Thanks, everyone, for joining us. This is our second to last panel. I think this is going to be a really good opportunity for all of us to dig into three very different companies and get perspective on three very different strategies. I really hope that you'll take an opportunity to ask questions and really try and understand how the current environment is impacting each of these companies and how each of them is looking to take advantage of their market position to exploit the opportunities they see. I'll start. We've got Doug Elliot, who runs Hartford's commercial P&C business. We've got Doug Worman, who runs Alterra's U.S. insurance segment. Jim Hinchley, who is the Chief Underwriting Officer for commercial markets at Liberty Mutual.
Just to give you an indication here, Jim's area, his business unit focuses on writing mid to large size policies in primarily domestic commercial markets. Doug Elliot focuses more on small and mid-sized commercial risks, again, in the U.S. Doug Worman, both primary and excess, primarily in the U.S.
With, I would assume, a bias towards the mid and large size policies. Is that fair?
Yes.
Okay. Just keep that in mind. Like I said, I think this is a very unique intersection of individuals here on this panel. I'll give each of these folks a couple of minutes here to introduce themselves, and then we'll get started. I'll start with Doug Elliot.
Thank you. Good afternoon, everybody. Absolutely, at The Hartford, small commercial is a big business for us. It's an important business and probably the cornerstone of our commercial P&C franchise. We've been in it a long time. I think we're known as an innovator. Our returns have been very steady through that period. As noted last year on our investor day, we still feel very good about our performance today and moving ahead. We do have a successful, solid middle market franchise. Candidly, I've been here at The Hartford now 13 months, we're spending a lot of time thinking about product platform rebalancing a bit. I would characterize it as a year ago, a bit more workers' comp dependent than we'd like it to be longer term.
We've worked quite a lot of our resource at that effort over the past nine months, it's a multi-billion dollar business. We also have a specialty casualty national accounts franchise with some specialties around it. I think across the commercial market space, a terrific platform. Obviously, as I sit here today in May of 2012, I feel a lot better than I did 90 days ago and certainly 180 days ago, given market conditions. I feel really good about what we accomplished in the first quarter relative to pricing and underwriting. Thank you for having me.
Thanks, Doug. I'll turn to our second Doug on the panel, Doug Worman.
Thank you. At Alterra, we feel, again, we are very pleased with our first quarter. We're a diversified organization geographically and by product. In the insurance side of things, we focus on the property casualty markets, excess casualty, inland ocean marine, property, E&O and D&O in the States. We also have designations between how we address distribution. We have a huge footprint, which we're very proud of on the wholesale side, continue to expand our footprint on the retail side. We play off of the capabilities and the great success we've had in the Bermuda markets with the underwriting capabilities, guidelines, and what have you.
Then to our only Jim on the panel, James Hinchley.
Okay. Thanks. As mentioned in the introduction, I'm the Chief Underwriter for the Commercial Markets business unit at Liberty Mutual. We are one of four big business units at Liberty Mutual. We concentrate on mid to large size commercial risks. We do have other parts of the company that also write commercial risks within the U.S. Liberty Mutual Agency Corporation focuses on small commercial risks. Liberty International Underwriters, or LIU, focuses on specialty and professional lines. In our world, we're focused generally on account sizes 150,000 and up, and it's a pretty big universe. Just to give you an idea of some of the things that are important to us these days. Probably the things we're working on are improving profitability.
I think we've made a lot of strides in the last 18-24 months, like much of the market, we've needed to take some hard action to get there. We're looking to diversify our revenue streams within the Commercial Markets business unit. Although workers' comp is not that big a piece of Liberty Mutual's overall business, I think it was about 12% last year of the total company's writings. It is a substantial part of my business unit's writings, and we're probably a little overweight there and need to help balance that out. We're looking at diversification efforts. We're looking at a lot of process and technology efforts as well. It's just becoming more and more important. Those are some of the things we're trying to deliver on this year.
Great. All right. Let me start out, I guess, with Doug Elliot. Where are you seeing the most aggressive competition coming from? Is there a segment of the market that you feel like has made rate actions more difficult or retention more challenging given the rate actions you're taking? How do you see that dynamic playing out at this point?
I'll start with the compliment, I'll end with your question. Clearly, property and workers' compensation are two lines that are achieving the most significant rate advances over the past four to five months. That's a good thing because both those lines had stress, both across the marketplace and at The Hartford. We needed to take some of our own action as well. On the other side, I think GL is a line across the middle market that needs a bit more rate, given what I think the aggregate performance is. The other area where I still see capacity is in some of the professional lines. I know you had a panel on that this morning.
Yep.
I think that that is another area where, over the next several quarters, we hope to address. We will continue to address some challenges where we're just not comfortable yet with the risk-return trade-off.
Is it the former lines, the areas where you're seeing rate? Are those lines comp and property in particular, that on the margin require more infrastructure than maybe the areas where pricing has been less stellar? Or is it some other attribute, just purely competitive that you see there?
Yeah. I think it's been much more competitive, also there have been trends that have worked against us. Clearly, the unemployment economic trends are pushing against the workers' comp line. We've had weather, we've had natural peril and other challenges in the property lines. I would address much more of our access to those stimulants than I would underlying machinery, if you will.
Sure. Jim, maybe kind of on the larger case side.
Yeah. I think Doug's comments fit in with our overall view of the market. I think on the larger side, as I mentioned, we write a large spectrum of risks from pure middle market all the way up to the biggest accounts. I think where you start to see some pressure, I would say, is as you move up into sort of larger middle market accounts. What might be not necessarily for us a big account, but what might be a big account for a regional company. I think some carriers are hesitant to let go of their biggest accounts. Due to the broad spectrum that we participate in and compete against, we compete against large national carriers, we compete against regional carriers, we compete against captives and programs, and all types of things.
I would say probably, broadly as you move up, it probably gets a little more competitive. Then as you continue to push up in size, you start to have fewer participants in that marketplace. Some of that pressure goes away. I would say the large end of middle market is pretty competitive.
I guess, Doug Worman, if you kind of think about your position in the market, whether it's on the primary or excess side, where do you see Alterra being able to kind of exploit its infrastructure, its kind of strategic template best? Is it on the primary? Is it on the excess side? Is it a little bit of both?
Yeah. It's a little bit of both, it's depending on product. Not all products we do write primary on. We have the benefit, especially in the U.S., to leverage off what we've developed in Bermuda. We don't have a lot of the legacy issues. As rates firm in some products and are increased in others, we're able to jump on that and use our expertise and specialization. Like Jim and Doug said, the property side, there's a lot of opportunities there even on the non-CAT basis. On the casualty side, we're seeing more and more opportunities. We're able to get a little higher than what our targeted rates are.
The E&O and D&O space, if you're playing down low and you underwrite to exposure and you know how to underwrite and you're excluding certain things and the right attachment points, we feel there's a fit there. In the inland and ocean marine, a lot of the same. There's a lot of moving parts, and then depending on product and also segment, revenue segment that you're getting into and sophistication, I would say it does differ. Having the specialization with employees, it goes a long way on how to do it.
How important is being nimble as far as your strategy is concerned? Is that something that Alterra values? I guess as a derivative of that question, from a franchise perspective, is there a risk of being maybe too nimble when you see opportunities?
Well, I sort of look at it a little differently. I would say we take a lot of pride in being nimble. What I view as nimble is we don't commoditize ourself. We think we have a real specialty. I think that's sort of different than jeopardizing the franchise. We try to bring value, communicate that value, and bring a real business solution. If you were just to throw limits up and experience rate it and just have a price attached to limit, there's a lot of players out there that can do it. If there's a client that can relate with you, understands what you're doing and what you're bringing to the table and how you can benefit them, we feel like we're bringing that to the table.
Can you give an example, kind of like a real life example of kind of how those attributes?
Yeah. I'll gravitate maybe to my sweet spot a little because I came through the D&O world. Even now, there's a lot of markets out there that say they want to be in the D&O space. They write commercial D&O. They say they want to do Side A D&O on the commercial side. We're getting down low and dirty, and we're playing with some of the financial institutions, but we're able to also extract where we see the exposures. There's prior acts, there's different attachment points. There's a way you can structure things and team up with the broker, and then also the client. There's a lot of value on that because what it does, it allows us then to get in touch, have a touchpoint with the client and the broker, and we then cross-sell other products.
Got it. Thank you. One question that I posed to this morning's panel on professional liability was the impact of low interest rates and how do you as an organization factor in low interest rates when you think about pricing your business? Is it at the front? Is it an ancillary consideration to just pure combined ratio? How do interest rates factor in? I'll start with Jim, if that's okay.
Sure. It's an important piece of the equation. It's an important component in all long-tail lines. We have a big book of workers' comp, and we know that risks that we put on the books today that generate new money today are not earning the same investment yields as in prior periods. It's incumbent upon us to make sure that our underwriters understand that. Really, the underwriters work through pricing models, and it's important that pricing models reflect realistic investment assumptions. We're consistently, we're not updating those daily with market fluctuations, but we update them regularly to make sure that they encompass our assumptions about interest rates. We make sure that we're in line with what our investments department thinks about yields and so on.
It's extremely important for the underwriters to understand that it's not a combined ratio that maybe somebody learned when they were a first-year underwriter straight out of college 20 years ago. Maybe interest rates were different at that point in time, and what you could write a profitable book of business at is different than today. It's incumbent upon the managers to make sure we drive that into the underwriters at the desk level. We do it through our actuaries. We do it through our product management team. We do it through the underwriting management team. I think we need to make people think about that and about writing to an underwriting profit no matter what line of business they're in. We're not going to drive radically away from long-tail lines to short-tail lines.
It impacts pricing, and it's a big consideration of what we do day in and day out.
Do you think about a fully loaded ROE, including investment returns when you're pricing business? Is that how you kind of think about it?
Yes. I mean, the pricing models contemplate capital allocations and contemplate things, investment yields. There are various targets and different ways that we look at business. Yes, I would say we're trying to generate a return.
Great. Doug, you want to?
Yeah, Mike, I would say that it is a factor. It is built into the models to a degree. It also is dependent on long tail and short tail. The reality is, we're trying to drive our underwriters to write to a combined ratio. The investment side, obviously from a capital holding standpoint, then we build that into ultimately what it means for a return to our shareholders. If we were to encompass too much of a return on the investment side, even if it was the 3% or 2%, then arguably, you could write at 100 and still assume that your book is profitable. We like to look at things from a combined ratio standpoint.
Underwriters have to write their business up against what their cost of doing business is, which is their loss and their administrative costs, and try to create a margin there. Try to keep it south of 100.
Does that, as you think about the rate environment now, is the number that you need in order to generate a return that's acceptable to your shareholders, is that number different than it was a couple of years ago?
Well, I would say that, you would have to say your combined ratio number would have to be lower-
Lower
if you wanted to get to higher ROE across the board.
Is that something that you communicate to the underwriters up front or?
We manage that. No. I don't really need them focused on that. What they need to focus on is profitability. We have a very capable senior staff that manages it. You do it through underwriting guidelines, which we have practice groups within Alterra that keep things very consistent across all platforms. You do it through authorities, what underwriters can and can't do. Then the people that are in the know and ultimately what we're trying to achieve, when the risks get a little tougher and they're not quite as vanilla, then they're making the decision. It doesn't go all the way down to every underwriter, but it's known throughout senior management.
Doug?
Yeah, I would say consistent with both my counterparts. We've got a group inside our actuarial pricing team that's looking at yields on a monthly basis, and then we're loading and thinking about those changes relative to our pricing models on a regular basis, less than quarterly and more than daily. Last summer is a good example. July, August, we saw significant moves, and I can remember in our operating reviews having conversations with folks about what that meant to our targets and how we were going to adjust our targets forward. It's a very vibrant part of how we think about generating returns.
I would assume that implies that last summer you started raising rates to account for lower interest rates. How does that conversation with agents, how does that dialogue work? You communicate the higher pricing to your agents, they communicate that higher pricing to their insureds. Is it kind of understood that interest rates are the driver? Can you just kind of walk me through the way that that-
Right
that conversation happens?
There's a big change between talking about an aggregate pricing need across a book and somebody's renewal tomorrow that has an embedded $400,000 renewal, and what do we need to do on it. In general, we're talking to our customers about the change in yield. Obviously, that depends upon line, so it becomes a much more relevant conversation if we're talking workers' compensation than if it were property. There's a span across what we're writing and how that manifests. Trends, their loss experience, yield pressures, et cetera, CAT, weather, all go into our conversation relative to where we think we need to be relative to collective premium and their expected loss content.
Great. Any questions from the audience? Okay. There's one here. There we go. Good eye.
Hi. I was wondering if the panel could discuss the use of predictive modeling in your businesses, where you're using it today, and where you may use it in the future.
Sure.
Sure. I can talk to that a bit. The last couple of years, we've made significant investments in predictive modeling. One of the key areas for us is within our workers' comp claims organization. We've launched and branded something called Vantage Comp, which is really our overall workers' comp capabilities. One of the things that they've built within the organization is predictive modeling in claims and what it's designed to do, and this is one of the benefits of being a large operation with a lot of scale and a lot of history. For good or for bad, we have a lot of claims data, and that helps us in certain regards. What we've done is we've built a predictive model which flags certain things that a claims handler may not notice on their own.
It's really trying to identify potentially severe claims before they become severe claims. It's identifying things like where claimants might have comorbidities or other factors that may make an innocuous-looking claim have the potential to spiral out of control. It will provide claims handlers with alerts about claims. It does not tell them what to do, but we've gotten very good feedback on it, and I think it's been a good effort on our part there to really advance the process forward using technology. Also in pricing. Again, particularly in workers' comp, data-driven analytics is key to us. Those are the two places within my organization that we're using that significantly on the commercial side.
For Alterra, I would say that on the back end, that's obviously very similar to what you just said, Jim, but on the front end, I would say that predictive modeling is one of our strengths. Our chief underwriting officers build a system across all units that we use what I call experience rating. We have the data. Even if we write something or don't write it, we build in all the information, try to track it by industry group, geographics, things of that sort. There's loss triangles around it. We try to ultimately define what we think are the appropriate ILFs. I think if you look at historically Alterra, you'll see we're not known for necessarily being the lower pricing, and we're trying to track that predictive modeling ahead of time.
Sometimes even our aggregation, we come up with scenarios around some of this modeling that it's not property aggregation, it's other product aggregation that will even keep us from underwriting something. You could argue it's conservative, but it's been very successful, and it's a really big part of our culture at Alterra.
At The Hartford, predictive modeling has been a big part of our underwriting strategy for several years. I would say inside commercial, clearly small commercial uses predictive modeling extensively throughout our small commercial book. To a lesser extent, but growing by the day would be middle market. In other areas, including claim, we're experimenting with different uses of predictive modeling. A big part of how we compete day to day.
We have a question here.
Would love your thoughts on whether you think pricing in the industry can get better on a sustained basis just on the basis of companies thinking, "Hey, we're not making enough money," as opposed to really needing a shortage of capital in the industry to get that hardening of pricing.
Who do you want? Doug, do you want to go ahead, Doug Worman?
Sure. If I understood the question correctly, I guess you're asking is pricing just going to come because of fundamentals? I truly think it will. I think that right now we're at a point in time where reserve releases have been masking somewhere where the industry really is. I think on an accident year basis, we're north of 100 for the last couple of years as an industry group. I would say the price isn't quite caught up to the exposure. Having said that, I think the fundamentals will catch up. Will it take a little longer? Because, yeah, we're coming off some pretty good times in the earlier years of the decade. It's a little different than we were coming off when the market firmed last time because we also, at that point in time, had three-year deals.
The market's been a little more responsible from that standpoint, and they also have the hard market reserve releases to count on. I think that there is a misassumption, if that's even a term, where things were going to go in 2008 and 2009 with some of the legacy players. There was some then staffing up and some remodeling and some bets that were made that now they're going to have to be corrected. With some of that, you're seeing behavioral changes. With some of that, I think you're going to see some discipline come back into the pricing, and I think it's going to be driven fundamentally. Especially without the investment side of things, we're going to have to go that way as an industry.
Doug? Dougie?
Yeah. I would say to you that I see a much more disciplined marketplace today. I would include the fourth quarter, so I'm extending that into a really solid six-month stretch. I expect that to continue on. I know there's a big question as to what happens when you come back around the backside of 2012, particularly fourth quarter, when those accounts that now had their first significant rate change in several years are up for their second renewal. I don't think one firm in a 12-month period is going to solve the ills of 110 combined ratio for this industry on the commercial side in 2011. I think we're an extended period. Time will tell, and that is an aggregate view, primarily driven at the middle. There are different nuances in specialty lines.
There are different nuances in small commercial and the upper end of casualty, et cetera. In general, our core middle, to me, needs pretty significant work. I'm pleased to sit here today feeling much better about the marketplace and clearly feeling good about what we accomplished in the first quarter.
Jim?
I think the question that you pose is a very important one for us. I think it is a different kind of changing market versus one that has a shock, maybe a shock event that causes a loss of capital. I think the trends are pointing the right direction for the industry. I think commercial lines carriers are getting better at things like analytics. I think fundamentally the low interest rate environment in some ways is good for the industry. It promotes a healthier underwriting discipline and reinforcement of that notion that maybe people got away from in times of better investment returns or in times of hard markets. There's discussion a little earlier on the panel about GL pricing, and I think GL pricing has been masked by reserve releases.
I think the components are there for necessary fundamental underwriting action to take hold and improve the overall market. Only time will tell, do we start to slip back into old habits as over a period of time. I hope not.
Just maybe kind of along those lines, can you talk about where you think your pricing is right now relative to loss trends? Is that something where the price changes we've seen over the past couple of quarters have allowed the margin expansion argument on a written basis to start to gain steam? Maybe we'll start with Doug Elliot.
When I think about the middle market where the core of this change is occurring and I think about first quarter, I would suggest that nearly all lines, clearly comp and property, look like they're out in front of loss trend. I know it's very early in the year to predict a trend, but you can look at history and do your best to assume where you think at least 2012 will start. I mentioned before that I think GL needs some work across the industry. That may be a line that's a bit closer, whether it's on or about at loss trend. I think that depends by carrier. In general, I think this is an area that has been underperforming, and I think we've seen now a turn toward better days.
2012 on the backside, the second half of the year, should be a plus relative to that business.
Doug Worman?
I see a lot of the same. I'll focus on the casualty again. I think I agree with Doug that the pricing really isn't where the loss trends need to be, and I'd mentioned that just with the trailing accident year figure that I gave.
Right.
Again, especially in the U.S., and we're starting in a lot of these lines from just about one year out now. We're getting the benefit of that upward tweak and as Doug said, better days ahead. We're actually getting the advantage of that for me. We don't have the legacy issues. I think there's a lot of correction that has to be done, but I also think there's some profitable spots.
Jim?
Yeah. I think the one thing I would add to that is given what's gone on in the first quarter, I think people can draw the conclusion that rate increases are outpacing trend. One of the things that we think about a lot is as the economy continues to recover, it starts to change some dynamics. You start to see more vehicles back on the road that maybe weren't in use previously or have been utilized less. You start to see newer workers hired and brought onto payrolls where they weren't previously, and those things can have a negative impact on trends. You have to pay a lot of attention to a bunch of things that are taking place simultaneously, and those are just a couple things relating to trend that we like to keep our eyes on.
That's great. Question here.
Hi. Thank you. This morning, John Doyle suggested that at AIG that risk-adjusted profitability was really the key driver at the firm. What are the performance metrics at your firms that really are trying to drive that business? Assuming profitability is one of them, how do you balance that with retention and dare we say grow the book at the underwriting level?
Jim, do you want to start?
Sure. Balancing profitability and retention. Our primary goal within my business unit has been to improve profitability. We've made a lot of strides in the last 18 to 24 months, but I don't think there's a single underwriter in our organization who doesn't know that at this point in time, profitability is our number one goal. I was at our office in Midtown this morning emphasizing that point to a bunch of our staff. I'll be back in Boston tomorrow with a different group of staff making that point. On Thursday, I'm going to be in Charlotte with a different set of underwriters making that same point. I think we are focused on profitability. We will take the rate action that we think we need.
We will do it in a way that hopefully protects our overall book and our relationships with our production sources, our agents and brokers. For us, it's really about the focus is on profitability and where we're looking to grow. I think you can take necessary rate actions and grow at the same time. Not all lines of business are in the same spot. I think for us, there's a lot of opportunity in our business where over a period of time, we have a large customer base where we have not provided a full suite of products to those customers. Sometimes it's been because we've been difficult to do business with internally. The property guys weren't well enough aligned with the casualty guys, the umbrella guys weren't well enough aligned with the primary guys.
What you end up with is a book of business that is not completely rounded out. I think we've taken a lot of steps to address that. I think we look at opportunities to grow first by, I would say, rounding out existing customers that we already know without having to look for true new business. I think we're trying to balance those. In our organization, I would say profitability is the message that is well received right now.
Mr. Worman?
Yeah, from Alterra's standpoint, first of all, I think it's a little scary we're quoting John Doyle because he's a good buddy of mine. He's absolutely right, and that's actually been the culture at AIG way prior to me even coming aboard. When I mentioned experience rating earlier, we build that in with exposure rating, and that's really evaluating the risk and trying to underwrite to profitability. It's a big component to everything. We're going to write every risk by portfolio on how we think it needs to be written, where we think the burn layer may or may not be, and where we're going to get a profit. We're not underwriting to get market share. We're not underwriting just to book revenue because long term, that's not a healthy book of business.
The market eventually will turn and there's going to be a lot more opportunities. Until then, you have to sort of pick your spots and do your best and keep your expertise, keep your guidelines, as I said, and your authorities in place and underwrite to the exposures. That's where we get and our philosophy is if you look at the talent base that we brought on that was existing at Alterra for quite some time, that's where our focus is and that's where we think the sweet spot is for profitability and the underwriting.
At a senior level across commercial, we have very sophisticated risk-adjusted models that probably the top 20 of us look at and we debate, ROE is a big mechanism there. I would take a different twist. Tomorrow night we're having our top 10 field people come in. Relative to frontline underwriters and the people that lead those underwriters, there's a heavy focus on accident year profitability. On Thursday, we're going to take 6 hours and we're going to take March and April apart. We're going to talk about everything we know about loss trend. We're going to look at all the levers that were available to them relative to rate actions, underwriting, mix change, industry, class, new, et cetera. We do that on a 30-day basis. We'll redial the backside of May and June, and we'll continue to do that.
Out in the front lines, we're pushing them and linking them relative to their performance on an accident year basis. What can they control, and how are they moving the dial so that we end up at a better margin position?
Great. Chris. Oh, here we go. Sorry about that.
Hi.
You got me now.
I apologize for the relatively elementary nature of my question in advance. You guys are effectively saying that business needs greater margin, needs more pricing over time. I guess, can you dimension how these things typically occur over the course of your careers and over the course of as you see the marketplace today? Meaning, obviously cycles can take longer and shorter and stuff, but as you kind of look out, is it a series of two and three years' worth of rate increases to get profitability to where you say, now we're sort of in a good equilibrium spot? Can you dimension that for me, please?
Anybody want to take that?
I'll start. I think there's been a lot of discussion and points made over the past 2, 3, 4 quarters, Chris, about whether this cycle change will look like any of the prior cycle changes. What I would say is if we were having this conversation last summer, middle of the summer, at least speaking for myself, I was feeling a lot like I did in the summer of 2001. I was very frustrated in 2001. The late '90s were getting softer. Excess liability trends were coming at books of business. Generally, we were headed to a point where the accident year returns were just not acceptable, not close to being acceptable. I think last summer, those of us that were looking at 2010 and the beginning play out of 2011 were getting some of those same thoughts.
As we tried to work on increasing rate over the course of 2011, frustrated, making some small progress in the beginning part of the year, but gradually feeling much better about the way the year finished.
I don't know whether the backside of 2012 will look like the backside of 2002 or 2003. I think that all depends on how this market moves, how capital comes or goes. In general, I think there's a need for a sustained series of underwriting actions across some of the core middle activities. Then we can have a separate conversation about small commercial. I think we could have a separate one about all these separate lines. To me, as carriers, we're much more sophisticated in terms of the ability to slice and dice and understand the metrics associated with all those businesses. I do think it'll be different than anything we've seen in the past. I also think we've seen a turn here.
I'm much more bullish about second and third quarter, and the fact that we're going to earn in a sustained period of very solid pricing.
I also think it's different than the past. As I mentioned earlier, it's a different dynamic in how the business was written the prior four years and also some of the discipline within the insurance companies. I think it's also different by product and then where you want to have your attachment points and what have you. Something that you want to keep a close eye on is where you think your attachment point is, and your burn rates, and actuarial, and loss triangles, because that ultimately can mean what you want to expose and the rate you want to get, and it's going to shift by product. You also need to, I think, really analyze how you want to team up with your reinsurers. That can be used as a tool from a couple different aspects or not. It just all depends on each and every organization.
Like Doug, I sort of feel like we're at 1999, 2000, where you're seeing a fundamental change. You're seeing behavioral change. You're seeing carriers take different positions than they have in the prior few years, whether it's they're not putting up $75 million more and they're putting up $25. That creates voids, and it sounds like it'd be easy. It also creates voids where some carriers that aren't used to coming down low and playing in those spots and taking on that lead position are going to be forced to. To do that, they may not be as comfortable. They may not have the broad breadth of experience, so they may need more rate. I always reference behavioral changes. We're seeing that, and we're seeing it across the board, not just with one legacy carrier. There's a couple of them.
I don't think it's going to be broad-brush across the industry. I think it's going to be different products go up and down at different times. In my opinion, unless something really catastrophic happens, I don't think it's all going to move at once.
Just a brief follow-on comment. I would say, as an industry, we haven't gotten here overnight. It hasn't been one bad year and one set of renewal decisions that's gotten us to the place we are in terms of overall profitability, and we're not going to get out of it in a year. We need to think as carriers around we need to have multi-year strategies, and know we can't afford to keep losing accounts on the books. We need to manage portfolios. We need to manage overall relationships with our production sources. There's a lot of things. We need to manage expenses and scale and volume. There's a lot of things that come into play in those decisions. It is a multi-year effort, and it needs to be sustained over that time to truly fix our issues that we're facing.
Obviously, a lot of conversation around pricing. Is there an area of your book where you feel like the dialogue around terms and conditions is more important in order to address issues in some markets? If so, can you kind of talk about what those are? I'll start with Doug Worman.
I think some of the marine products. Obviously there's a true specialty there. Any product that there is a true specialty, there's a lot of negotiation with terms and conditions and attachment points and sublimits and what have you. I would also say the same in the D&O and the E&O markets. Those markets are different for industry group. It's not just one commoditized product. In fact, you have different types of policies for different industry groups within some of those products. Those are areas, and that gets back to my behavioral change comment. That's where before you see rate change, you're starting to see tightening of policies. Slow, but they're there.
I think one of the areas I'd point to is property. I think the number of non-modeled CAT losses that we've seen as an industry over the last several years is alarming. I think one of the things we're often talking to underwriters about is making sure the use of appropriate sublimits and wind deductibles and things like that. As you see losses from events like flooding, there are certain things where customers might be more open-minded about what limits they will accept on their policies. I think it's one of the things that we try and keep at the forefront of underwriters' minds, because I think sometimes people have a tendency, and I think it's human nature. I've got a renewal. It's already on the books. It's the price. The first thing I think about is what is the price for next year?
You see, there's more levers to pull than just price, we want our underwriters thinking about it. We engage in that dialogue significantly, we try and make sure that we understand the differences. What would you rather have, a little more rate or a little less limit? Understand those trade-offs and where it can help us avoid certain damaging situations.
Yeah, it's interesting. Normally, I jump into a casualty conversation because it's so natural on this topic. I agree with Jim that there's a quiet story around property relative to underwriting discipline, diligence on the risk and limits, et cetera, that over the next couple of years, given all the issues with weather, CAT, tornado, wind, et cetera, that the best underwriters in this business are carefully constructing their portfolio around.
I think we have time for one more question. Someone from the audience. No one wants? Twice. Okay. I think the question was posed before about retention. As you think about rate, is there a level of retention that you are managing towards? For example, if you say, "Look, we're pushing for 6% or 7% rate, retention is flat. We think that retention should be falling to be at that optimal place to make sure that we're getting the right rate." I mean, do you think about the aggregate statistics that way? Are you looking to make sure or how do you look to make sure that you're getting the maximum rate that you can extract without damaging the legacy portfolio business you have? I'll start with Jim.
We think about it a lot of different ways. People often talk rate and retention, but there's so many dynamics to it, whether it's by line of business, by size of account, by geographies. I would say we have rate and retention goals for all of our underwriting segments drilled down to a pretty low level. What we try and get people to think about is achieving the right balance, I think between rate and retention. I think on our worst, most underperforming accounts, driving that rate level just is critical. On our best performing accounts, the retention lever might be more critical. It depends on how we categorize various groupings of accounts, but it's definitely a trade-off. I don't have an optimal number that we necessarily strive for.
It really varies segment by segment. I think we're probably a little more focused on profitability which involves both levers. I think rate is generally probably winning out because you can continue to push and see. If you don't continue to push, you won't find where the tipping point is.
Go for it.
Yeah. The rate and retention metrics are something I think everyone watches. There's another differentiation there, too, if you're wholesale, retail.
Okay.
Retail businesses tend to be a little stickier than wholesale, but that's for a couple different reasons. If you have a high retention rate, you sort of have to ask yourself, "Okay, is my policy a little broad? Am I a little cheap? Am I leaving money on the table?" Not that any particular underwriter is just looking to gain money, but they ultimately have to weigh it against are they getting the right rate and they're selling the right product within their portfolio. Now, you could argue some people may be better salespeople than other people, right? That maybe they're better off at that.
If you become a point in time it goes the other way and you're not able to get the rate that you need and your retention drops to 50%, 60%, well, then that's when you have to ask yourself, "Should I stay in the business or get out?" Because if you can't get the rate that you need to make profitable business, at the end of the day, no matter what your retention is, you need the appropriate rate to keep the business healthy.
Go for it.
We've done a lot of work on the metrics, and maybe this is the accountant inside me, but Thursday when we have our field people, and we're going to talk a lot about it. We've mechanically looked at the trade between rate and retention. It obviously matters in terms of how the line is performing. We spend a lot of time thinking about are we on the right side of the trade? Are we improving our margins going forward? The lines that are performing better, obviously, you'd like to have a tighter spread. You want to be retaining more of it. It absolutely is a part of our thought process, our debate internally with our folks, and making sure that we're making all the right pulls that'll head us in the direction we want to head.
Okay. Well, join me in thanking our panelists here today.