Q2 2022 Selective Insurance Group Inc Earnings Call

August 4, 2022

Good day, everyone welcome to selective insurance group's second quarter 2022 earnings call at this time for opening remarks, and predictions electric nickel over to senior Vice President Investor Relations and Treasurer Rohan Pie you may begin.

Good morning, everyone without costing this call on our website selective duck call. The replay is available until September 4th.

We used three measures to discuss our results and business operations first be on GAAP financial measures as reported in our annual quarterly and current reports filed with the SEC and second we use non-GAAP operating measures, which we believe makes 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 and losses on investments and unrealized gains and 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 deferred strong 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 and.

non-GAAP reconciliations to any reference non-GAAP financial measures in our supplemental investor package found on the investors page of our website.

Third we make statements and projections about our future performance. These are forward looking statements under the private Securities Litigation Reform Act of 1095.

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 obligations to update or revise any forward looking statements.

Now I'll turn the call over to John <unk>, Our chairman of the Board President and Chief Executive Officer, who will be followed by Mark Wilcox EVP and Chief Financial Officer John .

Thank you Ron.

Good morning, and thank you for joining US today, we delivered strong earnings in the second quarter, continuing our long term track record of consistently achieving our target operating returns while also generating excellent top line growth.

Our annualized non-GAAP operating ROE was 11, 4% in the second quarter and for the first six months, our annualized operating ROE was 12, 1%.

Based on our updated forecast for the full year, we are on track to hit our 11% ROE target from 2022 and.

And record our ninth consecutive year of double digit Roe.

Despite slightly elevated non catastrophe property losses from the impact of higher economic inflation, we produced a 95, 5% combined ratio in the second quarter.

Our year to date combined ratio was 94, 3% slightly better than our initial full year guidance.

Growth in net premiums written was 12% for the quarter driven by strong renewal pricing in commercial standard commercial lines and excess and surplus lines.

Solid retention rates and spend commercial and personal lines and an increase in exposure.

In standard commercial lines renewal pure price increases in the second quarter averaged five 3% up from four 8% in the first quarter.

Retention of 86% was up a point from the prior year period, suggesting a pricing environment remains constructive.

Combined with our exposure increased from three 9% the total premium change in our commercial lines renewal book in the second quarter was a positive nine 4%.

We have long maintained a highly disciplined approach to managing renewal pricing in the context of expected loss trends, we have been extremely transparent about this over the past several years, providing the expected loss trend in our forward combined ratio guidance.

With the heightened interest in this topic I want to highlight the approach we have consistently taken and how we view trends in the current environment.

The first key point is that loss trend is affected by both frequency and severity.

We continue to see frequencies running slightly lower than pre pandemic levels across most lines of business, providing a bit of an offset to severities, which are being impacted by a higher level of economic inflation.

When we gave our initial guidance in January we set our 2022 combined ratio included a loss trend assumption of 5% across all lines.

More specifically net loss trend assumed a five 5% trend for casualty lines and a 4% trend from property lines.

Underlying that property trend assumption was an expectation that frequencies will continue to run below pre pandemic levels and partially offset the higher severities.

While property frequencies have held up relative to our expectations severities have come in higher.

We see current year severity trends in the property lines running closer to 10% as economic inflation is hitting those lines, particularly heart the.

The impact of this higher trend, which continued from the first through the second quarter is fully reflected in our current year combined ratio guidance and amounts to an approximately 70 basis point increase to our all lines expected loss ratio.

Through the first two quarters, we remain confident that our assumed casualty loss trend is holding up well it.

It is also worth noting that we have largely remains on R. 22, 2020 in 2021 casualty loss picks.

Might the better than expected frequencies in bolt accident years.

This recognizes the potential for elevated severities to emerge in those more recent accident years.

Increased pricing is the primary lever available to address higher loss trends. We are pleased with the sequential increase in our commercial lines renewal pure pricing in the second quarter, which was up 50 basis points over the first quarter.

Renewal pure price increases in our lines of business most affected by economic inflation was strong with commercial auto up 8% and commercial property up seven 5%.

Another key lever is adjusting and inflation insensitive exposure basis to generate additional premium increases which serves as an offset to the inflationary impacts on loss trend.

For example in commercial property, we saw an exposure increase of about three 8% for the first half of the year.

A portion of this increase acts to offset the increase in property severities. When we combined the exposure change with renewal rate of about seven 5%. They produce a total impact of over 11%, which is approximately in line with the severity trend from this line.

We have a proven track record of effectively managing price relative to loss trend through market cycles going back over a decade.

The organizational strength, we have built continues to serve us well in this more uncertain economic environment, we remain highly confident in our ability to continue to deliver consistently strong underwriting margins moving forward.

Turning to investments the higher interest rates realized in the first half of the year have had both negative and positive impacts on our investment portfolio.

Book value dropped by 14% for the first six months of the year due to the impact of realized and unrealized losses on the fixed income portfolio.

However, higher rates have also created the opportunity to increase overall book yield while also moving up in credit quality.

Through the first two quarters, we have increased the pre tax book yield on our fixed income portfolio by 50 basis points.

With an approximate three two times investments to equity ratio every 100 basis points of higher return on the investment portfolio translates to approximately 250 basis points of additional Roe.

I'll close with a few quick business updates overall I remain extremely pleased with our strong execution. Despite an environment of economic capital market loss trends uncertainties, our commercial lines geographic expansion plans discussed on recent calls remain well on track we opened for Mark during the second quarter and are on track to <unk>.

Alabama in Idaho in the coming months we.

We expect to maintain a similar pace over the next several years.

Geographic expansion is an attractive and relatively low risk growth opportunity for us as we can leverage our strong underwriting and technical capabilities in business lines that we understand well.

While outsized catastrophe losses during the quarter hurt our personal lines results, we continue to make solid progress in migrating our business towards the mass affluent market.

Direct written premium growth in the target mass affluent segment was strong in the quarter at 20%, reflecting our superior coverage and service capabilities as the year progresses, we expect to continue to obtain additional rate and exposure changes to further offset higher loss severities.

Our E&S business remains a strong contributor to our financial results. The marketplace continues to provide strong pricing and business flow opportunities. Our E&S business profile is primarily smaller accounts and lower hazard risks with a casualty focus our new automation platform for general liability property and package business provides us with.

Capacity to continue to grow the business, while enhancing operating efficiencies.

Our strong market position has us well positioned to navigate this challenging environment and continue to produce strong and consistent results. We've delivered over the past several years with that I will turn the call over to Mark. Thank.

Thank you John and good morning, I'll review, our consolidated results for the quarter and first half of the year.

Segment, operating proponents and capital position and finish with some comments on our updated guidance for 2022.

For the second quarter, we reported net income available to common stockholders per diluted share from <unk> 61.

Our non-GAAP operating EPS of $1 17.

The writing results and investment performance, we are both meaningful contributors to our solid results with alternative investment income covenant better than we had previously expected.

Our results translated to an annualized non-GAAP operating ROE of 11, 4% for the quarter and 12, 1% for the first half of the year.

So let me so consolidated underwriting results, we reported 12% growth in net premiums written for the quarter and year to date driven by strong growth in our promotional lines Haneda segments.

We reported a consolidated combined ratio of 95, 5% for the second quarter.

Combined ratio included $46 million of net catastrophe losses of five five points and $12 million of net favorable prior year Casualty reserve development.

And for one four points of catastrophe losses related to a series of Midwest storms that were particularly impactful from personal lines segment outside of personal lines cat loss activity was well within expectations.

On an underlying basis or excluding catastrophes and prior year casualty reserve development in the second quarter combined ratio was 91, 4% down from 93, 1% in the first quarter, but ill.

Compared with 89% in the year ago period, driven by non cat property losses and protect.

The year ago period benefited from pandemic, driven frequencies, which favorably impacted non cap property losses.

For the second quarter non cat property losses accounted for 16 six points on the combined ratio, which is about one point higher than expected.

Losses were driven by higher auto physical damage and commercial property Severities. This continues the theme we experienced in the first quarter and it's factored into our updated full year expectations.

Yesterday, we reported a 94, 3% combined ratio of 92, 2% on an underlying basis.

Combined ratio includes the non cat property loss ratio of 17, 5%, which is running about one point above expectations and is partially offset by lower than expected expense ratio.

In addition, our year to date cash cap loss ratio a full percentage points is running a bit better than expected for the first half of the yen.

Ill stated ex cat combined ratio guidance of 95% for the year implies an underlying combined ratio of approximately 91, 5% for.

This is consistent with our guidance from last quarter, but it is up from 91% at the start of the year.

With the increase driven by expectations that non cat property losses will run about 70 basis points higher than we expected when we started.

Yes.

Moving to expenses our expense ratio was 32, 5% for the second quarter slightly down relative to 32, 7% in the prior year period.

For the first half of the year.

The expense ratio of 32, 3% was slightly below our full year run rate expectation of 32, 5%, primarily due to the timing of some labor benefits and other overhead expenses over the longer term, we remain focused on lowering the expense ratio to a range of initiatives, including technology and process improvements while balancing this objective with <unk>.

The type of investments.

Expenses, principally comprised of holding company costs and long term stock compensation totaled $8 million in the quarter compared with $9 million in the year ago quarter.

Turning to our segments standard commercial lines net premiums written increased 12% driven by renewal pure price increases averaging five 3% excellent retention of 86% and exposure growth of approximately three 9% new business was in line with a year ago.

The commercial lines combined ratio was a profitable 93, 1% and included three three points of net catastrophe losses at one eight points of net favorable prior year Casualty reserve development.

Favorable prior year Casualty reserve development was driven by $10 million from workers' compensation for accident years, 2019 of prime and $2 billion from bonds for accident year 2020.

In commercial lines underlying combined ratio was 91, 6%. This was two three percentage points higher than the year ago period with the increase principally coming from two two percentage points of higher noncash.

Non cat property losses.

<unk> auto physical damage severities, which we highlighted last quarter.

Elevated levels of non cat commercial property losses were a bit higher than expected this quarter as well.

And our personal lines segment net premiums written increased 5% relative to the prior year period.

Fuel price increases averaged <unk>, 6% retention was slightly up relative to a year ago at 85% of new business growth was strong at 23%, reflecting the successful execution of our mass affluent strategy as the growth was within our target market.

However, the combined ratio was an unprofitable ones 116, 9% for the quarter driven by a heavy cat loss quarter with the cash impact of the combined ratio by 28 seven points.

The underlying combined ratio of 88, 2% was two seven points higher than in the prior year period, driven by higher personal auto physical damage losses.

In our E&S segment net premiums written grew 17% relative to a year ago renewal pure price increases averaged six 9% retention remains strong our new business was up 17%.

Also a renewal rights transaction entered into late last year was again not material to the premium growth. The combined ratio for the segment was a solid 95, 8% in the quarter and included two eight points of net catastrophe losses the underlying combined.

The ratio of 93% was two nine points higher than the prior year period, driven mainly by three nine points of higher non cat property losses.

Moving to investments our portfolio remains well positioned as of quarter end, 91% of the 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 years and offering a high degree of liquidity risk assets, which include our high yield allocation contained within fixed income public.

Equities and alternatives represented 10, 9% of our investment portfolio down about a point as we reduced public equities and high yield exposure in the quarter.

For the quarter after tax net investment income of $56 7 million was down relative to $67 4 million in the year ago period alternative investments, which are reported on a one quarter lag contributed $7 $3 billion of after tax gains both have to our prior expectation for loss in the quarter significantly outperforming public benchmarks.

But were down $16 3 million compared to the prior year period, yes.

Year to date, we have generated $22 $4 billion of after tax gains from alternative investments. Our current best estimate is for approximately $15 million of after tax income from alternatives for the full year. Therefore implies we expect to get back some of our year to date gains most likely in the third quarter.

I would highlight.

A highlight.

No. It's an inherent degree of the precision of an estimated future returns from alternative investments, particularly when estimated them over a relatively short time horizon.

The after tax yield on the total portfolio was 3% for the quarter, which translated to nine one percentage points of annualized home care.

non-GAAP operating contribution.

The after tax yield on the fixed income securities portfolio was three 1% in the second quarter up from two 6% in the first quarter.

While generating underwriting income continues to be I'll focus. We also continue to actively manage the investment portfolio to optimize our risk adjusted investment yields and what has become an attractive fixed income market. We put approximately $1 5 billion of new money to work.

In our fixed income portfolio during the first half of the year.

We have moved up in credit quality on these purchases, which have average take up led by its credit rating.

The after tax new money yields for the quarter was up meaningfully to three 6% relative to two 6% in the first quarter.

One 8% in the comparative quarter.

In addition, approximately 14% of our fixed income portfolio remains invested in floating rate securities and these securities are resetting at high benchmark rates up and increase book yield.

First on income.

Since yearend, we've increased the pretax book yield of our fixed income portfolio by about 46 basis points. This includes 27 basis points. This quarter. In addition to the 19 basis point increase last quarter.

We expect to put an additional $700 million to work the new fixed income purchases in the second half of the year.

From organic cash flows for maturities coupons at operating cash flow.

While the current investment bucket is helping prospective investment income a higher interest rate environment and wider credit spreads.

Negatively impacted the total return on the portfolio. The portfolios total return was negative $2 nine 8% in the quarter and negative 637% for the first half of the year.

Turning to capital our capital position remains strong with $2 6 billion of Capex as of June 30th.

Beneficiary declined seven 2% during the second quarter, and it's down 42, 2% for the first half of the year.

With our earnings more than offset by an increase in net unrealized losses adjusted book value per share increased 1% in the quarter and over the trailing 12 months is up 9% or 12% inclusive of dividends.

Our financial position remains extremely strong.

Holding company has $510 million of cash cash and investments exceeded our longer term target on that previous rents to surplus ratio because that's something a bit to one one times, but it's still at the low end of our target range of $1 35 to one five times our.

Debt to capital ratio of 63% is also very conservative.

During the first half of the year, we repurchased 86 1000 shares common stock at an average price of $75 41 per share for a total of $6 5 million.

As of the end of the quarter, we had $9 1 million of remaining capacity.

Of our share repurchase program, which we plan to use opportunistically.

I'll conclude with an update on our guidance. We currently expect the GAAP combined ratio this year, excluding catastrophe losses of 95% inclusive of net favorable casualty reserve development in the first half of the year.

Our guidance assumes no additional prior accident year casualty reserve development.

The loss assumption remains full points on the combined ratio.

We now projected after tax net investment income of $250 million, which is up $10 million relative to our prior guidance, reflecting higher income from our core fixed income portfolio. We still expect approximately $50 million of after tax net investment income from alternative investments, which implies losses in the second half of the year, but I would again highlight the <unk>.

<unk> estimated in this line item and the fact that alternative investment income could come in materially lower or higher than our current expectations.

Overall effective tax rate of approximately 25%, which includes an effective tax rate of 19, 5% of net investment income of 21% for all other items.

And weighted average shares of $61 million on a diluted basis, which assumes no additional share repurchases. We've made under our whole sortation overall, a strong first half of the year in terms of growth and profitability.

And with that I'll ask the operator to open up the call for questions.

Thank you we will now begin our Q&A portion if you would like to ask a question on the phone. Please press star one on your telephone and wait for your name to be announced if you wish to cancel your request. Please press star and then two once again star one to ask a question. Please sweet cream to be announced and start to cancel your request.

Yes.

And we have a question on the line. Our first question is from Michael Phillips from Morgan Stanley . Your line is open Sir.

Hey, Thanks, good morning, everybody.

I guess, Marc I want to make sure I understand the wording the way Youre talking about the guidance for the first half of the year. So I'm, sorry, if I'm a little confused here.

For the full year <unk> 95 for the first half.

X cat was 93.

Two points about two points of favorable spent 93 or about $92 three depending on which one user alright.

You can find that 95 for the full year to the <unk> 93 for the first half with a 92 two for the first half.

So.

But over the first half were flat control Thats my confusion.

Yes, no good.

Good question, Mike. So let me walk you through that to make sure Im answering your question correctly. So our guidance is on an ex cat basis come back to the underwriting just a second.

For the full year, we're forecasting an X cat combined ratio of 95%.

Year to date, we're at 93% so that does imply a slightly higher.

Yes.

Combined ratio for the second half of the year of 97.

Another way to look at it is.

Underlying basis. So this is ex cat ex favorable reserve development.

Year to date underlying combined ratio is 92, 2%.

And then what.

I highlighted in my prepared comments was on an underlying basis, our guidance would you take the year to date favorable reserve development and spread it over the full year, it's approximately a point.

So the full year, we're expecting an underlying combined ratio of 91, 5% and that would that imply underlying margin improvement in Q3, and Q4, which would average about 97% that gets you to the 91 five for the full year. So I know thats kind of a detailed reconciliation, but hopefully that squares up with year to date results for the full year.

Guidance on our ex cat.

Underlying basis.

It does I think so again, the $92 to get to about a 91 five.

Right correct.

Correct.

So, let's talk about that and so the improvement in the back half of the year I guess I want a couple that with what John's earlier comments with.

I guess thats, what we saw in the second quarter is that the severity rise to 10% added about 70 bps to your overall loss ratio.

Yes, youre, assuming that the rate that you have the pricing that you have now will help to offset that so thats, where thats improvements going to come from in the back half here.

Yes, I think Thats right, Mike, Let me, maybe start and John can jump in as well. So a couple of things to think about one is.

Highlighted on non cap property losses that run at about a point above expectations here today, it's actually about 90 basis points is a little bit of rounding with talks about embedded in our guidance for the full year about 70 basis points.

Non cat property losses, but what we started the year, we started the year with an underlying combined ratio of 91.

That would suggest a 91 five so we are expecting continued elevated non cat property losses in the back half of the year, although subsided a little bit as we're getting strong rate increases and healthy exposure growth.

From a premium perspective, we also now expect perhaps a little bit of expense ratio improvement relative to our guidance of 32, 5% and that sort of displays you back to the 91 five for the full year.

Yes.

Mike This is Jon the only the only thing I'll add to that I think it's important to put the non cat property losses.

The proper context, so as Mark indicated it's about a year to date, it's about 90 basis points.

<unk> expectations that equates to about $22 million.

18 of that $22 million is auto physical damage, so theres, a little bit of traditional property, but if you put together a commercial property home and off along with E&S property. It's only a couple of ways our schools were expected.

I want a physical damage is the one line of business, we as an industry don't have and inflation sensitive exposure base, whereas in the property lines, we have and Thats why we think it was important to kind of point out the combination of <unk> plus the exposure change in the property lines that we've highlighted commercial property in particular.

Because those exposure increases during neutralized the inflationary impacts.

Severity.

That's why we wanted to put that altogether.

Okay. No. That's helpful. Thanks cleared up so thanks for all the details guys.

So I guess second question then is on on your commercial book.

And maybe this is because the dollars are a little bit small, but anything to read on this quarters, new business was not down but flat relative to prior quarters. It was kind of down thats pretty flat this quarter anything to read there and kind of what does that mean going forward I guess for the sustainability of that are pretty strong.

Commercial lines overall growth.

If new business, maybe flat if that continues and then.

If theres any exposure impacts from the top line from what might happen in the economy, So kind of two parts.

Part question on that thanks.

Yes sure.

New business is always going to be a little bit bumpy quarter to quarter, and I say that because our primary focus on new business acquisition is pricing and underwriting discipline.

I don't think and I believe this is probably what you've heard from others in the market I think overall the market pricing dynamics remained fairly rational when new business pricing is always a little bit of a different game and I think you go through periods of time, where markets different markets, sometimes dial up their focus on new business and as a result of that we might not be.

Comfortable with where pricing levels, Mark, but I won't say, that's flat new business. Overall in Q2, we had a really strong Q Q2 last year. So I think that would explain part of the differential we're comfortable with where we are writing new business levels, but from quarter to quarter. You. Just we'll see some inherent noise in that in that number on it.

Year over year basis based on our ability to win accounts at pricing levels.

Underwriting quality perspective that we're comfortable with.

Now I do think you don't want to factor in a little bit of what you mentioned as well, which is that exposure increase thats evident and everybody's renewal book is also probably impacting favorably.

Average sized up premiums on new business, so theres, probably a little bit of lift in that new business number and if you strip that out I would say you might actually referred us some semi business as being down slightly on an exposure just adjusted basis, but a long way of saying new business quality and pricing is something we monitor very closely we're breakup.

More with what we are bringing on the books and at what pricing level, but thats going to bounce around from quarter to quarter, depending on our ability to win is based on where the market is.

Okay. No. Thanks, that's helpful last one if I could then guys on commercial auto.

There's physical damage issues in property issue, there too as well.

But I guess.

Are you seeing anything recent trends that might indicate on that on the <unk>.

Non property side of commercial on the liability side of commercial auto that might indicate that deadline might start to become more of a problem child like it was.

A few years back.

So I don't I Wouldnt point to anything specific there or first first comment I'll sort of refer back to us.

Commercial auto liability is included in that casualty discussion I had in my prepared comments and we had embedded.

The current year loss trend assumption of five 5% across all casualty lines that includes auto bi but I also stressed the point and I want them to make the connection there.

The 2020, one accident years for us.

We have stayed on spent largely stayed on those initial loss picks and obviously auto liability for US is a big part of our casualty loss picks.

And we've done that because while the frequency benefit is real and I think those accident years age to the point, where we feel like that frequency benefit is real we're staying on those loss picks because any concerns over emerging severity in the current accident year would also ultimately come through in the more recent prior accident years, So I think thats.

Just reflective of our way of recognizing that whether it's evident or not at this point.

We were concerned that severities might emerge and we extend on those loss picks for that reason essentially largely ignoring the frequency benefit that's been recognized for that line of business.

Great. Okay. Thank you for your answers guys.

Thank you. Thank you.

Thank you. Your next question is from the line of Paul Newsome from Piper Sandler Your line is open.

Thank you good morning.

Just also interested in the commercial auto.

Mostly covered.

Bob had the same smoothing.

Property and liability.

<unk>.

Completion of the impact.

So broadly as well.

Or is it.

You are talking about property.

Right.

So general liability commercial auto and commercial property.

So.

My comments about property.

<unk> casualty youre actually from a loss trend perspective.

That's right from our loss trends across the handful of Bob seem to kind of.

That seems to be some differentiation amongst companies between.

Tom.

Guys.

Customer.

If you see the same thing.

No. So now we do split out the BOP in the BOP into the property component and the casualty component and Thats embedded in the breakdown that I gave you and property represents about 60% to 65% or 70% of the.

Of that premium allocation. So it's in there I will say it was in my my last.

The last question relative to whats driving the non cat property for the most part our BOP on a property basis has been running a little bit better than expected.

Year to date basis, and there is a combination of what likely frequency driven more selling and severity driven.

But I'm not sure if I'm getting to your specific question, Paul I'll make sure I'm understanding it correctly.

It sounds like there's not a big differentiation in terms of.

Loss trends.

Versus others.

Yes.

The other thing to note too as Bob.

Bit of a smaller line for us in many of our competitors and part of that is a lot of our small accounts are in small artisan contractor segments, which are not written on a box. Those are written on a on a property and GL package.

Not as big of a line for us as well.

Somewhat similar.

Any differentiations loss trends.

Talking about sort of the excess piece.

Worldwide.

Properties.

Right.

I would say no.

We do a full reserve analysis, a foot for reserve review by line.

<unk> umbrella, we have not seen any noticeable shift in trends in our in our umbrella line, which has been a consistently strong performer for us.

I would say because we write the umbrella that we write and I think this is probably reflective of most of our standard market peers is generally written on a supported basis, meaning youre, writing the underlying GL and auto and I think you would expect that youre seeing umbrella issues you'd be seeing severity emerge unexpectedly high.

On the auto northern GL that underlies it and we're not seeing that as.

As I said earlier the loss trend assumptions, we have.

The current year and the more recent prior accident years are holding up quite well and I think that's the first thing you would see before you saw an umbrella impact.

<unk>.

One way of saying no. There is nothing in our umbrella trends that have us concerns at this point.

Alright. Thank you I appreciate the help.

Thank you Paul.

Thank you next question is from the line of Meyer Shields from AB W. Your line is open.

Great. Thanks, good morning.

John first of all thank you for all of your commentary on the impact of the exposure base growth.

I was wondering given your.

Pricing capabilities.

What are the opportunities for actually even making that flowed through even better or more responsive to inflation.

Well I guess I feel like we do a really good job of that I think this comes through in the non cap property commentary.

A majority of the non cap property noise, we're seeing is driven by auto physical damage because it is the one line, we don't have that exposure inflation sensitive exposure base I feel like.

There's two aspects to this especially on the casualty lines, which is make sure youre getting your exposure base right. When you write accounts and then make sure you've got a lot of discipline and timely disciplined around auditing those policies that are auditable to make sure you're quickly recognizing any change and charging for any change.

And exposure and I think the discipline around that is certainly important and then I think on the property side, It's just making sure that <unk> got discipline around running updated replacement cost estimator, which include the impact of building materials and reagents and youre getting those through your exposure basis as quickly as <unk>.

Possible I think those are the big drivers on that unfortunately on the auto physical damage side, there's just not a lot of levers available to reflect those increased cost of repairing and replacing vehicles and your exposure base, which means that pricing is your primary tool.

And that's why we continue to be focused on for that line.

Understood and I guess that was kind of my question I know, it's certainly not industry practice right now is there any way of actually incorporating.

Replacement costs in the price and product coverage.

I think that would be a very positive change going forward I think we're all highly dependent on third parties to do that for us in personal auto it is done.

It's done on an annual basis, so theres a bit of a lag there and I wouldnt suggest that thats responsive to actual changes in replacement.

And repair cost.

What you really see in terms of inflation. When you got is happening on a very lag basis in personal auto you don't have.

You don't have anything similar type of model year lift.

In commercial auto each year, but again these are not I wouldn't call these inflation sensitive.

I think the providers of those estimates for us would be doing the industry a real service by being a lot more responsive like we are in the property side to the change in the replacement cost and again, we're in an unusual circumstance I think historically you have never seen this kind of movement in this short of a period of time and the cost of.

Used vehicles and the cost of repairing vehicles, but I think we should all learn from this and I think that would be.

A positive change going forward to be more responsive to exposure.

Our inflation a placement adjustment exposures.

Yes.

That's very helpful. Thank you.

Second question, I guess and I apologize if I missed this I was wondering if I could get quarterly and year to date catastrophe losses by line of business I know, we've got that on some previous calls.

Yes, I'll just give you a market second to final score.

Yes.

Sure.

And maybe I can start with outstanding commercial lines and walk you through that and see if that hits. The market then we could go into.

First of all on D&S, but I think those are pretty self explanatory explanatory, but in outstanding commercial lines.

For the quarter and commercial auto it was 677000 commercial property $19 million 143000.

And Paul.

$2 530000.

Love to.

$2 3 billion or $3 three points on the combined for cats in Q2 for standard commercial lines. So 15 five points on the property line, Yes, 15, and the <unk> silicon.

<unk> eight points on the bottom line exactly.

Right right.

Thank you.

Is that good.

Yes.

I don't think we got in the first quarter. So I'm, hoping for you to date numbers, but I can also follow up on that.

Yes.

Maybe the year to date numbers quickly.

Commercial loans 986000 year to date our.

Promotional property $32 million at 84000, and bump up $4 billion to 240000.

It gets you to the 37.

$3 million on a year to date basis of $2 eight points on the combined and then in personal lines there is a little bit.

First of all it out you wanted that split but most of the cat loss activity has been homeowners.

That is perfect. Thank you so much.

Thank you. Our next question is from the line of Chris Carter from Bank of America. Your line is open.

Hi, everyone.

Good morning, Greg.

I'm wondering if we could look at personal lines, a little bit I know you all mentioned expecting maybe some accelerated rate increases in the back half of the year.

With the rate being a little bit lower than in 2021 year to date, and just kind of flat sequentially. I was wondering if there is.

Is anything related to the mix change going on in that book.

Maybe.

Having some increases year to date for us.

I guess, if you think that the.

6%.

Richard.

The rate that you are taking so far.

Yes. Thank you Greg so that is the actual rate number I don't want anybody to mislead anybody be misled by that at all that's the actual rate number I think what you were pointing to though it's more of a mix change and there is a substantial mix of business change happening in our portfolio and historically without getting too much into the specific differential.

<unk>.

Our target market Thats generating that growth has performed better than our non target market historically the.

The book of business transformation has been meaningful and I mentioned I gave you the.

The growth in target market premium in the quarter on a direct basis and that was 20%.

First as you saw the overall at 5% growth in the quarter. So you could see a substantial shift in that book, that's happening, which will generate and our view mixed change now that said, we need to be responsive to the overall <unk> level increased from a loss cost perspective, which we think impacts every every <unk>.

Out of the market pretty evenly and Thats why we will be increasing their filed rates amount right amount. So it will just take a little bit longer for those to appear in the pure rate that you see reported but I can't understate that mix change because we believe it is meaningful and then the other point I will highlight is when we got into the PGA.

The pandemic, we opted to just provide premium credits our rate level was actually positive in 2020 and flat in 'twenty. One overall as opposed to taking big rate decreases filed rate decreases like a number of market participants. So I think the starting point is a little bit different.

But notwithstanding that we don't want to see rates pick up as we move forward in both the auto and home lines.

Yes.

Thank you and I guess related to.

Outperformance you mentioned in your target market for that.

Core loss ratio.

<unk> been quite a variable as we speak.

From peers over the past few quarters is kind of hovering in that give or take 61% to 62% range is that also a function of the mix changes ongoing in the book or is there anything else unique in your books that might have concluded.

Step up that we've seen from.

Some peers this quarter.

No I think that the mix change would be that would be the one thing that would be impacting that again. There is some property sensitivity. There we've seen homeowners in particular come in a little bit better than expected on a non-GAAP basis.

But there is nothing else there that would suggest otherwise.

Thank you.

Thank you. Thank you agree.

Thank you once again for those who would like to ask a question on the phone. Please press star one on your telephone and wait for your name to be announced and to cancel your request. Please press star followed by the number too.

Our next question is from Scott <unk> from RBC capital markets line is open.

Yes. Good morning, Thank you.

Just had a question severity is up for the industry across a lot of lines and you mentioned in your comments about the claims frequency.

Still being down versus pre pandemic levels and I'm wondering if you're able to quantify that really at all and just it would be.

Interested to hear your thoughts as to why you think that.

That has not rebounded.

With the exception of any worker's comp too to kind of current levels given the reopening.

It's been around for a year plus just anything you can share on that.

Yes, I think the.

Firstly, I know im not going to quantify specifically by line, but I will tell you, it's pretty consistent across all lines and I use the word slight.

On a on a on level basis, when so when you strip out the impacts of rate change on an odd level basis, we continue to see frequencies below pre pandemic levels, albeit slightly so that'll be in the single digit percentages and it'll vary a little bit by line.

I understand your point about.

The reopening, but I think we have to recognize the economy behaves dip has been behaving differently post pandemic that has pre pandemic.

I think the obvious its always been talked about is that the shift in miles driven so even if they bounce back the type of miles driven are different I think shopping behaviors have changed I think there's a whole bunch of behavior changes I think that people who are working from home visit change and I think those things will all probably have some influence on free.

Brinci for different lines of business not just auto.

It's hard to specifically point to any one of those items individually, but I think there clearly has been some consumer behavior change and some employee behavior change all of which could accumulate to change frequency patterns and in this instance result.

Lower frequency pattern that might persist again, I'm not predicting that frequency will continue to come down because they've been relatively stable. The last couple of years and have settled out for a long enough period of time, where it's a little bit of a trend that you could point to relative to pre pandemic.

And again, you always want to look at this on an on level basis. So you don't you don't get a false reading.

The price impact.

Cumulative price increases you want a high level that to get to a real view of frequency.

That's really helpful. I appreciate that.

Hey, I just had a quick question two on the high net worth business you can cover that all of it but could you give us a little more of an update I know you mentioned that the 20% growth but in terms of.

How many states you're in how many states do you think youll be in in the next couple of years and just the overall loss profile on where you think that might stand.

Once once you get that up and running versus where the book had been.

Just anything to share on that is just based on what you've learned so far.

Yes, so just in terms of the state footprint. We're in the same 15 state footprint that we were in when we when we launched the transformation so.

I would say.

A portion of our commercial line states.

I can run term, if you want but theres been no change to that for the state.

Okay.

We'll evaluate the opportunity to potentially expand geographically as well it would take a very disciplined approach around that.

With regard to the loss profile again, I don't want to I don't want to go too deep into that topic, but I will tell you. There is in our in our historical view from a loss ratio perspective, there hasnt been a differentiator it's been recognizable and we expect that difference to continue to benefit us from a mixed change perspective.

But I'd rather not go into specifics in terms of what that means in terms of loss ratio points.

Sure I understand.

And just two other quick ones just on the investment side alternative it seemed like that.

That may have outperformed a little bit in the quarter. I think you mentioned some commentary was there any particular class.

That did outperformed on that or any anything anything more you can share on that.

Yes.

So thats been outperformance.

So it's been a bit of a growing allocation for us it's an asset class that we really like its about four 9% of our total invested assets with a heavier weighting towards private equity and to a lesser extent private credit and real assets when.

When you look at the public market benchmark.

Quarter lag. So you have to go back to Q1 to see how the public market benchmark supposedly we're expecting a loss in Q2 and we came in a decade that I've mentioned after tax of about $7 4 million most of that gain came from private equity and then to a lesser extent real assets, particularly energy and infrastructure.

And then private credit to a lesser extent.

Okay. That's helpful. And then just the last one two on you mentioned.

The $700 million in capital you expect to deploy in a fixed income or the second half of the year is that going to be typically in the same areas you looked in the first half or anything more you can touch on there.

Yeah. So we've been very active this year from a from an investment perspective really trying to optimize the portfolio and build book yield than what it's been obviously a rapidly increasing interest rate environment and then secondly.

In the second quarter a.

A little bit of a widening of credit spreads.

The market's anticipation of a slowdown in the economy.

Or a recession at some point.

So in the first half of the year I mentioned, we put $1 5 billion.

Our cash flow to look into the portfolio and increase the book yield by approximately 46 basis points, which is meaningful in terms of <unk> contribution to selective.

In the second half of the year were anticipating about $700 billion. That's obviously, an estimate with a range around that and that's just organic cash flow. So when you think about mature natural maturities coupons and operating cash flow we can.

Some of the insurance operation of that boost to our investment operations.

That's without doing any proactive traded the portfolio year to date, we have been very active from a sales perspective. So it hasnt just been organic cash flow trading the portfolio.

To put new money to work.

In terms of.

Allocations, we've really likes securitized in the first half of the year.

To a lesser extent.

Taxable munis, but mainly in the securitized sector agency <unk> CLO slippage.

Found attractive from a yield perspective, and also from a credit quality perspective.

As I highlighted one of the benefits of trading the portfolio. This year. It has been not only to increase the book yield so if they come a little bit more defensive with a higher <unk>.

Allocations to high rated securities go in as to what might be.

A little bit of a downturn from an economic perspective, so really accomplishing a couple of things and maybe one last thing I'll mention that it's embedded in our forward investment income guidance as the benefit of the floating rate exposure.

<unk>.

We're about a 14% allocation to floaters as LIBOR has moved up but now sofa, meaning.

Meaningfully on a year to date basis.

Probably about two 6%.

Each points here today as those securities reset typically every 90 days.

That's been a nice lift in terms of the book yield.

Contributors to the core fixed income that we've generated year to date and expectations for the full year as well.

Okay got it thanks for all the answers.

Thank you we don't have any further questions on queue I would like to turn floor back to our speakers.

Great well. Thank you all for joining us and look forward to speaking to you again next quarter.

Thank you.

Thank you and that concludes today's conference for today. Thank you all for participating you may now disconnect. Thank you very much.

[music].

Good day, everyone and welcome to selective insurance group's second quarter 2022 earnings call. At this time for opening remarks introductions I'd like just to call over to senior Vice President Investor Relations and Treasurer Rohan Pie you may begin.

Good morning, everyone without costing this call on our website selective dot com. The replay is available until September 4th.

We used three measures to discuss our results and business operations must be on GAAP financial measures as reported in our annual quarterly and current reports filed with the SEC and second we use non-GAAP operating measures, which we believe makes it easier for investors to evaluate our insurance business.

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.

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 1995, they are not guarantees of future performance and are subject to risks and uncertainties.

We discuss these risks and uncertainties in detail in our annual quarterly and current reports filed with the SEC and we undertake no obligations to update or revise any forward looking statements.

Now I'll turn the call over to John Maccioni, Chairman of the Board President and Chief Executive Officer, who will be followed by Mark Wilcox EVP and Chief Financial Officer John .

Thank you Ron.

Our annualized non-GAAP operating ROE was 11, 4% in the second quarter and for the first six months, our annualized operating ROE was 12, 1%.

Based on our updated forecast for the full year, we are on track to hit our 11% ROE target from 2022 and.

And record our ninth consecutive year of double digit Roe.

Despite slightly elevated non catastrophe property losses from the impact of higher economic inflation, we produced a 95, 5% combined ratio in the second quarter.

Our year to date combined ratio was 94, 3% slightly better than our initial full year guidance.

Growth in net premiums written was 12% for the quarter driven by strong renewal pricing in commercial standard commercial lines and excess and surplus lines.

Retention rates in standard commercial and personal lines and an increase in exposure.

In standard commercial lines renewal pure price increases in the second quarter averaged five 3% up from four 8% in the first quarter.

Retention of 86% was up a point from the prior year period, suggesting a pricing environment remains constructive.

Combined with our exposure increase of three 9% the total premium change in our commercial lines renewal book in the second quarter was a positive nine 4%.

With the heightened interest in this topic I want to highlight the approach we have consistently taken and how we view trends in the current environment.

The first key point is that loss trend is affected by both frequency and severity.

Continue to see frequency is running slightly lower than pre pandemic levels across most lines of business.

Finding a bit of an offset to severities, which are being impacted by a higher level of economic inflation.

When we gave our initial guidance in January we set our 2022 combined ratio included a loss trend assumption of 5% across all lines.

More specifically net loss trend assumed a five 5% trend for casualty lines and a 4% trend from property lines.

Underlying our property in trend assumption was an expectation that frequencies will continue to run below pre pandemic levels and partially offset the higher severities.

While property frequencies have held up relative to our expectations severities have come in higher.

We see current year severity trends in the property lines running closer to 10% as economic inflation is hitting those launch, particularly hard.

The impact of this higher trend, which continued from the first through the second quarter and is fully reflected in our current year combined ratio guidance and amounts to an approximately 70 basis point increase to our all lines expected loss ratio.

Through the first two quarters, we remain confident that our assumed casualty loss trend is holding up well.

It is also worth noting that we have largely remained on R. 22, 2020 in 2021 casualty loss picks.

The better than expected frequencies in bolt accident years.

This recognizes the potential for elevated severities to emerge in those more recent accident years.

Renewal pure price increases in our lines of business most affected by economic inflation was strong with commercial auto up 8% and commercial property up seven 5%.

Another key lever is adjusting and inflation insensitive exposure basis to generate additional premium increases which serves as an offset to the inflationary impacts on loss trend.

For example in commercial property, we saw an exposure increase of about three 8% for the first half of the year.

A portion of this increase acts to offset the increase in property severities. When we combined the exposure change with renewal rate of about seven 5%. They produced a total impact of over 11%, which is approximately in line of the severity trend for this line.

We have a proven track record of effectively managing price relative to loss trend through market cycles going back over a decade.

Turning to investments the higher interest rates realized in the first half of the year have had both negative and positive impacts on our investment portfolio.

Book value dropped by 14% for the first six months of the year due to the impact of realized and unrealized losses on the fixed income portfolio.

However, higher rates have also created the opportunity to increase overall book yield while also moving up in credit quality.

Through the first two quarters, we have increased the pre tax book yield on our fixed income portfolio by 50 basis points.

With an approximate three two times investments to equity ratio every 100 basis points of higher return on the investment portfolio translates to approximately 250 basis points of additional Roe.

I'll close with a few quick business updates.

I remain extremely pleased with our strong execution, despite an environment of economic capital market loss trend uncertainty our commercial lines geographic expansion plans discussed on recent calls remain well on track we opened Vermont during the second quarter and are on track to open Alabama in Idaho in the coming months, we expect to maintain that.

Similar pace over the next several years.

Geographic expansion is an attractive and relatively low risk growth opportunity for us as we can leverage our strong underwriting and technical capabilities and business lines that we understand well.

While outsized catastrophe losses during the quarter hurt our personal lines results, we continue to make solid progress in migrating our business towards the mass affluent market <unk>.

Our E&S business remains a strong contributor to our financial results. The marketplace continues to provide strong pricing and business flow opportunities. Our E&S business profile is primarily smaller accounts and lower hazard risks when a casualty focus our new automation platform for general liability property and package business provides us with.

Capacity to continue to grow the business, while enhancing operating efficiencies.

Our strong market position has us well positioned to navigate this challenging environment and continue to produce strong and consistent results. We have delivered over the past several years with that I'll turn the call over to Mark. Thank.

Thank you John and good morning, I'll review, our consolidated results for the quarter and first half of the year discuss.

Discuss our segment operating performance and capital position and finish with some comments on our updated guidance for 2022.

For the second quarter, we reported net income available to common stockholders per diluted share from <unk> 61.

Our non-GAAP operating EPS of $1 17 underwriting results and investment performance were both meaningful contributors to our solid results with alternative investment income coming in better than we had previously expected.

I'll translate into an annualized non-GAAP operating ROE of 11, 4% for the quarter and 12, 1% for the first half of the year.

Turning to our consolidated underwriting results, we reported 12% growth in net premiums written for the quarter and year to date, driven by strong growth in our commercial lines and E&S segment.

We reported a consolidated combined ratio of 95, 5% for the second quarter the.

The combined ratio included $46 million net catastrophe losses of five five points and $12 million of net favorable prior year Casualty reserve development accounted for one four points of catastrophe losses related to a series of Midwest storms that were particularly impactful for our personal lines segment outside of personal lines cat loss activity.

It was lower than expectations.

On an underlying basis or excluding catastrophes and prior year casualty reserve development in the second quarter combined ratio was 91, 4% down from 93, 1% in the first quarter.

89% in the year ago period, driven by non cat property losses in particular, the year ago period benefited from pandemic revenue frequencies, which favorably impacted non cap property losses.

For the second quarter non cat property losses accounted for 16 six points on the combined ratio, which is about one point higher than expected the higher losses were driven by higher auto physical damage and commercial property severity. This continues the theme we experienced in the first quarter and is factored into our updated full year expectations.

Yesterday, we reported a 94, 3% combined ratio of 92, 2% on an underlying basis. The combined ratio includes the non cat property loss ratio of 17, 5%, which is running about one point above expectations and is partially offset by lower than expected expense ratio.

In addition, our year to date cash cat loss ratio of four percentage points. This is running a bit better than expected for the first half of the year.

Ill stated ex cat combined ratio guidance of 95% for the year implies an underlying combined ratio of approximately 91, 5% for the yen.

This is consistent with our guidance from last quarter, but it is up from 91% at the start of the year.

With the increase driven by expectations that non cat property losses will run about 70 basis points higher than we expected when we started the year.

Moving to expenses our expense ratio was 32, 5% for the second quarter slightly down relative to 32, 7% in the prior year period.

The first half of the year.

The term investments corporate expenses, principally comprised of holding company costs and long term stock compensation totaled $8 million in the quarter compared with $9 million in the year ago quarter.

In commercial lines combined ratio was a profitable 93, 1% and included three three points of net catastrophe losses at one eight points of net favorable prior year Casualty reserve development.

Favorable prior year Casualty reserve development was driven by $10 million from workers' compensation for accident years, 2019 of prime and $2 billion from bonds for accident year 2020.

Auto physical damage severities, which we highlighted last quarter remained at elevated levels of non cat commercial property losses were.

Were a bit higher than expected this quarter as well.

And our personal lines segment net premiums written increased 5% relative to the prior year period renewal pure price increases averaged <unk>, 6% retention was slightly up relative to a year ago at 85% of new business growth was strong at 23%.

The successful execution of our mass affluent strategy as the growth was within our target market.

The combined ratio was an unprofitable ones 116, 9% for the quarter driven by a heavy cat loss quarter with the cast impacted the combined ratio by 28 seven points.

The underlying combined ratio of 88, 2% was two seven points higher than in the prior year period, driven by higher personal auto physical damage losses.

In our E&S segment net premiums written grew 13% relative to a year ago. We are now on pure price increases averaged six 9% retention remained strong and new business was up 17%. The Alibaba renewal rights transaction entered into late last year was again not material to the premium the combined ratio for the segment was a solid 95.

Five 8% in the quarter and included two eight points of net catastrophe losses. The underlying combined ratio of 93% was two nine points higher than in the prior year period.

Made by three nine points of higher non cat property losses.

Let me start investments our portfolio remains well positioned as of quarter end, 91% of the portfolio was invested in fixed income and short term investments with an average credit rating of eight plus and an effective duration of four one years and offering a high degree of liquidity for us.

<unk> assets, which include our high yield allocation contained within fixed income public equities and alternatives represented 10, 9% of our investment portfolio down about a point as we reduced public equities and high yield exposure in the quarter.

For the quarter after tax net investment income of $56 7 million was down relative to $67 4 million in the year ago period alternative investments, which are reported on a one quarter lag contributed seven $3 billion of after tax gains relative to our prior expectation for Boston quarter significantly outperforming public benchmarks.

But were down $16 3 million compared to the prior year period.

Year to date, we've generated $22 $4 billion of Austin tax gains for models under the divestments. Our current best estimate is for approximately $58 million and after tax income from alternatives for the full year. Therefore implies we expect to get back some of our year to date gains most likely in the third quarter.

I would highlight.

There is an inherent degree of the precision of an estimated future returns from alternative investments, particularly when estimating them over a relatively short time horizon.

The after tax yield on the total portfolio was 3% for the quarter, which translated to nine one percentage points of annualized Opex non-GAAP operating contribution.

The tax yield on the fixed income securities portfolio was three 1% in the second quarter up from two 6% in the first quarter.

Generating underwriting income continues to be I'll focus. We also continue to actively manage the investment portfolio to optimize the risk adjusted investment yields and what has become an attractive fixed income market. We put approximately $1 5 billion of new money to work.

In our fixed income portfolio during the first half of the year.

We have moved up in credit quality on these purchases, which have average stay double a minus credit rating.

The after tax new money yield for the quarter was up meaningfully to three 6% relative to two 6% in the first quarter at one 8% in the comparative quarter.

In addition, approximately 14% of our fixed income portfolio remains invested in floating rate securities.

Securities are resetting at high benchmark rates, helping to increase book yield and investment income.

Since yearend, we've increased the pre tax book yield of our fixed income portfolio by about 46 basis points. This includes 27 basis points. This quarter. In addition to the 19 basis point increase last quarter.

We expect to put an additional 700 millions of open new fixed income purchases in the second half of the year from organic cash flows for maturities coupons and operating cash flow.

While the current investment bucket is helping prospective investment income a higher interest rate environment and wider credit spreads.

Negatively impacted the total return on the portfolio. The portfolios total return was negative $2 nine 8% in the quarter and negative 637% for the first half of the year.

Turning to capital our capital position remains strong with $2 6 billion of Capex as of June <unk>.

Beneficiary declined seven 2% during the second quarter and is down 42, 2% for the first half of the year.

With our earnings more than offset by an increase in net unrealized losses adjusted book value per share increased 1% in the quarter and over the trailing 12 months, it's up 9% or 12% inclusive of dividends.

Our financial position remains extremely strong our holding company has $510 million of cash cash and investments exceeded our longer term target and then produce rents to surplus ratio or is there some events of one point or one time, but it's still at the lower end of our target range of $1 35 to one five times.

Our debt to capital ratio of 63% is also very conservative.

During the first half of the year, we repurchased 86 1000 shares common stock at an average price of $75 41 per share for a total of $6 5 million as of the end of the quarter, we had $90 1 million of remaining capacity.

Under our share repurchase program, which we plan to use opportunistically.

I'll conclude with an update on our guidance. We currently expect the GAAP combined ratio this year, excluding catastrophe losses of 95% inclusive net favorable casualty reserve development in the first half.

Our guidance assumes no additional prior accident year casualty reserve development.

Our catastrophe loss assumption remains full points on the combined ratio.

We now projected after tax net investment income of $258 million, which is up $10 million relative to our prior guidance, reflecting higher income from our core fixed income portfolio. We still expect approximately $50 million of after tax net investment income from alternative investments, which implies losses in the second half of the year, but I would again highlight the <unk>.

<unk> estimated in this line item and the fact that alternative investment income could come in materially lower or higher than our current expectations.

And overall effective tax rate of approximately 25%, which includes an effective tax rate of 19, 5% for net investment income of 21% for all other items.

And weighted average shares of $61 million on a diluted basis, which assumes no additional share repurchases. We may make under our authorization overall, a strong first half of the year in terms of growth and profitability.

Yes.

And we have a question on the line. Our first question is from Michael Phillips from Morgan Stanley . Your line is open Sir.

Hey, Thanks, good morning, everybody.

I guess, Marc I want to make sure I understand the wording the way Youre talking about the guidance for the first half of the year. So sorry, if I'm a little confused here.

For the full year <unk> 95 for the first half.

Ex cats was $98 three.

Two points about two points of favorable said 93 or about $92 three depending on which one user alright.

You can find that 95 for the full year to the 93 for the first half with a 92 two for the first half.

So.

During the first half were flat control Thats my confusion.

Yes good.

Good question, Mike So let me walk you through that to make sure.

So you're correct question correctly. So our guidance is on an ex cat basis come back to the underlying adjusted socket.

So for the full year, we're forecasting an X cat combined ratio of 95%.

Year to date, we're at 93% so that does imply a slightly higher.

Combined ratio for the second half of the year of 97.

Other way to look at it is.

Underlying basis. So this is ex cat ex favorable reserve development.

Year to date underlying combined ratio was 92, 2%.

And then.

What I highlighted in my prepared comments was on an underlying basis. Our guidance would you take that at year to date favorable reserve development and spread it over the full year and it's approximately a point.

So the full year, we're expecting an underlying combined ratio of 91, 5% and that would that imply underlying margin improvement in Q3, Q4, which would average about 97%. It gets you to the 91 five for the full year. So I know thats kind of a detailed reconciliation, but hopefully that squares up with year to date results for the full year.

Guidance on our ex cat.

Underlying basis.

It does I think so again, the $92 to get to about a 91 five.

Alright, correct correct okay.

So, let's talk about that and so the improvement in the back half of the year.

Couple that with what John's earlier comments with.

I guess thats, what we saw in the second quarter is that the severity rise to 10% added about 70 bps to your overall loss ratio.

Yes, youre, assuming that the rate that you have the pricing that you have now will help to offset that so thats, where thats improvements going to come from in the back half of the year.

Yes, I think Thats right Mike.

Stan and Tom can jump in as well so a couple of things to think about one is.

Highlighted on non cat property losses that run at about a point above expectations here today, it's actually about 90 basis points is a little bit of rounding with talked about embedded in our guidance for the full year about 70 basis points.

Higher non cat property losses from where we started the year, we started the year with an underlying combined ratio of 91.

That would suggest a 91 five so we are expecting continued elevated non cat property losses in the back half of the year.

Although subsided a little bit as we're getting strong rate increases and healthy exposure growth.

From a premium perspective.

So now expect perhaps a little bit of expense ratio improvement relative to our guidance of 32, 5% and that sort of displays you back to the 91 five for the full year.

Yes.

Mike This is Jon the only the only thing I'll add to that I think it's important to put the non cat property losses.

In the proper context, so as Mark indicated it's about a year to date, it's about 90 basis points.

<unk> expectations that equates to about $22 million.

18 of that $22 million is auto physical damage, so theres, a little bit on traditional property, but if you put together a commercial property home and Bob Malone with E&S property, it's only a couple of million dollars schools were expected.

Auto physical damage is the one line of business, we as an industry you don't have an inflation sensitive exposure base, whereas in the property lines, we have and Thats why we think it was important to kind of point out the combination of <unk> plus the exposure change in the property lines, where we highlighted commercial property in particular.

So as those exposure increases due to neutralize the inflationary impact of severity.

That's what I wanted to put that altogether.

Okay. No. That's helpful. Thanks cleared up so thanks for all the details guys.

So I guess second question then is on on your commercial book.

Maybe this is because $1 or a little bit small, but anything to read on this quarters, new business was not down but flat relative to prior quarters. It was kind of down thats pretty flat this quarter.

Anything to read there and kind of what does that mean going forward I guess for the sustainability of that are pretty strong.

Commercial lines overall growth.

If new business, maybe flat if that continues and then if.

Theres any exposure impacts from on the top line from what might happen in the economy, So kind of two parts.

Part question there. Thanks.

Yes sure.

<unk> business is always going to be a little bit bumpy quarter to quarter, and I say that because our primary focus on new business acquisition is pricing and underwriting discipline and I don't I don't think and I believe this is probably what you've heard from others in the market I think overall the market pricing dynamics remained fairly rational when new business pricing is.

Always a little bit of a different game.

You go through periods of time, where markets different markets, sometimes dial up their focus on new business and as a result of that we might not be comfortable with where our pricing levels, Mark, but I won't say that's flat new business. Overall in Q2, we had a really strong Q2 last year. So I think thats that would explain part of the differential.

We're comfortable with where we are writing our new business levels, but from quarter to quarter. You. Just we'll see some inherent noise in that in that number on a year over year basis based on our ability to win accounts at pricing levels and went from an underwriting quality perspective that we're comfortable with.

Now I do think you don't want to factor in a little bit of what you mentioned as well, which is that exposure increase thats evident and everybody's renewal block is also probably impacting favorably.

The average size of premiums on new business, So theres, probably a little bit of lift in that new business number and if you strip that out I would say you might actually referred us to new business as being down slightly.

On an exposure just adjusted basis, but a long way of saying new business quality and pricing is something we monitor very closely we're very comfortable with what we're bringing on the books and at what pricing level, but thats going to bounce around from quarter to quarter, depending on our ability to win is based on where the market is.

Okay. No. Thanks, that's helpful last one if I could then guys commercial auto obviously theres physical damage issues in property issue there too as well.

But I guess.

Are you seeing anything recent trends that might indicate on that on the <unk>.

Non property side of commercial on the liability side of commercial auto that might indicate that deadline might start to become more of a problem child like it was a few years back.

So I don't I Wouldnt point to anything specific that our first first comment I'll start I'll refer back to us.

Commercial auto liability is included in that casualty discussion I had in my prepared comments and we have embedded.

The current year loss trend assumption of five 5% across all casualty lines that includes auto bi but I also stressed the point and I want them to make the connection there.

The 2020, one accident years for us.

We have stayed on spent largely stayed on those initial loss picks and obviously auto liability for US is a big part of our casualty loss picks.

And we've done that because while the frequency benefit is real and I think those accident years have age to the point, where we feel like that frequency benefit is real we're staying on those loss picks because any concerns over emerging severity in the current accident year would also ultimately come through in the more recent prior accident years, So I think thats.

Reflective of our way of recognizing that whether it's evident or not at this point.

We were concerned that severities might emerge and we extend on those loss picks for that reason essentially largely ignoring the frequency benefit that's been recognized for that line of business.

Great. Okay. Thank you for your answers guys.

Thank you. Thank you.

Thank you. Your next question is from the line of Paul Newsome from Piper Sandler Your line is open.

Thank you and good morning.

We are also interested in the commercial auto.

Mostly covered.

Bob had the same sort of thing.

Property and liability.

Exposures that.

Completion of impacts as you were talking sort of broadly as well.

Or is it.

When you are talking about property.

Right.

So general liability commercial auto and commercial property.

So.

And my comments about property and casualty youre actually from a loss trend perspective.

That's right from a loss trends <unk> seen the kind of.

Seems to be some differentiation amongst companies between.

Size.

Customers.

If you're seeing the same thing.

Of that premium allocation. So it's in there I will say it was in my my last.

Last question relative to whats driving the non cat property for the most part our BOP on a property basis has been running a little bit better than expected on a year to date basis and there is a combination of it's less likely frequency driven more selling and severity driven.

But I'm not sure if I'm getting to your specific question, Paul I'll make sure I'm understanding it correctly.

It sounds like it's there's not a big differentiation in terms of.

Loss trends and Bob.

Versus others.

Yes.

The other thing to note too is BOP is a bit of a smaller line for us in many of our competitors and part of that is a lot of our small accounts are in small artisan contractor segments, which are not written on a box. Those are written on a on a property and GL package. So it's not as big of a line for us as well.

Tom.

Somewhat similar.

Any differentiation in these loss trends.

Talking about sort of the excess piece.

Worldwide.

Our properties.

The higher end.

I would say no.

We do a full reserve analysis of put full reserve review by line.

Clothing umbrella, we have not seen any noticeable shift in trends in our in our umbrella line, which has been a consistently strong performer for us I want to say it because we write the umbrella that we write and I think this is probably reflective of most of our scatter market peers is generally written on a supported basis, meaning youre writing the.

Buying GL and auto and I think you would expect that youre seeing umbrella issues you'd be seeing severity emerge unexpectedly high on the auto in northern Cal that underlies it and we're not seeing that.

I said earlier.

Loss trend assumptions, we have in the <unk>.

Current year and the more recent prior accident years are holding up quite well and I think thats. The first thing you would see before you saw an umbrella impact that surprised you.

Long way of saying no. There is nothing in our umbrella trends that have us concerns at this point.

Alright, great. Thank you I appreciate the help.

Thank you Paul.

Thank you next question is from the line of Meyer Shields from AB W. Your line is open.

Great. Thanks, good morning.

John first of all thanks for all of your commentary on the impact of the exposure base growth.

Wondering given your.

Pricing capabilities.

What are the opportunities for actually even making that flow through even better or more responsive to inflation.

Well I guess I feel like we do a really good job of that I think this comes through in the non cap property commentary.

Majority of the non cap property noise, we're seeing is driven by auto physical damage because it is the one line. We don't have that exposure that inflation sensitive exposure base I feel like.

And that's why we continue to be focused on for that line.

Understood and I guess that was kind of my question I know, it's certainly not industry practice right now is there any way of actually incorporating.

Replacement costs in the pricing for auto coverages.

I think that would be a very.

Very positive change going forward I think we're all highly dependent on third parties to do that for us in personal auto. It is done it's done on an annual basis, so theres a bit of a lag there and I wouldn't suggest it's as responsive to actual changes in replacement.

And repair cost.

What you really see in terms of inflation, but you've got it's happening on a very lag basis in personal auto you don't have.

You don't have anything similar type of model year lift.

In commercial auto each year, but again these are not I wouldn't call these inflation sensitive.

I think the providers of that.

Those estimates for us would be doing the industry, a real service by being a lot more responsive like we are in the property side to the change in the replacement cost and again, we're in an unusual circumstance I think historically you have never seen this kind of movement. In this short of a period of time and the cost of used vehicles and across our recurring via.

But I think we should all learn from this and I think that would be.

A positive change going forward to be more responsive to exposure.

Our inflation a placement adjustment exposures.

Yes.

That's very helpful. Thank you.

The second question, I guess and I apologize if I missed this I was wondering if I could get quarterly and year to date catastrophe losses by line of business I know, we've got that on some previous calls.

Yes, I'll just give a market second to final score.

<unk>.

And maybe I can start with outstanding commercial lines as we walk you through that and see if that's the market then we could go into.

First of all on D&S, but I think those are pretty self explanatory explanatory, but outstanding commercial lines for.

For the quarter and commercial auto it was 637000 commercial property at $19 million 143000.

And Paul.

$2 530000 total.

Up to $22 3 billion or $3 three points on the combined for cats in HGT for standard commercial lines. So 15 five points on the property line, Yes, 15, and the <unk> eight points on the bottom line exactly.

Right right.

Thank you and your partners is that good.

Yes.

I don't think we got in the first quarter. So was hoping for you to date numbers, but I can also follow up yes.

Yes.

Ill give you the year to date numbers quickly so commercial note 986000.

Year to date.

Actual property $32 million at 84000, and bump about $4 million 240000.

It gets you to the 37.

$3 million on a year to date basis of $2 eight points on the combined and then in personal lines. There is a little bit and push photo if you wanted that split but most of the cat loss activity is in homeowners.

That is perfect. Thank you so much.

Thank you. Our next question is from the line of Chris Carter from Bank of America. Your line is open.

Hi, everyone.

Good morning, Greg.

Okay.

Wondering if we could look at personal lines, a little bit I know you all mentioned expecting maybe some accelerated rate increases in the back half of the year.

With the rate being a little bit lower than in 2021 year to date, and just kind of flat sequentially.

Wondering if there was anything related to the mix change going on in that book.

Maybe.

Having some increases year to date.

I guess, if you think that the.

The 0.6% is actually representative.

Right that you are taking so far.

Yes. Thank you Greg so that is the actual rate number I don't want anybody that mislead any be misled by that at all that's the actual rate number I think what you were pointing to is more of a mix change and there is a substantial mix of business change happening in our portfolio and historically without getting too much into the specific deferred.

Rentals are our target market thats generating that growth has performed better than our non target market historically.

The book of business transformation has been meaningful and I mentioned I gave you that.

The growth in target market premium in the quarter on a direct basis and that was 20%.

Versus you starting overall at 5% growth in the quarter. So you can see a substantial shift in that book that is happening, which will generate and our view mixed change now that said, we need to be responsive to the overall <unk> level increased from a loss cost perspective, which we think impacts every every <unk>.

And the market pretty evenly and Thats why we will be increasing their filed rates amount right amounts I will just take a little bit longer for those to appear in the pure rate that you see reported but I can't understate that mix change because we believe it is meaningful and then the other point I will highlight is when we got into the pieces.

The pandemic.

We opted to just provide premium credits our rate level was actually positive in 2020 and flat in 'twenty. One overall as opposed to taking big rate decreases filed rate decreases like a number of market participants. So I think the starting point is a little bit different.

But notwithstanding that we don't want to see rates pick up as we move forward in both the auto and home lines.

Yes.

Thank you and I guess related.

Outperformance you mentioned in your target market for that.

The core loss ratio hasn't really been quite as variables, we've seen from peers over the past few quarters.

Hovering about give or take 61% to 62% range is that also a function of the mix changes ongoing in the book or is there anything else unique in your books.

Might have precluded.

Step up that we've seen from.

I'm curious this quarter.

But there is nothing else there that would suggest otherwise.

Thank you.

Thank you <unk>.

Thank you once again for those who would like to ask a question on selling please press star one on your telephone and wait for your name to be announced and to cancel your request. Please press star followed by the number too.

Our next question is from Scott <unk> from RBC capital markets line is open.

Yes. Good morning, Thank you.

Just had a question.

Severity is up for the industry across a lot of lines and you mentioned in your comments about the claims frequency.

Still being down versus pre pandemic levels and I'm wondering if you're able to quantify that really at all and just be interested to hear your thoughts as to why you think that.

That has not rebounded kind of with the exception of any worker's comp too.

To kind of current levels given that the reopening.

Been around for a year plus.

Anything you can share on that.

Yes.

Thank.

The first one I'm not going to quantify specifically by line, but I will tell you, it's pretty consistent across all lines and I use the word slight.

I understand your point about.

The reopening, but I think we have to recognize.

The economy behaves dip has been behaving differently post pandemic than it has pre pandemic.

I think the obvious its always been talked about is that the shift in miles driven so even if they bounce back the type of miles driven are different I think shopping behaviors have changed I think there's a whole bunch of behavior changes I think the people who are working from home visit change and I think those things will all probably have some influence on.

Frequencies for different lines of business, not just auto and <unk>.

Hard to specifically point to any one of those items individually, but I think there clearly has been some consumer behavior change and some employee behavior change all of which could accumulate to change frequency patterns and in this instance resulted in a lower frequency pattern that might persist again I'm not predicting that.

Frequencies will continue to come down because they have been relatively stable. The last couple of years and have settled out for a long enough period of time, where it's a little bit of a trend that you could point to relative to pre pandemic.

And again, you always want to look at this on an on level basis. So you don't you don't get a false reading, but because.

The price impact.

Limited price increases you want a high level that they get to a real view of frequency.

That's really helpful. Appreciate that.

Hey, I just had a quick question two on the high net worth business, you've covered that all of it but could you give us a little more of an update I know you mentioned that the 20% growth but in terms of.

How many states you're in how many states do you think youll be in in the next couple of years and just the overall loss profile on where you think that might stand.

Once once you get that up and running versus where the book had been.

Just anything to share on that is just based on what you've learned so far.

Yes, so just in terms of the state footprint. We're in the same 15 state footprint that we were in when we when we launched the transformation so.

I would say.

A portion of our commercial line states.

I can run <unk>, but theres been no change to that for the state.

Okay.

Right now we don't have immediate plans to expand geographically and I say right now, we're expanding our footprint commercially and to the extent, we continue to gain traction and gain confidence in the mass affluent market, we'll evaluate the opportunity to potentially expand geographically as well it would take a very disciplined approach.

With regard to the loss profile again, I don't want to I don't want to go too deep into that topic, but I will tell you there is in our.

In our historical Q1 ratio perspective, there hasnt been a different set of its been recognizable and we expect that difference to continue to benefit us from a mix change perspective.

But I'd rather not go into specifics in terms of what that means in terms of loss ratio points.

Sure I understand.

And just two other quick ones just on the investment side alternative it seemed like that.

That may have outperformed a little bit in the quarter. I think you mentioned some commentary was there any particular class.

That did.

<unk> done that.

Anything more you can share on that.

Yes.

Also under this bit outperformance.

It has been a bit of a growing allocation for us it's an asset class that we really like its about four 9% of our total invested assets with a heavier weighted towards private equity and to a lesser extent private credit and real assets.

When you look at the public market benchmarks as you know we're a quarter lag. So you have to go back to Q1 to see how the public market benchmark proposal, we weren't expecting a loss in Q2, and we came in a decade that I've mentioned after tax of about $7 4 million most of that gain came from private equity and then to a lesser extent.

<unk> assets, particularly energy and infrastructure and then private credit to a lesser extent.

Okay. That's helpful. And then just the last one two on you mentioned.

Yeah. So we've been very active this year from.

From an investment perspective, really trying to optimize our portfolio and build book yield than what it's been obviously a rapidly increasing interest rate environment and then secondly in the.

Second quarter, a little bit of a widening of credit spreads.

With the market's anticipation of a slowdown in the economy.

Central or a recession at some point.

So in the first half of the year I mentioned, we put $1 5 billion.

Our cash flow to look into the portfolio and increase the book yield by approximately 46 basis points, which is meaningful in terms of <unk> contribution to selective.

In the second half of the year were anticipating about $700 million. That's obviously, an estimate with a range around that and that is just organic cash flow. So when you think about mature natural maturities coupons and operating cash flow we can.

Some of the insurance operation as opposed to us.

That's what operations.

Without doing any proactive trading the portfolio year to date, we have been very active from a sales perspective. So it hasnt just been organic cash flow trading the portfolio.

Put new money to work.

Kevin.

Our allocation sleep really likes securitized in the first half of the year and to a lesser extent.

Taxable munis, but mainly in the securitized sector agency <unk> CLO slip it.

We've found attractive from a yield perspective, and also from a credit quality perspective.

As I highlighted one of the benefits of trading the portfolio. This year has been not only to increase the book yield. So if they come a little bit more defensive with a higher allocation to higher rated securities go in as to what might be a little.

Bit of a downturn from an economic perspective, so really accomplishing a couple of things and maybe one last thing I'll mention that it's embedded in our forward investment income guidance as the benefit of the floating rate exposure.

That were about 14% allocation to floaters as LIBOR has moved up but now sofa.

Meaningfully on a year to date basis.

Yes.

Probably about two six percentage points year to date as those securities reset typically every 90 days.

That's been a nice lift in terms of the book yield.

So the core fixed income that we've generated year to date and expectations for the full year as well.

Okay got it thanks for all the answers.

Thank you we don't have any further questions on queue I'd like to turn floor back to our speakers.

Great well. Thank you all for joining us and look forward to speaking to you again next quarter.

Thank you. Thank you.

Thank you and that concludes today's conference for today. Thank you all for participating you may now disconnect. Thank you very much.

Q2 2022 Selective Insurance Group Inc Earnings Call

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