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CNA Financial (CNA) Q2 2022 Earnings Call Transcript

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CNA Financial (CNA -4.83%)
Q2 2022 Earnings Call
Aug 01, 2022, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day and welcome to the CNA 2022 second quarter earnings conference call. [Operator instructions] As a reminder, today’s conference is being recorded. I would like to turn the call over to Ralitza Todorova, AVP, Investor Relations, for opening remarks and introduction of today’s speakers. Please go ahead.

Ralitza TodorovaAssistant Vice President, Investor Relations

Thank you, Elaine. Good morning and welcome to CNA’s discussion of our second quarter 2022 financial results. Our second quarter earnings press release, presentation, and financial supplement were released this morning and are available on the Investor Relations section of our website, www.cna.com. Speaking today will be Dino Robusto, chairman and chief executive officer; and Scott Lindquist, chief financial officer.

Following their prepared remarks, we will open the line for questions. Today’s call may include forward-looking statements and references to non-GAAP financial measures. Any forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the call. Information concerning those risks is contained in the earnings press release and in CNA’s most recent SEC filings.

In addition, the forward-looking statements speak only as of today, Monday, August 1, 2022. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding non-GAAP measures, reconciliations to the most comparable GAAP measures and other information have been provided in our earnings press release, financial supplement, and other filings made with the SEC. This call is being recorded and webcast.

A replay of the call may be accessed on our website. If you are reading a transcript of this call, please note that the transcript may not be reviewed for accuracy. Thus, it may contain transcription errors that could materially alter the intent or meaning of the statements. With that, I will turn the call over to our chairman and CEO, Dino Robusto.

Dino RobustoChairman and Chief Executive Officer

Thank you, Ralitza, and good morning, all. We are very pleased with the second quarter results as we had excellent production performance, including 17% gross written premium ex captives growth and a 64% increase in underwriting gain. Our core income declined by $96 million, driven by limited partnerships and common equity returns, which declined by $171 million, while income from our fixed income portfolio was up $16 million as we turn the corner in the second quarter with fixed income yields now increasing. Scott will provide more detail on investments.

In the second quarter, the PNC all-in combined ratio was 91%, a three point improvement compared to the second quarter of 2021, reflecting a lower underlying combined ratio, increased favorable prior period development, and lower catastrophe losses. Pretax catastrophe losses were $37 million or 1.8 points of the combined ratio, compared to $54 million or 2.8 points in the prior year period. For PNC overall, prior period development was favorable by 1.6 points, compared to two points favorable in the second quarter of 2021. Our PNC underlying combined ratio was a record 90.8% this quarter, reflecting 0.6 points of improvement over the second quarter of 2021.

In the quarter, our corporate segment core loss was $25 million higher year over year. These results include a $51 million after-tax charge related to unfavorable prior period development, largely associated with legacy mass stored abuse claims, including the recent Diocese of Rochester proposed settlement, which occurred in the second quarter. Drilling down on PNC production. Gross written premium growth, excluding captives, was 17%, and net written premium growth was 20%.

Excluding the impact of a one time catch-up related to the addition of the property quota share reinsurance treaty in the prior year period, net written premiums grew by 13%. New business grew by 27% this quarter, which we are pleased with, given that pricing and terms and conditions remain strong and consistent with our renewals. Retention was up two points to 85% this quarter, our strongest in nearly five years. And they were up in each of our operating segments.

Exposure change improved by a point and now is about plus 3% across our entire portfolio and plus 5% in our core middle market and construction business units. The overall written rate increase was 6% in the second quarter, down one point from last quarter with some exposure as we actually saw a modest upturn such as larger CAT-exposed property in national accounts and auto in our construction portfolio. Overall, for commercial, rates remained relatively stable at about 5%, moderating only one point from the third quarter of 2021. So pricing dynamics, by and large, continue to reflect rationality in the marketplace.

We see this as we look across lines of business and compare the results to our overall PNC increase of 6% in the quarter. By way of example, within commercial, auto rightfully continues to achieve rate increases above that overall average. Work comp continues to be below, which is reasonable, given the continued strong profitability. Property is above and large national accounts property is low double digits.

In specialty, medical malpractice continues to be above. D&O with a cumulative rate increase of over 100% since the start of 2019 is now below the overall average while the rest of management liability is still above as cyber continues to be well above in high double digits. And from a geography standpoint, our international book, which includes Canada, Europe, and our syndicate, continues to be above the overall 6% increase. So we think that rates have been moderating in a measured way, and we expect to see some up and down movements across the various lines, influenced by how loss costs, inflation, CAT exposure, and overall economic conditions continue to play out.

We feel good about the return on the majority of our books. But as I have mentioned before, we don’t anchor rate adequacy to a point in time, but rather on a longer term basis because it is a moving target. First, we don’t assume we will cover our long run loss cost trends every year going forward. History from past underwriting cycles clearly teaches us that.

And second, in periods when loss cost trends have been increasing, essentially doubling to about 6% in the last four years in our portfolio, the pace at which the rate adequacy target moves is also changing. So we view this period in the cycle as a time to opportunistically continue pushing very hard for rate and balancing the rate retention dynamic in ways that will grow our PNC profit dollars. On an earned basis, overall PNC rate in the quarter was 8%, which is still nicely above our long run loss trends assumptions. But with the uncertainties regarding the various aspects of inflation in the broader market, we remain prudent in acknowledging margin.

So let me add a little color on how we are considering inflation in our retrospective reserving and prospective pricing. But first, a comment on what inflation metrics we focus on, because the headline CPI inflation number isn’t necessarily the best proxy for the aggregate impact of economic inflation on loss costs in our portfolio. When we think about economic inflation, we focus on three components that can impact their claim costs, medical inflation, non-medical cost of goods sold inflation and wage inflation, and how each impacts our portfolio, which often will not equate to the weighting ascribed in the CPI metric. For example, in our portfolio, medical inflation has a much larger impact than the weight it has in the CPI.

And within the non-medical cost of goods sold inflation, we focus more on a few key items such as increases in construction materials and used car and truck prices rather than an overall average. Wage inflation, obviously, increases costs, but has a partial offset on the premium side so we incorporate that dynamic. The impact from these refinements are used in our reserving and pricing studies, more so than the headline CPI number. And importantly, these impacts are treated separately from the impacts of social inflation, which has become a prevalent liability loss cost inflation over the past several years.

We think about social inflation as being driven by somewhat independent factors we and others in the industry have spoken about at length, such as more aggressive plaintiffs bar, a higher number of nuclear verdicts, higher prevalence of litigation funding, and changing jury attitudes, which are increasingly punitive, regarding corporations. As we have previously noted and we continue to believe, social inflation may still be obfuscated somewhat because court dockets are still backlogged. So let me provide some examples of how we have and continue to incorporate these inflation pressures together with our earned to pricing trends into our assessment of prior and current accident years. Our medical malpractice business has been impacted by social inflation and higher long run loss cost trends starting several years ago.

We saw that in the data and increased our accident year loss ratio fix considerably, which led us to start raising prices very early on at the expense of retention. And we increased prior year reserves through unfavorable prior period development of $210 million from 2017 through 2021, which we have spoken about on prior calls. And we continue to maintain ongoing loss cost trends for this class above our overall PNC average. For commercial property, we reacted to increases in loss costs from inflation in the third quarter last year and we increased our long run loss cost trend assumptions about two points in our property lines, which we also previously discussed.

These increases, in fact, impacted the pricing and reserving for our current and most recent accident years, given the short tail nature of the claim development patterns. And the last example is worker’s compensation. We did not reduce our accident year fix to reflect the lower levels of benign medical trends over the last five-plus years as we maintain the higher long run loss cost trends that were more evident prior to this period of benign medical trends. In addition, we have only partially reacted to the favorability in prior accident year reserves that the lower, more benign trends, would suggest.

Accordingly, we believe our current reserve position is strong and further that our prudence will allow us to withstand a period of higher medical inflation should a situation occur where the rate environment remains slightly negative, when medical inflation accelerates in the next 18 or 24 months, of course. Should it then keep increasing for several years hence, that will put pressure on our loss costs. But in that situation, we will at least have ample time to thoughtfully react. This general pattern of prudence in reacting to prior year favourability and not reflecting the entire perceived the margin between loss cost trend and earned rate in recent accident year fix is evident across our entire portfolio and reflects our conservative underwriting company bias.

Even maintaining that prudence, the PNC underlying combined ratio was a record 90.8% this quarter. The expense ratio of 30.5% was lower by about a point, and the underlying loss ratio of 60% was half a point higher than the prior year quarter. But as I’ve mentioned in prior quarters, the property quota share treaty that we purchased in June of last year lowered the net premium mix between property business and our other classes. And since our property business has a lower underlying loss ratio its mix effect increased the overall PNC underlying loss ratio by about a half a point.

We remain very pleased with the purchase of the quota share treaty as well as the additional cash cover in our property per risk treaty and catch treaty, all of which were successfully renewed last month at a modest mid-single digit rate increase. Now let me provide a little more detail on the three business units. The all-in combined ratio for specialty was 88.1% in the second quarter, which is now the eighth consecutive quarter below 90%. The underlying combined ratio was 89.2%, a record low and consistent with last year.

The expense ratio of 30.4% is up slightly from the second quarter of 2021 while the underlying loss ratio improved by 0.4 points to 58.6%. Gross written premium ex captives grew by 8% in the second quarter, and net written premium growth was 6%. We achieved rate increases of 7% in the quarter. This is down three points from the first quarter but is still exceeding long-run loss cost trends, and earned rate at a little over 10% is still well above long-run loss cost trends.

Retention was 85% consistent with last quarter, and new business grew 9%. Turning to commercial, the all-in combined ratio is 93.2%, the lowest all-in quarterly combined ratio since 2008. CATs in the quarter were three points, compared to our 10-year average in commercial of six points. The underlying combined ratio was 92%, a one point improvement over last year.

The underlying loss ratio of 61.5 is 1.4 points higher in the prior year quarter. However, as I mentioned earlier, this is largely due to the mix impact of the property reinsurance program we purchased last June. The expense ratio improved by 2.3 points to 30% in the second quarter due primarily to strong growth. Commercial gross written premium ex captives grew by 25% this quarter, and the net written premium growth was 20%, excluding the impact of the one time catch-up related to the addition of the property quota share reinsurance treaty in the prior year quarter.

New business was up 39% in the quarter as several larger opportunities we had been courting for quite a while successfully landed in the quarter. For commercial, the rate increase was plus 5%. And excluding workers compensation, the commercial rate increase was plus 6% and plus 7% on an earned basis. With the modest moderation in pricing we are experiencing, we continue to believe that commercial earned rates, ex workers comp, should remain at or above long-run loss cost trends through year end.

Commercial retention was strong again this quarter at 86%, which is higher than any quarter since prior to the pandemic. We continue to see middle market digital exposure changes in lines of insurance with inflation-sensitive exposure basis like work comp and general liability, and we are clearly highly focused on valuation for property. In national accounts, valuation increases were up nearly 10% prior to other account-level changes, like higher deductibles and movement within a property tower. These various exposure increases are a good outcome and we estimate that up to half of the increase acts as additional weight in our portfolio over and above our 6% rate increase.

For international, the all-in combined ratio was 91.6% this quarter. The underlying combined ratio was 90.6%, reflecting 1.9 points of improvement from the prior year quarter. The underlying loss ratio of 58.5% is lower by a half a point, and the expense ratio of 32.1% is down 1.4 points compared to last year. In terms of our loss exposure to Russia, Ukraine, it continues to be de minimis.

International gross and net written premiums grew 13% or 18%, excluding currency fluctuations. Rates were up to 7%, which is a one point decrease compared to last quarter, but remain above long-run loss cost trends. Retention in international was particularly strong at 85%, and it was broad based, including our Lloyd’s syndicate. With the syndicate and European business reunderwriting behind us, international retention increases are meaningfully contributing to the profitable growth of our PNC operations as is new business, which grew by 24%.

And with that, I will turn it over to Scott.

Scott LindquistChief Financial Officer

Thanks, Dino, and good morning, everyone. Core income of $245 million is down 28% as compared to the second quarter a year ago, leading to a current quarter core return on equity of 8.1%. Our PNC operations produced core income of $317 million. Underlying underwriting income of $191 million pre-tax was up 15% over the second quarter of 2021.

Overall, underwriting gain in the quarter was up 64% year over year to $185 million. Net investment income of $432 million pre-tax was up $16 million in our fixed income portfolio, offset by a $171 million decline in our limited partnership and common stock investments, which we report in core income. More on our investment results in a moment. Our Q2 expense ratio of 30.5%, which is 1.1 points lower than last year’s second quarter.

Lower acquisition expenses and higher net earned premiums drove the favorability despite continued strategic investments in technology, analytics, and talent. To drill down a bit further, specialty incurred higher underwriting expenses primarily related to technology. Commercial benefited from lower acquisition costs and higher net earned premiums while international acquisition expenses continued to benefit from the repositioning of this portfolio over the last several years. As I noted last quarter, there will be a certain amount of variability quarter to quarter.

However, we continue to believe an expense ratio of 31% is a reasonable run rate. For the second quarter, overall PNC net prior periods relevant impact on the combined ratio was 1.6 points favorable, compared to 0.2 points favorable in the prior year quarter. In the commercial segment, favorable development and workers compensation was partially offset by unfavorable development in general liability and auto. In the specialty segment, favorable development and surety was partially offset by management and professional liability.

Favorable prior period development in international was driven by the commercial classes. The paid to incurred ratio was 0.89 in the second quarter. This is up slightly from the first quarter and consistent with the fourth quarter of 2021. The 0.89 ratio remains at the lower end of our pre-pandemic range.

The ratio, which fluctuates quarter to quarter, has been consistently lower over the past two years. As Dino noted earlier, our corporate segment produced a core loss of $78 million in the second quarter, compared to a $53 million loss in the prior year quarter. Annually, we conduct a review of our mass tort reserves in the second quarter, while asbestos and environmental reserves are reviewed every fourth quarter. As a result of this quarter’s review, the segment includes a $51 million after-tax charge related to the unfavorable prior period development largely associated with legacy mass tort abuse claims, including the recent Diocese of Rochester proposed settlement.

For life and group, we had core income of $6 million for Q2 2022, which was $37 million lower than last year’s second quarter, primarily from lower investment income from limited partnerships. As a reminder, we will be conducting our annual gross premium valuation review during the third quarter. While we are on the topic of life and group, I’d like to give a brief update as to the approaching change in GAAP accounting methodology related to long duration targeted improvements, otherwise known as LDTI, that will apply to our long-term care business. We will be adopting this change effective January 1, 2023, but will apply it as of January 1, 2021.

Two years of adjusted financial results will, therefore, be included in our 2023 financial statements. Recall in last quarter’s call, we estimated the net impact of these changes will be a $2.2 billion to $2.5 billion decrease of stockholders equity. As of the transition date of January 1st, 2021, in a rising interest rate environment like we have seen over the last two years as the corporate single-A rates increase, the impact of adoption decreases. As an example, assuming June 30, 2022 interest rates were in place on January 1, 2021, we estimate the transition impact would have been significantly lower to a decrease of $400 million to $700 million to stockholders equity, as corporate single-A rates are substantially higher at June 30, 2022 than at January 1, 2021.

Finally, I want to emphasize this change in accounting has no impact to the underlying economics of CNA’s business. Turning to investments. Total pre-tax net investment income was $432 million in the second quarter, compared with $591 million in the prior year quarter. The decrease was driven by our limited partnership and common stock results, which returned a $15 million loss in the current quarter, compared to a $156 million gain in the prior year quarter.

The current quarter results reflect losses in our hedge fund limited partnerships of $35 million and common stock portfolio of $21 million, directionally in line with equity market performance during the quarter that were partially offset by positive returns of $41 million from our limited partnership private equity portfolio, the gain in the prior year quarter reflected particularly strong results from all three portfolios. As a reminder, private equity funds, which now represent approximately 75% of our limited partnership portfolio, generally report to us on a three-month lag. So results this quarter were primarily reflective of performance from Q1 2022. Given that broader public equity markets were notably down in the second quarter, it would be reasonable to expect pressure on private equity valuations in the near term.

Hedge funds now represent 25% of our limited partnership portfolio and predominantly report results on a real time basis. If you refer to pages 10 to 14 of our financial supplement, you will find additional details of our limited partnership holdings and income under private equity and hedge fund strategies. Our fixed income portfolio continues to provide consistent net investment income, which has been steadily increasing over the last several quarters. We continue to benefit from the higher invested asset base driven by higher PNC underwriting income.

As a point of reference, our average book value has increased $1.5 billion from the prior quarter — prior year quarter, excuse me. Additionally, I am pleased to note the average effective income yields in our PNC portfolio were higher in the current quarter relative to the first quarter, indicating that we have reached an inflection point where reinvestment rates were about 100 basis points above our PNC effective yield. Given the longer duration nature of our life and group portfolio, we have not yet reached an inflection point in this segment. Fixed income assets that support our PNC liabilities in life and group liabilities had effective durations of five years and 9.7 years, respectively, at quarter end.

The increase in life and group duration from 8.9 to 9.7 years during the quarter is reflective of strategic actions taken to simultaneously reduce reinvestment risk by selling short-dated holdings projected to roll off in the near term while also extending duration by redeploying the proceeds into longer dated high quality securities at yields exceeding our long-term assumptions. In total, over $1.9 billion of long-dated fixed income securities were acquired in the life and group portfolio during the quarter, with an average yield of 4.7% and an average rating of A+. Meanwhile, the $1.8 billion of mostly tax exempt securities sold in the quarter as part of this repositioning generated $19 billion of pre-tax investment gains. While higher rates are positively impacting the outlook for investment income, from a balance sheet perspective, they have continued to adversely impact our net unrealized investment position, which ended the quarter at a $1.8 billion loss, down from a $4.4 billion gain at the end of the fourth quarter 2021.

The investment portfolio credit quality remains strong, with a weighted average rating of A with very little in impairments. Accordingly, interest rate-driven fluctuations in market values do not impact how we manage our investment portfolio as we generally hold our fixed income securities to maturity. Notwithstanding the decrease in our net unrealized gain position, our balance sheet continues to be very solid. At quarter end, stockholders equity, excluding accumulated other comprehensive income, was $12.2 billion or $45.06 per share, an increase of 4% from year end, adjusting for dividends.

Stockholders equity including AOCI, which reflects our investment portfolio, moving into a net unrealized loss position position during the quarter was $9.5 billion or $35.06 per share. We continue to maintain a conservative capital structure with the leverage ratio of 19%, excluding AOCI, and our capital remains above target levels required for our current ratings while statutory surplus remained stable after dividends. Finally, net investment losses were $40 million in the second quarter, compared with a net investment gain of $27 million in the prior year quarter. The current quarter results were driven by an unfavorable change in the fair value of our non redeemable preferred stock portfolio, reflecting the higher interest rate environment while the prior-year gains were primarily the result of sales calls and exchanges.

Operating cash flow was strong once again this quarter at $608 million and was a result of solid underwriting and investment cash flows. In addition to strong operating cash flows, we continue to maintain liquidity in the form of cash and short-term investments, and together they provide ample liquidity to meet obligations and withstand significant business variability. Finally, I am pleased to confirm our regular quarterly dividend of $0.40 per share, which will be payable on September 1st to shareholders of record on August 15th. With that, I’ll turn it back to Dino.

Dino RobustoChairman and Chief Executive Officer

Thanks, Scott. Our second quarter generated fantastic results across commercial, specialty, and international. We have been clearly focused on accounting for social inflation for several years, both prospectively and retrospectively, and we continue to be prudent in the face of uncertainty and backlogged court dockets. More recently, we have similarly included the impacts of the rise in economic inflation.

Market pricing remains relatively rational and we are successfully optimizing the rate and retention dynamics across the board and effectively growing our new business at strong terms and conditions. Bottom line, we remain enthusiastic about our business opportunities going forward. And with that, we’ll be happy to take your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We will take our first question today from Gary Ransom of Dowling and Partners. Please go ahead.

Gary RansomDowling and Partners — Analyst

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

Dino RobustoChairman and Chief Executive Officer

I think going forward probably the more recent average makes makes a lot more sense. But I’d say about a third probably benefited from the quota share. Keep in mind also, Gary, that obviously all the reunderwriting we did on the syndicate which had a lot of U.S. CAT exposure that was coastal, also wildfire, we reunderwrote all of that.

We also mentioned on several calls some of our property reunderwriting from the healthcare aging services, coastal exposure, wildfire exposures, and some of that probably benefited the CAT ratio this quarter. And then always it’s probably appropriate to put a little luck in there.

Gary RansomDowling and Partners — Analyst

Right. OK. That’s helpful. I just also wanted to ask about the rate versus loss trend.

I mean you gave us a lot of material there. And I, if I think about what’s going on, we have rates gradually decelerating, but we also have the potential for inflation accelerating loss cost trends perhaps. It all seems to be bringing the point at which those two lines cross maybe a little bit closer. It seemed like you were preparing for that possibility.

But is the market — do you think there’s any place where the market is prepared for that? Is the market reacting to that possibility or it just seems like there’s — the fact that there’s so much uncertainty isn’t — I don’t see it from the outside completely reflected in market behavior. But you might have a different viewpoint.

Dino RobustoChairman and Chief Executive Officer

I mean, it’s really — it’s hard to say. I think it has been rational. It’s been moderating quite slowly, Gary. We did see on our larger property in national accounts in particular anything that’s CAT exposed there, the rate actually went up from probably high single digit to slightly over double digits.

So that could be, one would say, a rational reaction. Clearly, there’s a lot of talk of that in large property. Now, it’s not a huge portfolio for us but clearly we do have a national accounts property strategy. I mentioned before we are trying to balance the portfolio a little bit.

So we are seeing that conversation on property. Commercial, auto, we saw it on, as I said, in our construction and it’s high single digit in auto, so that’s good. And the rest, we just are going to be as prudent as we can be on the loss cost trend side. And as I said, look, I mean, we don’t think about rate adequacy at any moment in time.

And so we’ve got an opportunity, we continue to push for rate, and that’s what we are doing. And I think the trade-off that the underwriters are making are good ones. It’s harder to sort of incorporate more of a market overall, their perspective. That’s just the way I see it, and hence, why I think in the end you get the gaps still persisting maybe through year end, as I indicated, and we’ll see.

You have a tough CAT season, that can turn around because it’s not only — the inflation is going to put a pretty big toll on — if you have a large CAT in addition to sort of demand surge. So that’s probably not enough from what you wanted, but that’s the best I could offer.

Gary RansomDowling and Partners — Analyst

No, that’s great. Yeah, it’s always difficult to see all the trajectories of these things. I also wanted to ask about the retention in international. It’s up at 85%.

You did talk about it a little bit, but are there any particular classes or types of business, where it’s a little more sticky for you now after all that reunderwriting?

Dino RobustoChairman and Chief Executive Officer

Yeah. So, let me just parse out because we throw in Canada there too. I mean, Canada has always maintained a relatively stable and good retention ratio. It was more with respect to, as you point out, Europe and the Lloyd’s syndicate, and you had seen retentions in the low 60s for quite a few quarters.

And as we reunderwrote the portfolio, what we did is just aligned it with our appetite in the United States. And so what we do in commercial here and what we do in specialty here is — it is what we are targeting. We took down the portfolio substantially. What we left, we really wanted to hang on to.

And I think we saw some good increase on the retention. It’s nothing more significant than that. I think both Europe and Hardy were 80 or a little over. So that’s what we had expected, right? We went in through the renewal season expecting that after the reunderwriting and so many quarters of it being down substantially.

Gary RansomDowling and Partners — Analyst

OK. That’s great. And maybe just one more on the mass tort abuse claims. You seem to be implying that there were other things besides Rochester that might have been in the abuse claim category.

Is there anything there you can mention or talk about?

Dino RobustoChairman and Chief Executive Officer

Yes. So I think Scott mentioned it, right, we do the mass tort review every second quarter. We don’t parse out all the components in there. A lot of it has to do with abuse and the impact of reviver statutes, but there’s other — oil, the mass torts.

And based on that review, we think — and all the information we have, that we have at appropriately reserved and broadly across all of the mass torts but there’s a host of things in there.

Gary RansomDowling and Partners — Analyst

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

Dino RobustoChairman and Chief Executive Officer

Yeah. Yeah. No, I mean, listen, and that falls under the abuse. But at this point, there isn’t anything for us to comment as it’s ongoing and active, as you saw.

And listen, when and if warranted, we’ll obviously comment on it, like we always do.

Gary RansomDowling and Partners — Analyst

Terrific. Thank you very much, Dino.

Dino RobustoChairman and Chief Executive Officer

OK. You’re welcome.

Operator

Thank you. We take our next question from Meyer Shields of KBW. Please go ahead.

Meyer ShieldsKeefe, Bruyette and Woods — Analyst

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

Dino RobustoChairman and Chief Executive Officer

So this was more, as I caveat at the end of that sentence, what history taught us that. Well, in any underwriting cycle, Meyer, it plays over 15, 16 years, you get, I don’t know, eight, 10 years of a soft cycle. You’ve got you’ve got pricing that will drop below long-run loss cost trend. So that’s why — it was more just that fact of reality.

I’ve seen it happen over 40 years. It’s going to continue to happen. Now’s the time to continue to take advantage of the pricing in the marketplace, to keep pushing harder. It’s nothing more sophisticated than that.

It’s just the reality that causes us not to talk about, well, we’re rate adequate now. And so that’s really all I was trying to get at.

Meyer ShieldsKeefe, Bruyette and Woods — Analyst

OK. That’s helpful. Thanks for clarifying that. Within specialty, I guess, both last quarter and this quarter, we’ve seen the warranty expenses rise faster than the revenues.

And I was wondering whether there’s anything material there and how that’s — how you’re expecting that to play out and becoming going forward.

Dino RobustoChairman and Chief Executive Officer

No, there’s nothing really there. A little bit of, as we indicated, some technology and a little bit of analytics. We also hired some additional staff and talent as we sort of moved away from the shutdown periods of the pandemic. But it’s nothing really significant.

Meyer ShieldsKeefe, Bruyette and Woods — Analyst

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

Dino RobustoChairman and Chief Executive Officer

Yeah, so when we talk to a lot of the clients, I think they still remain relatively optimistic. And I mean, I think the economy is going to be what it’s going to be, right. So we — what we do is we pay close attention to exposures and the audit premiums. Now both of them were up considerably in the quarter.

And so, so far, the signs continue to look good and we’re just keep tracking exposure. We keep tracking all the premiums. Obviously, if you get into a deeper recession, you’ll see it in the audit premiums and we’ll be able to reflect it. But right now, it continues to be a pretty good outlook.

Meyer ShieldsKeefe, Bruyette and Woods — Analyst

OK. Fantastic. [Inaudible] Thank you.

Dino RobustoChairman and Chief Executive Officer

Thanks.

Operator

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

Josh ShankerBank of America Merrill Lynch — Analyst

Yeah. Thank you. The disclosure in the call has been excellent, but I want to go a little deeper. And I — well, you said on the call that you want to talk about both pricing and reserves for preparing for inflation.

You’ve been very fulsome, and please don’t let me get anything wrong. If I say something wrong, correct me. But I think about two years ago, you were estimated 2.5%, 3% long-term cost inflation, and now you’re closer to 5.5%, 6%. Have the reserves for ’16, ’17, ’18, ’19 the unpaid losses been revised up in all classes other than workers comp over that time? Every time — and you’re not alone.

There’s a lot of folks that say oh, we’re taking up our loss picks and yet they still release reserves. And so I’m trying to figure out how you when taking the long term. So can you talk a little bit about that and what’s happened in the last, like nine months?

Dino RobustoChairman and Chief Executive Officer

Sure. So let’s — look, first of all, if you look at the open claims on quite a few of the lines, so if you look umbrella, you look at medical malpractice, you look at auto, all of those are unfavorable, and you can see it. Of course, we had offset on comp, but don’t forget, we also had offset on surety, and that’s significant. But if you look at the other lines, as I gave you, there were $200 million just on medical malpractice.

When you add commercial [Inaudible] and umbrella, which you can obviously see to a large extent in our disclosures, it’s been substantial because it does, to your point, Josh, and a point you’ve been making effectively, it does affect the past, not only the future, because of all of the open claims.

Josh ShankerBank of America Merrill Lynch — Analyst

And so when you said, look, we — I don’t want to — I read it was just rhetorical in some ways and Meyer got into it a bit. But when you say that we’re not always going to be below, we’re not targeting a long-term pick — I guess it’s hard for me to parse that. we’re not targeting a long-term inflation pick in how we’re pricing. We’re attacking it more organically.

I just — is there confidence that those reserves are now being picked at or above the long-term loss cost inflation that you have in your assumptions?

Dino RobustoChairman and Chief Executive Officer

Yeah. We clearly — we’ve increased those long-run loss cost trends substantially, right. They doubled, as I said, in four years. And we believe with the actions we have taken over this period and in this quarter, that the reserves do capture it.

Now, it’s possible that long-run loss cost ratios, which we are sitting at about 6%, might go up. My point on the other aspect that Meyer brought up of rate, it was a question of rate adequacy because you hear conversation around rate adequacy. What I was simply suggesting is that we don’t focus on that as much because it is, it has been increasing. It can continue to increase.

And so you might be rate adequacy in a rate adequate line and quickly you’re not any more because of long-run loss cost trends. And then the other component I was just making is let’s be realistic. There’s also times in a soft cycle where you’re not going to make it. And so my point there was simply that, hey, now’s the time to go get more rates.

And that’s all I was intending.

Josh ShankerBank of America Merrill Lynch — Analyst

And that makes sense. And then my other question on medical loss inflation, to what extent is it just a lagging indicator? Medicare and the HMO does have a lot of bargaining power. And so the cost of medical services had been tame as we’re using pricing for medical services that was set in the past. But should we expect that the input costs for hospitals are rising, even if the cost to the patients haven’t gone up yet? Well, first of all, let’s just put in context the medical malpractice line and our actions on that medical malpractice line, which have been substantial, both in terms of unfavorable, prior period development and long-run loss cost trends.

And of course, in consequence pricing, etc., was a function clearly of social inflation. We saw significant attorney representation increase on those cases. We saw on embolden plaintiffs. We saw higher settlement demands even when the facts didn’t warrant it.

That’s what drove that a lot. Hard for me to sort of then sift through all of that and say, is it an indicator for what medical trends are going to do as we see it in work comp? Not — it’s not something that I can assess and I wanted to be clear on the social inflation impact on professional or medical malpractice. Does that help? That helps. And what about on workers compensation, which has been very favorable.

Some of that — there’s some medical in that. Is it — and look, I certainly expect that workers comp loss trend will rise in the future. But to what extent is that — is medical costs a delayed or a lagging indicator of inflation as opposed to a concurrent indicator?

Dino RobustoChairman and Chief Executive Officer

I mean, I’m not really sure how to — when you look at the CPI, medical inflation on the CPI this quarter, I think it changes every quarter, went up to 4.5%. Our trends are showing less, probably under 4% and a function of some of the things that offset, increase schedule, the opioid utilization, which has come down, the fee schedule does — those kinds of things just cause a lag. And so some of that has a lag impact. We watch it, we clearly have a good handle on it.

As I was trying to point out on the work comp, because we’ve been so conservative that if it goes up, we think we’ve got some room there. Of course, if it really turns a corner, a function of economic inflation goes up for a protracted period of time, well, the good news is we’ll have a little bit of time to react, and we think we can, based on our portfolio that we have, which to a large extent is more sort of the white collar work comp.

Josh ShankerBank of America Merrill Lynch — Analyst

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

Dino RobustoChairman and Chief Executive Officer

OK. Thanks, Josh.

Operator

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

Dino RobustoChairman and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ralitza TodorovaAssistant Vice President, Investor Relations

Dino RobustoChairman and Chief Executive Officer

Scott LindquistChief Financial Officer

Gary RansomDowling and Partners — Analyst

Meyer ShieldsKeefe, Bruyette and Woods — Analyst

Josh ShankerBank of America Merrill Lynch — Analyst

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