Q1 2022 Selective Insurance Group Inc Earnings Call

May 5, 2022

Good day everyone.

Welcome to selective insurance group's first quarter 2022 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 role Han pie.

Sir you May proceed.

Thank you Jill and good morning, everyone.

My final costing this call on our website <unk> dot com. The replay is available until June four.

We used three measure to discuss our results and business operations. Firstly your GAAP financials I just reported.

Luckily and current reports filed with the.

Second we used non-GAAP operating income and non-GAAP operating return on common equity do you have a lifespan in operation we.

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 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.

Adjusted book value per common share from book value per common share by the exclusion of total after tax unrealized gains and losses on investments included in accumulated other comprehensive loss or income.

GAAP reconciliations to any reference non-GAAP financial measures in our supplemental investor package bundled in.

Investors page of our website.

Third we made statements and projections about our future performance. These are forward looking statements under the private Securities Litigation Reform Act of 1095, they are not guarantees of future performance objectives and uncertainties we.

We discuss these risks and uncertainties are detailed 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'll turn the call over to John Hall, shielding tablets and of the Board President and Chief Executive Officer, who will be followed by Mark Wilcox, our EVP and Chief Financial Officer John .

Thank you Rob and good morning.

I wanted to focus on our continued strong operating results and financial position as well as key industry trends.

Mark will provide further details on the quarter's financial results and I'll return with a brief closing comments before we take questions.

In the first quarter, we generated solid financial results, notably a 12, 8% annualized non-GAAP operating Roe.

Above our 11% target.

Underwriting profitability and investment performance were both meaningful contributors to our financial results.

Net premiums written grew growth remained strong at 11% driven by an overall renewal pure price increases averaging four 6%.

Exposure growth of approximately three 5% on our renewal book for commercial lines.

Excellent retention across all three segments and overall new business growth of 14%.

Our 93, 1% combined ratio for the quarter included two five points of net catastrophe losses offset by two five points of net favorable prior year Casualty reserve development.

The underlying combined ratio was also $93 one.

And looking at the quarter one of discuss some important themes.

First I'm extremely pleased with how our team has effectively leveraged our strong market position with our best in class distribution partners to accelerate growth and execute our granular pricing strategy as market conditions have improved over the past three years.

Our growth is truly a testament to our strategic competitive advantages, which include our unique field model, placing empowered underwriting staff and proximity to our distribution partners and customers.

Our franchise value distribution model defined by meaningful and close business relationships with a group of best in class independent agents.

Our ability to develop and integrate sophisticated tools for risk selection pricing and claims management and delivering a superior omnichannel customer experience enhanced by digital platforms and value added services.

We've maintained a consistent approach to managing renewal pure pricing and retention across commercial lines pricing cycles, both firm and salt.

Over the last decade, we have been disciplined and consistent obtaining renewal pure price increases along with underwriting and claims improvements in line with or above expected loss trends are.

Our approach incorporates proven processes that integrate projected loss trends and delivers pricing guidance to our underwriters at the individual account level.

As we look forward these tools and capabilities give us confidence in our ability to effectively manage profitability in a more uncertain loss trend environment.

The industry continues to face uncertainty related to forward loss trends a theme we have been highlighting for the past several quarters. There are three primary drivers of this increase uncertainty economic inflation, social inflation and the atypical frequency and severity patterns, resulting from the COVID-19 pandemic as evidenced in the two most recent accident.

Yours.

These factors influenced our decision to embed a higher loss trend assumptions in our 2022 loss picks as discussed last quarter.

When assessing our underlying underlying combined ratio. It is important to note that our first quarter results generally have seasonally higher non cat property losses.

Furthermore, note that the year over year change is impacted by a particular, particularly favorable first quarter of 2021, which benefited from lower pandemic related loss frequencies.

However, the current quarter also includes the impact of elevated severities in the property and commercial auto physical damage lines, which we attribute to elevated economic inflation.

We use multiple levers to help mitigate the impact of rising loss trend over time.

The first is obtaining the appropriate renewal pure price increases, which we continue to do and specialty, especially in the lines of business, where the impact of inflationary pressures as the grapes.

While renewal pure price in commercial lines was $4 eight for the quarter.

We saw favorable moving out as the quarter progressed in fact pricing was five 1% in both February and March and we saw this trend continued into April with renewal pure price of five 2%.

The lines, most impacted by economic inflation commercial auto and property generated renewal pure price increases of seven 4% and seven 6% respectively. During the quarter.

Commercialized retention was very strong at 87% a reflection of the successful execution of our granular pricing strategy.

In addition to rate we continue to ensure exposure basis are accurate.

To resound upfront data collection and post policy audited, our general liability and workers compensation policies capture additional premium in line with actual payroll and sales growth on.

On the property lines, we routinely evaluate our overall profit for our overall portfolio to ensure building values are reflective of current replacement cost estimates and our insurance to value or IPV has always been strong.

We also have a formal process to update property values as policies renew.

In the quarter, we saw exposure growth of approximately three 5% on our overall commercial lines portfolio.

While there may be some portion of exposure that Facebook favorably impacts loss ratios, we made no explicit assumption and our loss pick for that potential benefit.

The third lever is business mix improvements, which we look to implement continuously by managing granular pricing and retention based on profitability cohorts over time. These efforts should yield loss ratio improvements in the book.

For the first quarter, the cohort of accounts with the lowest expected future profitability, representing about 8% of our portfolio had renewal pure rate increase is six six points higher.

And our top performing cohort.

Retention rates for our lowest performing cohort were seven six points lower than the average for our top performing cohort representing 22, 5% of our book.

In addition, we are always seeking to enhance our claims processes and drive efficiency gains, which over time reduced losses and loss adjustment expenses.

Finally, I wanted to highlight is the impact of rapidly rising rates on the investment returns as well as GAAP equity.

During the quarter higher interest rates drove a negative total return on our fixed income portfolio that produced $275 million after tax and mark to market loss on our fixed income securities portfolio.

This drove the $3, 51% or 8% reduction in book value per share for the quarter.

Simultaneously, we actively traded a portion of our portfolio to optimize higher new money investment yields which should increase income on our fixed income securities portfolio going forward.

We remain pleased with our investment portfolio positioning principally allocated to highly rated and highly liquid securities.

Overall, I am proud of our strong execution, which positions us to meet our operating and financial targets for the year, our consistent track record of managing rate and retention relative to expected loss trend is one of the key drivers of why 2021 marked our eighth consecutive year of delivering double digit operating Roe.

Despite increased uncertainty and forward loss trend, we remain confident in our ability to continue delivering strong underwriting margins.

Now I'll turn the call over to Mark.

Thank you Tom and good morning, I'll review, our consolidated results discuss our segment operating performance, our capital position and our updated 2022 guidance.

We reported net income available to common stockholders per diluted share of <unk> 89.

non-GAAP operating EPS of $1 41.

Underwriting results and investment performance for both meaningful contributors to our strong growth.

This translated to an annualized non-GAAP operating ROE of 12, 8%, which is above our 11% target.

So when you saw consolidated underwriting results, we reported 11% growth in net premiums written driven by strong growth in our commercial lines and E&S segment, we reported a consolidated combined ratio of 93, 1% included in the combined ratio was $21 million of net catastrophe losses for two and a half point and $20 million of net.

Prior year Casualty Reserve development also two and a half points on an underlying basis, so excluding catastrophes and prior year Casualty reserve development. The combined ratio was 93, 1%. This underlying combined ratio was up three one points for the year ago period, and above our 91% guidance for the full year.

The variance to boats relating primarily to high non cat property losses.

As John mentioned, there are a couple of drivers here.

In comparison to the year ago period, non cap property losses with two six percentage point in time.

As a reminder, the year ago period benefited from lower frequency principally driven by the pandemic. In addition, first quarter non cat property losses have historically been about $1, one point seasonally higher than the full year and this is built into our quarterly combined ratio expectation.

After factoring in the seasonality our first quarter non cat property losses came in about one one points higher than we would've expected. This was principally driven by higher severity in our commercial auto physical damage lines, which were impacted by inflationary pressures from new and used commercial auto prices parts shortages and high labor costs.

We are closely monitoring the impact of inflationary trends on our book and we expect these trends will have some negative pressure on underlying margins. This year principally for short tail lines, which is reflected in our updated full year guidance as John mentioned, we've been increasing renewable fuel prices to reflect this trend and also expect business mix shifts claims processing.

Proven to help mitigate the impact of inflationary pressures.

Moving to expenses our expense ratio was 32, 1% for the first quarter, which was in line with the prior year period. The expense ratio is below our full year run rate expectations of 32, 5% due to the timing of some travel entertainment advertising bad debt Foundation.

Overhead expenses, which we expect to come through in the coming quarters.

We remain focused on lowering the expense ratio for a range of initiatives, while ensuring we are investing appropriately to support our long term strategic objectives.

Current expenses, which are principally comprised of holding company costs and long term stock compensation totaled $11 million in the quarter with a year over year increase related to relatively strong share price performance.

Turning to our segments and commercial lines net premiums written increased 11% driven by renewal pure price increases averaging four 8% excellent retention of 87% exposure to growth of approximately three 5% new business growth of 12%.

Commercial lines combined ratio was a profitable 93, 6% and included two three points of net catastrophe losses and three points of net favorable prior year casualty reserve development. The favorable prior year Casualty reserve development was driven by $10 million for workers' compensation $5 million of general liability and $5 million for bonds for accident.

<unk> 2019.

The commercial lines underlying combined ratio was 94, 3%. This was three seven percentage points higher than the 96% for the prior year period with the increase principally coming from three three points or five non cat property losses, and driven by commercial auto physical damage severities as I've mentioned earlier.

Personal lines segment net premiums written were flat relative to the prior year period renewal pure price increases averaged 0.6% retention was slightly up relative to a year ago at 84% of new business was down 2%. The combined ratio was 91% and included six points of net catastrophe losses.

<unk> combined ratio of 85% to $3 higher than the prior year period, driven by three nine points of higher non cap property losses, principally driven by high frequencies and severities in the personal auto physical damage lines.

And on the E&S segment net premiums written grew 29% relative to a year ago.

Pure price increases averaged seven 7% retention remained strong and new business was up 25%.

Also a renewal rights transaction that we entered into late last year was not a meaningful factor in premium growth.

Combined ratio for the segment was an extremely profitable 91, 1% in the quarter and included one seven points of net catastrophe losses.

Underlying combined ratio of 89, 4% was four six points accrued for 94% in the prior year period, driven mainly by two seven points of improved non cap property losses and to a lesser extent improved casualty margins at a lower expense ratio.

Moving to investments our investment portfolio remains well positioned as of quarter end, 90% of our portfolio was invested in fixed income and short term investments with an average credit rating of a plus and an effective duration of four one yes, offering a high degree of liquidity.

Risk assets, which include our high yield allocation could take within fixed income public equities and alternative investments represented 11, 8% of our investment portfolio.

For the quarter after tax net investment income of $58 5 million was up 4% from the year ago period alternative investments, which are reported on a one quarter lag contributed $15 $1 million of after tax gains.

The tax yield on the total portfolio was 3% for the quarter, which translates to eight seven points of annualized non-GAAP operating contribution.

The after tax yield on the fixed income securities portfolio was 2% to 6% in the first quarter, which is up relative to the prior two quarters.

We were active during the quarter trading a portion of our fixed income portfolio to optimize risk adjusted investment yields and a rapidly rising interest rate environment, we put approximately $920 million of work in new fixed income securities. During the quarter was $476 million coming from active sales and the remaining cash flow coming from maturities.

Cash flow and deploy available cash and short term investments. These purchases had an average credit rating of double a minus and the duration of five four years.

The average after tax new money yields on these purchases was up meaningfully to two 6% to two 1% last quarter and one 7% in the comparative quarter as purchase activity combined with higher resets on our floating rate securities and the sale of lower yielding securities increased the pretax book yield about fixed.

Income portfolio by approximately 19 basis points in the quarter.

Looking ahead, we expect to generate about $1 billion of investable cash flow during the remainder of 2022 with natural maturities coupons on operating cash flow that will be invested most likely at higher reinvestment rates we.

We will continue to be judicious in terms of trading the portfolio as we manage the impact of crystallizing losses versus building book yield.

In addition securities with floating rate characteristics accounted for 14% of our fixed income portfolio at March 31, and as these securities are currently resetting that high benchmark rates. They will also help improve our book yield as a reminder, with US three times investment leverage at 100 basis point increase in pre tax investment yield.

Flights for approximately two four points of our wheat.

While the higher interest rate environment with a tailwind from reinvestment rates did negatively impact total return on book value per share. The total return on the portfolio was negative three 5% and significantly higher benchmark interest rates and slightly wider credit spreads resulted in meaningful reversal about that unrealized gain position we reported 245.

$5 million after tax net unrealized investment losses in stockholders equity during the quarter.

In addition, we reported $72 million of after tax net realized and unrealized losses net income driven by 9 billion of after tax realized losses, as well as $21 million and after tax credit and intent to sell impairments impair.

The impairments largely driven by higher benchmark interest rates. Despite recording impairment charges, we have not experienced a deterioration in the overall credit quality of our portfolio, which remains very very strong we have no direct exposure to Russia oil price within our investment portfolio.

Turning to capital our capital position remains extremely strong with $2 8 billion of GAAP equity as of March 31 book value per share declined seven 6% during the quarter with a strong earnings more than offset by an increase in net unrealized losses adjusted book value per share increased one 3% in the quarter and is up $13.

1% over the last one year period.

Our financial position remains extremely strong our holding company has $518 million of cash and investments, which is above our longer term target.

Net premiums written to surplus ratio of 136 times is at the low end of our target range of 135, so about $5 five a.

Debt to capital ratio of 15, 4% is also very conservative.

During the first quarter, we repurchased 1000 shares of our common stock at an average price of $75 49 per share for a total of $75 $5000.

We did not repurchase any shares subsequent to the quarter end.

We have $96 $5 million of permitted capacity under our share repurchase program, which we plan to use opportunistically.

I'll conclude with an update on our guidance for 2022, a GAAP combined ratio, excluding catastrophe losses of 91% inclusive of net favorable casualty reserve development from the first quarter.

Our guidance assumes no additional prior accident year casualty reserve development catastrophe loss assumption remains full points on the combined ratio.

We are now projected after tax net investment income of $205 million up $5 million from our prior guidance of $200 million inclusive of $15 million after tax gains from our alternative investments, which is down from our prior guidance of $20 million and then.

The net impact is on non alternative after tax net investment income expectations up $10 million also recall, we reported under the investment income on a one quarter lag and we expect a poor first quarter capital market returns to result in net losses for Marvell soda this allocation of second quarter results.

But overall effective tax rate of approximately 25%, which includes an effective tax rate of 19, 5% for net investment income from 21% for all other items and weighted average shares of $61 billion on a diluted basis, which does not reflect any share repurchases we may make.

Share repurchase authorization overall, a strong start to the year in terms of growth and profitability with that I'll turn the call back over to John .

Thanks, Mark we continue to execute our plans to generate growth and profitability that significantly outperformed the commercial lines industry results over time.

Our strong capital position allows us to evaluate the most efficient forms of capital deployment to support our initiatives to enhance our market position and generate attractive shareholder returns.

Our commercial lines geographic expansion plans continue to progress we are on track to open the states of Alabama, Idaho in Vermont This year with others planned for subsequent years.

Geographic expansion is an attractive long term growth opportunity, we opened the southwestern states of Arizona, Colorado, Utah, and New Mexico in late 2017 and early 2018.

These three states. In addition to our expansion into New Hampshire generated $145 million of direct premiums written in 2021 up 42% year over year. The business mix is similar to our existing portfolio and profitability remains in line with our expectations.

Can you to migrate our personal lines business towards the mass affluent market, where our strong coverage and service capabilities provide us a competitive advantage in.

In the quarter, new business in our target market was up 7% and total premium in that market was up 11% as.

As the year progresses, we expect to achieve increased rate levels on a written basis to address rising loss severities.

Our E&S business has been a particularly strong contributor to our financial results over the past few years.

We target smaller account and lower hazard risks with a casualty focus reflecting the characteristics of our commercial lines book we.

Invested in and have implemented a new automation platform for general liability property and package business. This technology investments should increase our capacity to grow and improve our underwriting controls agency integration options and process efficiency.

As we look at the balance of 2022, we are confident we can successfully navigate an uncertain economic environment with a consistent underwriting discipline that is marked our last decade generating strong profitability and growth.

With that we will open the call up for questions. Thank you operator.

Thank you Sir at this time, if you would like to ask a question. Please press star one on your Touchtone phone. Please ensure that your line is muted. Please record your name when prompted so that may introduce you to ask your question. Once again, Please press star one at this time.

Our first question is from.

Carter with Bank of America. Your line is open.

Hi, everyone. Good morning.

Morning, Ryan.

Thank you Paul.

Underlying loss ratio in commercial lines for the quarter I know that.

Talk about some seasonality in non cat property losses, I guess I was wondering if that was.

Okay.

<unk>.

In excess of your usual expectations or solely driven by severity or if there is any sort of outsized kind of more of a volatile large property losses in there just kind of trying to figure out any read through from the quarter's results how the rest of the year might play out.

Yes, great. Thank you for the question so first.

First point I would make is the non cat property losses that we saw were probably more of an auto physical damage driven item than they were in a property turbine item either a commercial or personal property. So the volatility that others have pointed to with regard to property losses in particular, we certainly see but in this.

Quarter, I don't really see anything outstanding relative to the property of pure property lines be it commercial property.

Tom.

Sure Bob.

With regard to auto physical damage that that really is all severity and I think that's an important point for us to really focus on.

That drove the result in the quarter, we do expect that we would expect as I made the comment in my prepared remarks, but thats, probably driven by economic inflation and everybody is in a similar position I think some companies might have larger or smaller commercial auto books, but thats purely severity driven increase that.

We saw in the quarter and its actually we assuming those trends will continue through the balance of the year and that is embedded in our full year combined ratio guidance. So if you were to look at our combined ratio guidance. We don't anticipate any additional we never anticipate any additional prior year development.

About a 70 basis point impact from the full year earn through of the higher severities that we saw in auto physical damage. So our assumption is there economic inflation driven and our assumption is that they will continue through the balance of the year, but you always have to put that in context of what it means in terms of the size of the portfolio.

So auto physical damage for us.

When you combined commercial and personal Theres less in terms of just under 10% of our total premium so that's where we've seen some of the higher than expected inflationary impacts. It's a relatively small premium base and that premium base is pretty similar to your distribution of loss dollars as well and that's why the impact on the.

Full year guidance is about 70 basis points higher than it would've otherwise been.

Okay. Thank you.

And I guess switching to the kind of more of the casualty side of things.

I mean, as we've seen CT three open in <unk>.

Turning to the process some of the backlog.

Cases from the past few years have loss trends on the long tail side of things kind of trended in line with where you thought they would be.

Historical social inflation, just as all of these claims are being processed.

Yes.

I would say is yes, they have but I do want to recall the point that we made at the end of 2021, we did embed a higher loss trend assumption in our casualty loss picks for 2022, and then we increased our overall loss trend from 4% to 5% there is a little bit of variation from line to line and at the time, we pointed to.

Social inflation being one of those factors, but I would say so far we are the trends are in line with expectations.

Ill say, we continue to see a little bit better than expected frequencies on a few of the casualty lines not all but a few other casualty lines relative to pre pandemic levels and from an economic inflation perspective, you actually saw medical inflation ticked out in the most recent print this year compared to where it was last year. So we haven't updated our trend assumptions, but they are certainly.

Some favorable items in there along with the unfavorable item, we just talked about relative to auto physical damage.

Okay. Thank you.

Thank you for your question. Our next question is from Scott <unk> with RBC capital markets. Your line is open Sir.

Yes, good morning.

Just wanted to ask first on the rate trends that you're seeing in commercial lines and excess and surplus state you mentioned the commercial lines, they got a little bit better as the quarter progressed and E&S. They were they were up a little bit too.

Sequentially.

That's not what we're seeing from others.

The other peers or the.

The trends are weakening and I'm just curious if you can talk about the.

What do you attribute that to any specific areas.

And do you expect that to continue over over the next few quarters.

Yes. Thanks. Thanks for the question I made it E&S first and I'll come back and hit commercial lines E&S was strong in the quarter at seven 7% and that was consistent across property and casualty I think that trend is pretty well with what we saw at least in the latter half of last year, although it did tick up from about I guess, we're about 6%.

In Q4 and E&S so.

No.

Premium growth remained strong and we think theres an opportunity to continue to generate some favorable rates. There. So I think we feel good about the outlook for that line on commercial lines.

I'm glad you picked up on the point, because we continue to see a little bit of sequential improvement in the quarter and then we also gave you. The April number at five 2%. We didn't put the January number in there you could software in January is a bigger premium up but January was four 5%. So from January to April .

That's about a 70 basis point tick up in renewal pure pricing and I think it really ties into our earlier commentary relative to where the loss trend move is happening and it is on the shorter tail lines.

That's where we're focusing so as we go forward. We think there is an opportunity and a need to raise rates on those short tail lines to address some of the economic inflation and everybody is fighting here, but again. This is all in the context of really strong margins and very consistent margins and continued strong operating Roe.

For selected.

Yes that makes sense sounds like it's more commercial auto and property driven than compared to the other kind of liability lines based on what you are saying.

Okay.

Yes.

I wanted to ask two on commercial auto you mentioned that severity.

Which.

Certainly thats pretty evident out there.

Okay.

Claims sizes inflation is definitely hitting how much the average claims are.

But I'm wondering if you could talk to you on that.

Commercial auto side, what youre seeing in terms of frequency, whether you feel like that.

Sort of back to pre pandemic levels or are you still getting a benefit there but that benefit is offset by the increased severity is just kind of what youre seeing on that line and what you and what youre expecting for 'twenty, two and 'twenty three.

Yes, I think from a commercial auto perspective, they continue to be a little bit better than pre pandemic levels and actually probably a little bit better than expected personal auto is a lot closer to pre pandemic levels at this point so.

So it's really just more of a move in severity from our perspective, but frequencies are still a slight benefit on the on the auto physical damage side, and we continue to actually see favorable frequencies as I mentioned on a couple of the casualty lines, specifically in workers' comp and to a lesser extent auto liability and Ian.

<unk> liability.

Okay.

That's helpful. And then last one I just had was on the.

Cargo renewal rights deal.

I mentioned early on that you expect a 20% to $40 million of premium from that and then you mentioned this quarter. It wasn't a major contributed last quarter it wasn't.

Are you still expecting that.

To be within that range or youre, just not picking up as much business as you thought from that.

Yes.

And I know Mark made referenced citizens prepared remarks, we are not seeing that success rate that we had anticipated now again that deal was structured where it's it's a pretty low risk deal for us we did pick up a fair amount of Allen and some agency partnerships, but the point that we've made when that transaction was announced is that the opportunity to renew that.

Business was going to be dependent on our comfort level from a underwriting and a pricing perspective.

And what we're seeing now is our hit ratios are significantly lower than expected because we're maintaining that discipline and again all of this is in the context of really strong E&S growth for us. So there is opportunities out there. It's just that that portfolio. I think has been more of a struggle to meet our pricing and underwriting criteria as we look to renew.

Those accounts.

So overall you're right.

I would I would anticipate in less than expected over the over the first year term of that renewal rights transaction.

Okay.

Figure just when.

To clarify that I appreciate that thanks for all the answers.

Yes.

Thank you for your question before we take our next question. Just a reminder, if you would like to ask a question. Please press star one on your Touchtone phone. Please be sure to mute. Your line can record your name to be introduced we have a question from Meyer shields with K B W. Your line is open.

Thanks, Good morning all.

Assuming my math is correct it looks like the underlying accident year loss ratio for GL actually went up on a year over year basis.

I guess I wasn't expecting that because you talk about higher loss trends in shorter tail lines I was hoping you could talk us through what's going on there.

Yes, so I'll start market could provide the details and primary you talking full year compared to the first quarter are you talking first part in the first quarter, because first quarter to first quarter. The tax the accident year GL is pretty much spot on.

It was $88 nine last year to 89 this year just back out the effect of prior year development.

Yes, I was looking year over year, but I guess it seems to be the same trends, it's not I guess I would've expected.

Yes.

We're talking to tack of a point on the quarter and less than a point on the other 60 basis points on a full year. So I would call that flat on an accident year basis.

Flat and really strong on an accident year basis at 89.

Okay. So thats certainly a fair description.

I guess I guess, if you had another workers' compensation book is in huge and I think we've talked about this in the past.

But are you seeing higher wages make their way into indemnity claims yet.

Well I don't I cant give you a specific answer on that but I think it is a fairly safe assumption that the wage growth that we're seeing coming through is assumed in our in our.

Indemnity loss cost assumptions, so we view that as one of the areas where exposure is the loss ratio neutral item doesn't hurt view doesn't benefit you on the indemnity side. So our assumption would be if it hasnt actually happened yet.

Wages are coming through as exposure your losses will move in tandem with it and there is potentially a benefit on the medical side, because wages economy, why not talking specific to our book, but wages wage inflation is above medical inflation. So there is there is an inherent.

Medical loss ratio benefit and in our portfolio and I think this is fairly reflective of the industry. The last dollars ultimate loss dollars are about 50, 50 indemnity and medical.

Okay understood. Thank you so much.

Thank you.

Gentlemen at this time I have no further questions.

Okay well. Thank you all for your participation and look forward to speaking to you again soon thank you.

This does conclude today's conference call. We thank you all for participating you may now disconnect and have a great rest of your day.

[music].

Good day everyone.

Welcome to selective insurance group's first quarter 2022 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 role Han Pi sorry.

Sir you May proceed.

Thank you Jill and good morning, everyone.

Final costing this call on our website <unk> dot com. The replay is available until June four we.

We used three measure to discuss our results and business operations first we use GAAP financial measures reported on a new quarterly.

Quarterly and current reports filed with the SEC.

That can be used non-GAAP operating income and non-GAAP operating return on common equity throughout the lifespan in operation.

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 is non-GAAP operating income divided by average common stockholders' equity.

GAAP reconciliations to any reference non-GAAP financial measures in our supplemental investor package.

The investors page of our website.

Third we made statements and projections.

<unk> is about our future performance. 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 are detailed 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'll turn the call over to John Mascioli as Jeff listen of the Board President and Chief Executive Officer, who will be followed by Mark will talk about <unk>.

<unk> Chief Financial Officer.

John .

Thank you Rod and good morning.

I wanted to focus on our continued strong operating results and financial position as well as key industry trends.

Mark will provide further details on the quarter's financial results and I'll return with a brief closing comments before we take questions.

In the first quarter, we generated solid financial results, notably a 12, 8% annualized non-GAAP operating Roe.

Above our 11% target.

Underwriting profitability and investment performance, we are both meaningful contributors to our financial results.

Net premiums written grew growth remained strong at 11% driven by an overall renewal pure price increases averaging four 6%.

Exposure growth of approximately three 5% on our renewal book for commercial lines.

Excellent retention is across all three segments and overall new business growth of 14%.

Our 93, 1% combined ratio for the quarter included two five points of net catastrophe losses offset by two five points of net favorable prior year Casualty reserve development.

The underlying combined ratio was also $93 one.

And looking at the quarter, one to discuss some important themes.

Our franchise value distribution model defined by meaningful and close business relationships with a group of best in class independent agents.

Our ability to develop an integrated sophisticated tools for risk selection pricing and claims management and delivering a superior omnichannel customer experience enhanced by digital platforms and value added services.

We've maintained a consistent approach to managing renewal pure pricing and retention across commercial lines pricing cycles, both firm and salt.

Over the last decade, we have been disciplined and consistent obtaining renewal pure price increases along with underwriting and claims improvements in line with or above expected loss trend.

Our approach incorporates proven processes.

Great projected loss trend and delivers pricing guidance to our underwriters at the individual account level as.

As we look forward these tools and capabilities give us confidence in our ability to effectively manage profitability in a more uncertain loss trend environment.

The industry continues to face uncertainty related to foreign loss trends have been we have been highlighting for the past several quarters. There are three primary drivers of this increase uncertainty economic inflation, social inflation and the atypical frequency and severity patterns, resulting from the COVID-19 pandemic as evidenced in the two most recent accident year.

Yes.

These factors influenced our decision to embed a higher loss trend assumption in our 2022 loss picks as discussed last quarter.

When assessing our underlying underlying combined ratio. It is important to note that our first quarter results generally have seasonally higher non cat property losses.

Furthermore, note that the year over year change is impacted by a particular, particularly favorable first quarter of 2021, which benefited from lower pandemic related loss frequencies.

However, the current quarter also includes the impact of elevated severities in the property and commercial auto physical damage lines, which we attribute to elevated economic inflation.

We use multiple levers to help mitigate the impact of rising loss trend over time.

The first is obtaining the appropriate renewal pure price increases, which we continue to do and specially especially in the lines of business, where the impact of inflationary pressures as the grades.

While renewal pure price in commercial lines was $4 eight for the quarter.

We saw favorable moving out as the quarter progressed in fact pricing was five 1% in both February and March and we saw this trend continuing into April with renewal pure price of five 2%.

The lines, most impacted by economic inflation commercial auto and property generated renewal pure price increases of seven 4% and seven 6% respectively. During the quarter.

Commercialized retention was very strong at 87% a reflection of the successful execution of our granular pricing strategy.

In addition to rate we continue to ensure exposure basis are accurate.

Some upfront data collection and post policy auditing, our general liability and workers compensation policies capture additional premium in line with actual payroll and sales growth.

We also have a formal process to update property values as policies renew.

In the quarter, we saw exposure growth of approximately three 5% on our overall commercial lines portfolio.

While there may be some portion of exposure that Facebook favorably impacts loss ratios, we make no explicit assumption and our loss pick for that potential benefit.

The third lever is business mix improvements, which we look to implement continuously by managing granular pricing and retention based on profitability cohorts.

Over time these efforts should yield loss ratio improvements in the book.

For the first quarter, the cohort of accounts with the lowest expected future profitability, representing about 8% of our portfolio have renewal pure rate increase is six six points higher than that in our top performing cohort.

Retention rates for our lowest performing cohort were seven six points lower than the average for our top performing cohort representing 22, 5% of our.

In addition, we are always seeking to enhance our claims processes and drive efficiency gains, which over time reduced losses and loss adjustment expenses.

Finally, I wanted to highlight is the impact of rapidly rising rates on the investment returns as well as GAAP equity.

This drove the $3, 51% or 8% reduction in book value per share for the quarter.

Simultaneously, we actively traded a portion of our portfolio to optimize higher new money investment yields which should increase income on our fixed income securities portfolio going forward.

We remain pleased with our investment portfolio is positioning principally allocated to highly rated and highly liquid securities.

Despite increased uncertainty and forward loss trend, we remain confident in our ability to continue delivering strong underwriting margins now.

Now I'll turn the call over to Mark.

Well, Thank you John and good morning, I'll review, our consolidated results discuss our segment operating performance, our capital position and our updated 2022 guidance.

We reported net income available to common stockholders per diluted share of <unk> 89.

non-GAAP operating EPS of $1 41.

Underwriting results and investment performance for both meaningful contributors to our strong growth.

This translated to an annualized non-GAAP operating ROE of 12, 8%, which is above our 11% target.

So let me talk consolidated underwriting results, we reported 11% growth in net premiums written driven by strong growth in our commercial lines and E&S segment, we reported a consolidated combined ratio of 93, 1% included in the combined ratio was $21 million of net catastrophe losses for two and a half point and $20 million of net.

Prior year Casualty Reserve development also two five points on an underlying basis, so excluding catastrophes and prior year Casualty reserve development. The combined ratio was 93, 1%. This underlying combined ratio was up three one points for the year ago period, and above our 91% guidance for the full year.

The variance to vote relating primarily to high non cat property losses as.

As John mentioned, there are a couple of drivers here.

In comparison to the year ago period, non cat property losses with two six percentage points.

Footages and high labor costs.

Proven to help mitigate the impact of inflationary pressures.

Overhead expenses, which we expect to come through in the coming quarters.

We remain focused on lowering the expense ratio for a range of initiatives, while ensuring we are investing appropriately to support our long term strategic objectives.

Operating expenses, which are principally comprised of holding company costs and long term stock compensation totaled $11 million in the quarter with a year over year increase related to relatively strong share price performance.

Turning to our segments and commercial lines net premiums written increased 11% driven by renewal pure price increases averaging $4 HSN excellent retention of 87% exposure growth of approximately three 5% new business growth of 12%.

Commercial lines combined ratio was a profitable 93, 6% and included two three points of net catastrophe losses and three points of net favorable prior year casualty reserve development. The favorable prior year Casualty reserve development was driven by $10 million of workers' compensation $5 million for general liability and $5 million for bonds for accident.

Is 2019 and product.

By commercial auto physical damage severities as I mentioned earlier.

In our personal lines segment net premiums written were flat relative to the prior year, Eric renewal pure price increases averaged 0.6% retention was slightly up relative to a year ago at 84% of new business was down 2%. The combined ratio was 91% and included six points of net catastrophe losses, yes.

All lines combined ratio of 85% to three five in the prior year period, driven by three nine points of higher non cap property losses, principally driven by high frequencies and severities in the personal auto physical damage line.

In our E&S segment net premiums written grew 29% relative to a year ago.

Pure price increases averaged seven 7% retention remained strong and new business was up 25%.

Also a renewal rights transaction that we entered into late last year was not a meaningful factor in premium growth.

Combined ratio for the segment was an extremely profitable 91, 1% in the quarter and included one seven points of net catastrophe losses.

The underlying combined ratio of 89, 4% was four six points improved from 94% in the prior year period, driven mainly by two seven points of improved non cap property losses and to a lesser extent approved casualty margins at a lower expense ratio.

Risk assets, which include our high yield allocation to table, just fixed income public equities and alternative investments represented 11, 8% of our investment portfolio for the quarter. After tax net investment income of $58 5 million was up four.

<unk> percent from the year ago period alternative investments, which are reported on a one quarter lag contributed $15 $1 million of after tax gains.

The tax yield on the total portfolio was 3% for the quarter, which translated to eight seven points of annualized non-GAAP operating contribution the.

The after tax yield on the fixed income securities portfolio was 2% to 6% in the first quarter, which is up relative to the prior two quarters.

We were active during the quarter to trade in a portion of our fixed income portfolio to optimize risk adjusted investment yields and a rapidly rising interest rate environment.

Approximately $920 million of work in new fixed income securities during the quarter was $476 million coming from active sales and the remaining cash flow coming from maturities operating cash flow and deploy available cash and short term investments. These purchases had an average credit rating of double a minus and the duration of five points for you.

The average after tax new money yield on these purchases was up meaningfully to two 6% from two 1% last quarter and from one 7% in the comparative quarter. This purchase activity combined with higher resets on our floating rate securities and the sale of lower yielding securities increased the pre tax.

Book yield about fixed income portfolio by approximately 19 basis points in the quarter.

We will continue to be judicious in terms of trading the portfolio as we manage the impact of crystallizing losses versus building book yield.

In addition securities floating rate characteristics accounted for 14% of our fixed income portfolio at March 31, and as these securities are currently resetting at high benchmark rates that will also help improve our book yield as a reminder, with US three times investment leverage 100 basis point increase in pre tax investment yield translates to.

Proximately two full points of ROE.

While the higher interest rate environment was a tailwind from reinvestment rates did negatively impact total return on book value per share. The total return on the portfolio was negative three 5% and significantly higher benchmark interest rates and slightly wider credit spreads resulted in meaningful reversal of our net unrealized gain position we reported 200.

$45 million of after tax net unrealized investment losses in stockholders equity during the quarter and.

In addition, we reported $72 million of after tax net realized and unrealized losses net income driven by $9 million of after tax realized losses, as well as $21 million and after tax credit and intent to sell impairments impairments largely driven by higher benchmark interest rates. Despite recording impairment charges, we have not experienced a deterioration.

Overall credit quality of our portfolio, which remains very very strong.

Have no direct exposure to Russia, Ukraine within our investment portfolio.

Turning to capital our capital position remains extremely strong with $2 8 billion of GAAP equity as of March 31 book value per share declined seven 6% during the quarter with a strong earnings more than offset by the increase in net unrealized losses adjusted book value per share increased one 3% in the quarter and is up 13.

One 1% over the last one year period.

Our financial position remains extremely strong our holding company has $518 million of cash and investments, which is above our longer term target our.

Net premiums written to surplus ratio of 136 times is at the low end of our target range of $1 3545 to five <unk>.

The capital ratio of 15, 4% is also very conservative.

During the first quarter, we repurchased 1000 shares of our common stock at an average price of $75 49 per share for a total of $75 $5000. We did not repurchase any shares subsequent to the quarter end.

We have $96 $5 million of permitted capacity under our share repurchase program, which we plan to use opportunistically.

I'll conclude with an update on our guidance for 2022.

GAAP combined ratio, excluding catastrophe losses of 91% inclusive of net favorable casualty reserve development from the first quarter.

Our guidance assumes no additional prior accident year casualty reserve development catastrophe loss assumption remains four points on the combined ratio.

The net impact is on non alternative after tax net investment income expectations up $10 million also recall, we report alternative investment income on a one quarter lag and we expect a poor first quarter capital market returns.

And net losses from our alternative is allocation of second quarter results.

The overall effective tax rate of approximately 25%, which includes an effective tax rate of 19, 5% for net investment income from 21% for all other items and weighted average shares of $61 million on a diluted basis, which does not reflect any share repurchases we may make.

Share repurchase authorization overall, a strong starts at year in terms of growth and profitability with that I'll turn the call back over to John .

Thanks, Mark we continue to execute our plans to generate growth and profitability that significantly outperformed the commercial lines industry results over time, our strong capital position allows us to evaluate the most efficient forms of capital deployment to support our initiatives to enhance our market position and generate attractive shareholder returns.

Our commercial lines geographic expansion plans continue to progress we are on track to open the states of Alabama, Idaho in Vermont. This year with others planned for subsequent years geographic.

<unk> expansion is an attractive long term growth opportunity, we opened the southwestern states of Arizona, Colorado, Utah, and New Mexico in late 2017 and early 2018.

We continue to migrate our personal lines business towards the mass affluent market, where our strong coverage and service capabilities provide us a competitive advantage.

In the quarter, new business in our target market was up 7% and total premium in that market was up 11% as.

As the year progresses, we expect to achieve increased rate levels on a written basis to address rising loss severities.

Our E&S business has been a particularly strong contributor to our financial results over the past few years, we target smaller account and lower hazard risks with a casualty focus reflecting the characteristics of our commercial lines book.

We invested in and have implemented a new automation platform for general liability property and package business. This technology investments should increase our capacity to grow and improve our underwriting controls agency integration options and process efficiency.

With that we will open the call up for questions. Thank you operator.

Our first question is from.

Carter with Bank of America. Your line is open.

Hi, everyone. Good morning.

Good morning.

Thank you well I guess.

The loss ratio in commercial lines for the quarter I know that.

Talked about some seasonality in non cat property losses, I guess I was wondering if that was.

Okay.

Losses.

In excess of your usual expectations were solely driven by severity or if there was any sort of outsized kind of more of a volatile large property losses, and there was kind of trying to figure out any read through from the quarter's results how the rest of the year might play out.

Yes, great. Thank you for the question so first.

First point I would make is the non cat property losses that we saw were probably more of an auto physical damage driven item than they were in a property driven items, either a commercial or personal property. So the volatility that others have pointed to with regard to property losses in particular, we certainly see but in this.

Quarter, I don't really see anything outstanding relative to the property of the pure property lines be it.

Commercial property call.

Sure Bob.

With regard to auto physical damage that that really is all severity and I think that's an important point for us to really focus on.

That drove the result in the quarter, we do expect that we would expect as I made the comment in my prepared remarks that that's probably driven by economic inflation.

Everybody is in a similar position I think some companies might have larger or smaller commercial auto books, but thats purely severity driven increase that we saw in the quarter and its actually we assume those trends will continue through the balance of the year and that is embedded in our full year combined ratio guide.

So if you were to look at our combined ratio guidance, we don't anticipate any additional we never anticipate any additional prior year development. There was about a 70 basis point impact from the full year earn through of the higher severities that we saw in auto physical damage. So our assumption is there economic inflation driven and our subs.

<unk> will continue through the balance of the year, but you always have to put that in context of what it means in terms of the size of the portfolio. So auto physical damage for us.

If you combined commercial and personal Theres less in tech just under 10% of our total premium so that's where we've seen some of the higher than expected inflationary impacts. It's a relatively small premium base and that premium base is pretty similar to your distribution of loss dollars as well and that's why the impact on the <unk>.

All year guidance is about 70 basis points higher than it would've otherwise been.

Okay. Thank you.

And I guess switching to the kind of more of the casualty side of things.

I mean, as we've seen CT three open and.

Starting to process some of the backlog.

Our cases in the past few years.

Loss trends on the loan.

Retail side of things kind of trended in line with where you thought they would be.

Relative to historical social inflation, just as all of these claims are being processed.

Yes, so what I can say is yes, they have but I do want to recall the point that we made at the end of 2021.

Did embed a higher loss trend assumption in our casualty loss picks for 2022, and we increased our overall loss trend from 4% to 5% there is a little bit of variation from line to line and at the time, we pointed to.

Social inflation being one of those factors, but I would say so far we are the trends are in line with expectations I will say, we continue to see a little bit better than expected frequencies on a few other casualty lines not all but a few other casualty lines relative to pre pandemic levels and from an economic inflation perspective.

Actually saw medical inflation ticked down in the most recent print this year compared to where it was last year. So we haven't updated our trend assumptions, but there are certainly some favorable items in there along with the unfavorable item, we just talked about relative to auto physical damage.

Okay. Thank you.

Thank you for your question. Our next question is from Scott <unk> with RBC capital markets. Your line is open Sir.

Yes, good morning.

Sequentially.

What we're seeing from others.

Others peers are.

The trends are weakening and.

Im just curious if you can talk about the.

What do you attribute that to any specific areas.

Do you expect that to continue over over the next few quarters.

Yes. Thanks. Thanks for the question I May have E&S first then I'll come back and hit commercial lines E&S was strong in the quarter at seven 7% and that was consistent across property and casualty I think that trend is pretty well with what we saw at least in the latter half of last year, although it did tick up from about I guess, we're about six.

In Q4 and E&S so.

The premium growth remained strong and we think theres an opportunity to continue to generate some favorable rates. There. So I think we feel good about the outlook for that line on commercial lines.

<unk> picked up on the point, because we continue to see a little bit of sequential improvement in the quarter and then we also gave you. The April number at five 2%. We didn't put the January number in there you could software in January is a bigger premium up but January was four 5%. So from January to April .

About a 70 basis point tick up in renewal pure pricing and I think it really ties into our earlier commentary relative to where the loss trend move is happening and it is on the shorter tail lines.

That's where we're focusing so as we go forward. We think there is an opportunity and a need to raise rates on those shorter tail lines to address some of the economic inflation and everybody is fighting here, but again. This is all in the context of really strong margins and very consistent margins and continued strong operating Roe.

For our first electric.

Yes that makes sense sounds like it's more commercial auto and property driven than compared to the other kind of liability lines and based on what you are saying.

Yes.

I wanted to ask two on commercial auto you mentioned that severity.

Which.

Certainly thats pretty evident out there.

Average claims sizes inflation is definitely hitting how much the average claims are.

But im wondering if you could talk to you on that.

Commercial auto side, what Youre seeing in terms of frequency, whether you feel like that is.

Sort of back to pre pandemic levels.

Are you still getting a benefit there, but that benefit is offset by the increased severity just kind of what youre seeing on that line and what you and what youre expecting for 'twenty, two and 'twenty three.

Or a move in severity from our perspective, but frequencies are still a slight benefit.

On the on the auto physical damage side, and we continue to actually see favorable frequencies as I mentioned on a couple of the casualty lines, specifically in workers' comp and to a lesser extent auto liability and E&S liability.

Okay.

That's helpful. And then last one I just had was on the <unk>.

Cargo renewal rights deal I think you had mentioned early on that you expect a 20% to $40 million of premium from that and then you mentioned this quarter. It wasn't a major contributed last quarter it wasn't.

Are you still expecting that.

To be within that range or youre, just not picking up as much business as you thought from that.

Yes.

I think and I know Mark made reference citizens prepared remarks, we are not seeing the success rate that we had anticipated now again that deal was structured where it's it's a pretty low risk deal for us we did pick up a fair amount of Allen and some agency partnerships, but the point that we made when that transaction was announced is that the opportunity to renewed.

That business was going to be dependent on our comfort level provides underwriting and a pricing perspective.

Those accounts.

So overall your question.

I would I would anticipate in less than expected over the over the first year term of that renewal rights transaction.

So you can figure just.

Clarify that I appreciate that thanks for all the answers.

Yes.

Thank you for your.

Question before we take our next question just a reminder, if you would like to ask a question. Please press star one on your Touchtone phone. Please be sure to Amin. Your line record your name to be introduced we have a question from Meyer shields with K B W. Your line is open.

Thanks, Good morning all.

Im assuming.

Assuming my math is correct it looks like the <unk>.

You're lying accident year loss ratio for GL actually went up on a year over year basis.

I guess I wasn't expecting that because you talk about higher loss trends in shorter tail lines I was hoping you could talk us through what's going on there.

Yes.

I'll start market could provide the details and primary you talking full year compared to the first quarter are you talking first part in the first quarter as first quarter to first quarter. The tax the accident year GL is pretty much spot on.

Any $88 nine last year 89, this year and just back out the effect of prior year development.

Yes, I was looking year over year, but I guess it seems to be the same trends, it's not I guess I would've expected.

We're talking we're talking to tack of a point on the quarter.

Less than a point on the other 60 basis points on a full year. So.

Recall that flat on an accident year basis.

And it's flat and really strong on an accident year basis at 89.

Okay. So thats certainly a fair description.

I guess I guess, if you had another workers' compensation book is in huge and I think we've talked about this in the past.

But are you seeing higher wages make their way into indemnity claims yet.

Well I don't I can't give you a specific answer on that but I think it is a fairly safe assumption that the wage growth that we're seeing coming through is assumed in our in our.

Medical loss ratio benefit and in our portfolio and I think this is fairly reflective of the industry.

Lost dollars ultimate loss dollars are about 50, 50 indemnity and medical.

Okay understood. Thank you so much.

Thank you.

Gentlemen at this time I have no further questions.

Okay well. Thank you all for your participation referred to speaking to you again soon thank you.

This does conclude today's conference call. We thank you all for participating you may now disconnect and have a great rest of your day.

Q1 2022 Selective Insurance Group Inc Earnings Call

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