David Motemaden: Hi, thanks. Good morning. I had just a follow-up question just on the adverse prior-year development. I guess, what does that do to your view of future loss cost trends? It sounds like some of it is run-off, but also some of it is more business that you’re obviously still writing. So I’d be interested in how you’ve changed your 5.5% to 6% loss trend assumptions.
Alan Schnitzer: Yes, David, good morning. It’s Alan. Thank you. Two things in response to that. One, I would say that – I would just point you to the combined ratio and underlying combined in BI in the quarter, and obviously, we think about how prior-year development influences that through – base your changes and you can see a pretty solid results. And as we’ve shared with you before, I always – I always want to just preface this by saying, it’s a very blunt instrument to try to capture what’s going on across billions of dollars of premiums in a single loss trend metric. Every line has its own dynamics, and the question usually comes in, in terms of loss trend, but, of course, there is base year changes, there’s exposure changes, there’s other adjustments to loss activity.
So always puts and takes in all those – in all those measures. But all-in, I’d say there really hasn’t been much significant change. And I would go back to a comment that Dan made, on $15-odd billion of reserves, this is a relatively small adjustment. And we’re always every quarter looking at all our reserves, and sometimes they go up, sometimes they go down, but relatively small. And as Dan said, the returns in BI continue to be exceptional.
David Motemaden: Got it. Thanks. And then I guess, I should just take that. I mean, it’s obviously a very fluid environment. But I guess, it would – fluid macroenvironment. It would seem that just given the re-acceleration in renewal rate change, the gap between written rate and loss trend has been expanding. I guess, is that the right take? Or is there anything else that I’m missing there? Obviously, we have to take catastrophes into account, but there – I know Fidelis has come in. I’m just wondering if there’s anything else I’m missing on the underlying loss ratio.
Alan Schnitzer: No, I mean other than – Greg mentioned in the script that the non – the non-cat property losses came in a little better than we thought. But for the most part, I think the way you slice it up is about right.
Dan Frey: Yes. And David, it’s Dan. I’ll just – you mentioned Fidelis, I mean, we said at the beginning of the year that Fidelis was not going to be big enough to have a meaningful impact on the underlying combined ratio, and that’s still the case including Q2.
Alan Schnitzer: I think you got it right, David.
David Motemaden: Thank you.
Alan Schnitzer: Thank you.
Operator: Your next question comes from the line of Ryan Tunis of Autonomous Research. Please go ahead.
Ryan Tunis: Hi, thanks. Good morning. So, yes, Alan, I hear you that you’ve got $15 billion reserves, sometimes they go up, sometimes they go down. But I guess, I’d say, they don’t usually go up quite as much in a given quarter, especially when there is so much workers’ comp reserve releases, and I mean, there’s also like a pretty sharp acceleration of pricing. So it does look from the outside like – I don’t know maybe you guys are seeing something new or you’ve identified something from a trend perspective. I guess, just if anything, in this review, I guess, what have you learned this year that, I guess, you might not have known a year ago?
Alan Schnitzer: Let me start, Ryan, and I will turn it over to Dan. But we’re squaring triangles, and we’re doing – we’re applying actuarial analytics to a series of triangles and historical losses, and that’s really how we’re coming up with this. I mean, the overwhelming thing that all of us are looking at is higher levels of economic inflation. And so that – you know, that is no doubt a contributor here.
Dan Frey: Yes, Ryan. The only thing, I think, I’d add to Alan’s comments, which I agree with. We’ve said, as people have asked over the last several quarters and pricing has continued to be strong for quite a while now, is that sustainable? And here you see it ticking up and I think we just keep going through the litany of pricing is going to be a reaction to what’s your – what’s your return target and what’s happening in the loss environment. So we talk about continued increased frequency and severity of weather losses and you see that certainly this quarter, headline inflation, social inflation, that we said never went – never went away, and an uncertain overall macro environment. So those things continue to factor into our pricing.
Those things also get evaluated every quarter and every year in terms of our view of loss trend in prior-year reserve development. So what you’re seeing here again across the place, net favorable prior-year reserve development, I get the focus on the liability lines so – but really what you’re seeing there is a degree of difference as opposed to some surprise. We’ve been talking about inflation for a long time and we were the first people to be talking about social inflation and never thought that went anywhere. So directionally, it’s not a surprise. It’s just an adjustment to the order of magnitude.
Ryan Tunis: Got it. And then for Michael, and maybe Greg, I guess, on the cat front, I mean, you guys were highlighting a frequency of events. But it seems like to me that severity must be at least as bigger of a contributor. Then maybe I’ll just talk about – yes, in other words, I don’t think I would have ever expected $1 billion of personalized with 6 Bcf] events. So from a severity perspective, like how – what’s weighing on is here? Is it like the size of the hail, in other words, like the nature of the weather? Or how much of is elevated repair cost, demand surge like that type of thing?
Michael Klein: Hi, Ryan, it’s Michael. Yes, all of that. So I think your point is a good one. So if you look at the quarter, I think the number of events, PCS designated events was 19, that is above the long-term average. So there is a frequency of events that’s higher. And that’s a relatively high number for Q2. But actually, the majority of it really is severity. Now, some of that severity, to your point, is the underlying weather activity itself. I think on average, the events in this second quarter impacted about eight states apiece as opposed to six states apiece, so they were a little broader and more all-encompassing. And then again, historical averages. So you’ve got the number of events and then the size and magnitude.
There certainly are anecdotal total evidence of more severe larger hail, those types of things. But the other item that you mentioned, it really is as big, if not a bigger factor than sort of the frequency and the magnitude of the events, and that’s just insured values and cost to repair and the severity pressures that we’ve been talking about across both auto and property and frankly any first-party coverages that we offer as an organization really exacerbating that. So I think it’s – I think it’s all of those things, but it’s at least as much a severity issue, and at least as much driven by economic inflation as it is the weather activity itself.
GregToczydlowski: And Brian, from a Business Insurance or a commercial point-of-view, we weren’t immune from some of the same dynamics that Michael just articulated. I think we just have a broader array of products that you get a little more diversification when you add the workers’ comp, the GL and all the other products on top of that.
Operator: Thank you. Your next question comes from the line of Alex Scott of Goldman Sachs. Please go ahead.
