prior period?
spk02: Hey, Meyer. This is Al. No, it would not have had a material impact. Remember, as I said, the effective date for this was 6-1. So I talked about that unearned adjustment. That's really a reflection of looking back at written policies and the unearned components of that. But given the effective date of 6-1, no really meaningful impact on earns, expense ratio, or loss ratio.
spk01: Okay, excellent. Thanks so much.
spk00: And there are no further questions. At this time, I will turn the call back over to Dino Robusto for any additional or closing comments.
spk03: No, thank you, everyone. We look forward to next quarter and chatting with you. Bye now.
spk00: And that will conclude today's call. We thank you for your participation.
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