Q3 2021 Selective Insurance Group Inc Earnings Call
Good day, everyone welcome to selective insurance group's third quarter 2021 earnings call at this time for opening remarks, and introductions I would like to turn the call over to senior Vice President Investor Relations and Treasurer Rohan Pai.
Good morning, with Diamond Guard thing Thats gone on our website selective dot com. The replay is available until November 27.
We used three measures to discuss our results and business operations first we use GAAP financial measures as reported in our annual quarterly and current reports filed with the SEC.
Second we use non-GAAP operating income and non-GAAP operating return on common equity to analyze trends and operations.
We believe these measures make it easier for investors to evaluate our insurance business.
Non-GAAP operating income is net income available to common stockholders, excluding the after tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities.
Non-GAAP operating return on common equity as non-GAAP operating income divided by average common stockholders' equity.
GAAP reconciliations to any reference non-GAAP financial measures in our supplemental investor package found on our website investors page.
Third we made statements and projections about our forward growth.
These are forward looking statements under the private Securities Litigation Reform Act of 1095, they are not guarantees of future performance and are subject to risks and uncertainties.
We discuss these risks and uncertainties, including supplemental disclosures about the COVID-19 pandemic and detail in our annual quarterly and current reports filed with the SEC and we undertake no obligation to update or revise any forward looking statements.
Now I will turn the call over to John <unk>, Our President and Chief Executive Officer, who will be followed by Mark Wilcox, our EVP and Chief Financial Officer.
Thank you Ron and good morning.
I'll make some introductory comments about our results and highlight some of the higher level themes impacting the industry and our company Mark will discuss our financial results and then I'll return with some brief closing comments before opening the call up for questions.
We delivered another strong quarter, despite elevated catastrophe losses, principally related to hurricane Isaac.
Our strong underlying profitability allows us to generate an underwriting profit EBIT when net catastrophe losses are elevated as was the case in the third quarter.
While negatively impacting our quarterly results tragic events like hurricane either provide us the opportunity to deliver great value to our customers at their time of greatest need.
I'm proud to say that is exactly where our claims professionals have done.
We generated a solid annualized operating ROE of 10, 6% for the quarter for the first nine months of the year, our annualized non-GAAP operating ROE was 14, 5% well above our full year operating ROE target of 11%.
It also builds on our seven year track record of generating consistent double digit operating Roe.
Putting us among a very small group of peers that have achieved similar results.
I am pleased to announce that our board of directors underscoring our strong financial and operating performance approved a 12% quarterly dividend increase to 28 per share.
Our underlying underwriting performance remains at expected levels and our investment performance, particularly from alternative investments contributed meaningfully to overall results for the quarter and year to date.
For the quarter, our strong net premiums written growth of 13% was driven by renewal pure price increases averaging five 3% for commercial lines and five 6% for E&S.
Exposure growth of approximately 3% on our renewal book for commercial lines saw.
Solid commercial lines retention of 86%.
New business growth of 24% for commercial lines and 20% for E&S.
Our 98 six combined ratio for the quarter included 10 points of net catastrophe losses, partially offset by one eight points of favorable prior year Casualty reserve development.
The underlying combined ratio was 94 reinforcing the high quality of our book of business.
Net investment income after tax was $75 million in the quarter benefiting from the exceptional performance from our alternative investments, particularly unrealized gains on our private equity limited partnership portfolio.
I'd like to highlight a few key themes.
First property losses across the industry remain volatile in the third quarter was no exception and there is nothing to suggest that this trend of increased volatility will reverse and industry pricing does not currently reflect this reality.
Individual company results should not be evaluated on an ex cat basis, but rather to over time inclusive of an expected cat load.
In our case that cat load is four points in a typical year and as noted in our updated guidance. We expect 2021 to be above that level as hurricane Ida is likely to be one of the costliest events in U S history.
We seek to manage our catastrophe risk through strong risk modeling and oversight disciplined underwriting guidelines and pricing actions and prudent reinsurance purchases.
Second the industry faces, increasing headwinds and higher uncertainty relative to loss trends driven by both economic and social inflation.
Neither is a new phenomenon, but both have increasingly.
Additional uncertainty has been introduced by the pandemic related reduction to claim frequencies that meaningfully impacted loss experienced in 2020 and continued albeit at a less significant level through the first nine months of 2021.
These factors call for strong discipline around establishing forward loss selections and pricing targets and consistently achieving those targets over the long term.
For 10 consecutive years, our renewal pure price increases have met or exceeded expected loss trend.
Third the industry continues to face lower after tax Butchy book yields on their investment portfolios as new money rates on core fixed income portfolio remain close to record lows.
Many companies, including selective have benefited in recent quarters from the strong returns and alternative investments. These returns are likely to normalize in coming quarters lowering the ROE contribution from investment income.
The ongoing industry wide pressure on after tax investment portfolio book yields must be offset by improving underwriting results. It is a strong underwriting companies like selective that are best positioned to drive in this environment.
Finally, we continue to execute on balancing our objectives around growth and profitability. Our consistent success is a testament to our excellent distribution partner relationships sophisticated underwriting and superior customer servicing capabilities.
For the first nine months of the year commercial lines renewal pure price increases averaged five 5% new business was up 13% and the renewal retention was a solid 85%.
For smaller commercial lines accounts with policy premium of less than $10000 renewal pure price increased four 7% in the first nine months of the year.
While larger accounts in excess of $100000 in premium generated renewal pure price increases of six 1%.
Across all size cohorts, our highest quality accounts based on future profitability expectations, which constituted 25% of our renewal premiums for the first nine months produced three 2% pure rate and point of renewal retention of 93%.
Our most challenged accounts comprising 11% of our renewal premium generated 10% pure rate and point of renewal retention of 85%.
Our ability to understand and price risk on a granular basis has allowed us to maintain strong retention, while generating loss ratio improvement through an improved mix of business over time.
We remain extremely well positioned from an operating and financial standpoint, we continue to deliver on our plans to generate consistent profitable growth.
Now I'll turn the call over to Mark to review the results for the quarter and return with some additional commentary before taking questions.
Thank you John and good morning, I'll review, our consolidated results discuss our segment operating performance and finish with an update of our capital position.
For 2021.
For the third quarter, we reported net income available to common stockholders per diluted share of $1 18, and non-GAAP operating earnings per share of $1 18.
This translated to an annualized ROE non-GAAP operating ROE of 10, 6% with a meaningful contribution from investments this quarter.
<unk> were particularly strong in the context.
The elevated catastrophe loss quarter.
For the nine months ended September <unk>, our annualized non-GAAP operating ROE of 14, 5% to 7% is well above our 11% target for the year driven by strong underlying underwriting results favorable reserve development and alternative investment income overall, we are extremely pleased with our performance so far this year.
Consolidated net premiums written for the third quarter increased 17% compared with a year ago.
Mary drivers of our top line growth was strong renewal pure price increases exposure growth solid retention rates and strong new business growth in outstanding commercial lines.
E&S segments.
Year to date net premiums written increased 17% or 12% when adjusted for the prior year COVID-19 related premium premium items.
We reported a consolidated combined ratio of 98, 6% for the third quarter included in the combined ratio was $76 3 billion of net catastrophe losses, or 10 points and $14 million of net favorable prior year casualty reserve development of one eight points.
Principal driver of catastrophe losses in the quarter was hurricane Ida, which accounted for 54 billion of gross losses.
Net losses from Ida for $43 million as we exceeded our catastrophe reinsurance program retention.
Majority of our Hurricane Ike losses were incurred in the states of New Jersey, New York, Maryland, and Pennsylvania, and all of our losses represented a substantial component.
After a relatively benign first half of the year for catastrophe loss activity to selected yesterday catastrophe losses of that running higher than expectations, principally driven by hurricane Idaho.
On an underlying basis or excluding catastrophes and prior year Casualty reserve development. The combined ratio was 94% for the quarter.
So the nine months of the year, we reported a combined ratio of 92, 6% and an underlying combined ratio of 89, 8%. This compares favorably to our initial 2020 guidance of a 91% underlying combined ratio primarily reflects better than expected non cat property losses at a lower than expect.
That expense ratio.
Moving to expenses our expense ratio was 32, 6% for the quarter compared with 32, 4% for the prior year period for the first nine months our expense ratio of 32, 4% reflects some of our cost containment initiatives as well as lower than expected travel and entertainment and overhead expenses.
We continue to expect ongoing improvements to our run rate expense ratio over time.
Ensuring we don't sacrifice investments to support our long term strategic objectives.
Corporate expenses, which are principally comprised of holding company costs and long term stock compensation totaled $4 3 million in the quarter compared to $3 9 million a year ago. The increase was driven by stronger performance relative to our peer group, which impacted the variable component of our long term incentive compensation plan.
Set in part by decline in our stock price in the quarter.
Turning to our segments for the third quarter standard commercial lines net premiums written increased 17% driven by renewal pure price increases, averaging five 3% solid and stable retention of 86% of new business growth of 24% exposure.
Exposure to growing from revised economic activity also provided a healthy tailwind.
For the first nine months of the year net premiums written increased 19% or 13% when adjusted for the prior year Covid $19 million of items.
The commercial lines combined ratio was a profitable 97, 2% for the third quarter that included eight one points of thank you casualty losses, and two three points of net favorable prior year Casualty reserve development.
<unk> prior year Casualty reserve development consisted of $8 million outlook is compensation.
For general liability and $2 million for the offline and related to lower than expected claims emotions for accident years 2018 and.
The underlying combined ratio was 91, 4%.
In our personal lines segment net premiums written declined 2%, reflecting continued competitive market conditions, particularly proposal.
Renewal pure price increases averaged four 2% for the quarter retention was slightly out relative to a year ago at 84% of new business was down 15% the.
The combined ratio in the quarter of 115, 2% was impacted by 26 seven points of net catastrophe losses.
Hurricane items contributing 13 six points the underlying combined ratio was 88, 5%.
Our E&S segment net premiums written increased 32% for the quarter relative to a year ago renewal pure price increases averaged five 6%.
Pension was higher and new business is up 20% the combined ratio for the segment was 93, 7% in the quarter, which included nine two points of net catastrophe losses. The underlying combined ratio was 84, 5%.
During the quarter, we entered into a transaction with I'll go with a 10, one effective date to purchase of renewal rights for its E&S full commercial contract binding business.
Book has a similar risk profile to us with a focus on small contractors habitation and retail classes with an average premium per policy of approximately $2000. We currently expect to renew between $20 and $40 million of premium which is a small portion of <unk> prime enforce book from a financial standpoint, we view this as an attractive trans.
<unk> trucks.
All of which we will not be assuming any legacy reserves of comps this transaction fits us strategically by increasing our distribution points with wholesale brokers as part of the transaction. We are very pleased to welcome nine former algo E&S employees to selected <unk>.
Building out and strengthening our E&S underwriting capabilities in seat.
Moving to investments our investment portfolio remains well positioned as of quarter end, 91% of our portfolio was invested in fixed income and short term investments with an average credit rating of AA, plus and an effective duration of four years offering us a high degree of liquidity risk assets, which include our high yield allocation contained within fixed.
Income public equities and limited partnership investments in private equity private credit and real asset strategies represent 10, 8% of our portfolio.
For the quarter after tax net investment income of $74 7 million was up $19 6 million from the year ago period. The increase was primarily driven by $73 8 million of after tax alternative investment gains compared to $14 $7 million in the comparative period as a reminder, net investment income from alternative investments.
<unk> is reported on a one quarter lag.
We have now experienced five consecutive quarters of very strong income from alternatives. The returns over the last five consecutive quarters of well above long term expectations are not sustainable.
The after tax yield on the portfolio was three 8% for the quarter delivered a strong 11 points of our REIT contribution with alternative this contributed about five points.
The after tax yield on fixed income securities was $2 five to seven in the third quarter, which is which was slightly down from two 6% in the year ago period. The total return on the portfolio was <unk>, 8% for the quarter, primarily reflecting the strong alternative asset performance.
Average after tax new money yield on fixed income purchases during the quarter was one 8% compared with two 2% for the year ago period strong operating cash flow of $543 million for the first nine months equated to 22% of net premiums revenue.
Turning to capital our capital position remains extremely strong with $2 9 billion of GAAP equity as of September 30th.
Book value per share has increased 7% during the first nine months of the year to $45 27.
Benefiting from our strong earnings.
We have built significant financial flexibility with $515 million of cash and investments at the holding company.
Net premiums written to surplus ratio is at the low end of our target range of 135 times.
During the quarter, we repaid $60 million of federal home loan bank debt, which reduced our debt to capital ratio of 14, 6%.
Our significant financial flexibility gives us the ability to grow at rates above our sustainable growth rate, particularly while the pricing environment is strong and it also allows us to evaluate attractive opportunities to advance our strategic objectives.
We did not repurchase any shares fund third quarter subsequent to quarter end under our $100 billion share repurchase program, we have $96 6 million of remaining capacity under the program, which we plan to use opportunistically.
I will finish with some commentary on our updated outlook for 2021, we now expect a GAAP combined ratio excluding catastrophe losses of 88%. This is an improvement from our prior guidance of 89% and reflects strong profitability inclusive of net favorable casualty reserve development in the first nine months of the year.
Our guidance assumes note fourth quarter prior accident year Casualty reserve development.
We've increased our catastrophe loss assumption of five points on the combined ratio from four points, reflecting the elevated catastrophe losses in the third quarter, principally from our big item.
We now project an after tax net investment income of $240 million, including $75 million in after tax gains from our alternatives. This is up from our prior guidance of $220 million at $55 million.
<unk> and principally reflects the very strong third quarter after tax net investment income from alternatives.
To expect an overall effective tax rate of approximately 25%, which includes an effective tax rate of 19, 5% for net investment income and 21% for all other items. Our prior guidance was for an effective tax rate of 19% for net investment income.
Finally weighted average shares remained $60 5 million on a fully diluted basis.
In summary, our ability to generate solid returns despite elevated catastrophe losses speaks to the underlying profitability of our book of business.
Well positioned investment portfolio and the ongoing successful execution of our strategic objectives. We are very pleased with our year to date 14, 5% annualized operating Roe.
While our reported results continue to reflect some nonrecurring benefits such as higher than expected alternative investment income and favorable prior year Casualty reserve development. Our underlying results are very strong we are delivering on our objective of disciplined growth and we remain exceptionally well positioned with that I'll turn the call back over to John.
Thanks, Mark we remain on track for 2021 to more of our eighth consecutive year of double digit ROE and an industry that struggles to consistently meet its cost of capital.
It is our unique operating model topnotch distribution partners and talented and hard working employees that have driven this performance and have us positioned to maintain this top tier performance well into the future.
We also remain focused on making the investments necessary to further enhance our competitive position.
Our enhanced small business platform is generating strong early returns in this segment of the market in which we have always excel.
To support our strong growth in the E&S segment, we are nearing completion of our new underwriting platform that will improve agents' ease of interaction with us in personal lines the necessary product enhancements to compete in the Apple and market have been deployed and are being well received in the market.
While the decline in our non target segment is masking the growth we are experiencing in the mass Apple in market, we expect person the personal lines segment to generate growth in 2022.
We continue to invest in our digital customer offerings as adoption continues to accelerate these.
These platforms along with our ongoing focus on innovation to expand our value added service offerings are expected to generate future retention benefits.
And we invest in our key distribution partners through various agency development programs in support of our goal of achieving a 12% share of their business.
As we look to the remainder of the year and into 2022, we are confident about our ability to build on our long term track record of superior financial performance. We have a strong market position that is bolstered by our franchise distribute distribution partner relationship strategy.
We also have the tools technology and people that will help us execute on our plans.
Above all we will remain prudent and disciplined in our approach to generating profitable growth and approach that has been key to our delivering superior operating and financial performance over time.
With that we will open the call up for questions operator.
Sir.
At this time, we will begin the question and answer session. If you would like to add.
If you would like to ask a question. Please press star on your touched star one on your Touchtone phone. Please mute your phone and record your name and company when prompted.
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Our first question will be from the line of Charlie that are possible.
Research. Your line is open. Please go ahead.
Hey, guys good morning.
Good morning, Mike.
My first question is so your ex Cat combined ratio guide for the full year is a bit higher than the year to date performance can you talk directionally about some of the factors driving that.
Look for <unk>.
Yes, good observation. So when you think about the guidance for 2021, we started the year with.
Combined ratio of 95% and that included all points of catastrophe losses, an underlying combined ratio of 91%.
Our current guidance is for a combined ratio of 93%, which includes five points of cat losses, our Nx and ex cat combined ratio of 88%. So we have two points.
Moving from where we started the year.
If you look at it on an underlying basis, so ex cat ex favorable reserve development.
Worried about at 89, 8% on a year to date basis, which compares very favorably to that 91% when we started out the year.
And you can sort of back into the underlying for the full year.
Year to date reserve developments and.
Allocate that across the full year, so that would be at 92%.
Underlying combined ratio for the full year.
Take a look at the expectations for the full year versus year to date. We are you can sort of back into what the Q4 expectations.
Which would be at 94, 2% combined ratio of 91 six of our next cap basis was 91, 6% on an underlying basis, but really what we're reflecting is our expense ratio is sort of coming back to expenses coming back normal expectations that we had going into the non cat property losses.
It goes back to kind of Bob.
Original expectations for the full year.
Overall I think we're very pleased to report very strong improvement in the underlying combined ratio versus expectation.
At an overall combined ratio that is.
Better than expected when we started the year.
Okay, Great and then I guess for my second question on the underlying loss ratio.
Excess and surplus lines segment.
Improved quite a bit how can we think about the trend there.
And then just a quick one.
Sorry, if I missed this.
Remarks, but was there any notable benefit.
Personal lines from your flood program or should we expect one.
In the fourth quarter.
Yes, maybe I can start and Sean can jump in so starting with E&S just to make sure. We're looking at the site numbers, if I take the underlying cause.
Combined ratio in back half expenses.
And then back out non cat property losses.
Underlying call it casualty loss ratio within E&S is I'd have is up 47, one posted a 45 one.
And the comparative third quarter periods, so that's actually up a little bit.
But if you look at just the pure loss ratio, we did benefit from lower non cat property losses in the current quarter, which I think is the.
His efforts we outlook in the E&S.
DNS casualty loss ratio, a little bit higher in 2021.
In 2020.
But overall I would say in market the key points there what youre seeing in terms of the outperformance. This year is largely related to better than expected non cat property, while we still like the directional improvement that we've seen over the last couple of years in the E&S segment, we liked the rate level, we're getting there we're seeing good strong growth. So we're pretty pleased with the forward.
Our potential with.
With regard to both growth and profitability improvement in the E&S segment.
And then just back to the comments on personal lines. I think the question was was there any plus benefit do we expect any more in the fourth quarter.
Clearly as one of the top writers in the right growth flood program.
Chaucer's to adjudicate claims software big event for us.
The industry was a big event, we have relatively.
On the waste market share in the state of Louisiana. So the flood claim benefits there was not that significant but in the northeast, particularly in New Jersey, we have a pretty healthy market share in the write your own program. So.
So we adjusted a lot of clients in Q3 related to hurricane items, we recorded about $2 $2 billion of claims handling.
Fees within the quarter about $1 $5 million of that related to hurricane Ida and that was reflected as a benefit within the personal lines segment Q3, essentially all of that has been recorded in Q3, if we see some development from a flood perspective into Q4 that might be able to hold your comps are.
Patient that's all been reflected in Q3.
Thanks, guys.
Thank you. Our next question would come from the line of Chris Kearney with Bank of America. Your line is open. Please go ahead.
Hi, everyone.
Good morning, Chris Good morning.
You all talked about the loss cost trend of around 4% for commercial lines. I was wondering just given the recent uptick in inflation, how youll see that trending from here.
<unk>.
And accurate forecast.
Yes, I guess.
Addressed a little bit of this in my prepared comments from an industry perspective, but just in terms of how we think about it I think the first important point to make is we have always been very transparent about our view of expected loss trends and we build that into the reconciliation that underlies our combined ratio guidance and over the last couple of years what.
We have seen and you see in that guidance is.
An incremental movement up from about 3% to about 4% on an overall basis and I would say that what's fairly reflected relative to commercial lines as well as we sit here today and I know we spent a lot of time on this last quarter as well there are some some dynamics in the current loss trend environment that I think.
Need to be reflected going forward and from our perspective.
We could be looking at an incremental move higher.
The forward loss trends, but I think we're creating uncertainty as we continue to be in this environment, where frequencies continue to run lower than expected and while its not at the level of what 2020 was it continues to run a little bit lower than expectations through 2021, and then <unk> got this offsetting impact on the severity side.
And the severity is driven in part by that lower frequency by in part by other factors being economic inflation and social inflation and I think that's what we work through as part of our year end process and we'll be very transparent as we get into January or later January with our 'twenty two guidance relative to how we think about that.
But theres no question those are impacts I think you just have to factor in what happens with regard to frequency going forward and at what point does it returned to normal and then what is the offsetting severity impact if and when that happens.
Thank you and I guess just.
Another one on inflation across the industry. It seems like a lot of.
Conversations around inflation is focused on personal lines I was wondering if you're seeing any differences.
The elevated severity from repair cost in commercial lines versus personal lines, there or if it feels pretty consistent.
I think they've actually become more consistent I think last quarter, we saw a little bit of a different specifically on the property side, where personal lines was more elevated as an impact from inflation in commercial largely because of the higher prevalence of lumber and personal property repair than commercial.
The repair with lumber backing back down we see current.
Blended construction cost index change in the third quarter, that's about the same for personal and commercial property and I'll come back and hit on a second but it's kind of back down to that 6% sort of range, which you would expect to see come through in severity, but again, we were kinda will continue to live in a lower frequency environment. So there is an offset.
There on the auto side again, it commercial is a little bit different because the range of auto types is a lot different innovation in personal lines, but just to give you a sense from an industry number perspective in Q3 and this comes from one of the primary auto material damage vendors.
Blended claim cost increase on auto physical damage in the quarter is up about 15% and that's a combination of total loss continued to be up north of 30% and repair costs being up about 8% so it points.
Once together that way and if you look at our results in the in the auto lines you can see that non cap property comes through a little bit higher on a year over year basis, and you would attribute some of that too that that cost of repair thats running higher. So I think it is normalizing when you've got this higher starting point that needs to be worked through.
And then the longer term question becomes when does frequency returned to pre pandemic levels.
Which has been an offset to this point so I apologize for the long winded answer, but thats kind of how we would think about.
<unk> cost impact of economic inflation coming through.
Thank you.
Thank you. Our next question will be from the line of Scott <unk> of RBC capital markets. Your line is open. Please go ahead.
Yes, good morning.
I'm just wondering you mentioned personal lines do you expect to return to growth for 2022, which I'm assuming is this going to be driven by.
The high net worth and some of the initiatives you have there you mentioned.
But youre changing some parts of the portfolio, but.
Could you give an update on <unk>.
Just expand on that.
Where do you see that growth coming from is that going to be high net worth.
And how many can you refresh us how many states you.
And now and what your plans are for 'twenty two on that front.
Yes, sure I'll, let me just expand expansion first and we are currently at 15 states for personal lines and Thats been the case for a couple of years, we did expand into.
Arizona, and Utah, along with our commercial right. After our commercial lines expansion into those states. A few years back we don't have any near term plans to open up additional states. So the growth looking forward in our current plants will be coming from that existing 15 state footprint in terms of the growth we are seeing and again as I said in the prepared comments.
The overall portfolio growth showing negative.
In the quarter is masking some of the growth in our target market because we are seeing some pressure on the retention and drop off in new business in what we would consider our non target market going forward and we do expect as we move through 'twenty two quarter by quarter, we expect to see that start that balance start to shift and in the latter half.
The year, we'd expect to be in a stronger growth mode than we are in the first or second quarter, but that is that is driven entirely by our new target market business, we still although it's less than <unk>.
On a competitive auto environment to drive the growth it is still somewhat dependent on that and what we're seeing.
Over the last 18 months a lot of the larger players in personal auto rather than just continuing to provide credits opted to modify their rate plans down we saw a fairly significant move in the competitive landscape on auto which is still hurting our ability to grow the overall segment.
Our expectation is that we will start to reverse and you've hurdle of public commentary about forward rate finally expectations for a number of players we opted to handle that pandemic related drop in frequency through credits as opposed to making a wholesale change to our filed rate plan on the belief that the driving environment.
We returned to normal over time.
So I think that puts us in a better position going forward.
Okay.
Really helpful and just moving on to the you mentioned the auto renewal rights transaction, the $20 million to $40 million of premium was there any premium included in Q3 within that and then also could you talk about if there's any difference between.
That loss ratio business versus say geese CNS loss ratio is there any material difference in there.
Great. Great question first question is no there's really no third quarter premium impact from that this will largely be a fourth core up fourth quarter and then to the first three quarters of 'twenty two with regard to the to the pricing or profitability impact I think it's important to recognize and that's why we have with the <unk>.
Assumption, we have relative to the premium we will acquire which is a portion of the premium thats currently in that portfolio. Because this business will be offered a renewal on our forms are what our rating structure in our terms.
So we do expect to see.
A certain retention level.
Underlying that $20 million to $40 million number that Mark gave you. So we fully expect this to mirror, what we right not just by class of business, but in terms of price per unit of exposure and the terms and conditions.
Okay that makes sense.
Then lastly, I just wanted to touch on the dividend really nice dividend increase obviously good to see.
I believe this is the second year of a pretty significant.
Dividend increase so I'm just wondering if you could share the dividend policy. Obviously, you look at payout ratio. There's a lot of different factors that you would obviously consider.
But anything you can you can share on that how we should be looking at the dividend going forward.
Compared to maybe how you looked at it in the past.
Yes. Good question, perhaps I'll start and then John can provide some additional color if necessary so.
Okay.
Generating good returns for our shareholders for us means one generating strong operating Roe.
As far as being good stewards of our shareholders' capital and I think the dividend strategy is a reflection of that so for US we are.
Focus on disciplined profitable growth.
And the key contributing to funding that growth is profitability in retained earnings.
As a company that has a relatively high growth rate relative to the industry as a whole.
Focusing hard on the dividend payout ratio, ensuring we have a good sustainable growth rate is something that we focus on so we think about a sustainable growth rate is a function about florida are weak and the dividend payout ratio.
And we target a dividend payout ratio of around 20% to 25%.
<unk>.
We'd like to get through the third quarter get through hurricane for the most parts, we hurricane season before we reset the quarterly dividend.
But we think it's a good way to return some capital to our shareholders. While also retaining profitability in the form of capital to fund our future growth. So.
So we felt very good about the 12% dividend increase up to 28.
I think upload felt very comfortable with our capital position on growth prospects in our forward earnings expectations.
That's how we how we think about the dividend.
Okay. That's good comprehensive answer I appreciate all your answers. Thank you.
Thank you.
Thank you Sir our next question will be from the line of James backup <unk>. Your line is open. Please go ahead.
Good morning. Thank you can you discuss a little bit more.
Some of your plans are to achieve more savings outside of kind of a tiny movement, that's going on with the pandemic.
Do you expect with the cost containment efforts are focused on and how you're sort of balancing that with your growth plans.
Yes, I'll start and market certainly provide some additional commentary from our perspective. This is all about continuing to gain operational efficiency working smarter leveraging technology to allow our employees to handle an additional workload without needing to create more effort on their part so.
We really think about managing our fixed expenses and the growth in our fixed expenses at a lower rate than our top line is growing as a way to build those economies of scale and again, absolutely. That's a combination of working smarter, but also better leveraging technology and we've made a lot of investments in this area I know we've highlighted some of them in the past, but theres been a number of investments towards.
Underwriting tools test management tools that really help our underwriters to become more efficient net result of that as they could handle a larger renewable portfolio.
What the same result from an underwriting perspective, and I think that's really where our focus is this is not about cutting expenses out as mark indicated previously we're going to continue to make the investments and I highlighted a couple of them relative to technology from a small business into the E&S perspective were personalized product development, we're going to make those investments. This is not about cutting edge.
So this is about making sure that we're better leveraging the resources we have.
And growing our fixed expense rates at a much lower rate than we're growing our net premiums written and I think that'll be there continue to be the primary driver.
That's exactly right and I think from our perspective.
To generate continued consistent profitability being efficient in terms of how we think about expenses as important as we've mentioned in the past, but we think about mix of business a heavy weighting towards standard commercial lines and E&S slightly lighter weighted towards postal lines in some of our players we think an appropriate expense rate.
So for us on a long term basis is around 32%.
If you go back a couple of years, we were in the low 35% range from an expense ratio perspective.
Guidance for this year was 33 were $32 four year today. So we've been able to make those significant long term investments to drive underwriting profitability to support our authorization to higher really strong talented underwriters that individuals, but also drive the expense ratio down and as we look ahead to 2022.
It takes about 2023, we do have line of sight and see a pathway to getting down to that 32% expense ratio and J&J. One other point I'll make and I think this might be stating the obvious but I think we've also learned a lot through the last 19 months about our ability to deliver services virtually that used to be delivered in person.
And whether it's in the claims area and virtual inspections for certain claims types or in our safety management area, where we can now deliver much more efficient safety services to a broader population of our customers and do that much more efficiently by leveraging one of these virtual capabilities I think that's a that's a permanent benefit that will help.
On the efficiency side going forward, but also help on the customer experience side, and I think thats, a real beneficial outcome over the last 19 months.
Thank you that covers it for me.
Thank you.
Thank you once again, if you would like to ask a question you May press star one and to cancel your request you May Press Star followed by number two our next question will be from the line of Matt correlated with JMP. Your line is open. Please go ahead.
Hey, Thanks, good morning.
Hi, Matt.
Couple of questions. One just a follow up on the Argo renewal rights book.
Your current E&S book is up about two thirds, one third split casualty versus property should we expect something similar of that 20 to 40 million that you expect to renew or is there a reason to believe that it will be materially different.
We don't expect this will change our mix and this is largely in the binding segment, we think about our BNS business in two distinct <unk> predominantly two distinct segments, one being the binding authority segment, which is where this renewal rights portfolio.
And the other for US is our brokerage segment, which is the smaller end of the brokerage really the business that just falls outside of our binding constraints. This is all in the binary area and actually if you were to look at the split in our binding area, it's probably a little bit higher casualty weighted whereas brokerage is a little bit more of a 50 50 60 40 split casualty property. So.
No change in that in that mix, if anything it's a little bit more casualty driven.
Great and then Mark could.
Could you give the split of the cat losses.
Standard commercial in the quarter, and then I apologize I know you mentioned, it but you've talked too fast and we can keep up the prior year development I think you gave by line.
It wasn't able to catch all of them.
Yes, so let's start with the catastrophe loss activity in the quarter extended commercial lines by individual line of business. So in total if it's $50 billion or eight one percentage points on the standard commercial lines combined and commercial property. It was $32 eight or 29 three points on that.
Commercial property combined commercial auto.
$2 million of four full points bump was $8 9 billion or 38 seven.
Rounded that should get you to $50 million or eight one points on standard commercial lines.
And then in terms of the casualty reserve development. It was $14 million in total or two three points on the standard commercial lines combined ratio in the quarter.
We're all of the development was in standard commercial lines. It was $8 million favorable workers' comp 4 million favorable NGL and $2 million favorable and the bottom line.
Okay.
Perfect. Thank you very much and sorry to make you go over that again.
That's quite alright, my pleasure.
Thanks, Thank you.
No further questions I would like to turn the call back over to you Sir for closing remarks.
Great well. Thank you all very much for joining us this morning, and we look forward to talking to you again soon.
Thank you.
Thank you speakers. Thank you for joining the conference call today, you may now disconnect.
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