Earnings Call Transcript - CNA Q2 2022

Operator, Operator

Ladies and gentlemen, good day, and welcome to the CNA 2022 Second Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. I would like to turn the call over to Ralitza Todorova, AVP, Investor Relations for opening remarks and introduction of today's speakers. Please go ahead.

Ralitza Todorova, AVP, Investor Relations

Thank you, Elaine. Good morning, and welcome to CNA's discussion of our second quarter 2022 financial results. Our second quarter earnings press release, presentation and financial supplement were released this morning and are available on the Investor Relations section of our website, wwe.cna.com. Speaking today will be Dino Robusto, Chairman and Chief Executive Officer; and Scott Lindquist, Chief Financial Officer. Following their prepared remarks, we will open the line for questions. Today's call may include forward-looking statements and references to non-GAAP financial measures. Any forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the call. Information concerning those risks is contained in the earnings press release and in CNA's most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, August 1, 2022. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during the call. Regarding non-GAAP measures reconciliations to the most comparable GAAP measures and other information have been provided in our earnings press release, financial supplement and other filings made with the SEC. This call is being recorded and webcast. A replay of the call may be accessed on our website. If you're 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 our Chairman and CEO, Dino Robusto.

Dino Robusto, Chairman and CEO

Thank you, Ralitza, and good morning everyone. We are very pleased with our second quarter results, which showcased excellent production performance, including 17% growth in gross written premium excluding captives and a 64% increase in underwriting gain. Our core income saw a decline of $96 million, primarily due to losses from limited partnerships and common equity returns that fell by $171 million, although income from our fixed income portfolio rose by $16 million as we witnessed an increase in fixed income yield during the second quarter. Scott will elaborate on investments. The P&C all-in combined ratio for this quarter was 91%, showing a 3-point improvement since the second quarter of 2021, driven by a reduction in the underlying combined ratio, favorable prior period development, and lower catastrophe losses. Pre-tax catastrophe losses totaled $37 million or 1.8 points of the combined ratio, down from $54 million or 2.8 points in the same period last year. Overall, prior period development for P&C was favorable by 1.6 points, as compared to 2 points in the second quarter of 2021. The underlying combined ratio for our P&C business reached a record 90.8% this quarter, which is a 0.6 point improvement over the second quarter of 2021. However, our Corporate segment reported a core loss of $25 million more than last year. This includes a $51 million after-tax charge related to unfavorable prior period development, mainly from legacy mass tort abuse claims, notably the proposed settlement by the Diocese of Rochester that occurred in the second quarter. Diving into P&C production, gross written premiums grew by 17% excluding captives, and net written premiums rose by 20%. Excluding a one-time catch-up from the previous year’s property quota share reinsurance treaty addition, net written premiums grew by 13%. New business increased by 27% this quarter, which we are pleased with as pricing and terms remain strong and consistent with renewals. Retention improved by 2 points to 85%, our strongest in nearly five years, with growth seen in all operating segments. Exposure change rose by 1 point, bringing it to approximately 3% across our entire portfolio and 5% in our core middle market and construction business units. The overall written rate increase for the second quarter was 6%, which is down 1 point from the previous quarter. Some exposures, such as larger CAT exposed properties and national accounts, including auto in our construction portfolio, experienced a modest upturn. Overall, commercial rates have remained fairly stable at around 5%, only moderating 1 point since the third quarter of 2021, indicative of rational pricing dynamics across the marketplace. As we analyze various lines of business, we observe that commercial auto continues to achieve rate increases exceeding the overall average. Conversely, workers' compensation rates remain lower, which is logical given the sturdy profitability in that area. Property rates are typically in the low double digits for national accounts. In Specialty, medical malpractice rates are above average, while Directors and Officers (D&O) insurance has seen a cumulative increase of over 100% since early 2019 but has now slipped below the overall average. The rest of management liability remains above the average, with cyber insurance rates still in the high double digits. Geographically, our international book, encompassing Canada, Europe, and our Syndicate, continues to grow above the overall 6% increase. We believe that rates are stabilizing and expect fluctuations influenced by loss cost inflation, CAT exposure, and general economic conditions. We are optimistic about our portfolio's return, but we do not tie rate adequacy to a specific moment; rather, we view it over the long term as it is constantly changing. We don't assume we will meet our long-run loss cost trends annually since historical underwriting cycles indicate otherwise. In periods of rising loss cost trends—essentially doubling to about 6% in the last four years—rate adequacy adjustments also shift. Therefore, we view this cycle phase as an opportunity to aggressively pursue rate increases while balancing retention strategies to enhance P&C profit dollars. On an earned basis, overall P&C rate for the quarter was 8%, comfortably surpassing long-run loss cost trend assumptions. Given the uncertain inflation aspects in the broader market, we remain cautious about our margins. In terms of inflation consideration in our retrospective reserving and prospective pricing, we prioritize components influencing claim costs over the general CPI inflation number. We are particularly attentive to medical inflation, non-medical cost of goods sold inflation, and wage inflation, each impacting our portfolio differently than how they are weighted in the CPI. Medical inflation has a more significant impact in our portfolio, and we focus on specific key items such as increases in construction materials and used vehicle prices. Wage inflation raises costs but partially offsets premiums, which we factor into our analysis. These considerations inform our reserving and pricing studies more than the headline CPI figure. Moreover, we categorize social inflation separately from these impacts. Social inflation arises from various factors including an aggressive plaintiff's bar, an uptick in nuclear verdicts, increased litigation funding, and shifting jury attitudes that have become more punitive toward corporations. As we've mentioned, the impact of social inflation will likely be masked as court dockets remain backlog-laden. Examples demonstrating how we have integrated these inflation pressures and earned pricing trends into our assessment of past and present accident years include our medical malpractice segment, where we noted social inflation and increased long-run loss cost trends years ago. This prompted us to raise prices early on at the expense of retention. We also adjusted prior year reserves through unfavorable prior period development amounting to $210 million from 2017 to 2021, which we have discussed in previous calls. We sustain ongoing loss cost trends for this class above the overall P&C average. In commercial property, we addressed rising loss costs from inflation last year by raising our long-run loss cost trend assumptions by approximately 2 points, affecting pricing and reserving for both current and recent accident years due to the short-tail claim development patterns. Lastly, regarding workers' compensation, we refrained from lowering accident year fixes due to low benign medical trends over the past five years, maintaining higher long-run loss cost trends evident before that benign period. We have also reacted only partially to the prior accident reserves' favorability that lower benign trends would indicate. As a result, we are confident in our current reserve position, and our prudence will enable us to manage any increases in medical inflation should the rate environment remain slightly negative while inflating in the coming months. If that inflation persists for several years, it would undoubtedly pressure our loss costs; however, we would have ample time to respond accordingly. This prudent approach, evident across our entire portfolio, reflects our conservative underwriting bias. Despite this vigilance, our P&C underlying combined ratio achieved a record low of 90.8% this quarter. The expense ratio was 30.5%, slightly reduced by about 1 point, while the underlying loss ratio at 60% increased by 0.5 points compared to last year. As previously mentioned, the property quota share treaty, acquired in June last year, altered the net premium mix between property and other classes, raising the overall P&C underlying loss ratio by about 0.5 points due to the property segment's lower underlying loss ratio. We are pleased with the quota share treaty acquisition and the additional cap cover in our property per risk treaty and CAT treaty, all successfully renewed last month at modest mid-single-digit rate increases. Now, let me share more insights into our three business units. Specialty's all-in combined ratio was 88.1% this quarter, marking the eighth consecutive quarter below 90%. The underlying combined ratio stood at 89.2%, a record low consistent with last year. The expense ratio slightly increased to 30.4% from the second quarter of 2021, while the underlying loss ratio improved by 0.4 points to 58.6%. Gross written premiums excluding captives grew by 8% this quarter, and net written premiums increased by 6%. We achieved rate increases of 7% this quarter, which is down 3 points from the first quarter but still above long-run loss cost trends, with earned rate exceeding 10%. In the Commercial sector, the all-in combined ratio was 93.2%, the lowest quarterly combined ratio since 2008. CAT losses were 3 points compared to a 10-year average of 6 points in commercial. The underlying combined ratio improved by 1 point to 92%, while the underlying loss ratio of 61.5% was 1.4 points higher than the prior year's quarter, primarily due to the property reinsurance program's mix impact we acquired in June. The expense ratio improved by 2.3 points to 30% in the second quarter, largely driven by strong growth. Commercial gross written premiums excluding captives grew by 25% this quarter, and net written premiums rose by 20%, excluding the impact from last year's property quota share reinsurance treaty catch-up. New business surged by 39% this quarter as several substantial opportunities we had been quoting were successfully closed. The commercial rate increase was recorded at 5%, reaching 6% excluding workers' compensation and 7% on an earned basis. Despite a slight moderation in pricing, we maintain that commercial earned rates excluding workers' compensation should remain at or above long-run loss cost trends through year-end. Commercial retention was robust this quarter at 86%, marking the highest level since before the pandemic. Internationally, the all-in combined ratio was 91.6% this quarter, with an underlying combined ratio of 90.6%, reflecting a 1.9 point improvement from the prior year's quarter. The underlying loss ratio was 58.5%, down by 0.5 points, and the expense ratio at 32.1% was reduced by 1.4 points compared to last year. Our exposure to losses from Russia-Ukraine remains minimal. International gross and net written premiums grew by 13%, or 18% when excluding currency fluctuations. Rates increased by 7%, a 1 point decline from last quarter, yet still above long-run loss cost trends. Retention in the International segment was strong at 85%, with broad-based improvement across our Lloyd's Syndicate. Following the re-underwriting of the Syndicate and European business, the retention increases significantly contributed to profitable growth in our P&C operations, complemented by new business growth of 24%. And with that, I will turn it over to Scott.

Scott Lindquist, Chief Financial Officer

Thanks, Dino, and good morning everyone. Core income of $245 million is down 28% compared to the second quarter a year ago, leading to a current quarter core return on equity of 8.1%. Our P&C operations produced core income of $317 million. Underlying underwriting income of $191 million pre-tax was up 15% over the second quarter of 2021. Overall, underwriting gain in the quarter was up 64% year-over-year to $185 million. Net investment income of $432 million pre-tax was up $16 million in our fixed income portfolio offset by a $171 million decline in our limited partnership and common stock investments, which we report in core income. More on our investment results in a moment. Our Q2 expense ratio of 30.5% is 1.1 points lower than last year's second quarter. Lower acquisition expenses and higher net earned premiums drove the favorability despite continued strategic investments in technology, analytics and talent. To drill down a bit further, specialty incurred higher underwriting expenses primarily related to technology. Commercial benefited from lower acquisition costs and higher net earned premiums, while International acquisition expenses continue to benefit from the repositioning of this portfolio over the last several years. As I noted last quarter, there will be a certain amount of variability quarter-to-quarter. However, we continue to believe an expense ratio of 31% is a reasonable run rate. For the second quarter, overall P&C net prior period development impact on the combined ratio was 1.6 points favorable compared to 0.2 points favorable in the prior year quarter. In the Commercial segment, favorable development in workers' compensation was partially offset by unfavorable development in general liability and auto. In the Specialty segment, favorable development in surety was partially offset by management and professional liability. Favorable prior period development in International was driven by the commercial classes. The paid to incurred ratio was 0.89 in the second quarter. This is up slightly from the first quarter and consistent with the fourth quarter of 2021. The 0.89 ratio remains at the lower end of our pre-pandemic range. The ratio, which fluctuates quarter-to-quarter has been consistently lower over the past two years. As Dino noted earlier, our Corporate segment produced a core loss of $78 million in the second quarter compared to a $53 million loss in the prior year quarter. Annually, we conduct a review of our mass tort reserves in the second quarter, while asbestos and environmental reserves are reviewed every fourth quarter. As a result of this quarter's review, the segment includes a $51 million after-tax charge related to the unfavorable prior period development largely associated with legacy mass tort abuse claims, including the recent Diocese of Rochester proposed settlement. For Life & Group, we had core income of $6 million for Q2 2022, which was $37 million lower than last year's second quarter, primarily from lower investment income from limited partnerships. As a reminder, we will be conducting our annual gross premium valuation review during the third quarter. While we are on the topic of Life & Group, I'd like to give a brief update as to the approaching change in GAAP accounting methodology related to long-duration targeted improvements, otherwise known as LDTI that will apply to our long-term care business. We will be adopting this change effective January 1, 2023, but will apply as of January 1, 2021. Two years of adjusted financial results will therefore be included in our 2023 financial statements. Recall in last quarter's call, we estimated the net impact of these changes will be a $2.2 billion to $2.5 billion decrease of stockholders' equity as of the transition date of January 1, 2021. In a rising interest rate environment like we have seen over the last two years, as the corporate single-A rates increase, the impact of adoption decreases. As an example, assuming June 30, 2022, interest rates were in place on January 1, 2021, we estimate the transition impact would have been significantly lower to a decrease of $400 million to $700 million to stockholders' equity as corporate single-A rates are substantially higher at June 30, 2022, than at January 1, 2021. Finally, I want to emphasize this change in accounting has no impact on the underlying economics of CNA's business. Turning to investments. Total pre-tax net investment income was $432 million in the second quarter, compared with $591 million in the prior year quarter. The decrease was driven by our limited partnership and common stock results, which returned a $15 million loss in the current quarter, compared to a $156 million gain in the prior year quarter. The current quarter results reflect losses in our hedge fund limited partnerships of $35 million and common stock portfolio of $21 million, directionally in line with equity market performance during the quarter that were partially offset by positive returns of $41 million from our limited partnership private equity portfolio. The gain in the prior year quarter reflected particularly strong results from all three portfolios. As a reminder, private equity funds, which now represent approximately 75% of our limited partnership portfolio, generally report to us on a three-month lag, so results this quarter were primarily reflective of performance from Q1 2022. Given that broader public equity markets were notably down in the second quarter, it would be reasonable to expect pressure on private equity valuations in the near-term. Hedge funds now represent 25% of our limited partnership portfolio and predominantly report results on a real-time basis. If you refer to Pages 10 through 14 of our financial supplement, you will find additional details of our limited partnership holdings and income by the private equity and hedge fund strategies. Our fixed income portfolio continues to provide consistent net investment income, which has been steadily increasing over the last several quarters. We continue to benefit from the higher invested asset base driven by higher P&C underwriting income. As a point of reference, our average book value has increased $1.5 billion from the prior year quarter. Additionally, I am pleased to note the average effective income yields in our P&C portfolio were higher in the current quarter relative to the first quarter, indicating that we have reached an inflection point where reinvestment rates were about 100 basis points above our P&C effective yield. Given the longer duration nature of our Life & Group portfolio, we have not reached an inflection point in this segment. Fixed income assets that support our P&C liabilities and Life & Group liabilities had effective durations of 5 years and 9.7 years, respectively at quarter end. The increase in Life & Group duration from 8.9 to 9.7 years during the quarter is reflective of strategic actions taken to simultaneously reduce reinvestment risk by selling short-dated holdings projected to roll off in the near term, while also extending duration by redeploying the proceeds into longer-dated high-quality securities, at yields exceeding our long-term assumptions. In total, over $1.9 billion of long-dated fixed-income securities were acquired in the Life & Group portfolio during the quarter, with an average yield of 4.7% and an average rating of A plus. Meanwhile, the $1.8 billion of mostly tax-exempt securities sold in the quarter as part of this repositioning generated $19 million of pre-tax investment gains. While higher rates are positively impacting the outlook for investment income, from a balance sheet perspective, they've continued to adversely impact our net unrealized investment position, which ended the quarter at a $1.8 billion loss, down from a $4.4 billion gain at the end of the fourth quarter 2021. The investment portfolio of credit quality remains strong with a weighted average rating of A, with very little in impairments. Accordingly, interest rates driven fluctuations in market values do not impact how we manage our investment portfolio, as we generally hold our fixed-income securities to maturity. Notwithstanding the decrease in our net unrealized gains position, our balance sheet continues to be very solid. At quarter end, stockholders' equity excluding accumulated other comprehensive income was $12.2 billion or $45.06 per share, an increase of 4% from year-end, adjusting for dividends. Stockholders' equity, including AOCI, which reflects our investment portfolio, moving into a net unrealized loss position during the quarter was $9.5 billion or $35.06 per share. We continue to maintain a conservative capital structure with a leverage ratio of 19%, excluding AOCI, and our capital remains above target levels required for our current ratings, while statutory surplus remains stable after dividends. Finally, net investment losses were $40 million in the second quarter, compared with a net investment gain of $27 million in the prior year quarter. The current quarter results were driven by an unfavorable change in the fair value of our non-redeemable preferred stock portfolio, reflecting the higher interest rate environment, while the prior year gains were primarily the result of sales, calls and exchanges. Operating cash flow was strong once again this quarter at $608 million, and was a result of solid underwriting and investment cash flows. In addition to strong operating cash flows, we continue to maintain liquidity in the form of cash and short-term investments. And together they provide ample liquidity to meet obligations and withstand significant business variability. Finally, I am pleased to confirm our regular quarterly dividend of $0.40 per share, which will be payable on September 1, to shareholders of record on August 15. With that, I will turn it back to Dino.

Dino Robusto, Chairman and CEO

Thanks Scott. Our second quarter generated fantastic results across Commercial, Specialty and International. We have been clearly focused on accounting for social inflation for several years, both prospectively and retrospectively, and we continue to be prudent in the face of uncertainty and backlog in the court dockets. More recently, we have similarly included the impacts of the rise in economic inflation. Market pricing remains relatively rational and we are successfully optimizing the rate and retention dynamics across the board and effectively growing our new business at strong terms and conditions. Bottom line, we remain enthusiastic about our business opportunities going forward. And with that, we'll be happy to take your questions.

Operator, Operator

Thank you. We will take our first question today from Gary Ransom of Dowling & Partners. Please go ahead.

Gary Ransom, Analyst

Good morning. I had a few questions. One was just on the catastrophes and the impacts from the new quota share. Is it possible to quantify how much benefit you got in the quarter from that or how to think about what a run rate for your CAT load might be going forward?

Dino Robusto, Chairman and CEO

I think going forward, well probably, the more recent average makes a lot more sense. But I'd say about a third probably benefited from the quota share. Keep in mind also, Gary, that obviously all the re-underwriting that we did on the Syndicate, which had a lot of U.S. CAT exposure that was coastal, also wildfire, we underwrote all of that. We also mentioned on several calls some of our property re-underwriting from the healthcare aging services, coastal exposures, wildfire exposures, and some of that probably benefited the CAT ratio this quarter. And then, I guess always probably appropriate to put a little luck in there.

Gary Ransom, Analyst

That's helpful. I wanted to ask about the trend between rates and losses. You've provided a lot of information, and when I think about the situation, it seems we have rates gradually slowing down while there might be an increase in loss costs due to inflation. This appears to bring the point where those two trends intersect closer together, and it seems like you are preparing for that scenario. Do you think the market is ready for this? Is there any indication that the market is responding to this possibility? It appears to me that the significant uncertainty is not fully being reflected in market behavior, but you might have a different perspective.

Dino Robusto, Chairman and CEO

It's hard to say for certain, but it appears to be rational and moderating slowly. We noticed that for our larger properties, especially in national accounts that are CAT exposed, rates increased from high single digits to slightly over double digits. This can be seen as a rational response, and there's significant discussion around this in large property. Although it isn't a huge portfolio for us, we do have a national accounts property strategy and are looking to balance the portfolio a bit. We're seeing conversations around property, and for commercial auto, particularly in construction, it remains in high single digits, which is positive. We're committed to being as prudent as possible regarding loss cost trends. We don’t focus on rate adequacy at any specific time, but we do see an opportunity to continue pushing for rates, and I believe the decisions underwriters are making are sound. However, incorporating a broader market perspective is challenging, which may explain why we expect the gap to persist, possibly until year-end. We could face a tough CAT season, and with inflation impacting costs alongside a demand surge, this situation could change. I realize this may not be the detailed insight you were hoping for, but it's the best I can provide.

Gary Ransom, Analyst

That's great. Yes, it's always difficult to see all the trajectories of these things.

Dino Robusto, Chairman and CEO

Yes.

Gary Ransom, Analyst

I also wanted to ask about the retention in International. It's up at 85%. You did talk about it a little bit, but are there any particular classes or types of business where it's a little more sticky for you now after all that re-underwriting?

Dino Robusto, Chairman and CEO

Yes. So let me just parse out because we throw in Canada there too. I mean, Canada has always maintained a relatively stable and good retention ratio. It was more with respect to, as you point out, Europe and the Lloyd's Syndicate. And you had seen retentions in the low-60s for quite a few quarters. And as we re-underwrote the portfolio, what we did is just aligned it with our appetite in the United States. And so what we do in Commercial here and what we do in Specialty here is what we are targeting. We took down the portfolio substantially. What we left, we really wanted to hang on to. And I think we saw some good increase on the retention. It's nothing more significant than that. Both Europe and Hardy were 80% or a little over. So we had expected, right? We went in to the renewal season expecting that after the re-underwriting and so many quarters of it being down substantially.

Gary Ransom, Analyst

Okay. That's great. And maybe just one more on the mass tort abuse claims. You seem to be implying that there were other things besides Rochester that might have been in the abuse claim category. Is there anything there you can mention or talk about?

Dino Robusto, Chairman and CEO

Yes. So I think Scott mentioned it, right? We do the mass tort review every second quarter. We don't parse out all the components in there. A lot of it has to do with abuse and the impact of reviver statutes, but there's other old mass torts. And based on that review, we think and all the information we have that we have it appropriately reserved and broadly across all of the mass torts. But there's a host of things in there.

Gary Ransom, Analyst

I guess I was dancing a little bit around the Boy Scouts too, if there's anything specific you can say. I'll understand if there isn't anything you can say.

Dino Robusto, Chairman and CEO

Well, yes. No. I mean, listen, that falls under the abuse. But at this point, there isn't anything for us to comment on as it's ongoing and active, as you saw. And listen, when and if warranted, we will obviously comment on it, like we always do.

Gary Ransom, Analyst

Terrific. Thank you very much, Dino.

Dino Robusto, Chairman and CEO

Okay. You're welcome.

Operator, Operator

Thank you. Our next question comes from Meyer Shields of KBW. Please go ahead.

Meyer Shields, Analyst

Thanks. Dino, I want to start, if I can, I'm trying to understand one of the comments that you made where you say we don't assume we will cover our long-run loss cost trends every year going forward. Does that mean that when things are accelerating we should expect in the short-term loss ratios to go up?

Dino Robusto, Chairman and CEO

So this was more as I mentioned earlier. History has shown us that in any underwriting cycle, which spans over 15 to 16 years, you typically experience 8 to 10 years of a soft cycle. During this period, pricing tends to fall below the long-run loss cost trend. That's why it was more about the reality of the situation. I've witnessed this over 40 years, and it will continue to occur. Now is the time to capitalize on the current pricing in the market and keep pushing for better results. It's a straightforward reality that leads us to avoid saying we are adequately rated at this moment. That was my main point.

Meyer Shields, Analyst

That's helpful. Thanks for clarifying that. Within Specialty, both last quarter and this quarter, we've seen the warranty expenses increase at a faster rate than the revenues. I was wondering if there's anything significant there and how you expect that to develop going forward.

Dino Robusto, Chairman and CEO

No, there's nothing significant to report. We incorporated some technology and analytics, and we brought on additional staff as we transitioned away from the pandemic shutdown period, but overall it's not really noteworthy.

Meyer Shields, Analyst

Okay. And then final question, I'm just wondering whether or what you're seeing with regard to your clients in terms of a possible economic slowdown going forward. Are you seeing any level of concern?

Dino Robusto, Chairman and CEO

Yes, when we speak with many of our clients, they still seem quite optimistic. The economy will unfold as it does. We pay close attention to exposures and audit premiums, both of which saw significant increases this quarter. So far, the indicators remain positive. We will continue to monitor exposure and audit premiums. If we enter a deeper recession, it will be reflected in the audit premiums, but for now, the outlook remains good.

Operator, Operator

Thank you. Our final question today comes from Josh Shanker of Bank of America. Please go ahead.

Josh Shanker, Analyst

Thank you. The information provided during the call has been very informative, but I would like to delve a bit deeper. You mentioned you want to discuss both pricing and reserves related to inflation. Your explanations have been thorough, and please feel free to correct me if I state anything inaccurately. About two years ago, you estimated a long-term cost inflation rate of 2.5% to 3%, but now it seems to be closer to 5.5% to 6%. Have the reserves for unpaid losses from 2016 to 2019 been adjusted upward in all categories except for workers' comp during that period? Many companies express that they are increasing their loss estimates, yet still release reserves. I’m trying to understand how you approach this in the long term. Could you elaborate on that and discuss what has transpired in the last nine months?

Dino Robusto, Chairman and CEO

Sure. Let's first examine the open claims across several lines. If you look at umbrella, medical malpractice, and auto, all of those are unfavorable, and it's evident. We had offsets in workers comp, but we also had offsets in surety, which is significant. As I mentioned, there were $200 million just in medical malpractice. When you include commercial auto and umbrella, which are clearly indicated in our disclosures, the impact has been substantial. This, as you pointed out, affects not only the future but also the past due to all the open claims.

Josh Shanker, Analyst

When you mentioned that we're not always going to be below and that you're not targeting a long-term inflation pick in our pricing, I find it a bit challenging to understand. We're approaching this more organically. Do you have confidence that those reserves are currently being utilized at or above the long-term loss cost inflation you have in your assumptions?

Dino Robusto, Chairman and CEO

Yes, we have significantly increased our long-run loss cost trends, which have doubled over the past four years. We believe that the actions we've taken during this period and in this quarter ensure that our reserves are adequate. However, it is possible that our long-run loss cost ratios, currently around 6%, may rise. Regarding the point Meyer raised about rate adequacy, I want to clarify that we do not place as much emphasis on that because it has been increasing and can continue to do so. You might find that you are adequate in a certain line, but that can quickly change due to long-run loss cost trends. It's also important to recognize that during softer cycles, there are times when profitability may be challenged. My main point is that now is the time to seek higher rates, and that was my intention.

Josh Shanker, Analyst

And that makes sense. And then my other question on medical loss inflation, to what extent is it just a lagging indicator? Medicare and the HMO do have a lot of bargaining power. And so the cost of medical services had been tame as we're using pricing for medical services that was set in the past. But should we expect that the input costs for hospitals are rising, even if the cost to the patients haven't gone up yet?

Dino Robusto, Chairman and CEO

First, I’d like to provide some context regarding the medical malpractice line and the significant actions we've taken in that area, which have been influenced by adverse prior period developments and long-term loss cost trends. Additionally, the pricing adjustments were clearly affected by social inflation. We experienced a notable increase in attorney involvement in these cases, emboldened plaintiffs, and higher settlement demands even when the situations didn't justify them. This combination has played a large role in the situation. However, I find it difficult to determine if this is indicative of future medical trends as we observe in workers' compensation. I wanted to clarify the impact of social inflation on professional or medical malpractice. Does that clarify things?

Josh Shanker, Analyst

That helps. What about workers' compensation, which has been very favorable? Some of that includes medical costs. I certainly expect that the workers' compensation loss trend will increase in the future. But to what extent are medical costs a delayed or lagging indicator of inflation rather than a current one?

Dino Robusto, Chairman and CEO

I'm not really sure how to address this, but when we examine the consumer price index, medical inflation in this quarter has increased to 4.5%. Our trends indicate it's lower, likely under 4%, due to factors such as the fee schedule and reduced opioid utilization. The fee schedule creates a lag, meaning some effects are delayed. We are closely monitoring the situation and have a solid understanding of it. Regarding workers' compensation, our conservative approach suggests that if there is an increase, we feel we have some flexibility. If economic inflation rises for an extended time, the good news is that we will have some time to respond, and we believe we can manage it effectively based on our portfolio, which largely consists of white-collar workers' compensation.

Josh Shanker, Analyst

Well, I just want to say, as usual, the disclosure, the detail, the depth, it's all top tier. And thank you for doing so much work on this.

Dino Robusto, Chairman and CEO

Okay. Thanks, Josh.

Operator, Operator

Thank you. We'd now like to turn the call back over to Dino Robusto for any additional or closing remarks.

Dino Robusto, Chairman and CEO

Well, thank you very much everyone, and we look forward to chatting with you next quarter.

Operator, Operator

Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation. You may now disconnect.