The Hanover Insurance Group - Q2 2023

Transcript

Operator (participant)

Good day, welcome to The Hanover Insurance Group's second quarter earnings conference call. My name is Keith, I will be your operator for today's call. At this time, all participants are on listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this call is being recorded. I now turn the conference over to Oksana Lukasheva. Please go ahead.

Oksana Lukasheva (SVP of Corporate Finance)

Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer, and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets, and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement, and a complete slide presentation for today's call are available in the investor section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

These statements can relate to, among other things, our outlook and guidance for 2023, economic conditions and related effects, including inflation, supply chain disruption, potential recessionary impacts, evolving insured's behavior emerging from the pandemic, and other risks and uncertainties, such as severe weather and catastrophes that could affect company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements and in this respect, refer you to the forward-looking statement section in our press release, the presentation deck, and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures, such as operating income and accident year loss and combined ratios, excluding catastrophes, among others.

A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation, or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Jack.

Jack Roche (President and CEO)

Thank you, Oksana, and good morning, everyone. Thank you for joining us for our second quarter call. Changing weather patterns and persistent inflationary pressures have had a significant impact on our financial results during the first half of the year, prompting us to further accelerate our margin recapture plan, including additional catastrophe underwriting actions. The competitive landscape is changing rapidly in response to more frequent and severe convective storms and the continued inflationary pressures. In response, we are leaning into the hardest market we have seen in property, particularly in personal lines, as we execute on our margin recapture plan. We are determined to fully leverage our deep market knowledge, underwriting expertise, enhanced tools, and strong agency partnerships to address the unprecedented loss volatility in property lines of business.

Our progress to date, our strong market position, and our capable team give me the utmost confidence in our ability to succeed and deliver on the targets we conveyed at our Investor Day in 2021. We have a long history of successfully navigating challenging environments, and we are confident in our ability to do so going forward. With that theme in mind, I'll begin today's call with my perspective on the current dynamic environment and the significant catastrophe losses we experienced in the quarter, and a review of the actions we are taking to restore property profitability as part of our margin recapture and CAT management plans, including new initiatives we have underway. Jeff will review our financial and operating results in more detail and provide an update on our 2023 outlook, and then we will open the line for your questions.

The catastrophe losses we and the industry have experienced in the second quarter are extraordinary. In particular, the record-breaking hail storms that impacted the Midwest and Southwest. Hail damage represented the vast majority of catastrophe losses we experienced in the quarter. The magnitude of those losses was amplified by persistent and ongoing inflation, which continued to drive up loss costs. Nearly half of our total losses in the second quarter occurred in Michigan, where we have our largest personal lines presence. By any measure, this kind of extensive and widespread CAT activity in the state of Michigan in a single quarter is very unusual. With weather patterns changing and costs elevated, we are highly focused on a broad set of integrated actions across our portfolio.

The positive news is that we are operating in an extremely hard personal lines market, one that allows us to reset our pricing, meaningfully change terms and conditions, and further refine our underwriting and risk appetite. With this in mind, we are highly focused on executing the margin recapture plan we initiated last year, responding with a sense of urgency. I'm pleased to report that we've made tangible and promising progress on our plan. We fully expect to build on that momentum we have established, driving improved and sustainable profitability going forward. Looking first at personal lines, we are taking a number of steps to optimize pricing on our renewal book and to ensure new business quality and pricing are stellar. Renewal pricing is clearly our most powerful lever.

Year-to-date, we have received approval on 62 rate filings, with 51 of those in the market and effective today, and we have a robust pipeline of additional filings, including 10 that are pending approval. With pricing increases of 22% in homeowners and 12% in auto during the second quarter, we are beating our own rate expectations by a couple of points. This differential is expected to grow to 3-4 points in the second half of the year in auto, while homeowners' pricing beat will grow to 9 points, with an expected renewal price change of 27% in the fourth quarter. Not surprisingly, in the current personal lines hard market, retention has proved to be resilient, giving us even greater confidence in our enhanced profit improvement initiatives. The market has firmed meaningfully even since our last call 3 months ago.

We are seeing the impact of the hard market across the competitive landscape through both public and mutual carriers and in all geographies, particularly in the Midwest. We have achieved very strong pricing increases in new business as market disruption has heightened quoting activity across personal lines. Since early 2022, our new business auto and home prices have risen by 30%. As a result, our current new business pricing is generally at or above renewal pricing levels, which reinforces our strong commitment to prioritizing profit improvement over growth. Additionally, we are becoming more restrictive as we quote new business, reducing our appetite in certain geographies, tightening our guidelines on driver history, and implementing stricter rules regarding building and roof conditions.

We are also utilizing increasingly sophisticated tools to assist us on property evaluations, such as aerial imagery and third-party data technology on every home to ensure new business quality, which is equally as critical as pricing adequacy. As a result of our pricing and underwriting actions, personal lines PIF growth is now flat on a sequential basis, and we expect it to shrink on a sequential monthly basis starting in the third quarter. Our Michigan PIF has been shrinking for some time now, and it is down 5% year-over-year. While rate and exposure increases are necessary and very effective in enhancing price adequacy of our CAT exposure, we believe specific product changes have the potential to have a very significant impact on reducing our future CAT vulnerability in personal lines.

Recent hail events put a spotlight on the fact that houses, and roofs in particular, are still a full value replacement-type product in many geographies, and we believe the industry is ready for a broader fundamental change. As such, we are taking the following three steps. First, we're increasing all peril deductibles to specific minimum levels by Coverage A limit. Second, we're implementing wind and hail deductibles in multiple states. Third, we're transitioning to actual cash value schedule for roofs as our standard offering, with the intent to make more appropriate claims reimbursements for older roofs. While the industry has made advancements relative to diminishing roof valuations based on age and construction, we believe the pervasive hailstorm events necessitate broad-based industry change. It's clear and important to note that older roofs are much more likely to be replaced post-hail events.

As such, we will be mandating such coverage on older roofs in most states. These product changes will be implemented first on new business in the majority of our personal line states. In fact, effective next month, we are changing defaults on comparative raters for new business, so that business transacted through comp raters reflects our current standards. Most states will require a filing and approval for renewal policy changes, which will take a little longer to execute. When fully implemented, these actions are expected to significantly reduce our CAT risk, vulnerability, and future losses. To put this in perspective, a few examples will help showcase the expected impact. First, higher minimums on all peril deductibles will help increase cost sharing on CAT and non-CAT losses.

Further, a 1% wind/hail deductible would have the impact of more than doubling the deductible on a $500,000 Coverage A homeowner risk, and an ISO-based actual cash value roof schedule would reduce the claims costs by over 50% if a roof is over 15 years old. The cumulative effect of the actions we are taking in personal lines, including pricing, risk prevention, and the fundamental change in our policy forms, should materially reduce our personal lines' catastrophe vulnerability and the volatility of our results. Moving on to Core Commercial. Once again, we've made meaningful progress in all three of our margin recapture plan focus areas: pricing, underwriting, and risk prevention. In terms of pricing, we're leaning into the property hard market to push for even higher rate and exposure increases, which should help offset both elevated CAT and ex-CAT losses.

Core Commercial property renewal pricing increased 12.6% in the second quarter. As of March, we automated insurance-to-value adjustments in Small Commercial where appropriate, which are now set between 6% and 8% on top of rate increases and will increase overall renewal price change moving ahead. From an underwriting perspective, we took actions to reduce the volatility associated with property, particularly in Middle Market in 2022. We identified specific accounts with a higher likelihood of fire and other large loss volatility, and we completed appropriate non-renewals in this business in April of 2023. We were very successful with that initiative, as reflected in our current accident results for the second quarter.

In 2023, we are now more closely addressing the pricing adequacy of our CAT exposures in light of persistent inflation and changes in weather patterns with our enhanced analytics, third-party data, and CAT modeling. Specifically, we have identified approximately 5% of risks in our Core Commercial business that are most vulnerable to catastrophe losses. As we non-renew or significantly reprice this business, we expect our retention to decline slightly or our pricing to increase significantly. In the second quarter, these planned actions drove a dip in Middle Market retention to just below 80%, and we're pleased with this trade-off. Consistent with our focus on loss control and risk prevention, we further expanded water and temperature sensor installation in 2023, resulting in an increase in avoided property damage and business interruption claims.

We exhibited a 25% increase in protected accounts through the first quarter compared to the end of 2022. This figure has now doubled through the first 6 months of 2023. We learned a lot and are pleased with the effectiveness of the risk mitigation technology pilots through initial implementation over the last 18 months, with the success so far enabling us to surge ahead toward even higher implementation targets this year. We will be implementing 2,500-5,000 new sensors in commercial lines accounts, starting with 600 of our largest, most sophisticated and most exposed Middle Market accounts. These risks are targeted for installation this year, and we will continue to expand this program in the future. As a result of these actions, we anticipate the underlying ex-CAT loss ratio in our property book to further improve.

While catastrophe outcomes are difficult to extrapolate, we believe that our actions, when fully implemented, will reduce our vulnerability to winter storm losses substantially. While our profitability improvement initiatives are already showing significant progress, the pace of progress is expected to accelerate in the coming quarters as these actions price in and new ones are implemented. Our Specialty book continues to perform exceptionally well, delivering robust pricing-driven growth and an exceptionally strong combined ratio in the quarter and year to date. The specialty pricing environment is generally favorable overall, enabling us to achieve 11.4% price increase in the quarter. While the market environment in some of our segments is becoming more competitive, in particular management liability, our ability to deliver consistent profitability is a testament to our disciplined underwriting and rate strategy. The continued successful growth of our Specialty business is critical from a strategic perspective.

This business provides important diversification for our overall portfolio and consequently reduces our property and CAT exposures, all while providing our agent partners with highly valued capabilities and business opportunities. The value of our Specialty portfolio to our agents and customers hinges on a highly competitive set of offerings, account-centric orientation, efficient service, and coordinated relationship management. While our existing portfolio offers significant growth potential, our Specialty team is exploring complementary capabilities to support continued expansion of the business. For example, we are looking to further leverage technology to execute a low-touch, small Specialty strategy and potentially to expand our Specialty appetite slightly to align more closely with our Core Commercial customer set, so we can further maximize the benefits of our account and industry specialization strategy. In conclusion, we remain committed to long-term profitability targets that are ambitious and achievable.

We expect our ROEs to be strong in 2024 and to improve steadily through 2026. We have every confidence we will be able to achieve our target profitability, potentially beating our long-term 14% ROE target, supported by strong underwriting income and much higher than originally expected net investment income. We will, of course, continue to execute on our strategic priorities to continue expanding the top line. In the near term, profitability is our primary focus. With that, I will turn the call over to Jeff.

Jeff Farber (CFO)

Thank you, Jack. Good morning, everyone. Let me begin with a high-level overview of our results and then discuss the performance of each segment in more detail. Significantly higher than expected catastrophe losses, particularly impacting personal lines, resulted in a combined ratio of 111.3% for the second quarter. As noted in our pre-announcement, catastrophe losses in the quarter totaled $262 million, or 18.5% of net earned premium, stemming from 19 convective storms across multiple states. Over 70% of the losses were driven by hail peril. Putting aside. Our earnings were in line overall with our expectations. Lingering inflationary pressure in personal lines was offset by higher net investment income and strong underlying performance in both Specialty and Core Commercial.

Prior year reserve development was immaterial in the quarter, with favorability and Specialty offsetting unfavorable development in personal lines. The personal lines environment has resulted in some pressure on liability coverages, particularly auto bodily injury and umbrella, which is reported in home and other. Umbrella is inherently volatile, and we are monitoring it closely. However, we continue to be very pleased with this product offering, which remains one of the most profitable in personal lines. In auto, we preemptively increased our current accident year loss selections for bodily injury in light of our recent experience and broader industry trends. In the same vein, we are also seeing slight pressure within commercial auto liability, which offsets the continued favorability in workers' compensation. Specialty experienced continued favorability in the quarter, reflecting lower than expected losses in our professional and executive lines, claims-made business.

Our team continues to do a very good job in managing expenses, delivering an expense ratio of 30.6%, an improvement of 20 basis points from the prior year period. Our results in the first half of the year position us well to deliver on our full year expense ratio target. Now turning to our segment review, starting with Core Commercial. We were pleased to deliver a solid ex-CAT combined ratio of 89.3% for the second quarter. The underlying loss ratio of 56.2% outperformed our expectations, supported by significant improvement in commercial multiple peril, as we have observed both frequency and severity of large losses subside.

The strong performance in the quarter and year to date underscores the effectiveness of our margin recapture plan thus far, reflecting the impact of accelerated pricing and the $25 million of Middle Market property non-renewals we completed last year. Small Commercial continues to deliver robust profitability and benefit from rate increases earning in. On the top line, Core Commercial generated net written premium growth of 7.2%, driven in part by robust renewal pricing, especially in property. Specialty delivered exceptional performance once again this quarter, as we continued to successfully deliver on our operational and financial priorities. From a profitability standpoint, the specialty combined ratio, excluding catastrophes, improved 1.6 points from the prior year quarter, coming in at 85.6%, in part due to favorable development.

We delivered an underlying loss ratio of 54% for the second quarter, which despite the year-over-year increase, is well within our expectations. Relative to the prior year period, the ratio increased 1.7 points, primarily driven by prudently raised loss selections in certain liability coverages and a comparison to lower than usual losses in specialty property lines in the second quarter of 2022. Specialty top line growth was in line with our expectations, as net written premiums grew 7.6% for the quarter, propelled by growth in our most profitable lines. Retention also remains strong and as expected.

Pricing across the Specialty portfolio remains robust, helped by substantial increases of 15.3% in property during the quarter, inclusive of 23% in Hanover Specialty Industrial and 14% in Marine, our two largest property lines in Specialty, and lower, but still very reasonable pricing in casualty businesses. Moving on to personal lines ex-CAT results. Personal lines auto current accident year loss ratio, excluding catastrophes, was 79.1% in the quarter, compared to 72% in the prior year quarter. Loss picks for 2022 were adjusted upwards in the third quarter of 2022 to reflect higher inflation and repair delays. Physical damage inflation remains stubborn, especially for parts and labor. Frequency, while higher than 2022, is still better than our original expectations.

While we are seeing some stabilization in used car prices and parts, this measure has been volatile as of late. Similar to recent industry experience, we are seeing an increase in liability trends, primarily for bodily injury coverages. Liability trends are a continued area of focus, we are maintaining a prudent approach to setting our picks in BI, increasing our current accident year loss selections and continuing to file for higher rate increases. Homeowners' current accident year loss ratio, excluding catastrophes, was 62.8% in the second quarter, compared to 60.2% in the prior year quarter, reflecting an unusual spike in large fire losses. While materials cost inflation has slowed, higher labor costs continue to present a challenge in this line as well.

Personal lines generated net written premium growth of 10.1%, driven by robust pricing increases, which exceeded our original pricing targets for the second consecutive quarter. Personal lines renewal price change is up 16%, underscored by increases of 12% in auto and 22% in home, while policies in force remained flat on a sequential basis. These actions, including accelerated pricing and product changes, are expected to reduce our ex-CAT personal lines loss ratio by mid-single digits in 2024, compared to a full year 2022 baseline. Homeowners' improvement will occur more rapidly than in auto, given the ITV premium increases. That said, the ongoing personal lines inflationary trends have appeared to slow the pace of improvement toward our historically strong combined ratios.

It may take us a quarter or two longer to get there, but we have the utmost confidence in our ability to drive steadily to that objective, given our actions and the hard personal lines market. We expect to achieve target profitability on a written basis in 2024. Turning to reinsurance, we successfully completed our property treaty renewals on July 1. Leading up to the renewal, we anticipated meaningful rate increases, but we were very pleased to secure the program with overall lower risk-adjusted increases than expected, particularly in our per-risk treaty. The key elements and highlights of our current property reinsurance program are as follows: We renewed both treaties and maintained a very consistent structure from expiring treaties. The renewed per-risk property program is very similar to the expiring program in structure, retention, and pricing.

We secured full capacity across our catastrophe occurrence program, maintaining our $200 million retention. We placed the second tranche of the top $150 million reinsurance treaty layer. We maintained our multi-year placement with less capacity placed on an annual basis than last year. We closed on a new $150 million, 3-year catastrophe bond with favorable terms and pricing only slightly above last year's $150 million bond issuance, which remains in place for another 2 years if unused. Taken together, these changes have resulted in increased reinsurance limits and an occurrence program that exhausts at $1.8 billion, compared to the previous $1.6 billion for our highest concentration states. Overall, the success of these renewals provides third-party validation of our underwriting and mitigation actions. Moving on to investment performance.

Higher earnings yield and partnership income drove stronger than expected investment income of $87.6 million in the second quarter, which was primarily attributable to increased partnership income. NII contributions from partnerships can be volatile quarter to quarter. We continue to believe a more normalized partnership income expectation is approximately $7 million per quarter. The current interest rate environment provides a long-term benefit to net investment income, allowing us to reinvest at attractive market yields and higher quality. Looking at our equity and capital position, book value per share decreased 6.4% on a sequential basis to $62.62 in the second quarter, reflecting a net loss, a decrease in the fair value of fixed maturity investments, and payment of our quarterly shareholder dividend. Now, turning to our outlook.

We expect our full year 2023 ex-CAT combined ratio to be toward the higher end of our original 91%-92% guidance range, considering both loss experience to date, as well as the additional underwriting and pricing actions we introduced this year. With respect to our customary quarterly catastrophe guidance, I want to share the following: We are certainly experiencing an extraordinary CAT year on top of fairly heavy loss experience during the last couple of years, which has been well beyond our CAT expectations. This clearly requires a ground-up reevaluation in addition to the thorough and granular process we go through each year. Our expanded process will include a reevaluation of our modeled catastrophe losses, our historical experience, and supplemental non-modeled risks using the most contemporary tools. We will also incorporate the actions we are taking to address our CAT exposure.

We will share the results with you in early 2024. For now, we are laser-focused on leaning into the hard market and addressing and resetting our CAT risk profile. We are addressing current challenges head-on through strong execution of our margin recapture initiatives, with the efforts of these actions compounding over time to drive margin restoration in our property business. We are moving with a deep sense of urgency, a clear plan, and a strong team in place, and we look forward to providing further updates on our progress over the next several quarters. We have great confidence in our ability to return to our traditional placement of profitability. With that, we will now open the line for questions. Operator?

Operator (participant)

Yes, thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. The, excuse me, and the first question comes from Paul Newsome with Piper Sandler.

Jack Roche (President and CEO)

... Paul, you may be on mute.

Paul Newsome (Managing Director)

Good morning. Thanks for the call. I guess, you know, any, any more details about, you know, that gives us increased confidence in that sequential improvement, particularly in the personal lines underlying, would be very helpful. I get the rate, and I get the effects, but I think we've seen a lot of folks, you know, not quite make it in terms of improvement because of all those inflationary factors. I guess, you know, any confident, more confident comments would be helpful. Also, could you talk about sort of like, as we go through the quarter, are we still seeing sort of an acceleration overall of inflation? Or maybe you could just talk about your inflation pegs as well, particularly in personal lines.

Jack Roche (President and CEO)

Hey, Paul, this is Jack Roche. Thanks, thanks for your question. Obviously, the personal lines loss trajectory and our acceleration of pricing and terms and conditions are really top priority for us, in addition to our CAT management efforts. You know, to answer your first question, I think that the loss trend environment has been difficult for the industry to fully capture coming out in the post-pandemic environment. We're all trying to understand how the frequency trends and the severity trends are presenting themselves. There's a lot of good work being done from a claims analytics standpoint, to separate out the various different types of claims and not use the traditional frequency and severity methodologies as our exclusive way to get after that.

I think what you saw in this quarter is that we acknowledge that, even after the reset in midway through 2022, we needed to acknowledge that there was some persistency in the inflationary trends. We made those adjustments. We're committed to making sure that we don't get behind, and that we do the best we can to acknowledge the loss trends that are presenting themselves. We do expect that, that, you know, inflation is peaking or is going to peak here. There's some indications that that's starting, but we're not going to count on that in terms of how we attack the profitability challenges that we have.

I guess the best thing that we can do, that I think you're, you're seeing us do, is to accelerate pricing to the next level, on, on both home and auto. Relative to the CAT exposure, get even more, emphatic about the changes that we need to make in order to, to address that aspect of our personal lines profitability.

Paul, given the increases in price that we're getting, that are really accelerating, and some of the anomalous nature of what happened in the second quarter with fire losses, it would be very hard to imagine a scenario where we're not seeing sequential improvement in personal lines.

Paul Newsome (Managing Director)

Great. I'm sure other people will ask a bunch of personalized questions, so maybe I'll ask a commercial lines one. Obviously, the results have held up there much, much better than personal lines. You know, can you talk a little bit about sort of how you think of, of rate versus inflation in those businesses as well? Not, not so much for the next quarter, but, you know, as we're looking out in the next year or past, can we get some help on those businesses, or is it all sort of about top line growth at that, that point?

Jack Roche (President and CEO)

This is Jack again. I'll, I'll say a couple of overarching comments and then let Dick speak to some of his perspective there. I think the headlines for us are that because we do have a lot of property in our core commercial mix, we've been challenged more than some in terms of the CAT and the overall property volatility. The upside of that is that we are able to really lean into a firm market on the commercial lines property side and make some meaningful adjustments, not only in pricing, but also some underwriting and terms and additions there. So I do think that pricing is still the number one lever that we have, but price over loss trend, we believe is very much going in the right direction.

Dick, you want to follow up on that?

Dick Lavey (President of Agency Markets)

Just to amplify, I mean, Paul, we, we see the pricing environment as kind of remaining steady. You know, we feel with the work we're doing and the portfolio we have, we'll, we'll be able to persist at the levels that we're, we're currently experiencing. We're pricing ahead of loss trend, except for in workers' comp, which is, you know, an industry trend. And then, as Jack has referenced, you layer on the underwriting actions that we, we are going to take, although we're mostly through that, we, we, we constantly scrub parts of our, our portfolio. Pull all that together and, and we feel like we can stay ahead of loss trend as we are right now.

Jack Roche (President and CEO)

I guess maybe the last thing, this is Jack again. You know, the actions that we took, particularly in Middle Market, but to a lesser degree in Small Commercial, are clearly working, right? The underwriting on some of the large loss volatility that we had, we addressed pretty emphatically over the last several quarters, and we believe that a good portion of what we experienced in the second quarter shows that underwriting still matters.

Paul Newsome (Managing Director)

Great. Thank you. I'll let some other folks ask questions, but, appreciate the help, as always.

Jack Roche (President and CEO)

Thank you, Paul.

Operator (participant)

Thank you. The next question comes from Mike Zaremski with BMO.

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Hey, good morning. Thanks. I guess first question on the, you know, the, the ground-up study on, on your catastrophe, you know, I guess profile and, and kind of thinking through kind of your expectations in the future. Just curious, like, you did a good job, I thought, of giving us some stats on this being a, an anomalous event, especially the Michigan stats. I guess just, you know, stepping back, is there just more concentration in certain geographies that would, that just inherently makes, you know, your CAT losses a bit less predictable, given concentration? Is that something that makes sense in the relevance of this, the catastrophe study?

Jack Roche (President and CEO)

Mike, thanks for that question. This is Jack Roche again. I, I think, you know, we certainly are taking the current, current catastrophe trends very, very seriously, but we're thinking about it broadly. You know, to answer, you know, one of your questions in there, the, the most recent storms have clearly found our portfolio in a, in a disproportionate way. There's no denying that, whether it be Winter Storm Elliott and how it presented itself, or these hail storms that were heavily in the Midwest, and particularly in Michigan. I think the only fair way to answer the question is, when you look at the broader catastrophe environment, perils, geography, that we will certainly benefit when the storms start to hit some of the other areas that they traditionally hit.

We've proven that we've done some really good work on the property aggregate management relative to the hurricane perils, and even for some of the more traditional convective storms. We've, you know, done reasonably well when it comes to things like wildfire out West. So that's why the ground-up analysis is so important, is that we're not gonna play Whac-A-Mole with the most recent storms. We're taking very deliberate actions towards how we can improve our vulnerabilities around winter storms, as well as these most recent hail storms. Our work goes to more broadly looking at those CAT trends and expecting that the weather will continue to be challenging, but not as challenging as it's presented to us in the last three quarters.

Just to add a thought there, Mike. you know, clearly the model has produced an insufficient result, at least in recent times, and so I don't want to preempt the process, which is a very detailed process, but we're going to be supplementing the industry-leading models that we use, and we're going to be considering how we'd weight different time periods, you know, with that. you know, whether we want to use the traditional backward-looking or we want to, you know, weight some more current, current information to make sure that we're as contemporaneous as possible.

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Understood. Just curious, so it, you know, depending on, on the outcome of this process, will, you know, base case, this, you know, it will, it'll help you produce kind of a, I guess, expectations on, on catastrophe losses and profitability. Would this kind of preempt potential, you know, I guess, portfolio changes, on the margin, or, or could it be bigger changes to the portfolio, depending on the, the outcome of the, of the study?

Jack Roche (President and CEO)

We're already-

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Anything strategic other than just kind of fine-tuning? Could this mean, like, a, a bigger transaction or something like that?

Jack Roche (President and CEO)

Mike, we're already pricing for a CAT level that's meaningfully above what we had built into our plan. It just seems to necessitate that, given the current environment. you know, as we go forward, we're really optimistic about our ex-CAT results, we're really optimistic about our NII and the growing impact that that has. Even with a meaningfully higher CAT load, we still have a lot of confidence in our ability to hit the long-term targets. you know, surely, we'll look at the individual components of the portfolio and make some different decisions as to disaggregating or focusing capital in different directions from time to time.

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Okay. My follow-up's on specifically Core Commercial lines. You know, can you kind of maybe let us know how you guys are thinking about the profit recapture plan within this segment? You know, it seems like there's been-- well, we can see there's been some improvements on a, you know, on an underlying loss ratio basis, and we, we heard your comments about the fire losses, too. It looks like there's been some improvement, and it, it feels like maybe you're not pushing for as much price as, as, as well. Are, are you-- are we kind of in the later innings in Core Commercial in terms of the initiatives you've been taking over the past year?

Jack Roche (President and CEO)

I think the way I would answer that question is that we have executed extremely well against the initiatives that we put in place around looking at some of our kind of CAT, most CAT-exposed areas, particularly in Middle Market. We spoke about, you know, a $25 million group of property-oriented business that we took pretty flawless action on. We continue to go forward, and relative to pricing, we see some refirming in the property lines, and we are a beneficiary of that, given our mix as I said earlier. We are leaning into what we consider to be a very firm market in the property lines, and continuing to diversify our portfolio and really laser in on, you know, types of exposures that present themselves more to the CAT peril.

I think we talked in the last call about, you know, educational institutions and some commercial real estate that are a little disproportionate in terms of their exposure to some of the CAT perils. We've taken particular action on some areas of our portfolio where we just think the risk-reward trade-off isn't, isn't as good as it's been historically.

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. The next question comes from Bob Farmam, Bob Farnam with Ja- Janney.

Bob Farnam (Managing Director)

Hey, thanks. Good morning. A couple of questions, more on the competitive environment in personal lines. We've seen some kind of well-publicized pullbacks from the larger players from California and Florida and whatnot. I'm just curious, in your footprint, are you seeing anything like that of, of the larger players pulling back from certain types of risks? Is that presenting an opportunity?

Jack Roche (President and CEO)

Yeah, this is Jack. I know Dick has a lot more to say about this, the short answer is yes. We see that in the territories that we -- you know, the 20 states that we compete in, several of them are kind of mutual, kind of regional carrier-dominated, and others are more of a mixed, mixed bag of public and, and mutual companies. We definitely see, particularly some, some mutual companies, ceasing new business, meaningfully changing their, their pricing, not only on their renewal book, but their, their pricing acceptability. Our agents are clearly feeling a hard market across our footprint, as we said earlier, we're leaning into it because we, we need to improve this part of our business.

Dick Lavey (President of Agency Markets)

Yeah. Just to amplify that, I, I would say almost every state we're in, we see some action from multiple competitors in both stock companies and mutual companies. That could come in the form of tighter coastal controls, certainly pull back in, in new business, and absolutely pushing tighter terms and conditions. Which, which is why we have a lot of confidence in the aggressiveness and speed with which we're going to be moving. Of course, we think this is where our, our strategy will help us with a narrow distribution and tight relationships with our agents. We, we, we do, we do communication exceptionally well at the agent level and the, and the customer level. You know, you're not going to see us just send out a broad-based memo.

We'll be, we'll be very thoughtful about the, the way we approach, how we're changing our, our products.

Bob Farnam (Managing Director)

Right. The, the second question I had was, was, you may have already answered part of it, because my, my second question was, was, addressing adverse selection. If, if your rate increases are in excess of what maybe what others are charging or, or increasing, are you losing some of your better customers because it's, it's more advantageous to move to the better priced products? It sounds like you may, may not because the competitors may not be there to, to offer lower, lower rates. Long-winded question is just basically how you're dealing with adverse selection when you're raising-

Jack Roche (President and CEO)

Yeah, I can-

Bob Farnam (Managing Director)

... as much as you are. Yeah.

Jack Roche (President and CEO)

I can assure you that we evaluate regularly, not only our renewal book in terms of what's leaving us, but have very tight controls and monitoring of our new business. The short answer is, is that the quality of our renewal book is very strong. We are happy to, with the trade-off of the renewal and pricing at this point, and we're accelerating pricing. Don't see any adverse selection in that process. From a new business standpoint, as we said in our prepared remarks, we're tightening our underwriting guidelines and accelerating our pricing, in some cases above our renewal book, and the market is still flowing new business our way. We can be very selective in the short, short term.

We're just making sure we don't over-ingest new business of any flavor until we have confidence that we're on the right financial path. We're going to be very conservative, but the market is very much cooperating with us.

Dick Lavey (President of Agency Markets)

Yeah.

Bob Farnam (Managing Director)

Right.

Dick Lavey (President of Agency Markets)

And this is where highly segmented analytics, you know, play an important role, right? We look at our retention at a very granular level by customer type to make sure that we're not losing the kinds of customers that we know are high margin.

Bob Farnam (Managing Director)

Great. Okay. Thanks for the color, guys.

Operator (participant)

Thank you. The next question comes from Grace Carter with Bank of America.

Grace Carter (VP of Equity Research)

Hi, good morning, everyone.

Dick Lavey (President of Agency Markets)

Morning.

Grace Carter (VP of Equity Research)

You all have mentioned in the presentation some upward tweaks to loss cost trends in certain specialty liability lines. I was wondering if we could get some more color on which lines in particular were impacted, and if there was any corresponding impact on the Core Commercial book?

Jack Roche (President and CEO)

Yeah, Grace, thanks for the question. This is Jack. I know Bryan will, will chime in here quickly. I think overall, while we're dealing with a lot of property issues of late, we're also monitoring the liability trends, very, very tightly. In that context, Bryan and his team, as well as the Core Commercial team, are trying to make sure that we stay very prudent in our current accident year picks. Bryan, you can kind of respond more specifically within the casualty lines within Specialty.

Bryan Salvatore (President of Specialty Lines)

Yeah, sure. And as, as Jack said, and Jeff pointed out in his comments, right, we're just being very thoughtful about where there is a potential for increased, liability development.

And so in those lines, right? Whether it, it could be in our management liability lines, it could be in some of our E&S lines, you know, it behooves us to take a, a bit more conservative of a, of a, a position, increase our loss selections somewhat. In the end, I would say that, you know, where it comes in for us in terms of pricing and in terms of loss ratios on plan. I think it's thoughtful for us to at least make some adjustments in the environment.

Grace Carter (VP of Equity Research)

Thank you. I guess going back to an earlier question about rate and pricing in Core Commercial. It looks like rate and pricing were relatively flattish this quarter relative to the first quarter, and we had seen quite a bit of acceleration at some peers. I was just curious if we should think about that as maybe a function of mix by line or geography or account size, and just if we should expect some reacceleration going forward, given the property component of that book.

Jack Roche (President and CEO)

Grace, as I suggested earlier, I believe that the property lines within commercial broadly are further firming. I think the answer is yes. Going forward, we're certainly pushing more rate, and we see the market following that, but time will tell as we go through the next couple of quarters. Dick, I don't know if you have any specific-

Dick Lavey (President of Agency Markets)

I think we haven't spoken specifically about commercial auto, too, as the other line, which also continues to be hard and requires us to continue to lean in there. Our, our objective is to accelerate pricing in commercial auto as well. I think, you know, if you put those two, two together and, you know, you're, you're, you're gonna see certainly a step forward, not, not a step backwards.

Jack Roche (President and CEO)

I will remind you, though, that we have tended to be a little bit kind of ahead of the market and maybe a little bit more disciplined with our Core Commercial lines pricing. I'd like to think that you're seeing some people kind of come back to us, and the question is, where does it go from here? We think it goes up.

Grace Carter (VP of Equity Research)

Thank you.

Operator (participant)

Thank you. The next question comes from Matt Carletti with JMP.

Matt Carletti (Managing Director)

Hey, good morning.

Dick Lavey (President of Agency Markets)

Good morning.

Matt Carletti (Managing Director)

Just want to ask a question on some of the actions you're taking on personal lines. I think, you know, the market and you guys as well, have been pushing rate for a while, and I think we're pretty familiar with whether it be kind of regulators slow-playing things and then how the written and earnings patterns work. My question's around some of the non-rate actions you're taking, and can you just give us your thoughts on kind of how regulators might look at those differently, if it's an easier process or a tougher process in some of the larger states you're exposed to?

Then kind of if they get into the book any more quickly, because I know you got to write them in, but it seems like they, once they're written in, there's not an earned period that you really have to wait for. They kind of take effect immediately.

Jack Roche (President and CEO)

Yeah. The non-rate actions that we take, frankly, are within our control. They generally don't require, you know, any kind of approval from the state. You know, it really is tightening down your underwriting appetite. You might non-renew more business, which is something we're doing. When we see losses, you know, we can tighten the nozzle on the quality of business coming in through the operators and our top sales platform. So those are all within our control, and frankly, can have a pretty quick impact. Deductibles is the other lever that we talked about in our prepared remarks. Those two can be shifted quite quickly. In fact, we have all peril deductibles already filed.

We have the wind hail deductibles already filed and approved, so there's not that process in front of us. It's really about customer adoption and making sure that your pricing is properly adjusted to accommodate those different deductibles. So yeah, that gives us confidence that the, you know, the actions we're taking, frankly, can hit the marketplace pretty quickly, as we described.

Matt Carletti (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. The next question comes from Meyer Shields with KBW.

Meyer Shields (Managing Director)

Great. Thanks, and good morning. I want to follow up on Matt's question. I, I think everything you're talking about on the property side makes perfect sense. Is there any agency resistance to that? In other words, is there any pushback from the distribution in terms of how aggressively you're adjusting the property closure?

Jack Roche (President and CEO)

Meyer, thanks for that question. Obviously, given our strategy, that's an important question that we are asking ourselves, but obviously talking very, very openly with our distribution partners. The short answer is no. We feel like we've got a high level of support. People understand that we have had some financial, some substantial financial pressure based on the environment, both from an inflationist standpoint and a catastrophe standpoint. They also believe that we're driving pricing in terms of conditions that may be on the front end of the market, but are consistent with the market conditions. In the true spirit of our partnerships, we feel a high level of support.

We've had great discussions with our national agency council and our regional councils, and in some geographies, people are really anxious for us to push further because there is starting to be an availability issue as some of the markets start to shut down new business or really alter their new business appetite in a significant way. Us making adjustments in our pricing and not overreacting on the underwriting side is considered to be very supportive by our agency partners.

Meyer Shields (Managing Director)

Okay, that's, that's fantastic. One other, maybe this is a positive issue, but I was hoping you could talk about submission flows to for E&S Casualty business.

Bryan Salvatore (President of Specialty Lines)

Yeah, sure. Not surprising, I think, to us, is that the, the volume of submissions, both to our wholesale practice and our retail, E&S business, remain up. In fact, we are staffing more and more for it to, to keep up with the volume. I think it's an area for us that has really proven to perform well and to be delivering very strong double-digit growth for us. Yeah, thanks for the question. I, I'm, I'm pleased with the volume of submissions we're getting, and we just have to manage them because they're meaningful.

Meyer Shields (Managing Director)

Okay. Is there any change, I guess one competitor early in earnings season mentioned that they were seeing an uptick in, in casualty submission flows, and I'm just trying to see how broad-based that is?

Bryan Salvatore (President of Specialty Lines)

I'm sorry, I didn't quite get that.

Jack Roche (President and CEO)

How broad-based?

Bryan Salvatore (President of Specialty Lines)

Sorry?

Jack Roche (President and CEO)

How broad-based?

Bryan Salvatore (President of Specialty Lines)

Oh, whether, right, broad-based.

Meyer Shields (Managing Director)

I understand that there's a ton of property business moving to, the non-admitted market. I'm just trying to get a sense in terms of whether that is increasing or decreasing in, in casualty lines.

Bryan Salvatore (President of Specialty Lines)

No, we see, we see growth across both our property and our casualty E&S business. Frankly, the PIF count in our casualty business far exceeds our property business. It's, I would call it broad-based, yeah.

Jack Roche (President and CEO)

Yeah, this is Jack. I think we're not only seeing the market continue to present more and more opportunities, but we're being very disciplined around our own mix, including when we do property E&S, do it where it does not add to our CAT exposure, and it's more of a very targeted, lower limit property business that fits nicely into our portfolio. Both the market is supporting that in terms of flow, and our underwriting discipline is ensuring that we take advantage of the opportunities in the right way.

Meyer Shields (Managing Director)

Okay, excellent. That's very helpful. Thank you.

Operator (participant)

Thank you. The next question is a follow-up from Mike Zaremski with BMO.

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Great. Just a, a quick follow-up on, you know, the slight uptick you're seeing in some of the, casualty liability and inflation levels. You know, cognizant that, you know, you guys, have been, you know, talking about this more than others and in front of it, and, and your, your reserve release levels, too, are, are year-over-year, better than, than the industry average. Just curious, is this, is this kind of broad-based? I, I was looking at the transcript. It looks like you mentioned commercial auto in the prepared remarks, but then, you know, after Grace's question, you touched on other lines. Is this coming kind of broad-based? Is it mostly on the severity side, or is it certain vintages or just any other context you'd like to add?

Jack Roche (President and CEO)

I think it's a relatively minor issue, Mike. We're really just wanting to be prudent in the BI and some casualty coverages. You know, for us, it's probably an undersized issue, but we're seeing some of it in some recent years and just wanting to really be prepared for it.

Mike Zaremski (Managing Director and Senior Equity Research Analyst)

Okay, understood. Thank you.

Operator (participant)

Thank you. This concludes the question and answer session. I would like to return the conference over to Oksana Lukasheva for any closing comments.

Oksana Lukasheva (SVP of Corporate Finance)

Thank you, everyone, for a, a great dialogue today. We are looking forward to talking to you next quarter.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation, you may now switch off your lines.