Q2 2020 Selective Insurance Group Inc Earnings Call

July 30, 2020

HM.

[music].

Good day, everyone welcome to selective insurance groups second quarter 2020 earnings call. At this time for opening remarks city introduction I would like to trying to go over it just senior Vice President Investor Relations and Treasurer Rohan Pai. Please begin.

Good morning, everyone and welcome.

With some costing the goal on our website selective dotcom and the replay will be available until August 28 2020.

Ultimately investor package, which provides a GAAP reconciliations of any non-GAAP financial measures reference today also is available on the investor the page about website.

Today, we will discuss our results and business operations using.

GAAP financial measures that also are included in our filings with the annual quarterly current reports filed with the U.S. Securities and Exchange Commission.

Non-GAAP operating income, which we used to analyze trends in operations and believe it makes it easier for investors to evaluate on insurance business non-GAAP operating income as net income excluding the after tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities.

Statements and projections about our future performance. These forward looking statements under private Securities Litigation Reform Act of 1995 are not guarantees of future performance and that's subject to risks and uncertainties.

For a detailed discussion of these risks and uncertainty please refer to our annual and quarterly reports filed with the U.S. Securities Exchange Commission, which includes supplemental disclosures related to the cobot 19 pandemic.

You should be aware that selective undertakes no obligation to update or revise any forward looking statement on todays call of the following members of selective executive management team, John Marchioni, President and Chief Executive Officer, and not Wilcox Chief Financial Officer, now, let's turn the call over to John.

Thank you Ron and good morning.

Some introductory remarks, and then focused on some high level things impacting the industry and our company Mark will discuss our financial results and I'll return to highlight how we continue to invest in strengthening our platform. So that we remain well positioned from January continued superior financial performance.

Let me begin by say I remain extremely proud of how our employees has navigated through this difficult period.

Delivering exceptional service to our customers and distribution partners in spite of various challenges posed by carbon 19.

As we've stated in our earnings per release elevated catastrophe losses, which were well in excess of the historical meaning from the industry alternative investment losses that we report on a one quarter lag and the impacts of corporate 19 obscure the strong underlying results from our business.

Our premiums written growth remained solid despite the challenging economic environment, and we're pleased to report and profitable all and 98.4% combined ratio despite the higher catastrophe losses.

Our financial standpoint for the second quarter of 20, Twond selective reported non-GAAP fully diluted operating earnings per share or 40 cents, an annualized operating ROE we have 4.4%.

There were three main items, a negatively impacted our results during the quarter.

First we reported $83 million of catastrophe losses, which was an historically significant loss for us these losses related to numerous catastrophe events those more meaningful to our results included 43 million of losses related to April storms, and 20 million of claims related to civil unrest.

Second alternative investment losses totaled $16 million compared to a gain of $7 million in the year ago period.

We report alternative investment performance on a one quarter lag and the results reflect the decline in investment values during the first quarter.

With a market rebound in the second quarter, we expect our third quarter return on alternative investments to be much stronger.

Third covert 19 related items, including a continued earnings of the 75 million audit premium accrual booked during the first quarter and a slight increase to our premiums receivable allowance for doubtful accounts totaled $10 million and added 1.3 points to a combined ratio.

In addition, we returned approximately $20 million in premium credits to our commercial and personal auto customers, but offsetting reduction in reported losses for those lines of business.

Partially offsetting these items was continued net favorable casualty reserve development lower than expected non catastrophe property losses and ongoing expense management initiatives.

I'd like to highlight a few key topics.

First with respect to corporate 19 pandemic. This is an ongoing and tragic event that is impacting the health and livelihoods of numerous people around the country and across the world.

From a financial standpoint, we took a prudent and proactive approach starting a first quarter to reflect our estimates for potential exposures in the event.

And with the passage of another quarter. These estimates have largely health.

The following free estimates are recorded in the first quarter.

Number one a $75 million return audit and mid term endorsement premium accrual to reflect the anticipated decline in exposures on our in force premium for the workers compensation in general liability lines of business.

For which through June Thirtyth, the remaining accrual stands at $61 million.

So I think a 10 million $10 million in property in our for losses related to a small portion of our property policies that are specific some limited coverage for extra expense associated with a government ordered clean.

To date, we have not incurred any claims against this IB NR.

And third a 10.5 million dollar increase in our allowance for uncollectible premiums receivable, reflecting potential policy cancellations and nonpayment of premium.

In the second quarter, we increase this allowance by $3 million.

Despite the corporate 19 exposures loss trends were generally favorable benefiting from the lower level of economic activity.

This was particularly evident for the auto lines, we're driving activity declined substantially due to various government shelter in place directives. Although this was far more so for personal auto and commercial auto.

While claim frequencies were down during the quarter, we maintained our casualty lines loss ratios on plan for non auto lines due to the long tail nature of these exposures the inherent uncertainty presented by cobot 19, and the current volatile economic environment.

The reduction to our personal and commercial auto insurance loss ratios reflect the earned impact of the premium credits, which reduced premiums and losses by equivalent amounts.

The second topic I want to highlight was a significant level of catastrophic loss activity for us and the industry during the second quarter.

In short catastrophe losses were well above historical second quarter averages as measured by property claims services, our pcbs and driven by numerous smaller events rather than a few headline events.

None of these events reached our excess of loss catastrophe reinsurance reinsurance program, which has had attaches at $40 million per occurrence.

While quarters like this do happen on occasion, the annual impact of catastrophes on our loss ratio over the past 15 years has averaged three points and compares favorably to and best estimated industry average of 5.3 points.

We attribute this network differential to our conservative underwriting and pricing philosophy and strong reinsurance program.

Third we have continued to successfully execute on our strategy of consistently generating profitable growth, despite challenging market or economic conditions.

Overall second quarter reported net premiums written growth of 3% was reduced by three percentage points due to the app or mentions auto premium credits.

Our strong distribution partner relationships continue to present us with excellent opportunities for growth without sacrificing our margin targets.

Our field based employees and underwriting agency management claims and safety management, we're able to seamlessly transition to a virtual environment, while maintaining highly responsive personalized service and support to our customers in distribution partners.

Finally, with respect to pricing industry wide standard commercial lines pricing continues its upward trajectory driven by an interest rate environment that is expected to be lower for longer increased volatility passerby and non catastrophe property losses.

Firming reinsurance market and ongoing concerns over increasing loss trends.

Our second quarter commercial lines renewal pure pricing was up 3.9%.

Our successful track record of achieving renewal pure price that has matched or exceeded our expected loss trend in each of the past 10 years positions us well with a high quality and adequately priced enforced book of business.

The sophisticated and granular approach to risk selection and pricing is also deployed in the acquisition of new business.

Looking forward, we see opportunities to achieve higher price levels in property auto and general liability while workers compensation is expected to present the continued drag in the upcoming quarters.

Now I'll turn the call over to Mark to review the results for the quarter.

Thank you Don and good morning, I will review our consolidated results discussed on segment operating performance and finished with the updated outlook for 2020.

For the quarter, we reported net income per diluted share of 57 cents and 40 cents a non-GAAP operating earnings per share, we generated an annualized Roe of 6.2% and a non-GAAP operating hours of 4.4% for the posts off for the year, we generated a non-GAAP operating RMB, 6.7% well.

Operating ROE is well below our 11% target. So far this year, we feel good about the strength of our business, which continues to perform well. Despite some short term volatility can kobin 19 catastrophe losses at alternative investments. We believe we are well positioned to generate strong profitability for the balance of the Jim can.

Consolidated net premiums written growth was three percentage in the quarter.

That is inclusive of 19.7 million uncoated 19 related return premium credits proposal and commercial auto lines of business. These premium credits were accounted for as a reduction in net premiums written portfolio ended the quarter of offset by a reduction in auto bodily injury and physical damage losses.

The premium credits has the impact of producing a growth rate by three percentage points in the quarter strong renewal retention overall renewal pure price increases, averaging 3.9% and steady new business volumes helped drive the solid growth.

Year to date on net premiums written a flat with 2019, our year to date net premiums written was significantly impacted by coated 19 related items included the first quarter $75 billion 40 premium accrual and the 19.7 million from second quarter auto premium credits that collectively reduce the topline by seven percentage point.

Yeah.

As John mentioned, we had goal is $14 million of workers compensation and general liability accretive against the audit accruals during the quarter related to lower exposures and that both the accrual down to 61 million at quarter end.

It will be well into the latter part of 2021 until the promoted to complete and we know the full extent of the impact of the reduced exposure orderable premiums.

We achieved estimated to be down around 6% in 2020, we feel good about the will to premium accrual, but we will continue to evaluate at quarterly.

We reported the combined ratio of 98.4% for the second quarter, an excellent results in light of the significant level of catastrophe losses, and the ongoing impact recovered 19 catastrophe losses totaled 83 million and added 13.2 percentage points to the combined ratio favorable net prior year casualty reserve development of 50 million to help them.

Combined ratio by 2.4 points.

On an underlying basis, excluding catastrophes and prior year Casualty reserve development. The combined ratio was 87.6% a significant improvement compared to 91.1% in the prior year period for the first six months of 2020, the underlying combined ratio of 90.4% reflect 170 basis points ammonia.

The improvement underlying margins have benefited from lower than expected non catastrophe property losses and reduced underlying operating expenses.

Included in the underlying combined ratio did coated 19 specific underwriting accruals that reduced pre tax underwriting income by $9.6 million.

In the second quarter, an increase the combined ratio by 1.3 percentage points. These specific items include 6.6 million of reduced underwriting income due to the limited impact net of produced underwriting expenses and losses of our post quarter end $75 billion 40 premium accrual.

We also increased on previous receivable allowance for doubtful accounts by 3 million in the quarter due to decode Nike related billing related fees. These items reduced our second quarter EPS by 13 cents at our already by 1.4 percentage points.

Year to date, the specific coded 19 related pre tax underwriting charges totaled 34 million and have increased our combined ratio by 2.4 percentage points. These items have reduced by year today EPS by 45 cents, an RV by 2.4 percentage points.

Moving to expenses, our expense ratio was elevated as 34.3% for the quarter.

It would impact of the coated 19 related premium items reduced that pretty intuitive by $50 million than the second quarter of this coupled with a $3 million increase in our allowance for bad debt added 2.2 percentage points to the expense ratio.

As of the coated 19 related items the expense ratio of 32.1% for the quarter and 32.6% used today was better than expected as reflects expense management initiatives.

Some of these initiatives however can be seen a temporary as it relates to lower travel and entertainment expenses. Some short term deferrals of projects, a new highs and lower employee incentive compensation.

In addition, and Permian volumes come under pressure from a further economic slowdown the expense ratio will continue to face some upward pressure due to our operating cost being spread over a small upgrading base.

The expense ratio also face pressure about customers finances, the further impacted which could result in us having to increase our allowance for bad debts that said, we continue to seek out ways to improve operational efficiency leveraged our infrastructure and drive our expense ratio down over time, while continuing to invest in our business.

Corporate expenses, which are principally comprised of holding company cost silicone stock compensation totaled 6.3 going in the quarter compared with $9.6 million in the Utica year ago period, driven by lower stock based compensation expense.

Turning to our segments in the second quarter outstanding commercial lines reported at 5% increase in net premiums written a solid results in light of the challenging backdrop and reflects the strength of optimal base model deep in long term distribution partner relationships.

The growth is inclusive of the 15.4 billion impact of the April may commercial auto premium credits that reduced outstanding commercial lines quarterly growth rate by two percentage points.

New business was flat relative to a year ago, while retention was very strong at a 6% for the quarter of renewal pure price increases was stable at 3.9%. The combined ratio was 96.7% and the underlying combined ratio was 89.6% catastrophe losses accounted for 10.1 points on the combined ratio now.

Favorable prior year Casualty reserve development produced a combined ratio by three points and included reserve releases of $50 million and workers compensation and $10 million in general liability, partially offset by unfavorable prior year reserve development of 10 million in commercial auto.

The increase of the commercial auto prior year Reserve. This was driven by highest severities, putting pressure on the 2016 in 2019 accident years, as well as higher than expected frequencies and accident year 2019.

As John mentioned, while the current accident year reported claim frequencies with them during the quarter, except for reducing losses in the commercial would line related to the premium credit our 2020 casualty loss ratios for the stated commercial lines remain on plan.

Due to the long tail nature of these risks and the inherent uncertainty presented by Kobe team and the volatile economic environment. We do not believe it's appropriate to reflect the temporary reduction in frequency, but this time.

I'll post the line segment reported a 5% decline at previous revenue driven by $4.3 billion opposed to auto premium credits outfitted April may which impacted the growth rate by five point.

Renewal pure price increases averaged 3.1% retention remained solid at 84% and new business was up 13%. The segment produced a combined ratio of 1.8, which included an elevated level of catastrophe losses at 36.2 points. There was no prior accident year casualty reserve development the underlying.

By ratio was 72.6% benefiting from lower non catastrophe property losses.

Segment generated three percentage points in net premiums written growth renewable fuel price increases averaged 5.5% and new business was up 13% a high level of catastrophe losses. This quarter added 11.3 points to the combined ratio and resulted in a 100.9% combined ratio for the quarter.

There was no prior accident year casualty reserve development and the underlying combined ratio was a solid 89.6%.

Over the past fee is targeted price increases. This this make changes and exiting specific underperforming cost to the business have contributed to the improved combined ratio performance in this segment.

Our investment portfolio remained conservatively positioned as of June thirtyth, approximately 91% about portfolio was invested in coal fixed income securities and show some investments with an average credit rating of double a minus and effective duration of 3.6 years and operated a high degree of liquidity.

We increased risk assets modestly during the quarter from 8% to just over 9% of the overall portfolio as we found valuations attractive we will continue to evaluate further increases risk assets depended on bucket and economic conditions.

After tax net investment income of 28.5 billion was down 40% for the comparative quarter, driven primarily by $16 million accrete back alternative investment losses, which we reported one quarter lag the alternative investment losses came in at the low end of the estimated $15 billion to $20 billion rates that we disclosed last quarter.

We do however, expect a rebound the devaluation of the investments and this is reflected on the updated net investment income guidance, which I will discuss in a minute.

The overall off the tax yield on the fixed income portfolio, including high yield was 2.7% for the quarter. The average off the tax new money yield on fixed income purchases. During the quarter was also approximately 2.7% with purchase is more heavily weighted that earlier in the quarter, but its spread to a wider.

Total invested assets include an increase in pretax unrealized gain to the fixed income portfolio of 220 billion in the quarter driven principally by an area of credit spreads. The total return on the portfolio was a very solid full 0.2% for the quarter at 2.3% here today.

Our capital position remains strong with 2.3 billion of GAAP equity, which is up 4% from year end book value per share increased by 9.5% in the quarter.

Our net premiums written to surplus ratio is 1.4 times cash flow was strong with 197 billion of cash flow from operations here today up 20% from last year, and representing 14% of net premiums written.

We have 324 million of cash and investments at a holding company.

During the second quarter, we repay the 50 million that we throw in light of credit additive add up an abundance of caution in the first quarter.

We currently expect to repay the remaining short term borrowings by year end overall, a strong balance sheets and holding company cash and liquidity provides us with the resources and financial flexibility to continue to invest in a business and growing shorts operations.

As we've laid out in our earnings pre release, we have revised our full year 2020 guidance as follows a GAAP combined ratio excluding catastrophe losses of between 90, 91%. This represents an improvement from our prior guidance of a range of 90% to 93% is also assumes no additional prior accident year Reserve development.

Catastrophe losses of six points on the combined ratio.

Which is a 1.5 point increase from our prior guidance, reflecting higher than expected cat losses through the first off for the year.

As close to 19 is not the designated the Pts event such losses and on included in this ratio.

After the fact that invested income of $170 million, a 10 million improvement from our prior guidance of 169 and includes up to 5 billion that off the tax gains from alternative investments at overall infect effective tax rate of 18.5% and weighted average shares of 60.5 billion on a diluted basis.

Our 2020 guidance reflects the estimated full year impacted posted on team our underwriting results on guidance. This year has a high degree of uncertainty than in prior years due to the dynamics and fluid nature of the impact of the focus 19 pandemic on the us economy of business and our operations with that I'll turn the call back over.

John for closing comments.

Thanks, Mark we've continued to navigate through this challenging environment in concert with our distribution partners, ensuring we have not sacrifice in any way our high standards for customer experience.

While the topline growth outlook may get more difficult depending on the depth and duration of the economic downturn, we will maintain a disciplined approach to underwriting seeking to obtain risk adjusted pricing that meets or exceeds exceeds our loss trend expectations. We're extremely pleased with the quality and embedded profitability of our overall enforce book.

And are well positioned to continue to generate strong financial results.

Our success is built on three primary competitive advantages number one franchise relationships with best in class. This distribution partners to a unique yield model enabled by sophisticated tools and technology and three the ability to deliver a superior omnichannel customer experience. These comes.

Additive strength and served us well for decades and have positioned us for continued success over the long term.

We also recognize out without a highly engaged aligned and committed team our success could not be realized our employees remain our greatest competitive advantage.

We have unique culture of selective one built on diversity acceptance and inclusion key values and driving innovative costs.

Recent events, some violent and tragic at focus long deserved attention on regional and social injustice.

As an industry, we can and must do more into advance regionally quality at selected we continue to challenge ourselves to do more to increase diversity at all levels in the company and the ranks of our distribution partners and foster an environment of even greater inclusion we've always believed that if we deliver for our employees our customers and.

Our distribution partners, our shareholders will be consistently rewarded.

This focus is highlighted in our inaugural SC report published earlier. This year, we can be found on the Investor Relations page of our website and I encourage you to read it.

With that we'll open the call up for questions operator.

Thank you thanks decreases in the open up the canceled a question and answer session.

Participants who would like 10 question over this time. Please press Star then number one.

Looking at Needham and company during could prompt.

To cancel your request just prince time the numbers.

Again I wanted to ask a question will be the settlement.

Our first question comes from Mike Zaremski from Credit Suisse. Your line is open.

Good morning, my guys that fit and Charlie on for Mike. Good morning, guys. Good morning.

Good morning, and.

So.

Forgive me if you guys did to if I missed this in opening remarks, but.

In the past you kind of giving outbreak retention metrics for higher quality versus lower quality accounts and standard commercial lines would you be able to kind of give us the metrics that maybe some color around trend.

They are gathering yes, I agree did not include those in our prepared comments, but that was not for any change in the actual results I can tell you that the variation between best and worst performing segments on a forward outlook basis remains around seven points of rate differential so.

When you think about at our highest quality accounts are continuing to retain in they'll call of low 90% on a point of renewal basis, and we're seeing an offsetting reduction in our low and very low.

Expected buckets.

Ill call it in the mid Seventys to lower 80% range. So you've got caught about a 5% differential in retentions and about a 7% differential in rate and remember that above average cohort represents about half of our premium so that continues to drive our mill.

This improvement is when we talk about profit improvement you've got to two factors driving a number one is a differential between earn rate and loss trend and then the second is mix of business change and we think thats the best way to measure that mix change.

Got it. Thank you that's helpful and then none of that $15 million and reserve development in the quarter when you.

Kind of give us a feel of what lines that was then.

Yes, so I'll start and end market follow on how we had $15 million of favorable prior year coming out of comp worker's comp and and 10 million coming out of a general liability line. We did have an offset of $10 million of adverse prior year in the commercial auto I would say that commercial auto adjusts.

Estimated is spread out as Mark pointed has had in his prepared comments over the four prior accident years of 16 through 19, so small adjustments each of those prior years in the 16 17 18 periods. The primary driver there was a little bit of movement in severity and in a 19 year. It was a small combination of a little bit of frequency and a little.

A bit of severity.

Okay. Thanks, that's helpful and one more if I can.

You detailed a lot of the moving parts.

In the core loss ratio in your opening remarks I'm just wondering if you can maybe just pulling apart again and.

Okay.

Gave us a sense of what may be recurring versus more one time benefiting from.

Activity in the quarter I think I did market give you a specific features I think clearly the biggest driver in the improvement from an underlying combined ratio basis. When you strip out all the moving parts is that benefit to non cat property being lower than expected and lower than prior year and that I would say that makes.

The majority of it in terms of how that looks going forward. As we've said you do have some volatility in both catastrophe and non catastrophe losses in normal times, but as long as the economic.

Environment remains under some strain you could very well see some of that that favorable volatility persist, but I think it and it's no different than we talk about a casualty line side your severity on those losses, when our individual losses or catastrophe losses could bounce around from period to period, but thats the primary driver.

That's exactly right and Charlie do anything on added obviously, it's been an unusual you that low moving costs between catastrophe losses reduced level of economic activity its impact non catastrophe property losses and expenses and then obviously the cobot 19 specific accruals when you kind of caused through all of that.

So all of the moving parts are kind of take you back to the beginning of the year as we laid out.

Combined ratio full accounts, which was essentially 140 basis points of margin improvement from last year.

An expectation of a 91 five for the full year over the next cap basis accident year. If you look at where we are used today, we're at 90.4% on on an accident year ex cat basis on guidance that we put both for the full year up 90% to 91% that's.

On an ex cat basis, if you adjust for the reserve development that we recorded on a good today basis kind of annualized that now close the underlying combined ratio expect expectation at a 91% to 92% for the full year. So kind of split the difference is totally get feedback to where we were at the beginning of the year.

The guidance of 91, five now embedded in that quite a few movie Bob do you have the impact of the audit premium. We currently have all that bad debt.

That sounds that we recorded as John mentioned, the $10 million coded 19 related specific idea and off for the.

Potential for some specific coverages for both of the within property.

But then you also have some offsets as as Don mentioned related to non cat property losses, and a reduced level of underlying expenses, but I would kind of take you back to make feedback to kind of the 91.5 expectations for the for the full year with you when you kind of costs through all the moving parts in the quarter.

Got it thanks guys.

Thats on a quarter.

Thanks, Charlie.

Thank you. Our next question comes from much more Matt Carletti from JMP Securities.

Line is open.

Morning, Matt and good morning.

Good morning are you.

Good thank you.

Just a few questions I was hoping to start off maybe just on the topline on premium kick is hoping you can help us get appeal previous how things progressed across the quarter because it is clearly conditions economically and walk down the tough changed from April and May to June so whether that premium growth levels or submission.

Flow or is any way you can help us kind of get a little bit of the picture the progression as we went across the quarter and of course I know, it's just the last day of July, but if you have any insight into.

How July look can be helpful too.

Yeah. Thanks, Matt. This is John so I'm going to focus my comments on our predominant segment, which is standard commercial lines call, 80% of our premium I would say you definitely saw over the course of the quarter Progressive improvement from Primark topline perspective, and you saw the overall number of 3%, which actually was six in distress.

Pack of those.

Got it premium per commercial lines was about two points on that 5% growth for commercial so actually a pretty solid more more than solid overall growth rate per center commercial lines and got slightly better asset quarter went on.

I don't know that it was that dramatic I think our performance has been pretty consistent and I will tell you.

In July and we still have to booking days left today and tomorrow for previously thought I would expect July commercialized premium to be in excess of what you saw for the second quarter and I think thats, a combination of pricing and retention holding strong, but also very solid new business performance and I think this is an important point and I know companies talking.

Got their competitive advantages and they're great relationships and our sophisticated tools.

We continue to thrive in this environment and.

The ability to produce a 3% growth rate. Even if you include those premium credits in a quarter or were you all see what's happening to GDP in the quarter I'd speaks volumes about our positioning in the marketplace and the fact that aren't aren't distribution partnerships wants to continue to grow with us and they continue to provide us with opportunity.

Please we continue to use of tools, we have including a tool. We recently rolled out a couple of quarters ago that allows us to work with an agency to evaluate their entire portfolio relative to our underwriting appetite and identify accounts that we think when it would have a better home and selective I think thats feeding a fair amount of our growth opportunity. So.

Overall, I think we feel good about our ability to grow the commercial lines business. Despite what's going to continue to be some some economic headwinds as we move through the year.

I think manner.

But I was just going to add.

Just one one observation to that as John is exactly right. The performance has been exceptional the growth rate has continued through July the one caveat I think would be remiss not to mention is we did lift to believe holes to hold to early July.

And depending on whether our customers come in line with a premium payment.

It could be a little bit of an offset is done system cancellations coming through in August and September, but that's a little bit of allow comment at this at this point, we don't expect density not meaningful that there is some potential puts some pressure on the topline related to some cancellations due to the leading piece we had in place.

Okay perfect makes sense.

Then the other question when asking is.

It has been in the press in the past week kind of just.

For the past Committee, the New Jersey co video presumption Bill for workers comp and I know it's yes.

A bubble form it just your thoughts on it and kind of in relation to kind of your book of business and Youre workers comp exposures and what you make of it.

Thanks, Matt. So this is John again.

I think we talk about this a little bit in the on the first quarter call I think as long as a presumption laws or regulations remain appropriately focused on essential employees, who are required to interact with the public in the course of their employment, they're very manageable and I think what you're seeing.

I mean, what was that what the New Jersey law proposed I think it's actually schedules on for the assembly for today Assembly or center for today I would say that that bill as currently constructed is reasonable but I'll also say that we're in we're far enough into this pandemic to have a good sense in terms.

Terms of reported claim activity for workers comp and that includes those that would be covered and those that would not be covered and these to be presumption builds when you think about the claims adjudication process for workers comp you wouldn't be hard pressed to deny one of those claims one of them as a presumption law in place or not.

Not for an employee who is required to consider job because there were these essential in an essential business and could reasonably prove that they can track that the the virus in the course of their employment, but I'll tell you that what we've seen to this point and it doesn't mean that things could change and frequencies couldn't go higher as we move.

Through the balance of the year, but to this point theres nothing and actual reported frequencies to suggest that with or without a presumption law at any given see the activity for working age population is going to result in that much frequency of severity now I think there are clearly segments of the employee population.

And specifically first responders and medical professionals, who work in hospitals and are routinely exposed to cope with positive patients and I think thats an entirely different story, that's not really what our workers comp book is made up of.

I can't speak for the experience on that product.

Great and then one last just numbers question I apologize if I missed it but the big cat losses in the commercial line segment do you have the split between the that's kind of three different line, but at least historically catch cat property, the auto and the Bob.

Yeah, just give us Garrett will contribute.

That breakdown.

We see you want within commercial lines with a commercial line yet it within commercial yet.

Core to the impact.

Sure.

It did not to say the capital to dump, though cap profitable so 37 points.

On the commercial property line commercial auto was just under employed at 80 basis points and backwards.

The 2.1 points of the combined ratio in the quarter for a total of 10.1 points for commercial in total.

Got it great. Thank you very much.

Thank you Matt.

Thank you Matt next question comes from Paul Newsome from Piper Sandler Your line is open.

Good morning off this morning.

Were you guys.

Maybe you could talk a little bit more about the and little bit more broadly boxes competitive.

Environment at the moment.

It's particularly much you regional results.

Good morning growth.

Financially it doesn't seem like we're seeing some of the pullback from a competitive environment from.

Amongst similar companies that we were seeing elsewhere.

Maybe that's wrong.

Your thoughts on whether or not that's really we've seen an uptick or downtick tipping competition.

During the previous environment.

Yes, Paul.

This is really hard to evaluate because I think the information flow with a pandemic ongoing is a little bit more challenged and it's also hard to really unpack some of the drivers of different companies performance between new business and stronger Retentions.

We pick our spots and we always have picked our spots and our agents are providing us with opportunities I've said and where our hit ratios actually if you want to think about hit ratios as a proxy for the competitive environment. Our hit ratios have actually been fairly stable across small middle and large accounts, which I think would suggest.

But there hasn't been a radical shift in the competitive environment by I I qualify that by saying that I do think some companies have struggled to maintain the level of interaction with their distribution partners because of the disruption in their operation and I think I can't speak.

For other companies, whether regional or national but our operating model has underwriters that are specifically assigned to agents as opposed to broken out by a class of business. What that does is it gives you a great lineup communication to the individual producers on account so our ability to.

Pete off of those relationships and maintain them with outbound calls to request opportunities is different from companies who might have more of a centralized underwriting approach, where there's not enough established relationship between the account producer and the individual making that underwriting decision. So per companies that are structured like us and there might be one or two on.

Others that when you would put in that category are probably having an easier time identifying opportunities in creating submission flow.

Since the end.

Thank you little bit willingly.

Hey, good broadly talk about.

We took a little bit more bucket clean cost inflation in the new we've had some.

Contradictory comments I think maybe doing.

For various companies about whether or not we're seeing an uptick in the underlying.

Inflation is the.

Underlying inflation for the business.

Obviously, it's not easy to tell with all the other things going on at the same time, but GW further thoughts and then yes, I don't know that I would consider our commentary to be contradictory of what you're hearing I think what we often point to is that we have always had a disciplined approach and making our casualty loss picks.

Always embedded and expectation for future loss trend, so while actual frequency and severity trends over the last several years will influence a loss ratio pick for our casualty line, we would always adding an expectation for future loss trend and over the last couple of years that expectation.

One has gone up and we've been fairly transparent about this and would have been in that 3% range typically a few years back and over the last couple of years Weve any set up in just under 4% for commercial lines and I think your point you've got a couple of quarters now, we're it's hard to make any determinations as to whether or not that trend and.

Been modified in any way, but I think for us and our ability over 10 years. When you look at the track record and lay our rate and retention over the top of that loss trend weve been meeting or exceeding that number on a consistent patients for 10 years, so turning that dial up a little bit, which I think and our pricing outlook discussion we.

I do think Theres and there is a need in an opportunity to dial up price a little bit going forward as driven by a number of factors, while while one of that might be a movement from a loss trend perspective. You also have this cat and non cat loss volatility, but most importantly, you've got this lower for longer investment environment that for us.

All companies and we'd certainly embedded into our approach while lowering our effective target combined ratio. Because you can you can fully expect that through the balance of this year into 21 at a minimum youre going to generate less R&D premier investment portfolio, unless you're willing to dial up the risk profile, which is not how we do business. So.

You're going to need to lower year combined ratio target, which will lower your price ratio pricing indications and that's how we'll work that through so long way of saying I think we recognized some increase in loss trend, but also when our portfolio of smaller to mid sized accounts of other generally lower limits profile. We don't we don't see there sort.

In a headline loss ratio loss trend movements at some other companies maybe pointing to.

But my my apologizing to say you are.

If you're going to industry I, just think we've seen a lot of different views.

Everybody does Kuhn no offense taken.

[laughter]. Thank you very much.

Thank you reviewed will.

Thank you next question comes from Sean right now.

Between your line is open.

Good morning, Sean.

Yes.

Can you have walk us through what you saw with workers comp claim counts through the quarter and you know as as Dick I presume. The and then also maybe just a word some words on pricing as we've heard some talk about pricing potentially being nearing a bottom.

Yes, I'll I'll I'll start and we don't get into a lot of details or specifics around individual line claim counts in the quarter, but suffice it to say that based on my prior comments relative to the workers comp presumptions discussion, we have not seeing significant level of Kobe to related workers.

Claims reported but I think clearly we have seen a drop off in non Corbett claims reported over the course of the quarter.

I will say you have started to see it returned to a little bit more of a normal run rate, but still still below what we've historically seen as mark and I. Both indicated in our prepared comments, we haven't reacted to that frequency for our casualty lines I think it's it's not prudent to do so because of the sun the severity driver on the.

Casualty loss picks and the need to allow those to the age a little bit more before reacting to that so that would be the point relative to claim counts in terms of pricing and I've seen the commentary relative to workers comp bottomline priced reaching a bottom I'm not going to disagree I think thats, probably accurate, but you want to put that in the.

Shopper contacts, which is it's bottoming at a significant negative rate level and it will likely continue to be negative might be less negative as we move into 21, but it's still going to be a negative influence on the forward loss ratios for that line of business I do think what you might start to see is and we've commented on this in the past in addition.

To the Bureau filed rate changes, which has continued to be negative I think you've seen some aggressive pricing activity in the market on top of that that might start to change, which will make pricing a little bit better, but our expectation is you're going to continue to see negative filed rate changes all albeit slightly lower left.

Negative than they had been to this point.

Thank you that's a that's helpful.

Secondly, can you know what kind of feedback have you guys gotten on the personal auto rebates and how are you thinking about.

Personal line exposures to some of the bigger auto insurers potentially.

Enacting rate decreases.

Yes, we did provide the premium credits for the month of April and May and at this point have not extended that and I will tell you. What we've seen is the actual reported claim activity as the quarter went on has bounced back a fair amount they still a little bit below where it historically, maybe but not meaningfully below.

So with regard to the actions of the purpose of bigger auto writers. It's just not an area. We compete in we are generally writing.

Companion accounts that package up the auto and home and were generally competing for more of what we would describe as a consultation buyer who is going to focus a little bit less on price and a little bit more on making sure they're buying the right product with the right coverages to protect their on just the run on what their home as well, so I will say that that.

Change in competitive environment amongst the bigger players will put pressure on auto hit ratios.

It's it's listened to small segment of business for us you've seen our struggled to generating consistent topline growth and auto in part because of that competitive pricing environment and the pressuring us on our hit ratios and that we think that will probably continue with some of the actions that we've seen from some of the bigger players.

Okay. Thank you very much be will.

Yeah.

Operator revenue more questions online.

Yes, we had a question from wellpoint them from Boenning. Your line is open.

Yes, hi, there and good morning.

Execute smaller pieces here I want to talk about the after the surplus line market.

We've had a lot of companies doing they're pretty excited about.

Opex in that line in that.

This rates going up submissions going on so I just want to get a feel for what you guys are seeing that line, what we should expect going forward.

Yes. Thanks.

We saw solid growth quarter out of the DNS not extraordinary obviously, but in light of the economic circumstances pretty solid growth and pretty solid improvement from a pricing perspective, I think it's important to recognize that what we re in DNS tends to be the smaller and it's a $3000 average policy size.

It's predominantly in the binding authority space kind of lower end from a severity perspective and complexities respectively. In the Ines market. So I think some of what you might see in terms of a headline drill for Dms tend to be focused on.

Cash flows are coastal property in some of the higher casualty and certainly excess is one of the areas that that's running pretty hard from a market from a perspective I would say the one area that we have seen some migration from the admitted to the non admitted market would be habitational and Thats a segment that typically does bounce back and forth between admin.

It is not admitted at times like this and that is presenting some opportunities for us, but that's also a bit of a challenge segment from a pricing perspective, and it's an area and neither of rate level.

Got it okay.

And one other smaller quite and apologies to Mark maybe I missed it but other income went up in the quarter more than I expected. It to it really what was driving at that one timers, they expect sales and some strength there going forward.

Yes, the other income line, there's a couple of different items than that.

As we netted off again other expenses within the expense ratio. When you look at that combined ratio, there's nothing in particular that sent down.

So kind of ongoing run rate in other income.

Okay.

Great. Thanks.

Thank you.

Thank you My next question comes from Charlie leverage.

Your line is open.

Morning, guys, Hey, guys just one more.

On the commercial standard lines pricing.

And just wondering if there's anything to kind of glean from that.

Decelerating quarter over quarter.

Just looking at the SAP supplements.

No I and I would.

I hesitate to call it decelerated I mean, our store and threenine the to slight movements by aligning when I say slight we're talking 10, or 20 basis points would be workers comp down a little bit backup that could be mix.

Business generated and then property was probably down about a similar amount to 4.5% in the quarter versus four seven on a year to date basis.

I would I would characterize this as stable pricing over the last few quarters, but we do think theres, an opportunity and property certainly.

Let's see some improvement, albeit still negative and comp and NGL line continuing to move further north and then proper auto excuse me, we would expect to continue to be at the kind of run rate. We've seen so I think we feel good about the pricing environment, but you did see us say, a stable quarter and our results and I want I also.

I will highlight and I know I've said this a couple times index in the prepared commentary, we've got a really high quality and adequately priced enforce book of business driving our results in commercial line. So to a certain expand your underwriters are going to make sure they're focusing on protecting that renewal book.

And I think you might have seen some of that in the quarter with all of the struggles in the economy. There are certainly desire to protect that renewal inventory.

Got it thanks again guys.

Thank you.

Thank you Kathy speakers, we don't have any more questions on Keith I'll turn the call back to John for closing remarks.

Well. Thank you all through your participation today, we appreciate the engagement the questions and feel free to reach ounces or ROE honneur marked with any follow ups. Thank you all thank you.

Thank you Tim that concludes today's conference. Thank you all free training you may now disconnect.

[music].

Good day, everyone welcome to selective insurance group second quarter 2020 earnings call at this time for opening remarks, the introduction I would like to turn the call over just senior Vice President Investor Relations and Treasurer Rohan Pai.

Yes.

Good morning, everyone and welcome.

With that it's costing the called on our website selective dotcom and the replay will be available until August 28 2020.

Ultimately back to package, which provides GAAP reconciliations of any non-GAAP financial measures reference today also is available on the if that's a page about website.

Today, we will discuss our results and business operations using.

Yes financial measures that also on included in our filings with annual quarterly current reports filed with the U.S. Securities and Exchange Commission.

Non-GAAP operating income, which we used to analyze trended operations and believe makes it easier for investors to evaluate on insurance business.

Non-GAAP operating income as net income excluding the off the tax impact of net realized gains or losses on investment an unrealized gains or losses on equity securities.

Statements and projections about future performance. These forward looking statements under private Securities Litigation Reform Act of 1995 are not guarantees of future performance and that's subject to risks and uncertainties.

A detailed discussion of these risks and uncertainties leads to put to annual and quarterly reports filed with the U.S. Securities and Exchange Commission, which include supplemental disclosures related to the cold mid Ninetys indefinitely.

You should be aware the selective undertakes no obligation to update or revise any forward looking statement.

Today's call. It the following members of selected Executive management team, John Marchioni, President and Chief Executive Officer.

Well Cox Chief Financial Officer, now, let's turn the call over to John.

Thank you Ross and good morning.

Make some introductory remarks and that focus on some high level games and pack in the industry and our company Mark I will discuss our financial results and I'll return to highlight how we continue to invest in strengthening our platform, but I'm remain well positioned for generated continued superior financial performance.

Let me begin by saying I remain extremely proud of how our employees has navigated through this difficult period.

Delivering exceptional service to our customers and distribution partners in spite of various challenges posed by carbon dicey.

As we stated in our earnings press release elevated catastrophe losses, which were well in excess of the historical meaning from the industry alternative investment losses that we report on a one quarter lag and the impacts of Carbonite paid obscure the strong underlying results of our business.

Our premiums written growth remains solid and despite the challenging economic environment and we're pleased to report it profitable all and 98.4% combined ratio despite the higher catastrophe losses.

Our financial standpoint for the second quarter 2020, So I can reported non-GAAP fully diluted operating earnings per share or 40 cents, an annualized operating or are we at 4.4%.

There were three main items that negatively impacted our results during the quarter.

First we are reporting $83 million catastrophe losses, which was going to start with significant loss for us. These losses related to numerous catastrophe events those more meaningful to our results included 43 million of losses related to April storms, and 20 million of claims related to civil unrest.

Second alternative investment losses totaled $16 million compared to a gain of $7 million in the year ago area.

We were for alternative investment performance on a one quarter lack and the results reflects the decline in investment value starting the first quarter.

But the market rebound in the second quarter, we expect our third quarter return on alternative investments to be much stronger.

Third carbon 19 related items, including a continued earnings of the 75 million audit premium Oh, well, starting the first quarter and a slight increase work finance receivable allowance for doubtful accounts totaled $10 million, an added 1.3 points where combined ratio.

In addition, we returned approximately $20 million in premium credits to our commercial and personal auto customers, but offsetting reduction in reported losses for those lines of business.

Partially offsetting these items was continued net favorable casualty reserve development lower than expected non catastrophe property losses and ongoing expense management initiatives.

I'd like to highlight a few key topics.

First with respect to covert might be pandemic. This was an ongoing and tragic event that is impacting to help them livelihoods of numerous people around the country in across the world.

From a financial standpoint, we took a prudent and proactive approach starting to first quarter to reflect our estimates for potential exposures to the event.

The passage of another quarter. These estimates have largely health.

The following three estimates are reported in the first quarter.

Number one a $75 million return audit and mid term endorsement premium accrual to reflect the anticipated decline of exposures are enforced premium for the workers compensation and general liability lines of business.

Well what is your June thirtyth, the remaining accrual stands at $61 million.

Hi, Thanks.

I'd like $10 million in property Ivy NR for losses related to make small portion of our property policies that have specific some limited coverage for extra expense associated with a government ordered clean.

Today, we have not incurring any claims against society in our.

And third a 10.5 million dollar increase in our allowance for uncollectible brands receivable, reflecting potential policy cancellations and non payment of premium.

In the second quarter, we increase this allowance by $3 million.

Despite the conference I'd and exposures loss trends were generally favorable benefiting from the lower level of economic activity.

I was particularly evident for the auto lines, we're driving activity declined substantially due to various government shelter in place directives. Although this was far more so for personal auto and commercial auto.

Well quite frankly fees were down during the quarter, we maintained our casualty lines loss ratios on plan for non auto lines due to the long tail nature of these exposures the inherent uncertainty presented bike opened my team and the current volatile economic environment.

The reduction for personal and commercial auto insurance loss ratios reflect the earn impact of the printing and credits, which reduced plans and losses by one amounts.

The second topic I want to highlight once a significant level of catastrophic loss activity for us and the industry during the second quarter.

In short catastrophe losses were well above historical second quarter averages as measured by property claims services or piece, yes, and driven by numerous smaller events rather than a few headline events.

None of these events reached our excess of loss catastrophe breach reinsurance program, which has had attaches at $40 million per occurrence.

One quarters like this do happen on occasion, the annual impact of catastrophes on our loss ratio over the past 15 years has averaged three points and compares favorably to add best estimate an industry average of 5.3 points.

Turning to several differential to our conservative underwriting and pricing philosophy and strong reinsurance program.

Third we have continued to successfully execute on our strategy of consistently generating profitable growth, despite challenging market or economic conditions.

Overall second quarter reported net premiums written growth of 3% was reduced by three percentage points due to the aforementioned auto premium credits.

Our strong distribution partner relationships continue to present us with excellent opportunities for growth without sacrificing our margin targets.

Are you don't based employees and underwriting agency management claims and safety management, we're able to seamlessly transition to a virtual environment, while maintaining highly responsive personalized service and support to our customers and distribution partners.

Cost trends.

Our second quarter commercial lines renewal pure pricing was up 3.9%.

Our successful track record of achieving renewal pure price that has matched or exceeded our expected loss trend in each of the past 10 years positions us well with a high quality adequately priced imports book of business.

The sophisticated a granular approach to risk selection and pricing is also deployed in the acquisition of new business.

Now I'll turn it over to Mark to review the results from the quarter.

Thank you John Good morning, I will review our consolidated themselves.

Segment operating performance and finished with the updated outlook for 2020.

For the quarter, we reported net income per diluted share of 57 cents at 40 cents a non-GAAP operating revenues per share we generated an annualized ROE and 6.2% at a non-GAAP operating our three or 4.4% as opposed to offer the yes, we generated a non-GAAP operating RMB, 6.7% well.

Operating hourly is well below our 11% target. So far this year, we feel good about the strength of our business, which continues to perform well. Despite some short term volatility in coated 19 catastrophe losses and alternative investments.

We believe we are well positioned to generate strong profitability for the balance of the yen.

Consolidated net premiums written growth was 3% in the quarter.

And this includes about 19.7 million uncoated 19 related return premium credits.

Post salt and commercial auto lines of business. The Permian credits were accounted for the reduction in net premiums written portfolios in the quarter and were offset by a reduction in auto bodily injury and physical damage losses. The premium credits has the impact of producing a growth rate by three percentage points in the quarter strong renewal.

Pension overall renewal pure price increases, averaging 3.9% and steady new business volumes helped drive the solid growth.

Yesterday on net premiums written a flat with 2019.

I would say net premiums written was significantly impacted by coated IP related items included the first quarter 75 million audit premium accrual and the 19.7 million second quarter premium credits that collectively reduce the topline by seven percentage points.

As John mentioned, we sold $14 million workers' compensation general liability pregnant against the audit accruals during the quarter related to lower exposure and that both the accrual down to 61 million at quarter end.

It will be well into the latter part of 20.1 until the printing motors to complete and we know that full extent of the impact of the reduce exposure order volt preference.

With GE estimated to be down around 6% in 2020, we feel good about the order premium accrual, but we will continue to evaluate equivalent.

We reported the combined ratio of 98.4% for the second quarter, an excellent results in light of the significant level of catastrophe losses.

Ongoing impact the club in 19 catastrophe losses totaled 83 million and added 13.2 percentage points to the combined ratio.

Favorable net prior year casualty reserve development of 50 million to help the combined ratio by 2.4 points.

On an underlying basis, excluding catastrophes and prior year capacity for the development. The combined ratio was 87.6% a significant improvement compared to 91.1% in the prior year period.

For the first six months appointees funny, the underlying combined ratio, 90.4% reflect a 170 basis points of margin improvement underlying margins have benefited from lower than expected non catastrophe property losses and reduced underlying operating expenses.

Included in the underlying combined ratio that coated 19 specific underwriting that grows that reduced pre tax underwriting income by 9.6 million in.

In the second quarter and increase the combined ratio by 1.3 percentage points. These specific items include 6.6 million reduced underwriting income due to the impact that are produced underwriting expenses and losses of up post quarter $75 billion 40 premium accrual. We also increased operating with receivables.

Allowance for doubtful accounts by 3 million in the quarter due to the coated IP related billing lineage studies. These items reduced our second quarter EPS by 13 cents at our already by 1.4 percentage points year today, the specific coconut accumulated pre tax underwriting charges totaled 34 million and have increased by combined ratio.

By 2.4 percentage points. These items have reduced by used today EPS by 45 cents, an army by 2.4 percentage points.

Moving to expenses our expense ratio was elevated at 34.3% for the quarter.

The impact of the code 90 related premium items reduced net premiums earned by $50 million than the second quarter. This coupled with a 3 million increase in our allowance for bad debt added 2.2 percentage points to the expense ratio.

Most of these coated 19 related items the expense ratio, 32.1% for the quarter.

2.6% used today was better than expected as reflecting satisfaction initiative.

Some of these initiatives have it can be seen a temporary as it relates to lower travel and entertainment expenses. Some short term deferrals of projects, a new buyers and lower employee compensation.

The expense ratio will also face pressure customers finances, the further impacted which could result in us having to increase our allowance for bad debts that said, we continue to seek out ways to improve operational efficiency leveraged our infrastructure and drive our expense ratio down over time, while continuing to invest in our business.

Corporate expenses, which are principally comprised of holding company costs and lock on stock compensation totaled 6.3 going in the quarter.

It was 9.6 million in the year ago year ago period, driven by lower stock based compensation expense.

Turning to our segments and the second quarter standard commercial lines supported a 5% increase in net premiums written a solid results in light of the challenging backdrop and reflects the strength of our field based model.

The long term distribution partner relationship.

The growth is inclusive of that 15.4 billion impact of the April may commercial auto premium credits that reduced cost saving commercial lines quarterly growth rate by two percentage points.

New business was flat relative to a year ago, while retention is very strong at a 6% for the quarter or no fuel price increases and stable at 3.5%.

Fine ratio was 86.7% and the underlying combined ratio was 89.6%.

Patrick the losses accounted for 10.1 points on the combined ratio.

Net favorable prior year casualty reserve development and reduce the combined ratio by three points and included reserve releases, a $50 million and workers compensation and 10 million in general liability, partially offset by unfavorable prior year reserve development of 10 million in commercial auto.

The increase of the commercial auto prior year Reserve. This was driven by higher severity is putting pressure on the 2016 from 2019 after that is as well as higher than expected frequencies and accident year 2000, a dicey.

As John mentioned, while the current accident year reported claim frequencies with them during the quarter, except for reducing losses in the commercial water line related to the printing credit our 2020 casualty loss ratios for the same commercial lines remain on plan.

Due to the long term nature of these risks and the inherent uncertainty presented by covenant team and the volatile economic environment. We do not believe it's appropriate to reflect the temporary reduction in frequency. So at this time.

I'll post the line segment reported a 5% declined a debt payments revenue driven by $4.3 billion postal no credit and credit softening in April may which impacted the growth rate by five point.

Renewal pure price increases averaged 3.1% retention remained solid at 84% a new business was up 13% segment produced a combined ratio of 1.8, which included an elevated level of catastrophe losses at 36.2 points. There was no prior accident year casualty reserve development the underlying.

By ratio was 72.6% benefiting from lower non catastrophe property losses.

Segment February three percentage points, the net premiums written rather renewal pure price increases averaged 5.5% and new business was up 13% a high level of catastrophe losses. This quarter added 11.3 points for the combined ratio and resulted in a 100.9% combined ratio for the quarter.

It was no prior accident year casualty reserve development and the underlying combined ratio was a solid 89.6%.

Over the past the is targeted price increases the snake changes and exiting specific underperforming in cost of the business have contributed to the improve combined ratio performance in this segment.

Our investment portfolio remained conservatively positioned as of June.

Roughly 91% about portfolio was invested in coal fixed income securities and show some investments with an average credit rating of double a minus and effective duration of 3.6 years at operate a high degree of liquidity.

After tax net investment income of 28.5 billion look down 40% to the comparative quarter, driven primarily by 16 million a pretty back alternative investment losses, which we reported a one quarter lag the alternative investment losses came in at the low end of the estimated $15 million to $20 million rights that we disclosed last quarter.

We do have a expect a rebounded evaluation of these investments and this is reflected on the update that investment income guidance, which I will discuss in a minute.

The overall off the tax yield on the fixed income portfolio, including high yield was 2.7% for the quota.

The average off the tax new money yield on fixed income purchases. During the quarter was also approximately 2.7% with purchase is more heavily weighted that earlier in the quarter, but its spread for wider.

Total invested assets include an increase in pretax unrealized gain to the fixed income portfolio up 220 billion in the quarter driven principally by narrowing of the credit spreads. The total return on the portfolio was that very solid full 0.2% for the quarter at 2.3% today.

Our capital position remains strong with 2.3 billion of GAAP equity, which is up 4% from year end book value per share increased by 9.5% in the quarter.

Our net premiums written surplus ratio is 1.4 times ash flow was strong with 197 million of cash flow from operations here today up 20% from last year and represented 14% of net premiums written.

We have 324 billion of cash and investments at the holding company.

During the second quarter, we repay the 50 million that we draw a line of credit at of out of an abundance of caution in the first quarter.

We currently expect to repay the remaining shorts have borrowings by year end overall, a strong balance sheets and holding company cash and liquidity provides us with the resources and financial flexibility that continues to invest in a business and growing shorts operations.

As we had laid out in our earnings press release, we have revised full year 2020 guidance as follows a GAAP combined ratio excluding catastrophe losses of between 90, 91%. This represents an improvement from our prior guidance of arrange a 90% to 93%.

Also assumes no additional prior accident year reserved development.

Catastrophe losses of six points on the combined ratio.

Which is a 1.5 0.8, great from a prior guidance, reflecting higher than expected cat losses due to both softened.

As close as entities is not that does pages of Tcs event such losses at all included in this ratio.

Office asset investment income of $170 million, a 10 million improvement from our prior guidance of 160 billion that includes up to 5 billion. It off the tax gains from our alternative investments at overall effect effective tax rate of 8.5% and weighted average shares to 60.5 billion on a diluted basis.

A 2020 guidance reflects the estimated full year access code is 19 of our underwriting results. Our guidance. This year has a high degree of uncertainty than in prior years due to the dynamics and fluid nature of the impact that they focus on safety data on the us economy offices and their operations with that I'll turn the call back over.

John for closing comments.

And are well positioned to continue to generate strong financial results.

The strength of served us well for decades and have positioned us for continued success over the long term.

We also recognize that without a highly engaged aligned and committed team our success could not be realized our employees remain our greatest competitive advantage.

We have unique culture at selected one built on diversity acceptance and inclusion key values and driving innovative Paul.

Recent events, some violent and tragic.

Our focus long deserve attention on racial and social and justice.

As an industry, we can and must do more advance racially quality at selected we continue to challenge ourselves to do more to increase diversity at all levels in the company and the ranks of our distribution partners and foster an environment of even greater inclusion we've always believed that if we deliver for our employees our customers and our.

Our distribution partners, our shareholders will be consistently rewarded.

This focus is highlighted in our inaugural SP report published earlier. This year, we can be found on the Investor Relations page of our website and I encourage you to read it.

With that will open the call up for questions operator.

Thank you.

I'll now open up the queue for the question and answer session.

Since it was like type question over this time. Please press Star then number one.

Your name and company during this process to cancel your request just press time the numbers to.

Again I wanted to ask a question over the settlement.

Our first question comes from Mike Zaremski from Credit Suisse. Your line is open.

Morning, guys that hey, Charlie on for Mike Good morning, guys.

Yes.

Good morning, and.

So.

Forgive me if you guys did to if I missed that in opening remarks, but in the past few kind of given our great retention metrics for higher quality versus lower quality accounts and standard commercial lines would you be able to kind of give us those metrics that maybe some color around trend.

Yes, I agree did not include those in our prepared comments, but that was not for any change. The actual results I can tell you that the variation between best and worst performing segments on a forward outlook basis remains around seven points.

Rate differential so when you when you think about it our highest quality accounts are continuing to retain in call. It low 90% on a point of renewal basis, and we're seeing an offsetting reduction in our low and very low expected buckets.

Ill call it in the.

Mid seventys to lower 80% range. So you've got caught about 5% differential in retentions and about a 7% differential and rate and remember that above average cohort represents about half of our premium. So that continues to drive our mix improvement. It's all we talk about profit improved.

You got to two factors driving a number one is a differential between earn rate and loss trend and then the second is mix of business change and we think thats the best way to measure that mix change.

Got it. Thank you that's helpful and then none of that $15 million and reserve development in the quarter than you kind of give us a fee.

What lines that were then.

Yes, so I'll start and end market follow on we had $15 million of favorable prior year coming out of comp worker's comp and 10 million coming out of the general liability line. We did have an offset of $10 million of adverse prior year in the commercial auto I would say that commercial auto.

Just made is spread out as Mark pointed has had in his prepared comments over the four prior accident years of 16 through 19, so small adjustments each of those prior years in the 16 17 18 periods. The primary driver narrowed a little bit of movement in severity and in a 19 year. It was a small combination of a little bit of frequency.

A little bit of severity.

Okay. Thanks, that's helpful and one more if I can.

You detailed a lot of the moving parts.

In the core loss ratio in your opening remarks I'm just wondering if you can maybe just part of part again and.

Okay.

Given it's a sense of what may be recurring versus more one time telephone from.

Activity in the quarter I think I did market give you that specific features I pretty clearly the biggest driver in the improvement from an underlying combined ratio basis. When you strip out all the moving parts is that benefit and non cat property being lower than expected and lower than prior year and that I would say that Mike.

The majority of it in terms of how that looks going forward. As we've said you do have some volatility in bulk catastrophe and non catastrophe losses in normal times, but as long as the economic.

Environment remains under some strain you could very well see some of that that favorable volatility persist, but I think it and it's no different than we talked about in casualty line side your severity on those losses, when our individual losses or catastrophe losses could bounce around from period to period, but thats the primary driver.

That's exactly right and Charlie the receiver and added obviously, it's been an unusual year with a lot of moving costs between catastrophe losses reduced level of economic activity. This impact no catastrophe property losses that expenses and then obviously the code 19 specific accruals.

When you kind of caused through all of that until all of the moving parts kind of take you back at the beginning of the Eric we laid out.

Combined ratio forecast, which was essentially 140 basis points of margin improvement from last year.

Expectation of a 91 five for the full year over the next cap basis accident.

As you look at where we are used today, we're at 90.4% on on an accident year ex cafes says.

Guidance that we put forth for the full year, 90% to 91% that's.

On an ex cat base as you adjust for the reserve development that we recorded on it yet today basis kind of annualized that now close the underlying combined ratio expect expectation at a 91% to 92% for the full year.

Kind of split the difference is sort of good feedback to where we where as we get into the year. The guidance 91, five now embedded in that quite a few movie Bob do you have the impact of the favorable currently have all the bad debt.

It sounds that we recorded as John mentioned, the $10 million Cobot 19 related specific I did off the.

Potential for some specific coverages photophobia within property.

But then you also have some offsets additive as Don mentioned related to non cat property losses.

A reduced level of underlying expenses, but I would kind of take you back to feedback that kind of the 91.5 expectations for the for the full year with you when you kind of costs through all the moving parts in the quarter.

Got it thanks guys.

Thats on a quarter.

Thanks, Charlie.

Thank you Sir our next question comes from much more Matt Carletti from JMP Securities.

Line is open.

Morning, Matt Good morning.

Good morning are you.

Good thank you.

Just a few questions I was hoping to start off maybe just on the topline on premium cake is hoping you can help is going to feel forget how things progressed across the quarter because because clearly.

Missions economically and walk down the tough changed from.

For the May to June so whether that premium growth levels or submission flow or just any way you can help us kind of get a little bit a picture of the progression as we went across the quarter and of course I know, it's just the last day July's, if you have any insight into.

How July look can be helpful too.

Yeah. Thanks, Matt. This is John so I'm going to focus my comments on our predominant segment, which is standard commercial lines call, 80% of our premium I would say you definitely saw over the course of the quarter Progressive improvement from from our topline perspective, and you saw the overall number of 3%, which actually was six industry.

Half of those.

Got it premium for commercial lines was about two points on that 5% for commercial so actually a pretty solid more warning to solid overall growth rate per center commercial lines and got slightly better asset quarter went on.

I don't know that it was that dramatic I think our performance has been pretty consistent and I will tell you.

July we still have to 40 days left today and tomorrow for previously.

I would expect July commercialized premium to be in excess of what you saw for the second quarter and I think thats, a combination of pricing and retention holding strong, but also very solid new business performance and I think this is an important point and I know companies talk about their competitive advantages and they're great relationships and our sophisticated tools.

We continue to thrive in this environment and the ability to produce a 3% growth rate. Even if you include those premium credits in a quarter, where are you all see what's happening to GDP in the quarter, having speaks volumes about our positioning in the marketplace and the fact that our remarks distribution partnerships.

Want to continue to grow with us and they continue to provide us with opportunities. We continue to use with tools, we have including a totally recently rolled out a couple of quarters ago that allows us to work with an agency to evaluate their entire portfolio relative to our underwriting appetite and identify accounts that we think when it would have a better whole once.

Selective I think thats feeding a fair amount of our growth opportunity. So.

Overall, I think we feel good about our ability to grow the commercial launch business. Despite what's going to continue to be some some economic headwinds as we move through the year.

I think again.

But I would just going to add causes one one observation to that as John exactly right. The performance has been exceptional growth rate has continued through July but one caveat I think would be remiss not to mention is we did lift as drilling holes to hold early July.

And depending on whether our customers come in line with their previous favored.

It could be a little bit of an offset instances and cancellations coming through.

September, but that's a little bit of a wildcard at this point, we don't expect density not meaningful that there is some potential put some pressure on the topline related to some cancellations due to the leading fees we had in place.

Okay perfect makes sense.

Then the other question what asking is.

He has been in the press in the past week kind of just.

At the past Committee, the New Jersey co a good deal presumption bill for workers comp and I know it's.

Robotic platform just your thoughts on it and kind of in relation to kind of your book of business and you are workers comp exposures and what you make of it.

Yes, Thanks, Matt. So this is John again.

I think we talked about this a little bit.

On the first quarter call I.

I think as long as a presumption laws or regulations remain appropriately focused on essential employees, who are required to interact with the public in the course of their employment.

Our very manageable and I think what you're seeing what was that what the New Jersey law proposed I think it's actually schedules offer the assembly floor today Assembly or center for today I would say that that bill as currently constructed is reasonable but also say that we're on we're far enough into this pandemic.

I have.

Good sense in terms of reported claim activity for workers comp and that includes those that would be covered and those that would not be covered and.

The to be presumption Bill when you think about the claims adjudication process for workers comp you're you would be hard pressed to deny one of those claims one of as a presumption law in place or not for an employee who is required to consider job because there were these essential in an essential business and could reasonably prove that they can.

Practices the virus in the course of their employment, but I'll tell you that what we've seen to this point and it doesn't mean that things can change and frequencies couldn't go higher as we move through the balance of the year, but to this point, there's nothing in actual reported frequencies to suggest that with or without a presumption law at any given.

See the activity for working age population is going to result in that much frequency ups severity now there are clearly segments of the employee population and specifically first responders and medical professionals, who work in hospitals and are routinely exposed to cope with positive patients.

And I think thats an entirely different story, that's not really what our workers comp book is made up.

So I can't speak to the experience on that product.

Great and then one last just numbers question I apologize if I missed it but that the cat losses in the commercial line segment as you have the split between the that's kind of three different lines that at least historically catch cat property the auto in the Bob.

Yeah, just give us here.

That breakdown.

We say you want within commercial lines within commercial line, yeah within commercial yet.

The core to the path.

Sure.

Yes.

Hey, good cat losses of though cap profitable.

37 points.

On the commercial property line commercial what I was just under appointed 80 basis points and Bob was 52.1 points. So the combined ratio in the quarter for a total of 10.1 points for commercial in total.

Got it great. Thank you very much.

Thank you Matt.

Thank you Matt next question comes from Paul Newsome from Piper Sandler Your line is open.

Morning, often morning.

You guys I was hoping you could talk a little bit more about and little bit more broadly about the competitive.

Environment at the moment.

This is particularly much you regional than you saw.

A heck of a lot of growth and it's a financial it it doesn't seem like we're seeing some of the pullback.

The competitive environment.

Amongst similar companies that we were seeing elsewhere.

Thats wrong.

Your thoughts on whether or not that's really you've seen an uptick or downtick in competition.

During the previous environment.

Yeah, well I. This is really hard to evaluate because I think the information flow with a pandemic ongoing is a little bit more challenged and it's also hard to really unpack some of the drivers of different companies performance between new business and stronger Retentions.

We pick our spots and we always have picked our spots and our agents are providing us with opportunities I've said and were our hit ratios actually if you want to think about hit ratios as a proxy for their competitive environment. Our hit ratios have actually been fairly stable across small middle and large accounts, which I think would suggest.

That's our hasn't been a radical shift from the competitive environment, but I I qualify that by saying that I do think some companies have struggled to maintain the level of interaction with their distribution partners because of the disruption in their operation and I'd say I can't speak.

For other companies, whether regional or national but our operating model has underwriters that are specifically assigned to agents as opposed to broken out by a class of business. What that does it gives you a great lineup communication to the individual producers on account so our ability to.

Feed off of those relationships and maintain them with outbound calls to request opportunities is different from companies who might have more of a centralized underwriting approach, where there's not enough established relationship between the account producer and the individual making that underwriting decision. So per companies that are structured like us and there might be one or two.

Others that when you would put in that category are probably having an easier time identifying opportunities in creating submission flow.

Since the end.

A little bit really bleed.

Well, we talk about.

Through the little bit more about the claim cost inflation and the new detailed some.

Contradictory comments I think maybe you could we played well for various companies about whether or not we're seeing an uptick in the underlying.

Inflation is the.

Underlying inflation for the business.

Obviously, it's not easy to tell with all the other things going on at the same time, but GW further thoughts on that yeah, I don't know that I would consider our commentary to be contradictory of what you're hearing I think what we often point to is that we have always had a disciplined approach and making our casualty loss picks and.

Always embedded and expectation for future loss trend, so while actual frequency and severity trends over the last several years will influence a loss ratio pick for a casualty line, we would always adding an expectation for future loss trend and over the last couple of years that expectation.

It has gone up and we've been fairly transparent about this and would have been in that 3% range typically a few years back and over the last couple of years, we've entered that up in just under 4% for commercial lines and I think to your point, you've got a couple of quarters now where it's hard to make any determinations as to whether or not that trend.

And modified in any way, but I think for us and our ability over 10 years. When you look at the track record and layout rate and retention over the top of that loss trend weve been meeting or exceeding that number on a consistent patients for 10 years, so turning that dial up a little bit, which I think and our pricing outlook discussion we.

I think there's just there's a need at an opportunity to dial up price a little bit going forward as driven by a number of factors, while while one of that might be a movement from a loss trend perspective. You also have this cat and non cat loss volatility, but most importantly, you've got this lower for longer investment environment that for all.

All companies and we certainly embedded into our approach while lowering our effective target combined ratio. Because you can you can fully expect that through the balance of this year as a 21 at a minimum youre going to generating less ROI, we premier investment portfolio, unless you're willing to dial up the risk profile, which is not how we do business. So.

We're going to need to lower your combined ratio target, which will lower your price ratio pricing indications and that's how we'll work that for so long way of saying I think we recognize some increase in loss trend, but also when our portfolio of smaller to mid sized accounts of generally lower limits profile. We don't we don't see there sort.

Our headline loss ratio loss trend movements at some other companies may be pointing to.

But my apologizing to say Youre.

If you take two industry I, just think we've seen a lot of different use.

Let me just Kuhn no offense taken.

[laughter].

Thank you very much.

Thank you. Thank you bill.

Thank you next question comes from Sean.

From KBW your line is open.

Good morning, Sean.

Yes.

Can you have walk us through what you saw with workers comp claim counts through the quarter and let them as as they've got towards the end and then also maybe just a word some words on pricing as we've heard some talk about pricing potentially being nearing a bottom.

Yeah. So I'll, just I'll start and we don't get into a lot of details or specifics around individual line claim counts in the quarter, but suffice it to say that based on my prior comments relative to the workers comp presumption discussion, we have not seeing significant level of coded related workers.

Claims reported but I think clearly we have seen a drop off in non correlated claims reported over the course of the quarter.

I will say you have started to see it returned to a little bit more of a normal run rate, but still still below what we've historically seen as mark and I. Both indicated in our prepared comments, we haven't reacted to that frequency for our casualty lines I think it's not prudent to do so because of the says the severity driver on the.

Casualty loss picks and the need to allow those to the age a little bit more before reacting to that so that would be the point relative to claim counts in terms of pricing that I've seen the commentary relative to workers comp bottomline price, reaching a bottom.

I'm not going to disagree I think thats, probably accurate, but you want to put that on the proper context, which is it's bottoming out of significant negative rate level and it will likely continue to be negative might be less negative as we move into 21, but it's still going to be a negative influence on the forward loss ratios for that line of business I do think what you might start to see.

As we commented on this in the past in addition to the Bureau filed rate changes, which have continued to be negative I think you've seen some aggressive pricing activity in the market on top of that that might start to change, which will make pricing a little bit better, but our expectation is you're going to continue to see negative filed rate change.

Albeit slightly lower less negative than they had been to this point.

Thank you that's a that's helpful.

Secondly, can you guys what kind of feedback have you guys got on the personal auto rebates and how are you thinking about.

Personal line exposures to some of the bigger auto insurers potentially.

Acting rate decreases.

So a little bit below where it historically made but not meaningfully below.

With regard to the actions of the bigger auto writers, it's just not any already we compete in we're generally writing.

Companion accounts that package up the auto and home and were generally competing for more of what we would describe as a console pay the buyer who is going to focus a little bit less on price and a little bit more on making sure they're buying the writing product with the right coverages to protect their interest there on what their home as well so I will say that that.

Change in competitive environment amongst the bigger players won't put pressure on auto hit ratios, but its listened to small segment of business for us you've seen us struggled to generate consistent topline growth and auto in part because of that competitive pricing environment and the pressure that goes on our hit ratios and we think that will probably continue.

With some of the actions that we've seen from some of the bigger players.

Okay. Thank you very much be will.

Yes.

Operator revenue more questions online.

Yes are we had a question from Wells Fargo from Boenning. Your line is open.

Yes, hi, there and good morning.

Execute smaller pieces here I want to talk about the surplus line market.

Had a lot of company sitting there pretty excited about opex in that lie in that business rates going up submissions going on so I just want to get it feel for what you guys you're seeing that line, what we should expect going forward.

Yes. Thanks.

We saw solid growth quarter out of BNS, not extraordinary obviously, but in light of the economic circumstances pretty solid growth and pretty solid improvement from a pricing perspective, I think it's important to recognize that what we write and DNS tends to be the smaller it's a $3000 average policy size.

Size predominantly in the binding authority space.

Lower end from a severity perspective, and complexities respectively in the Ines market. So I think some of what you might see in terms of a headline is relatively DNS tend to be focused on.

Cash flows are coastal property in some of the higher casualty and certainly excess is one of the areas that that's running pretty hard from a market from a perspective, how much I have one area that we have seen some migration from the admitted to the non admitted market would be habitational and that's a segment that typically does bounce back and forth between has.

That does not have ended at times like this and that is presenting some opportunities for us. That's also a bit of a challenge segment from a pricing perspective, and as an area in either of rate level.

Got it okay.

And one other smaller and apologies to Mark maybe I missed it but other income went up in the quarter more than I expected it to it.

Driving at that one timers, they expect sales and some strength there going forward.

Yes, the other income line, there's a couple of different items than that.

As we netted off again other expenses within the expense ratio. When you look at that combined ratio, there's nothing in particular that sat down.

So kind of ongoing run rate in other income.

Okay.

Great. Thanks.

Thank you.

Thank you. Our next question comes from Charlie letter of credits your line is open.

Morning, guys, Hey, guys just one more.

On the commercial standard lines pricing.

Just wondering if there's anything to kind of going from that.

Decelerating quarter over quarter.

Just looking at the SAP supplement.

And I would.

I hesitate to give our quality accelerating I mean underscoring the three nine.

To slight movement by aligning when I say slight we're talking 10, or 20 basis points would be workers comp down a little bit backup back of the mix of business generated and then property was probably down about a similar amount to 4.5% in the quarter versus four seven on a year to date basis I would I retire.

Our crisis as stable pricing over the last few quarters, where we do pay theres, an opportunity and property certainly.

You might see some improvement, albeit still negative and comp and NGL line continuing tends to move further north and then proper auto excuse me, we would expect to continue to be at the kind of run rate. We've seen so I think we feel good about the pricing environment, but you did see us say, a stable quarter and our results and I want to at all.

I will highlight and I know I've said this a couple times in that in the prepared commentary, we've got a really high quality and adequately priced enforce book of business driving our results in commercial line. So to a certain expect your underwriters are going to make sure they're focusing on protecting that renewal book.

And I think you might have seen some of that in the quarter with all of the struggles in the economy. There are certainly desire to protect that renewal inventory.

Got it thanks again guys.

Thank you could be speakers, we don't have any more questions on Q I'll turn the call back to John for closing remarks.

Thank you all for your participation today, we appreciate the engagement with the questions and feel free to reach out to those are rohani remark with any follow ups. Thank you all thank you.

Thank you Tim that concludes today's conference. Thank you all for joining you may now disconnect.

Q2 2020 Selective Insurance Group Inc Earnings Call

Request a DemoDemo

SIGI

Selective Insurance Group

Earnings