Travelers Companies, Inc. Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen. Welcome to the second quarter results teleconference for Travelers. As a reminder, this conference is being recorded on July 21, 2022. At this time, I would like to turn the conference over to Ms. Abbe Goldstein, Senior Vice President of Investor Relations. Ms. Goldstein, you may begin.

Thank you. Good morning, and welcome to Travelers' discussion of our second quarter 2022 results. We released our press release, financial supplement, and webcast presentation earlier this morning. All of these materials can be found on our website at travelers.com under the Investors section. Speaking today will be Alan Schnitzer, Chairman and CEO; Dan Frey, CFO; and our three segment presidents: Greg Toczydlowski of Business Insurance, Jeff Klenk of Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take your questions. Before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-K filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also in our remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials in the Investors section on our website. And now I'd like to turn the call over to Alan Schnitzer.

Thank you, Abbe. Good morning, everyone. Thank you for joining us today. We are pleased to report a very strong second quarter, including an excellent bottom-line result, double-digit top-line growth in all three segments, strong and improved profitability in our commercial business segment, progress addressing the rental headwinds facing the personal insurance industry, a meaningful contribution from net investment income, and another quarter of progress on a number of important strategic initiatives. Core income for the quarter was $625 million or $2.50 per diluted share, generating a core return on equity of 9.3%. These results were driven by record net earned premiums of $8.3 billion, up 9% over the prior year quarter and a solid underlying combined ratio of 92.8%. The consolidated results reflect the benefit of our diversified portfolio of businesses. For the six months, core income was ahead of the prior year at $1.66 billion, an excellent first half result. We're particularly pleased with the continued strong underlying results for our commercial businesses. Looking at the two commercial businesses together, the combined BI-BSI underlying combined ratio for the quarter was 92.7%, an improvement of one point from the prior year quarter. Results in Personal Insurance were impacted by elevated severity in both auto and home. As you'll hear from Michael, we're on the right track in addressing the environmental issues. Excellent operations together with our balance sheet enabled us to grow adjusted book value per share by 8% over the past year after making important investments in our business, returning excess capital to shareholders. During the quarter, we returned $725 million of excess capital to our shareholders, including $500 million of share repurchases. Turning to the top line, thanks to excellent execution by our colleagues in the field and the strong franchise value we offer to our customers and distribution partners, we grew net written premiums by 11% this quarter to a record $9 billion, with each of our three segments growing double digits. In Business Insurance, net written premiums grew by 10%. Renewal premium change was 10.3%, which is the fourth highest quarterly renewal premium change going back more than 15 years. Renewal premium change included a renewal rate change of 4.9%. Both measures moved up from the preceding quarter. Retention remained very strong at 86%. We have a high-quality book of business and keeping it as a priority. Also, as we've shared previously, strong retention is a sign of a rational and stable pricing market. Underneath the headline numbers, execution in terms of rate retention at a segmented level was excellent. In Bond & Specialty Insurance, net written premiums increased by 13%, driven by excellent production in both our Surety and Management Liability businesses. Surety net written premiums were up 24%, Management Liability premiums were up 7%, driven by a renewal premium change of 8.8%, with retention that increased to a very strong 88% and strong new business. In Personal Insurance, net written premiums increased by 12%. We know premium change was meaningfully higher, both year-over-year and sequentially in auto and homeowners as we continue to execute to improve returns. You'll hear more shortly from Greg, Jeff, and Michael about our segment results. Turning to investments, our high-quality portfolio generated net investment income of $595 million after tax for the quarter, reflecting reliable results from our fixed-income portfolio and another quarter of strong returns from our non-fixed income portfolio. Speaking of investments, given the potential for a difficult economic environment ahead, we've included on Page 19 of the webcast presentation a slide breaking down the composition of our investment portfolio. Consistent with our long-time focus on risk-adjusted returns, we're underweight compared to most in terms of risk assets as a percentage of shareholders' equity. Our investment philosophy has served us well over many years and through many different market cycles. It starts with asset allocation. More than 90% of our $80 billion portfolio is invested in fixed-income securities. That sets us apart. Inside that, we also have a relatively high allocation to municipal bonds, where the default rate has been meaningfully lower compared to corporate bonds. Even within munis, we're discriminating. We're invested in only about 1,000 municipal issuers out of an estimated 80,000. Virtually all of our municipal bond holdings are rated AA- or higher. Our corporate bond portfolio is curated with the same level of discipline. Virtually all of it is investment grade. And within that, we are significantly overweight in AA and A credits and significantly underweight in BBB credit. During times of economic distress, credit quality is key and in the sometimes foreseeable and sometimes unforeseeable lead-up to those times, when spreads widen and volatility increases, the market doesn't allow for a graceful repositioning of a portfolio. So we stay true to the strategy that has served us well over decades. Our level of actual impairments over a long period has been remarkably low. In 2008 and 2009, when the Moody's default percentage reached 2% to 2.5%, our default rate never reached 1%. In the COVID charge turmoil of 2020, when the Moody's default rate was at 1%, our portfolio default rate was around 10 basis points. Given the credit quality of our portfolio, the fact that we hold the vast majority of fixed-income investments to maturity decreases in market value due to rising interest rates as the market is experiencing now have little to no impact on how we run the business or how we view the strength of our capital position. In terms of our investments in alternative asset classes, we don't reach for yield. Our private equity portfolio is well-diversified across strategies, sectors, and general partners. Our own real estate is high quality and entirely unlevered, and we have little in the way of hedge funds and higher-risk assets. Although we see potential short-term headwinds from recent declines in the equity markets, we also see near-term and potentially ongoing tailwinds from higher interest rates that will benefit our returns going forward. You'll hear from Dan shortly about how the recent rise in interest rates positively impacts our outlook for fixed income NII. Like everything we do, all starts with our tower. We have a world-class investment team that is responsible for executing on our investment philosophy. Those with position-making authority have worked with us and with each other for an average of around 20 years. That reinforces the long-term perspective we bring to our investment portfolio. I'm always grateful for their excellent work. But particularly at times like this, I'm reminded of the wisdom of our approach. It has contributed to a long history of industry-leading returns and industry-low volatility. To sum things up, building on our excellent results in the first half of the year, we're confident about our outlook, benefiting from years of strategic investments as part of our performance transformation action, guided by our decades of experience successfully executing in a variety of macroeconomic conditions and supported by an outlook for improving fixed-income returns. We remain well-positioned to deliver industry-leading returns and shareholder value over time. With that, I'm pleased to turn the call over to Dan.

Thank you, Alan. Core income for the second quarter was $625 million and core return on equity was 9.3%. These results were very strong, especially considering the high level of catastrophe losses, which is typical seasonality for us in the second quarter. While core income declined from the prior year quarter, remember that the prior year quarter included a very benign level of catastrophe losses and record returns from the non-fixed income portfolio. Our second quarter results include $746 million of pretax catastrophe losses. And while catastrophes were higher year-over-year, they were not outsized relative to our modeled estimates for the second quarter. On a year-to-date basis, we've accumulated $935 million of qualifying losses toward the aggregate retention of $2 billion on our property aggregate catastrophe XOL treaty. Our after-tax underlying underwriting gain of $444 million was down slightly from the prior year quarter. We generated record levels of earned premiums and reported an underlying combined ratio of 92.8%. Improvements in the underlying combined ratio in both Business Insurance and Bond & Specialty were more than offset by an increase in the underlying combined ratio in Personal Insurance. Greg, Jeff, and Michael will provide more detail on each segment's results in a few minutes. At the same time that we continue to make significant investments in strategic initiatives, the second quarter expense ratio improved 70 basis points from last year to 29%, driven by the combination of our focus on productivity and efficiency and strong top-line growth. We had been expecting the full-year expense ratio to be around 29.5% but now expect it to be more like 29% this year, getting down to that level a little sooner than we had expected. Turning to prior year reserve development. We had total net favorable development of $291 million pretax in the second quarter. In Business Insurance, net favorable PYD of $202 million was driven by better-than-expected loss experience in workers' comp across a number of accident years and favorable movement in CMP, partially offset by an increase in general liability reserves, including for runoff operations. In Bond & Specialty, net favorable PYD of $73 million was driven by better-than-expected results in Fidelity and Surety. Personal Insurance had $16 million of net favorable PYD with modest movement in both auto and home. After-tax net investment income decreased by 13% from the prior year quarter to $595 million. We were pleased that returns in our non-fixed income portfolio were strong, but as expected, they were less favorable than last year's record quarter. Fixed maturity NI was again higher than in the prior year quarter as the benefit of higher invested assets more than offset the impact of lower average yields during the quarter. With interest rates having moved higher during the second quarter, we're again raising our outlook for fixed income NII, including earnings from short-term securities to approximately $470 million after tax in the third quarter and then to $495 million in the fourth quarter. New money rates as of June 30 are about 100 basis points higher than what is embedded in the portfolio. So NII should continue to improve as the portfolio gradually turns over and as the portfolio continues to grow. Recall that results for our private equities, real estate partnerships, and hedge funds are generally reported to us on a one-quarter lag. While not perfectly correlated, our non-fixed income returns directionally follow the broader equity markets, which were down significantly during the second quarter. Through the first half of the year, the S&P 500 was down 21% with about three-quarters of that decline occurring in Q2. Accordingly, we expect that to impact our non-fixed income results next quarter. Turning to capital management, operating cash flows for the quarter of $1.4 billion were again very strong. All our capital ratios were at or better than target levels, and we ended the quarter with holding company liquidity of approximately $1.6 billion. Interest rates increased and spreads continued to widen during the quarter. As a result, our net unrealized investment loss increased from $1.4 billion after tax at March 31 to $3.8 billion after tax at June 30. As we've discussed in prior quarters, the changes in unrealized investment gains and losses generally do not impact how we manage our investment portfolio. We regularly hold fixed income investments to maturity. The quality of our fixed income portfolio remains, as Alan discussed, very high. Changes in unrealized gains and losses have little impact on our statutory surplus or regulatory capital requirements. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $112.37 at quarter end, up 2.4% from year-end and up 8.2% from a year ago. We returned $725 million of capital to our shareholders this quarter, comprising share repurchases of $500 million and dividends of $225 million. We have approximately $3 billion of capacity remaining under the most recent share repurchase authorization from our Board of Directors. It's also worth noting that in June, we early renewed our $1 billion credit facility for a five-year term. While the size of the facility and the group of participating banks was unchanged, we reduced our annual cost of the facility primarily through lower undrawn pricing while also improving other terms and conditions. In a time of rising borrowing costs and tightening credit terms, our financial strength, strong operating performance, and consistent fiscal discipline still enable us to obtain very favorable terms. You can see all the details in our 10-Q. Similarly, during the second quarter, we issued a new four-year cat bond, providing uninterrupted coverage upon the expiration of our prior cat bonds. The new bond, Long Point Re IV Ltd, increases the amount of coverage available to $575 million. The recently expired cat bonds had provided $500 million worth of coverage. Specific terms are shown on Page 20 of the webcast presentation, and we're very pleased with the results. Here again, our disciplined underwriting and consistent outperformance in the property line enabled us to increase our coverage and attain a reasonable rate online at a time when some parts of the market are finding reinsurance capacity harder to come by. Also on Page 20 of the webcast presentation, you'll find a summary of our July 1 reinsurance renewals. The structure of our main cat reinsurance program is generally consistent with the expiring program. And while as expected, we did see some price increases, it was in line with the price increases we're obtaining on the direct property premiums we're writing. So there's no adverse impact on margins. It's also worth noting that we increased the coverage under our Northeast property treaty by $150 million to $750 million, part of $850 million, above the same $2.25 billion attachment point. So to sum it up, we had an excellent quarter with double-digit premium growth in all three segments, solid underwriting profitability, and an improved outlook for fixed income NII, all of which bodes well for our future returns. And with that, I'll turn the call over to Greg for a discussion of business insurance.

Thanks, Dan. Business Insurance continues to have a strong 2022 with another terrific quarter in terms of both financial results and execution in the marketplace. Second-quarter segment income was $666 million, up about 4% from the prior year quarter driven by higher net favorable prior year reserve development and higher underlying underwriting income. The quarter's very strong underlying combined ratio of 92.4% was about one point better than the second quarter of 2021, driven by improvement in the expense ratio resulting from the combination of leverage from higher earned premiums and the benefits of our strategic focus on productivity and efficiency. The underlying loss ratio was about flat to the prior year quarter, reflecting the benefit of higher earned pricing as well as elevated property loss activity in the current quarter. Net written premiums were up in all domestic markets and lines of business, reaching $4.4 billion for an increase of 10%. Premiums benefited from strong renewal premium change and retention, both of which were once again historically high. Turning to domestic production for the quarter, renewal premium change of 10.3% was once again exceptionally strong. RPC includes renewal rate change of 4.9%, which was up 0.5 points from the first quarter and exposure growth of almost 6%. Retention was very strong at 86%. New business premium was about $500 million for the quarter. We're pleased with these production results and our strong execution in the marketplace. Given our high-quality book as well as several years of segmented rate increases and improvements in terms and conditions, we're thrilled to continue to produce historically strong retention levels. The rate gains we achieved in the quarter reflect deliberate execution given the significant improvements in profitability across the portfolio while continuing to price for the persisting headwinds and uncertainty in the current environment. As always, we will continue to execute our granular pricing, careful management of deductibles, attachment points, limits, sub-limits, and exclusions to achieve profitable growth. As for the individual businesses, in Select, renewal premium change was strong at over 9%, while retention of 83% was up 3 points from the prior year quarter. New business was up 8% from the prior year quarter driven by the continued success of our BOP 2.0 product. In addition to contributing to growth, the new BOP product is also contributing to improved margins in this business through industry-leading segmentation. Overall for Select, we're pleased with the improvement in profitability levels as well as the continued momentum in new business growth. In Middle Market, renewal premium change remained very strong at over 10%, while retention remained historically high at 88%. Underneath the RPC of 10%, renewal rate change of 4.8% was up 0.5 points from the first quarter, while exposure growth was nearly 6%. To sum up, Business Insurance had a terrific first half of the year. We continued to deliver strong results while investing in capabilities to enhance our data and analytics leadership, digitize the commercial transaction, and develop sophisticated and relevant products to drive profitable growth for the future. With that, I'll turn the call over to Jeff.

Thanks, Greg. Bond & Specialty had a terrific quarter on both the top and bottom lines. Segment income was $228 million, up 22% from the prior year quarter, driven by a higher level of net favorable prior year reserve development and higher underlying underwriting income. The underlying combined ratio was an excellent 82.2%, an improvement of 1.2 points from the prior year quarter. Turning to the top line, net written premiums grew a very strong 13% in the quarter to a record high, with contributions from all our businesses. Domestic Surety posted exceptional 24% growth in the quarter driven by larger average bond premiums. In domestic Management Liability, we are pleased that we drove a two-point improvement in retention, while renewal premium change of 8.8% remains strong following six straight double-digit quarters. We're also pleased that we increased new business 16% from the prior year quarter. So both top and bottom-line results for Bond & Specialty were terrific this quarter, reflecting excellent execution across our business and the value of our market-leading products and services to our customers and distribution partners. And now I'll turn the call over to Michael.

Thanks, Jeff, and good morning, everyone. For the second quarter, Personal Insurance reported a combined ratio of 111%. While it's not unusual for us to generate an underwriting loss in the second quarter, which typically has the highest weather-related loss activity, this quarter's results were also impacted by the inflationary pressure that we and the industry have been experiencing for the past few quarters. In total, the combined ratio increased 11.5 points compared to the prior year quarter and included a higher underlying combined ratio, higher catastrophe losses, and lower favorable prior year reserve development. The five-point increase in the underlying combined ratio reflects elevated loss severity in both automobile and homeowners and others, compared to a low level of automobile losses in the prior year quarter. Catastrophe losses were nearly five points higher than in the prior year quarter but not out of line with our assumption for second quarter catastrophes. Net written premiums for the quarter grew 12%, driven by higher renewal premium changes in both domestic automobile and homeowners & others. In automobile, the second quarter combined ratio was 104.3%, and the underlying combined ratio was 101.8%, an increase of about ten points relative to the prior year quarter. The increase reflects elevated vehicle replacement and repair costs. To a lesser extent, the increase is also a result of a comparison to a prior year quarter that still reflected lower loss - lower claim frequency related to the pandemic. Our primary response to the environmental challenge of inflation is higher pricing. We are pleased with our actions to increase rates over the past few quarters and remain confident in our ability to achieve further increases. As we have indicated in past quarters, it will take some time for rate actions to fully earn into our results. In Homeowners and others, the second quarter combined ratio was 118% and included 29 points of catastrophes primarily from severe wind and hail events across several regions in the U.S. The underlying combined ratio for the quarter was 90.3%, comparable to the prior year quarter. We continue to experience higher loss severity related to labor and material price increases, but that was largely offset by various items, including a comparison to a prior year quarter that included elevated non-weather losses, as well as current quarter benefits of earned pricing. Turning to quarterly production, we continue to make excellent progress in achieving pricing increases. For domestic automobile, renewal premium change was 6.3%, up a full three points from the first quarter of 2022. We continue to increase renewal premium changes and expect RPC to reach double digits by the fourth quarter. For domestic homeowners and others, renewal premium change increased about 1.5 points from the first quarter to a record high of 13.5%. The increase in renewal premium change was from both higher insured values and increased rate. While our primary focus is on improving profitability, we're not distracted from continuing to invest in capabilities to sustain our success. For example, in the quarter, we introduced new artificial intelligence-enabled aerial imagery to enhance our property underwriting and risk selection while simplifying the quoting process for agency customers. This is just one example of how we continue to advance our sophistication and risk expertise as part of our innovation agenda. With our focus on performing and transforming, we remain confident in our ability to improve profitability over time while continuing to build the business for the future. Now I'll turn the call back over to Abbe.

Thank you, and we are ready to open up for Q&A.

Your first question comes from Michael Phillips from Morgan Stanley.

I guess first question on auto, for personal auto. It feels like your rate activity has been a little bit later to take hold than peers and maybe still a little bit below loss trend. I just wanted to see if you agree with that. And then if so, kind of the two-part question of that. Just how do you view your profitability of the current book in auto? You're taking on some good new business there. So how is the profitability of the current book? And then I guess just we've seen some actions from others in prior period development. And I guess just confidence that that's not going to be the case for you guys.

Sure. I'll address the rate activity question. This is Michael Klein, and Dan will likely discuss prior period development. We've discussed rates pretty consistently over the last few quarters. As I mentioned in my prepared remarks, we are pleased with our progress. While some competitors have reported larger headline rate increases, when we evaluate our rate filing activity and levels against the broader market, we see that we are mostly in line with, if not slightly ahead of, the industry average. There are a few competitors that have reported larger figures, but overall, we remain very active in filing rates and incorporating new data into our indications. Our outlook is positive, and we are confident that pricing for personal auto will reach or exceed double digits in the fourth quarter. We continue to focus on enhancing profitability and making progress. Regarding new business, we achieved 318 this quarter, representing an increase of about 6% from the same quarter last year. This rise is now driven more by RPC than it was previously. Additionally, we are seeing a slowdown in policy growth in response to the rates we are implementing in the market. This is the direction we are heading, and our priority remains to drive pricing to improve profitability.

Mike, it's Dan. So on the PYD question, I guess I'd bring you back to accident years '20 and '21 when we were talking about seeing favorability largely frequency driven, but we are seeing favorability in personal auto. We are seeing favorability in commercial auto. We're seeing favorability in non-COVID claims in the workers' comp line. And we said at the time that we were recognizing some of that favorability in our results, but that there was also uncertainty in the environment. And one of the things we talked about was uncertainty around what the ultimate severity of some of those claims might be. And in personal insurance, we talked specifically about the fact that claims were happening at higher speeds and we were seeing some more severity. And so we said pretty consistently in 2020 and in 2021 that we were being cautious in our reserving in order to make sure that we were allowing for the additional level of uncertainty that we felt was possible. And so at least so far, the way things are playing out seems to bear that out.

Yes. And Michael, this is Michael Klein again. I just want to add one other comment on the pricing conversation, which is we get a lot of conversation about the headline rate number that people are getting today. It's also important, and we've talked about this in the past, to look back at the history. And our renewal premium change in personal auto never went negative. We didn't talk about that as much back then when some other carriers had renewal premium change that was negative. So the starting point matters, I guess, is the point that I would add. Thanks for the question. Sure. This is Michael Klein again. Just touching on that, the environment remains challenging with regard to bodily injury. We're observing increases in severity, but we also have frequency that has improved. So it's a balance between the two. We're confident that we have our claims management practices in place to respond appropriately.

Michael, this is Greg. We haven't seen any real material mix change. Of course, as we went through the pandemic, we had a certain mix of claims. And so as we normalize that, if we look at our claim mix today to pre-pandemic, there isn't any real material change.

I was hoping you could just comment on the overall outlook for business insurance margins and for further underwriting margin improvement. Certainly, we can look at your renewal rate changes, and then we can think about loss costs, which I think you've got to be getting impacted at least some by the CPI inflation that we're seeing. But there's obviously parts that aren't quantifiable for us, and we’d just be interested in understanding some of those pieces and how you see it unfolding.

Alex, it's Alan. Let me begin, and then I'll pass it over to Greg. To start, we're in a strong position. The underlying loss ratio and the overall combined ratio in Business Insurance are in a solid place. While we don't provide specific outlooks on those metrics, I will make a general observation. Currently, our overall pricing is ahead of the loss trend, so we anticipate some improvement as that pricing takes effect. However, it’s important to note that conditions are never static. For instance, this quarter we are seeing some elevated property loss activity, whereas just a few quarters ago we noted favorable property loss trends. Such fluctuations will always have an episodic nature. Nevertheless, when we evaluate the factors that we consider to be a steady state—and take into account current pricing versus our expectations for loss trends—we believe the outlook remains positive from a solid starting point.

Yes. Alex, this is Greg. Yes, clearly, our underwriters are looking at terms and conditions and insured values in this environment and constantly trying to get the right insurance to value on the exposure to the right both new business and renewal. And so that's been an active lever very similar to the personal insurance side. That's more on the transactional side. And on the flow side of Select, we do have an inflationary protection guard that we're actively managing to make sure that keeps up with the inflation environment. So very much an active management lever for us on the business insurance side.

The first question I had is around what the market seems to be projecting or anticipating a recession either later this year or next. And I was wondering if you could talk about how you might think business insurance and domestic bond and specialty might perform and where the areas of pressure might be if there is indeed a recession? And then related to that, I'm just curious as you strategize how you might change your approach to management of the company if this were to come to pass.

Thank you for the question. I'd like to share some general thoughts, and please feel free to follow up if I miss anything. In a recession, we will continue to focus on serving our customers, distribution partners, communities, and employees. From that standpoint, it’s business as usual for us. We recognize that economic downturns can affect our top line, which will have an impact on everyone. However, we believe we are well-positioned due to our efforts to enhance productivity and efficiency. We also have the financial resources to keep investing in our business without any interruptions. Regarding credit sensitivity, as I mentioned earlier, our investment portfolio is of very high quality, as is our surety business. One other point about recessions is that some pressure on the top line may be expected. Yet, historically, in commercial businesses, there may be some relief on loss trends. We manage our business with a long-term perspective, and there's not much we need to adjust. Our track record through various economic cycles, including recessions and financial crises, supports our belief that we are well-positioned and will perform effectively.

Yes. I think it's very hard to predict. And we've got a portfolio that is individually underwritten. And so that's why we say it's not going to be perfectly correlated. But directionally, if you see weakness in the equity markets, we'd expect to see at least some slowdown in the level of strength. We have, although rarely, seen negative returns in the alternative portfolio in times of extreme disruption, like we did in the first or second quarter of 2020, at the onset of COVID. But over a pretty short period, when the markets came back, we got all that back and then some. So we're not really in a position to give a forecast of whether we expect alternative NII to be less robust than it has or how low it might go. But again, we're doing this for the long term. And if you look at our results over a long term, even in significant downturns for the broader markets, we've done better than most.

My first question, I'm looking to get color on the Business Insurance margin. You guys called out higher earned pricing. You also called out elevated property losses. Could I get the impact of both of those on the current quarter?

Yes, Elyse, it's Dan. Recently, we've mentioned that the benefit of earned pricing is around 1 point, and that situation isn't likely to change quickly. With the written price decreasing over the last few quarters, we would anticipate a decrease in the earned basis, but that process takes time. So, we're still in that general range. Given that the margins have remained relatively stable compared to last year, this suggests that the property aspect has moved in the opposite direction from our expectations by about 1 point.

No, Elyse, we didn't. I'll mention two things. First, the loss activity we observed during the quarter was generally consistent with that. Second, we assess loss trends over a longer period, so they usually do not fluctuate significantly in any single quarter. However, to address your question, the loss activity we experienced aligned with our expectations.

Just in Business Insurance, how should we interpret the acceleration of written rate from 43% to 49%?

Ryan, it's Greg. I'll provide some insights from the previous quarter. The growth was widespread across several sectors, primarily in auto, property, and our main general liability lines. Our underwriters review every account up for renewal in that quarter and focus on ensuring that the pricing aligns with the risk, along with appropriate terms and conditions to achieve adequate rates. On one hand, we are optimistic about the pricing increase, and our returns have improved significantly when considering the industry trends and our pricing strategies over recent years. However, the challenges we previously mentioned, such as inflation and weather issues, remain present. Therefore, while it looks good overall, our underwriters will continue to concentrate on ensuring that renewed accounts meet the required rate adequacy. I hope this provides a clearer picture for the quarter.

Sure, Ryan. Thanks for the question. I would say two things. One, specific to your question on gas prices, and I think we talked about this a little bit last quarter. We don't see huge sensitivity in our miles driven data to gas prices. We actually think employment has a bigger impact on miles driven than gas prices do. So really, the impact of the price upswing we saw two, three months ago and the slight relief we've seen over the last month or so isn't really driving change in driving behavior based on the data we're observing. In terms of frequency, again, I think two comments are important about this quarter. One, the second quarter of last year still showed favorable frequency because driving levels were still depressed. And so they'll return towards pre-pandemic norms is a bad guide quarter or year-over-year. But in terms of driving behavior and claim frequency, we would say it remains in that space of approaching pre-pandemic normal levels.

I guess first question overall. I was hoping you could take us through how you're thinking about medical inflation potentially lagging the really high overall inflation that we've seen broadly and how that impacts loss trend selection?

Yes. Meyer, a couple of comments on medical inflation. So given that it impacts long-term lines like workers' comp and GL, you can imagine we watch it very closely. And two, as we've shared before, we take a very cautious approach to reserving those long-term lines. Having said that, while medical inflation certainly isn't immune from the broader inflationary environment, the recent trends on the whole continue to be, I'd say, relatively benign. The other thing is you got to make a distinction between medical inflation and the types of inflation that impact loss costs. So workers' comp and GL, for example, are driven by a subset of medical costs. We're treating workplace injuries. We're treating accidents. We're not treating chronic diseases. Those components of medical inflation that impact workers' comp and GL are increasing at lower than the headline medical CPI. Also, in terms of workers' comp, for example, we've got fee schedules and other medical management practices that mitigate the types of inflation that could impact those loss costs. So there's a little bit of a narrative on medical inflation. Hopefully, that's responsible.

Yes, Meyer. In the home segment, RPC really represents a combination of operational factors and insured values. The renewal premium change number we discussed reflects both the rate changes on renewals and the effects of increased value. To delve a bit deeper, we regularly assess replacement cost data and typically update our annual increased limit factors, referred to as AIL, once a year. However, in the current environment, we're evaluating this more frequently and have made a second update this year, which contributes to the continued rise in RPC for homes. This is also why I mentioned earlier that the increase in RPC for homes results from both rising rates and increased limits.

I have a question for Michael regarding personal auto. Could you explain how you are ensuring that claims are closed quickly and how you are resolving claims? I assume your portfolio includes more preferred business and newer vehicles that may be more complicated to repair, but it sounds like you believe you're managing those challenges effectively. Could you share your approach to closing claims in a timely manner for the auto book?

Sure, David. I can confirm that we are actively addressing the situation. Our claims team is highly skilled and effective, and we have strong processes in place within the organization. They are excellent partners in supporting the business. However, we are not exempt from the environmental challenges that have been discussed widely. Although we are effectively managing our responsibilities and your overview of our portfolio is accurate, we are experiencing delays in obtaining parts and securing time slots in body shops. This is impacting the time required for repairs and increasing the average rental days for nondrivable vehicles. We are taking various steps to assist customers in managing these delays. For instance, we engage with customers to ensure that, if their vehicle is drivable, they wait to take it to the shop until we both confirm that the necessary parts and labor are available. We are making every effort to navigate these challenges, but we are seeing longer average repair times. Additionally, salvage and subrogation processes are also taking longer, and overall vehicle availability continues to be a struggle. Despite these obstacles, I believe our claims organization is effectively managing the situation.

Got it. Dan, you mentioned that the expense ratio is expected to decrease to 29% for the full year, slightly ahead of schedule. Should we anticipate an expense ratio lower than 29% as we look towards 2023 or 2024? Or do you believe that 29% is an appropriate level to maintain moving forward?

Yes, David. We won't provide an outlook for 2023 or 2024. A couple of years ago, we were comfortable with a 30% expense ratio, and more recently, we were feeling better about 29.5%. We're not establishing a specific target for the expense ratio; instead, we're managing our business with a focus on the overall combined ratio and returns. We're making the investments we wish to make, and we've managed to improve our expense ratios in the process. Last quarter, we mentioned we might reach 29% sometime in the next year or two, and given our current success, it seems likely we will achieve that this year. I'm not inclined to provide an outlook beyond this.

I guess first question for Michael around the loss trends in personal auto. I heard you talk a lot about physical damage. Are you also seeing a bodily injury component there? Because it's something that we've certainly heard from a lot of the other auto insurers as of late. So maybe you could quantify or qualify that?

Yes, Yaron, thank you for the question. I’ll clarify rather than quantify. Similar to my comments from last quarter, we haven’t highlighted the bodily injury loss trend as a key factor in our year-over-year comparisons and expectations. This isn't because the trends haven’t been high or because we haven't noticed significant bodily injury losses. Specifically, we've observed increased inflation in bodily injury costs, but there has also been some positive movement in bodily injury frequency that is balancing out the higher severity. We had a solid assumption about what the bodily injury loss trend would be, so it hasn’t appeared as a notable difference from our expectations. However, that doesn’t imply that we aren’t experiencing pressure or that we aren’t paying attention to it; it simply means it aligns closely with what we anticipated.

Thank you very much. We appreciate everyone joining us today. And as always, if you have any follow-up, please feel free to reach out directly to Investor Relations. Thanks.

This concludes today's conference call. You may now disconnect.