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“Good morning. Market conditions in the third quarter, by and large, were a continuation of the trend that we’ve seen over the past several quarters. The casualty market and the workers’ comp market continue to benefit from rate increases. The professional markets, on the other hand, continue to be a bit of a mixed bag, with EPL pricing as well as private and non-for-profit D&O getting significant rate increases, lawyers also getting rate increases. Having said that, public D&O remains also very much bifurcated between the primary and the excess, with the primary getting meaningful rate increases, while the excess remains somewhat flat.
On the other end of the spectrum, the medical space, no pun intended, is somewhat of a bloodbath, quite frankly, with rates continuing to fall off, and the other miscellaneous D&O is also exceptionally competitive.
In our opinion, the professional space is probably some 12 to 24 months behind the casualty market when you think about it from the cycle.
The property market continues to fray around the edges. Clearly, a result of a lack of cat activity, along with the increasing supply of reinsurance capacity. These 2 factors are clearly putting a fair amount of downward pressure on pricing.”
“Obviously, rate in a vacuum is something that one needs to be very careful of. When we think about rate, we need to make sure that we’re not experiencing adverse selection as these higher rates are coming through. Our renewal retention ratio is the tool that we look to, to make sure that our rate increases are not creating this adverse selection. And our renewal-retention ratio for the quarter remained at approximately 80%, where it’s been for the past several quarters.”
“The fact of the matter is that we are in a business where we do not know our cost of goods sold until after the sale has been made.
As a result of that, we feel as though that it’s important to take a very measured approach in setting those initial picks. This is demonstrated by 27 quarters of positive reserve development, which is quite consistent with our approach, once again, of initially being cautious with picks and tightening as things develop over time.”
“The securitization of non-tail risks is having an impact on cat business and those large property risks. There’s lots of people who have investment portfolios who are looking for non-related risk profiles, and therefore, you’re seeing an increase in cat bonds and other kinds of behaviors. That’s going to continue to impact back on the business.”
“We think that people are beginning to recognize that investment returns are going to stay at this lower level, certainly for another 18 months, if not longer. ”
“Ever 100 basis points, as we’ve said, in loss investment income means you need, give or take, depending on the line of business, 4% or 5%, 6%, 7% more in underwriting profit. So whereas historically, people would say, if you’re right at a 93%, 94%, 95%, you’d get a good return, today, that number is 88%, 90% kind of a number to get a good return on your capital.”
“I think there’s quite a bit more of pain to go and a lot of people who are going to say, what are we going to do, and who are very, very short on their reserves for those — some of those things and are going to have to try to figure out a solution. But everyone doesn’t have to go out of business. Some of the people are plenty well capitalized and have plenty of smart people. They just have to face the reality that we have to do something. There will be more, however, than the 3 I mentioned that will go out of business.”
“what I would suggest to you is that oftentimes where the market has gotten the ugliest is oftentimes where you will see the greatest or the most severe reaction and the pendulum will swing farthest going in the other direction, and you just need to make sure that you don’t jump back in prematurely.”
“the reality is trying to figure out what your competitors do is a Rubik’s Cube.”
“I think these capital suppliers who are entering the business entirely based on models and forecasts are going to find out that human judgments actually are of value and important. And a number of them will get badly burned as they step away from the highly forecastable pieces of the business to other parts. So yes, they may step and put their toe in the water in other things, and I can assure you it will be extremely costly and short-lived.”
“We expect continued price increases, and as I said, I sort of bring my band a little closer, from 6% to 8% down to sort of 6.5% to 7.5%. But we’re quite optimistic and expect the balance of the year and next year to generate returns well within the range of our expectations and continue to have capital gains in line with the recent past. So thank you all very much. Have a great day.”