Q2 2024 Earnings Summary
- Excess and Surplus (E&S) lines are growing significantly, at a rate 50% higher than the standard market business, indicating strong growth opportunities in this profitable segment.
- Achieving substantial rate increases, with overall rate excluding workers' compensation at 8.3%, up 50 basis points sequentially, particularly driven by auto liability lines, helping to offset social inflation and maintain profitability.
- Expecting net investment income to continue increasing quarter-over-quarter for the foreseeable future, leveraging higher reinvestment yields and a focus on the fixed income market, which should bolster earnings.
- Increased catastrophe losses: The company experienced $90 million in catastrophe losses in the quarter, primarily due to severe convective storms in the U.S., which increased the loss ratio by 1.1 points over the prior year quarter.
- Ongoing pressures from social inflation, particularly in auto liability, which remains an area of concern. The company is facing challenges in securing necessary rate increases due to resistance from insurance departments, making it harder to keep up with loss cost trends.
- Slowdown in property insurance market growth: The growth rate in short-tail lines, particularly property insurance, has decelerated as market opportunities are not as robust as they were 6-12 months ago, potentially impacting future growth in this segment.
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Auto Liability Reserves
Q: Any color on reserve movements by product line?
A: Management noted that while there are various "pluses and minuses" across their 50 different businesses, they are particularly focused on the auto liability line due to challenges in the claims environment. They are approaching it with caution and ensuring that their reserves are adequate. They do not see issues in auto liability spilling over into general liability. -
Growth in E&S Lines
Q: How much of growth is coming from E&S mix shift?
A: The Excess & Surplus (E&S) business is growing approximately 50% faster than the standard market, driven by opportunities where standard markets cannot get necessary rate increases. This shift has significantly contributed to their top-line growth. -
Investment Income Outlook
Q: Will investment income continue to increase despite drop in inflation linkers?
A: Management expects net investment income to continue increasing on a year-over-year basis, even considering potential reductions from Argentinian inflation-linked securities. They are leaning into fixed income opportunities given current interest rates, rather than alternatives. -
Capital Return Strategy
Q: Why not increase regular dividend instead of paying specials?
A: The company prefers paying special dividends to maintain flexibility. This approach allows them to return capital to shareholders while retaining the ability to respond to future opportunities or market conditions. -
Catastrophe Losses
Q: What drove the $90 million in insurance cat losses?
A: The catastrophe losses were primarily due to severe convective storms in the U.S. Midwest, contributing to almost $90 million in losses within the Insurance segment. -
Impact of Social Inflation
Q: Does social inflation affect lines beyond auto?
A: Management believes social inflation affects all liability lines, but auto liability is most impacted. They see the trend as meaningful and are ensuring their pricing and reserves keep pace with the evolving claims environment. -
Workers' Compensation Trends
Q: Any changes in workers' comp loss trends, particularly frequency?
A: They are more concerned about medical cost inflation than frequency in workers' compensation. The medical trend is seen as a wildcard that could impact profitability going forward. -
Sale of Equity Holdings
Q: What caused the decline in the equity portfolio?
A: The company sold its common stock holdings to realize gains, deciding that the stock market wasn't the ideal place for their specialty positions at the moment. -
Cyber Exposure
Q: How significant is your cyber exposure after recent events?
A: The company's cyber exposure is less than a couple of percent of net written premium. They do not expect recent cyber incidents to result in material losses, though they acknowledge it highlights systemic technology risks. -
Reinsurance Expense Ratio
Q: Is the reinsurance expense ratio of 29% sustainable?
A: Management expects the expense ratio to remain around 29%, depending on business scale and market conditions. It could tick up incrementally if market conditions deteriorate significantly. -
Slowdown in Short-Tail Lines Growth
Q: Why is growth in short-tail lines slowing?
A: The slowdown is due to the peaking of the property reinsurance market, leading to less robust opportunities in the property insurance market compared to 6–12 months ago. -
Workers' Comp Frequency Trends
Q: Is workers' comp frequency becoming less negative?
A: While acknowledging that frequency may not remain negative indefinitely, their primary concern is rising medical costs, which they believe will "come home to roost."