Cna Financial Corp Q2 FY2021 Earnings Call

Good morning and welcome to CNA’s discussion of its 2021 Second Quarter Financial Results. CNA’s second quarter earnings release, presentation and financial supplements were released this morning and are available via its website, www.cna.com. Speaking today will be Dino Robusto, CNA’s Chairman and Chief Executive Officer, and Al Miralles, 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 reference 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 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 a transcript of this call, please note that the transcript may not be reviewed for accuracy, thus it may contain transcription errors that could materially alter the intent or meaning of the statements. With that, I will turn the call over to CNA’s Chairman and CEO, Dino Robusto. Please go ahead, sir.

Thank you, Rochelle and 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 than the prior quarter and the fifth consecutive quarter of double-digit rate increases. 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 0.5 a point in the first quarter which portends a meaningful margin growth. Based on four quarters of double-digit rate increases, margin 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 catastrophe losses. In the second quarter of 2021 pretax catastrophe losses were $54 million or 2.8 points of the combined ratio. During the second quarter of 2020 pretax catastrophe losses were $301 million or 17.5 points. The P&C underlying combined ratio was 91.4%, a 1.8 point improvement over last year's second quarter results. 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. We have been laser-focused on improving our underlying combined ratio by institutionalizing an expert underwriting culture throughout the organization, which included shutting business when we could not achieve an excellent path and 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 quota share treaty. Currently property lines represent less than 20% of our overall portfolio because of our heavy concentration in professional liability and in 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. 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 achieved the same for both critical catastrophe payrolls and other catastrophes created by convective storms and wildfires. 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 0.6 points of improvement from the first quarter of this year. The underlying loss ratio was 0.2 points higher than the second quarter of 2020. However, the prior year loss ratio reflected a COVID frequency benefit of 0.9 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 2 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 0.5 points 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, which you can see in the quarter as well as the first half of this year with gross written premium growth of 22% this quarter and 17% year-to-date or 13% excluding currency fluctuations in the quarter and 9% year-to-date. In Specialty, we also had strong growth. In the quarter gross written 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. If we can 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 Medical Malpractice price increases will persist at the double-digit level through year-end. Turning to Commercial, gross written premium ex-captives grew by 2% in the quarter, which was disproportionately impacted by the cyber incident that began on March 21. 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, particularly middle-market. Because the underwriters are primarily based in our branch offices with a focus on local agent and broker relationships and typically handle a high volume of smaller and midsized accounts, as well as the smaller end of our Construction business segment. This is in contrast to public D&O underwriters who are 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. Importantly, however, we saw significant increases in momentum throughout the quarter and retention for the month of June increased to 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 P&C gross written premium growth in June jumped to 13% fueled by new business growth of 32% and overall retention of 82%. This momentum has continued into the month of July. 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 P&C 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&C overall prior period development was favorable in the quarter by 0.2 points in the combined ratio and we'll 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 and then rates have exceeded long-run loss costs trends for six quarters after being below long-run loss cost trends for five straight years. More rate is therefore still needed and notwithstanding a 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 was 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 trend by about 2 points over the last couple of years in response to clear increases due to social inflation. 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 overly benefit prior year reserves until we have greater clarity on the impacts of social inflation in light of the shelter in place mandate obfuscating those trends. Of course, this is all playing out against a substantial gap of roughly 7 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 0.5 point at year-end, and the rates moderate as they did across the last two quarters roughly a point a quarter, 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 in 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. When you combine that with this 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 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 has 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.

Thanks, Dino and good morning to everyone. Starting with the financial results, core income for the quarter is $341 million compared to $99 million from the prior year quarter. The core ROE of 11.3% for the period shows that we continued 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 2 points of improvement versus the prior year quarter and 4/10 of improvement from the fourth quarter of 2020. As you will recall, the prior year quarter reflected a 0.5 point adverse impact associated with COVID-19. Expense ratio improvement was again achieved in all three of our P&C business segments. As I've said previously, the expectation was that written premium growth would ultimately translate into earned growth and expense ratio would benefit from this as we maintain discipline in our expense spend. While the timing of our discretionary investment 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 2/10 of a point favorable compared to 1.5 points favorable in the prior year quarter. Favorable development in Specialty during the quarter was driven by the Surety business somewhat offset by management and professional liability. In the Commercial segment, favorable development in Worker's Compensation was offset by unfavorable development in Commercial auto. Regarding 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 1, we renewed several treaties associated with our property reinsurance program. As part of this effort, we added a quota share treaty which covers policies written during the treaty term, as well as policies that were in force as of June 1. As a result of our decision to have all in-force policies benefit from this new treaty and from the onset of hurricane season, we seeded $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 June 1, the impact on earned premium for the quarter was modest. Now turning to Life & Group, this 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 & Group segment in the quarter was largely driven by favorable net investment income predominantly from the performance of our limited partnership investments. Additionally, morbidity experience was moderately favorable for the quarter, while persistency experience was slightly unfavorable. As a reminder, we will perform our Life & Group annual reserve reviews in the third quarter of this year. As always, we will take a close look for 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 normal rate for the 10-year treasury at 2.75% with a 10-year gradient period. While current interest rates are higher than one year ago, 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 from 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, this segment includes a $40 million pretax 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 in the quarter across both the P&C and Life & Group segments were significantly driven by private equity investments, and the effect of lagged results from the first quarter. As a reminder, our private equity funds primarily report results on a three-month or greater lagged 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 effects of lower reinvestment yields, substantially offset by the favorable effect 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 our investment yields. From a balance sheet perspective, the recent decline in interest rates during the quarter resulted in the increase in the unrealized gains position of our fixed income portfolio to $5.1 billion at quarter-end, up from $4.3 billion at the first quarter. Fixed income invested assets to support our P&C liabilities had an effective duration of 4.9 years at quarter-end. The effective duration of the fixed income assets to support our Life & 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 cumulated 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, driven by the improvement in our current accident year 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 scheduled quarterly dividend of $0.38. And with that, I will turn it back to Dino.

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 and our earnings grew 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.

Thank you. Our first question will come from Gary Ransom with Dowling & Partners.

Yes, good morning. Thank you for the comments on the market. You know, 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 your long-term loss cost trend is 4.5, maybe it will be 5, but I look at all these inflationary pressures and wonder if it might turn out to be 6 or 7. 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 worst trend?

Yes, 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 as we see it a little bit on property, obviously you’ll probably see it in demand surge if you have a large catastrophe, but if it reveals itself quickly, you put it in your loss picks quickly. In your reserving medical inflation, typically it’s been or at least for the last several years, hasn’t really impacted Work Comp as the reforms 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 on what lines. It was obviously the Medical Malpractice, it was Commercial Auto Liability and excess Umbrella. That’s why I think we continue to be prudent, both in the action year pick and how we look at reserves in prior accident years. I was playing out the 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. I think this is why you still see the difference in pricing in these lines still in big double digits. I think they’ll stay up there. As the shelter in place plays out and/or diminishes, 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’s possible, it’s why I am a little bit less definitive on the issue of rate adequacy and it being sort of a moving target somewhat. So it’s possible, we’ll keep an eye on it and I think you can use the math and if you play a different number it depends 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 and stay disciplined and prudent.

And 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. Have you seen, you had mentioned you haven't seen it very much in Worker's Comp, but has that played any role so far that has been visible in any of the liability lines or the injury cases?

I mean, clearly, injury cases that impact individuals and the health of individuals are going to have some impact, but if you look at the medical trends outside a bit of Work Comp, we really haven't seen it. It's been still fairly stable. There haven't been big 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, corporate, anti-corporate sentiment, etc.

Thank you for that. If I can just change subjects too, I wanted to ask about the cyber impact. Just wondering if in hindsight, was there anything that you're now doing differently, or just from a high level, things that you may have changed that will either help or prevent future incidents like that?

Yes, I think it's a little bit akin to an arms race. Whether it happens 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, it's a function of what happens to us, but what's happening out there, and it's getting clearly much better publicized. You just have to keep on going with it and you’ll probably say the same thing a year from now, and probably say the same thing five years from now Gary. But clearly, we have made additional changes and investments.

As this affected how you might underwrite cyber exposures as well, just due to chance, was it?

Yes, 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, right? We knew we had to take substantial action. Okay, I broke it only represents a little less than 5% of our Specialty, 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 limit. We've increased our deductibles and coinsurance. We got about 59, 60 points of rate in the second quarter, but also we have good reinsurance. We have a quota share treaty on individual cases, Gary, individual losses rather. We have an aggregate spot loss to protect us against a more catastrophic type scenario, where it hits multiple insureds. We’re doing all the right things, a lot more if you take out rate, a lot less growth. We're going to continue to be stringent in our underwriting in light of the activity.

Thank you very much, Dino.

Thanks, Gary.

And next we'll move to Josh Shanker with Bank of America.

Yes, thank you for taking my question. So I really don't want to get in the habit of some, you didn't talk about June production numbers and 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 then give us a, I guess a better sense of how we can project that? And maybe if you can layer in on that, talk about 2Q, 2020, which obviously had depressed writing because of the pandemic and maybe there was a boost here in 2Q, 2021 because of easy comps? So I guess there's a lot in there, but maybe there's a bit more detail that we can get to and understand better your trends.

Well, so Josh, I think you think about the trend as the cyber incident is behind us. So it happened on March 21. Our systems were totally locked down for three weeks. Obviously, that limits your transactional ability. When you get up and running, it takes a little bit of time to do some of the catch-up. We said gross written premium was 13% in June, 8 for the quarter. So, you do the math, it's pretty simple what sort of April and May was considerably lower and not surprising. The question is that it’s sort of disjointed. 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. I think it’s behind us and then they’ll move forward as it did in the absence of the cyber event. I don’t know if that helps, Josh. I mean I’m not...

Yes, I mean I'm in terms of, can we say that the first two weeks of April your production was down 40%? I mean, just trying to understand just how, when the cyber attack happened, I mean did it cut things off to zero? I mean, I know you had work around whatnot, but in the peak of the cyber attack, what was really happening with production?

I think the way to think about it, I mean, Josh, 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 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, it’s difficult to say what you would have gotten had you didn't have it versus you had it. It's hard to know. 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. That is about the best detail honestly I could provide and be accurate at the same time.

Certainly, it's fair to say that your earlier comment about not wanting to factor in pandemic-related frequency into your loss estimates is insightful. We still lack clarity on how things will unfold, whether it will turn out to be beneficial or not for insurance companies. Can you discuss the loss estimates in relation to the level of conservatism you are applying, considering both inflation concerns and pandemic frequency? When do you anticipate feeling more confident in making decisions on how to interpret the loss estimates based on your current inflation worries? Will it take several years before you're ready to incorporate current insights into your loss estimates?

Yes, that's a great question, Josh. And hard as you can tell by the way, I commented in the prepared remarks along the issue of rate adequacy. In my opinion, it just remains, I remain a little bit uncertain about it. 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. What we are trying to do is move when we actually know it and see it and are comfortable with it. 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 as you like, Josh. But I mean, that is, okay, that's the bottom line. That's what we're trying to figure out and I understand your question.

Can we discuss the competitiveness of the market? It's clear that you experienced some business losses due to the cyber attack, but it's also evident that you generated new business, suggesting you took customers from competitors. However, it appears others may have taken business from you as well. Given the current rates, is the market competitive? Are there instances of underpricing occurring? While there are expectations for sustained price increases, your retention seems weaker in this environment compared to previous times. Could you elaborate on what this indicates about the competitive landscape?

Yes, okay. There's a lot there. The way I would describe the marketplace is still disciplined. If you take the lines, subject it to the largest, or most pronounced long-run loss cost trends, I think they're still strong grade. Take the middle market, and our middle market, which in our portfolio is much more than half of it is professional services, financial institutions, tech, life sciences, as opposed to heavy manufacturing, very profitable business. The 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%. 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. They may want to be a little bit more aggressive. In general though, I consider it to be and remain a disciplined market. That’s the way I'd 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.

Thank you for all the details. I very much appreciate it.

Thanks, Josh.

Next we move to Meyer Shields with KBW.

Thanks. I'm pretty sure about the question in the past, but Al mentioned continued adverse reserve developments in commercial auto. 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 is in 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?

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 4.5, the reality is auto is closer to the sort of 8% and that has been consistently going up. You think you have a good handle on it and then the effects of social inflation are really bearing down on auto. Now, the good news is our rates rather than high single digits what we saw last year; we're at 13 points of rate. On the Commercial, obviously, because the Commercial fleets, we have an ability to impact the pricing more in the short term. This has been a little bit of chasing the long-run loss cost trends. 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. If you were to remove the price increases from our portfolio, you'd see relatively flat, slightly negative growth.

Okay, no, that's helpful. Switching gears 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, was there an adjustment in the prior period?

Hey, Meyer, this is Al. No, it would not have had a material impact. Remember, as I said, the effective date for this was June 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 June 1, no really meaningful impacts on earnings, expense ratio or loss ratio.

Okay, excellent. Thanks so much.

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.

Thank you, everyone. We look forward to next quarter and chatting with you. Bye now.

And that will conclude today's call. We thank you for your participation.