Q3 2022 Selective Insurance Group Inc Earnings Call
Excellent.
Good day, everyone and welcome to selective insurance group's third quarter 2020 to earnings call. At this time for opening remarks, and introductions I would like to turn the call over to senior Vice President Investor Relations and Treasurer railhead Bye.
Good morning, everyone, where some costing this call on our website selective duck call. The replay is available until December 4th.
We used three measures to discuss our results and business operations.
We use GAAP financial measures as reported in our annual quarterly and current reports filed with the SEC second.
Second we used 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 or losses on investments unrealized gains or losses on equity securities.
non-GAAP operating return on common equity as non-GAAP operating income divided by average common stockholders' equity.
Adjusted book value per common share differs from book value per common share up by the exclusion of total after tax unrealized.
<unk> gains and losses on investments included an accumulation.
Accumulated other comprehensive income and GAAP reconciliations to any reference non-GAAP financial measures in our supplemental investor package found on the investors page of our website.
Could we make statements and projections about our future performance. These are forward looking statements under the private Securities Litigation Reform Act of 1095%. They are not guarantees of future performance and are subject to risks and uncertainties.
We discuss these risks and uncertainties detailed in our annual quarterly and current reports filed with the SEC and we undertake no obligation to update or revise any forward looking statement.
Now, let's turn the call over to John <unk>, Our chairperson of the board President and Chief Executive Officer, who will be followed by Bob <unk>, Our EVP and Chief Financial Officer John .
Thank you Ron good morning, and thank you for joining us today before getting into the details of our performance for the third quarter and year to date I think it's important to put these results in the proper context.
We are operating at a very challenging environment defined by historically high levels of economic inflation elevated catastrophe losses and capital market volatility.
Despite this challenging backdrop selected continues to deliver consistently strong top and bottom line results during.
During the first nine months net premiums written were up 11% and our non-GAAP operating ROE was 11, 6%.
Based on our updated 2022 guidance, we expect to produce a full year operating Roe of 12%, marking our ninth consecutive year of double digit Roe for our shareholders.
While pleased with our overall results our underlying combined ratio has been under pressure due to higher severities in the property and auto physical damage lines of business. We remain disciplined in addressing this through a combination of pure price and exposure increases.
On the flip side higher inflation is also the impetus for the higher interest rate environment. This has allowed us to pick up significant book yield in our investment portfolio and boost overall returns now and into the future.
Moving on to our results in the quarter growth in net premiums written of 11% was driven by strong renewal pricing in standard commercial lines and excess and surplus lines strong retention rates and new business growth in standard commercial and personal lines and positive exposure change.
Our combined ratio was $96 eight in the third quarter and $95 two for the first nine months.
<unk> losses accounted for four points during the quarter, which was in line with our expectations and included a $10 million estimate for the ultimate net loss related to Hurricane Dorian.
However, non catastrophe property losses were three three points above our expectations for the first nine months of the year non cat property losses were one eight points above our initial expectations with approximately 60% of the excess losses attributable to the auto physical damage lines.
While we have been highlighting this in the past few quarters. This increase primarily relates to the economic inflationary pressures.
Across all property lines current year severities were up approximately 12, 5% year to date.
While frequencies were up slightly in the third quarter. They are generally in line with our expectations for the year to date.
We continue to be diligent about adjusting building and contents values to reflect these higher repair and replacement costs.
Year to date renewal premium change was 12% for our commercial property book and 10% through our E&S property and homeowners portfolios.
For the commercial auto physical damage lines loss severities continued to reflect inflationary pressures for factors such as repair parts used vehicles and light.
Our efforts to address the ongoing profitability challenge and commercial auto lines have centered on price increases, which averaged eight 7% in the third quarter and 8% for the first nine months of the year.
On the casualty side, we remain confident in our current year loss ratio selections, which included a five 5% assumed loss trend in.
In addition, we continue to see favorable casualty emergence from the prior accident years.
In the current accident year reported casualty claim frequencies continue to emerge better than expected and remained below pre pandemic levels.
Renewal pure price increases from our commercial lines segment averaged five 8% in the third quarter, which was a 100 basis points higher than the first quarter and 50 basis points above the second quarter.
Our retention rate of 86% remained strong.
Exposure growth during the third quarter was three 8% and total premium change in our commercial lines renewal book was approximately 10%.
We intend to remain disciplined and consistent in seeking price increases over time match, our forward loss trend expectations.
This long term approach to obtaining the appropriate price across the market cycle has defined our strategy for the past decade.
As we look towards 2023, we expect the commercial lines pricing environment to remain constructive as industry wide loss trends remain elevated and the reinsurance market continues to firm.
I also want to share a few thoughts on catastrophe losses, which have been well above expectations for the industry over the past five years.
While hurricane in it was not a significant loss event for selective this catastrophic loss of life and property reinforced the importance of understanding and managing exposure to large events.
Over the past 20 years, our actual catastrophe losses have been below the industry average as measured by points on the combined ratio.
Our catastrophe risk management efforts are centered on being disciplined around modeling catastrophe losses on both expected and extreme event basis.
Establishing clear guidelines around underwriting coastal properties.
<unk> managing our aggregate limits exposed in markets that present, the highest exposure and prudently purchasing reinsurance to protect the balance sheet.
Turning to investments the higher interest rates. So far this year have negatively impacted the value of our investment portfolio and reported GAAP book value. However, we have managed the portfolio to take advantage of the higher rates and enhance investment portfolio yield.
As of September 30 yield on the fixed income and short term investment portfolio was approximately 80 basis points higher than at the start of the year.
With a three four times investments to equity ratio every 100 basis points of higher return on the investment portfolio translates to over 260 basis points of additional Roe.
We are an underwriting company first and foremost with you an increase in investment ROE contribution as an opportunity to exceed our already targets not as an opportunity to forfeit underwriting margins.
I'll close with a few quick business updates we.
We continue to execute on our major strategic priorities, our commercial lines geographic expansion plans discussed on recent calls remain well on track.
Geographic expansion is a lower risk way of leveraging our skills and infrastructure to grow the business in lines that we understand well.
In October we began writing new commercial lines business in Alabama in Idaho, We had previously opened Vermont and the second quarter. We will continue to open additional states over the next few years.
While our personal lines results were again marked by catastrophe losses, we continue to make solid progress in migrating our business towards the mass affluent market.
Our new business growth in this segment largely reflects the ongoing migration.
Into 2023, we expect to obtain additional rate and exposure changes to further offset higher loss severities filed.
<unk> filed rate increases in the third quarter averaged 6%.
Are you going to ask business remains a strong contributor to our financial results and as this segment.
<unk> continues to offer attractive business flow opportunities and margins.
Although we are seeing heightened competition for casualty German classes, such as construction, we are well positioned to deliver on continued growth in this segment.
However, we will not do so at the expense of profitability.
As I look to the remainder of the year and into 2023, we are 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 will turn the call over to mark. Thank.
Thank you Todd and good morning.
I will review our consolidated results for the quarter and for the first nine months of the year I will discuss our operating performance and financial position I will then finish with our updated guidance for 2022.
The third quarter, we reported net income available to common stockholders per diluted share of <unk> 66.
non-GAAP operating EPS of <unk> 99.
Despite the higher level of Attritional non cat property losses.
<unk> loss from our allocation to alternative investments this quarter, we reported an annualized non-GAAP operating ROE of 10, 5%.
On a full year guidance, we are positioned to deliver solid results for the year with a 12% operating Roe, which.
Which is above our 11% target.
The higher expected cost of capital going into 2023, we expect to increase our operating ROE target for next year.
So Tony Tau consolidated underwriting results, we reported 11% growth in net premiums written for the quarter and year to date.
Strong growth in each of our segments, we reported a consolidated combined ratio of 96, 8% for the third quarter.
With 98, 6% in the year ago period.
And combined ratio included $34 million of catastrophe losses of four points and $68 million of net favorable prior year Casualty reserve development accounting for one nine points, we booked $10 million and also the net losses for hurricane related primarily to losses for the second landfall in South Carolina as we did not have.
A meaningful company exposure in the state of Florida.
In addition, we reported $1 9 million in estimated claims handling fees from hurricane Ian from a participation with Siemens National flood insurance program.
On an underlying basis, excluding catastrophes and prior year Casualty reserve development. The third quarter combined ratio was 94, 7%. This was four three percentage points higher than the year ago period, driven principally by higher non cat property losses.
For the third quarter non cat property losses accounted for $19 six points on the combined ratio, which was three five points higher than the year ago period the.
The higher losses were primarily due to elevated auto physical damage and commercial property severities and was driven by the economic inflationary factors that John mentioned.
We also experienced a somewhat high level of frequencies to the third quarter compared to the first half of the year.
As a reminder, attritional property losses experienced a level of volatility from period to period.
Also impacting the underlying combined ratio in the quarter was the recognition of $9 3 million of ceded earned casualty re instatement premiums.
Related to development of three losses for the 2018 and 2023 years.
These losses are fully reinsured under our casualty treaty the reinstatement premium added approximately zero eight points to the consolidated combined ratio. This quarter, we've otherwise stayed on our casualty loss picks for the 2022.
Sure.
For the first nine months, we reported a 95, 2% combined ratio or $93. One on an underlying basis catastrophe losses accounted for four points of the nine months combined ratio, which is better than expected for this year to date period.
Non cat property loss ratio of 18, 3% as run at about one eight points above expectations yesterday. This is the principal reason why our underlying combined ratio is projected to be higher than expected in 2022.
Moving to expenses our expense ratio was 32, 6% for the third quarter, which was in line with the prior year period for the first nine months expense ratio of 72, 4% was also in line with our expectations for the year.
We are focused on further reducing our expense ratio the impact of economic inflation and the potential for higher reinsurance costs may collectively put some upward pressure on our expense ratio in 2023.
Corporate expenses, which are principally comprised of holding company cost of long term stock compensation totaled $5 $5 million in the quarter compared to $4 3 million in the year ago period.
Turning to our segments standard commercial lines net premiums written increased 11% in the quarter driven by renewal pure price increases averaging five 8% excellent retention of 86% new business growth of 5% and exposure growth of approximately three 8%.
Commercial lines combined ratio was 96, 8% for the quarter and included two six points of catastrophe losses, and 16 $60 billion or two three points of net favorable prior year casualty reserve development. The favorable prior year Casualty reserve development was driven by $20 million from workers' compensation for accident years two.
<unk> thousand 19, prime $8 million from the business. So it is policy line also Brexit It is 2019 and prime and $3 billion from bonds for accident years 2020.
Reserve releases were offset in part by $15 million of net prior year unfavorable reserve development in the commercial auto line, driven by highest severities with $11 million attributable to the 2021 accident year frequencies.
Frequencies continue to remain below expectations for the 2021 year, we now expect client ultimate severity for this line and took action in the quarter.
Commercial lines underlying combined ratio was elevated at 96, 5% for the quarter. The five one percentage point increase from the year ago period was principally driven by four two percentage points of higher non cat property losses.
In addition, the ceded casualty owned reinstatement premiums added 0.9 points to the combined ratio and elevated our current accident year loss ratios for the general liability and workers' compensation lines in particular.
<unk> auto physical damage severities, which we highlighted last quarter remained at elevated levels of non cat promotional property losses were also.
As expected for the quarter.
And our personal lines segment net premiums written increased 11% relative to the prior year period.
Pure price increases averaged seven 5% retention was up from a year ago at 85% of new business growth was strong. These metrics reflect the successful execution of our vast affluent strategy as much of the growth was within our target market. The combined ratio was elevated at 101 eight as a result.
A 14 nine points of catastrophe losses, the underlying combined ratio of 86, 9% was one six points lower than the prior year period.
In our E&S segment net premiums written grew 9% relative to year ago renewal pure price increases averaged six 7% for retention remains strong and new business was up 8%. The combined ratio for the segment was a profitable 93% in the quarter and included five four points of net catastrophe losses, the underlying combined ratio of 80%.
Seven 6% was three one points higher than the prior year period.
Mainly by higher non cap property losses.
Moving to investments our portfolio remains well positioned as of quarter end, 92% of our portfolio was invested in fixed income and short term investments with an average credit rating of double a minus and the effective duration of four two years offering us a high degree of liquidity risk assets represented 10, 3% of our portfolio.
<unk> quarter, and down 60 basis points in the quarter as we continued to de risk against the more uncertain macroeconomic backdrop for.
For the quarter after tax net investment income of $51 5 billion was down relative to $74 7 million in the year ago period, driven by alternatives alternative investments, which are reported on a one quarter lag generated $4 4 billion of after tax losses.
$74 million after tax gains a year ago.
Year to date, we've generated $18 million of after tax gains from alternative investments.
Our best estimate is for approximately $7 million and after tax income from alternatives for the full year, implying an $11 billion after tax loss from <unk> in the fourth quarter, principally reflecting the negative third quarter performance of public markets.
As a reminder, while we provide our best estimate of alternative investment income for the full year. There was a high degree of precision and estimated alternative investment income in any given period.
After tax yield on the total portfolio was two 7% for the quarter, which translated to eight nine points of our contribution.
<unk> generated underwriting income remains our primary focus we continue to manage the investment portfolio to optimize the risk adjusted investment yields and one is at attractive fixed income market.
Approximately $2 3 billion of new money in fixed income securities. During the first nine months of the year.
As we put this new money to work we've taken the opportunity to move up in credit quality improved liquidity and increase our book yield the average pretax new money yields for the quarter was up meaningfully to five 1% relative to two 2% in the year ago period and came in well above the pre tax yield of our portfolio and.
In addition, approximately 14% of our fixed income portfolio remains invested in floating rate securities.
These securities are resetting at higher benchmark rates helped increase book yield and investment income.
Since year end, we've increased the pre tax book yield about fixed income and short term investments portfolio by approximately 82 basis points, which includes approximately 76 basis points from the third quarter.
About half of this increase used to date has come from our floating rate exposure.
We expect another uplift in book yield from fourth quarter floating rate resets. In addition, we expect to put an additional 300 billion. So look as in fixed income purchases in the fourth quarter from organic cash flows from maturities coupons on operating cash flow.
After tax net investment income, excluding alternatives, which principally reflects our allocation to fixed income securities was up 37% in the quarter compared to the prior year period and is up 19% year to date as these higher reinvestment rates are starting to benefit our results. This will accelerate as we look ahead to next year.
<unk>.
While the current investment bucket is helping drive significantly higher investment income from our fixed income investments. This environment has negatively impacted the total it with some of the portfolio the.
The investment portfolio's total return was negative two 6% in the quarter and negative eight 8% for the first nine months of the year.
Turning to capital our capital position remains strong with two full bill under the GAAP equity as of September 30th.
Despite statutory capital and surplus Rebating at year end levels on a GAAP basis book value per share was down 7% in the quarter and is down 20% for the first nine months of the year driven mainly by after tax unrealized losses within fixed income.
Adjusted book value per share increased 1% in the quarter and is up 10% for the trailing 12 months after adjusting for dividends.
Holding company cash and liquidity position, providing strong with 506 million of cash and investments, which is well in excess of our longer term target on that price references simplest ratio stands at 145 times, which is in the middle of target range of $1 35 to 155 times our.
Our debt to capital ratio of 13 to 17, 2% is also conservative.
Overall, despite the unrealized mark to market investment losses, we remain in a strong capital and liquidity position, which is available to support our growth.
During the first nine months of the year, we repurchased 165000 shares of our common stock at an average price of $75 47 per share totaled $12 4 million.
As of September 30, we had $84 2 billion and providing capacity under our share repurchase program, which we plan to continue using opportunistically and.
In addition, our board of directors approved a 7% increase in our quarterly cash dividend on common stock Adobe per common share.
I'll conclude with an update of our guidance. We currently expect a GAAP combined ratio this year, excluding catastrophe losses of 91, 5%.
The net favorable casualty reserve development in the first nine months of the year.
Our guidance assumes no additional prior accident year casualty reserve development.
Sophie loss assumption assumes three to five points on the combined ratio that puts our full year expected combined ratio expectations at 95% for 2022, which is consistent with our guidance at the start of the year.
The component parts, however has changed with the benefit of lower than expected catastrophe losses, our better than expected expense ratio and favorable casualty reserve development.
Set by higher than expected non cat property losses were up.
After tax net investment income assumption of $215 million remains unchanged from last quarter as lower after tax investment income from alternative investments was $7 million is offset by higher investment income from fixed income as a reminder, we started the year with an expectation of 200 billion about the fact that investment income included $20 million from auto.
This.
And overall effective tax rate of approximately 25%, which includes an effective tax rate of 19, 5% for net investment income and 21% for all other items and weighted average shares of $61 million on a diluted basis, which assumes no additional share repurchases we rank.
Under our authorization.
Overall, a solid first nine months of the year.
The guidance implies a non-GAAP operating Roe of around 12% of the year.
This will be a solid result against the macroeconomic backdrop this year.
As presented at another year of elevated catastrophe loss activity for the industry.
As we look ahead to 2023, we remained well positioned to continue delivering strong disciplined profitable growth.
With that I'll ask the operator to open up the call for questions.
Thank you.
The question and answer session. If you would like to ask a question. Please press star followed by the number one please send me a tariff filing and record your name and company maintain even from Ted Your name is required and company named Tien Tsin. This is your question. The answer. Your question you May Press Star and then number two one moment. Please for the upcoming question.
At this time speakers, we have three questions on queue. Our first question is coming from the line of Michael Phillips from Morgan Stanley . Your line is now open you may raise your question.
Okay. Thanks, Hey, good morning, everybody.
I guess I wanted to focus on your commercial pricing is up sequentially.
I'm trying to get a sense of how much of that is <unk>.
Property versus casualty as I compare your John your comments of the casualty loss trends that youre still seeing five 5% so kind of want to focus on the casualty side of that for a second.
I'm, assuming that the property rates are moving up pretty hard.
<unk> to inflation, so I assume thats pretty easy fix over next year.
Let's see how much cushion there is in the current pricing in the casualty side.
As we think about your 91, 5% this year and what that might look like next year.
Yes sure Mike. Thanks for the question and I think there's a lot of pieces in answering that question. So I'll try to work through them just at the highest level.
Great.
In the quarter for commercial lines pricing.
Comp workers' comp continues to be a negative impact on that so workers' comp pricing continues to be relatively flat so excluding comp.
The overall pricing at six 6% on a core in the current quarter and $6. One year to date commercial property is at seven 5% and I think that's an area that we expect to see go higher as we move into next year.
As you've heard from many of our competitors when you think about the inflationary impacts on loss trends and the <unk>.
Inflationary exposure adjustments for commercial property in particular, the blending of rate and exposure were up about 12%. This year. So again, we will think about it in those terms, but I think it's important to recognize that while the exposure increase provides loss ratio offset I will call.
The benefit, but it sort of neutralize the impact of some of the deflation inflation it shouldn't be mistaken for replacing the needed rate in that line of business for us and the industry. So you actually want to look at them together in terms of that.
The changes in severity, but rate continues to be a need for that line of business. So that's kind of how we think about it overall and as I said earlier, we see when you look at our retention and a stronger dollar retention continues to be that the market remains constructive and will remain constructive.
The other part of your point I, just want to clarify that the five 5% loss trends that you cited which we've also cited as the casualty loss trend embedded in our 'twenty two loss picks.
We are always evaluating our view forward loss trends and we will continue to do that and we will provide you that along with our updated guidance as we get into the beginning of 2023, but I would say if you look at this on a casualty versus property basis, and I think thats the best way to look at it for a company like selective.
Two thirds of our premium arent casualty lines.
And if you if you deconstruct that that five 5% loss trend, we have assumed in our 2022 casualty loss picks.
And exclude comp because comp continues to exhibit very different loss trends and more favorable loss trends that embedded loss trend in our casualty lines ex comp is a little over 6%.
And our price for those casualty lines, excluding comp is a little over 6%. So I think when you look at that you view that as a relatively relative offset for casualty. The remaining third of our premium is in property lines and Thats a combination of true property.
Physical damage.
Where you look at the combination of rate and exposure in that 10% to 12% range 12 for commercial and around 10 for E&S property and for home and actual severity. So I hesitate to call. This a trend actual severities on the property lines are up about 12, 5% for the year to date period.
Because economic inflation is the primary driver of that I think that's what creates the forward uncertainty, but you would expect it to track relatively closely with forward economic inflation on the component parts of the CPI that hit the property lines.
So im not sure I got that piece.
You bet.
Yes, I think you did.
Great very comprehensive appreciate it.
And then I'll switch over to investments.
You've done some work there to kind of reorganize the book and take advantage of the appeal.
It sounds like Youre not done from what Mark was saying.
I'm going to kind of reconfirm that youre still putting.
Putting new money into the higher rates and maybe it sounds like a positive for even more of a positive for where yields can be earned yields can be for you for next year.
Mike This is mark.
I would say, it's been a very constructive environment for <unk>.
Fixed income investing this year would put new money to work at much higher reinvestment rates that we've seen in quite some time and as I mentioned in my prepared comments, we've been able to increase the embedded book yields within our fixed income and short term investment portfolio, we've taken up from 297% to 379%.
Just the first three quarters and would expect to see that to continue we have cash flow. We can put some book we can opportunistically with.
With a few constraints trade the portfolio and we continue to have the allocation to the front end of the curve without floating rate exposure, we've seen LIBOR.
We have a benchmark you want to use increased significantly and that's it creates significantly since quarter end as well so we're going to continue to.
To optimize our risk adjusted returns in the investment portfolio and I think thats going to continue to deliver a higher level of core fixed income investment income over the next number of periods.
And I guess just to reinforce the point and I think Mark explained how we think about investment investing in our philosophy around investing that increase in investment or are we view as positive and in the near term. It does serve as a bit of an offset to the to the property commentary, we just had around underwriting margin pressures, but our focus remains.
Gains on improving that underlying combined ratio and addressing those inflationary pressures in the property lines. So this is a this is a great offset and we will continue to balance to give us additional upside from a an overall operating ROE perspective, but we expect to continue to boost underwriting margins going forward.
Okay perfect. Thanks, guys all the best.
Thank you.
We have the next question from the line up Paul Newsome with Piper Sandler. Your line is now open you may raise your question.
Good morning, Thanks for the call.
New patients.
Yes.
I wanted to return to kind of.
Thank you about how we should think about the perspective margin expansion perspective.
I was hoping you can sort of.
Mike.
Thank you.
About 10% of the business I think you said.
Workers' comp.
And I may or may not have a view on margin contraction.
Expansion there.
It sounds like if I take workers' comp about.
Two thirds of your businesses.
Liability insurance and it looks like rate it's about matching.
Please solutions as we speak.
And then the issue seemed to be the other.
Hello.
Roughly one quarter of the business Thats Cross property, where we may or may not seem unreasonable.
I guess do I have the math right.
Is the issue really about.
<unk>.
Whether or not I think at 12%.
<unk> property will continue.
In my own opinion about what happens with margins.
Bob.
So that's a fair way to look at.
Paul It is a fair way to look at it I think the way you've split the book up is right in terms of the property casualty split and with and without comp.
And I think to your point, you've got an assumption relative to comp margins going forward and that is what it is but I think thats exactly right.
Pressure, we've seen in our underlying combined ratio. This year is entirely driven by non cat property losses and that those non cat property losses in our estimation are not an underwriting concerns there's nothing in our portfolio that has dramatically shifted.
Purely the severity being pushed higher by the cost of repairing and replacing property BNP commercial property personal property or auto physical damage and the direction of that alongside of the direction of rates plus exposure.
On the on those property lines is where you want to think about margin impact on a go forward basis.
So was there anything.
Your opinion.
Mike.
What would happen.
Property inflation.
Other than just.
Our macro view on what's going on.
Property inflation.
Yes.
With respect.
With respect to <unk>.
Yes, I think.
FERC for our book and I can't speak for others for our book this is not about replacing parts of the portfolio. Because there are some underwriting concern in the portfolio. This is about pricing and making sure. Our exposure is accurate and I will tell you. This exposure dynamic is not a new concept for us we've always review.
Individually and the entire portfolio to make sure our insurance to value was strong and it always has been strong. So that's not your focus but I do think the other the other important point here again for US This goes back to <unk>.
Good risk selection, good pricing and good exposure management is while there's a lot of focus on for the industry on catastrophe exposure from Hurricane we have seen as an industry and as a company and.
An increased frequency of severity severe convective storm activity across the country and I think this is something we've always focused on we look at a line by line risk adjusted combined ratio target and when you think about it in those terms your risk adjusted target combined ratio for the property lines for everybody.
To be in the mid eights.
And the market is not currently pricing the property line.
To the mid eighties and that has to happen and I think that's this is not just about keeping up with inflation. This is these are lines of business that need additional on.
Underwriting margin improvement that MISO largely be achieved through pricing.
That makes sense.
I guess the way to sort of boil this down to you if I could do button here.
Operating performance next year.
It's going to be about what I think is happening.
Property in general.
Plus this issue.
And storms.
Essentially the risk.
To cooperating with us.
This itself.
So.
I think thats the right way to think about it again I don't want to get too far out in front of our own guidance for next year, but the dynamics of the marketplace dynamic and the selective dynamics on casualty and property are different dynamics I think are important to understand and think about separately.
Okay. That's great. Thank you very much as always grew which.
I appreciate the help.
Yeah.
Thank you Paul.
We have the next question from the line of Meyer Shields of <unk>. Your line is now open you may raise your question.
Great Thanks, and good morning.
So I wanted to follow up on the last question if I can.
When you talk about risk selection or the other.
The ideal risks in an inflationary environment the same as the ideal risks and <unk>.
Less inflationary environment to that change.
Standard for risk selection.
I don't know it shouldn't because again I think you always want a pride yourself on getting your exposure.
Correct.
And as long as Youre doing that Youre inflationary environment should not be a factor in terms of risk selection.
And that's an interesting question im sort of thinking about how I answer it as I'm answering it but I don't necessarily think jumps out at me as to why we would think about that differently.
As long as you have a good organizational discipline about getting accurate exposures upfront.
And again premium as rate times exposure. So you need both to be right on a consistent basis and as long as you understand where your rate level needs to be based on underwriting characteristics age of building damage ability roof age group type of occupancy.
<unk> all of those things need to be considered in your underlying rate, but if you have that right and you get your exposure right. It shouldnt be inflation upper inflation down difference in risk selection.
Okay. That's helpful. I was thinking more on the the question thinking it's the wrong word, but I was curious as to whether in the area of it.
At that time, Im sorry of elevated social inflation, whether target look different than they might have in the past but.
Completely understand what you're saying.
Yes.
Inflation number here just to follow up on that social inflation is a little bit different and I think that's where you do want to be very focused on your hazard mix across your casualty lines of business and again for us our hazard mix remained fairly stable.
And it allows our actuaries more stability when they look at frequency and severity trends both of which could be influenced by social inflation, but again, it's about getting those underwriting underlying fundamentals right and then it shouldn't make a difference. So I think the bigger question is if you see a shift in your casualty portfolio.
That presents a different frequency and severity pattern because youre hazard mix has shifted that's a different answer but our portfolio has been quite stable.
Sure.
No perfect and that would certainly help with the credibility, which is I think critical at this point.
And then the more pedestrian question for Mark could I, just get cat losses by product line for the quarter.
Sure.
Thanks.
So the cat losses for the quarter.
Our focus is standard commercial lines Lepage felt.
Commercial auto.
One 4 billion and commercial property 13, three and bought three four.
Wildly that should add up to the $18 two that says.
Financial supplement.
Okay.
Okay.
Today, though I think the other segments such as that.
If I can get.
Excess and surplus property that they could look at the pipeline. Thanks.
Yes, so for.
Postal lines, it's about $1 million in personal auto.
$10 3 billion in homeowners for 11 three.
And then.
$4 six and property.
The combination of all three should add up to the $34 one for the quarter.
Okay perfect.
And then looking forward with regard to floating rate Securities I was hoping you could update us on the plans for either expanding or contracting that portion of the portfolio.
Yes, so thats an excellent question.
From our perspective.
We look at the overall portfolio and all the key risk metrics of credit quality.
Quality liquidity book yield et cetera.
As I mentioned in my prepared comments, we have taken the opportunity to.
Yes.
The investment portfolio, we did increase the average credit rating of the portfolio are back to double a minus on the back of the purchases of $2 3 billion approaches puts a work yet today.
We still have a pretty.
A significant allocation to the front end of the curve.
It allows us to call Bell.
And go a little bit longer at the long end is to have that shortage sub allocation and we see still a little bit more growths of Ron in terms of LIBOR Sofa sofa.
Set expectations in terms of heightening some of Thats already built into that they could put a little bit more problematic with us to grow there, but I think one of the things we're thinking about it is not to get caught with that we're dosing on us.
Our expectation is in.
With all investment decisions the market change daily so things can change as you move from period to period.
But at this point I think.
The plan would be to take that floating rate exposure down.
At some point over the next quarter or two I'll be mindful of duration of the yield curve is pretty flat, we don't want to extend duration too much.
Some of that floating rate exposure is to triple a double a rated securities.
Thank you then a potential recession next year, we'd like to be up in quality. So we need to be mindful of credit quality as well and making sure. This liquidity in the buckets execute a sale of some of that floating rate exposure, but you put it altogether I think expectations out Friday for a little bit longer and then perhaps take that.
Floating rate exposure down over the next quarter or two.
Alright tremendous that was very helpful. Thank you.
We have the next question from the line of Greg Carter of Bank of America. Your line is now open you may raise your question.
Hi, everyone.
Good morning, Greg.
Looking at the Attritional loss ratio in personal lines. It doesn't seem to have moved around quite a bit over the past few quarters, which.
We've seen a lot of peers, some pretty substantial sequential deterioration I was just wondering if you could help us think through what might be shielding. Your book from some of the volatility that we've seen it appears so far that has to do with the.
Transition towards mass affluent and just kind of how we should think about that trending from here in light of inflationary pressures.
Yeah, great. Thank you for the question I don't know that I could point to anything specific other than what you've already pointed to which is our book has been transitioning meaningfully from the mass market to the affluent market.
It does present, a different pattern from a loss trend perspective that we anticipate and plan for but I don't want to I don't want to suggest that there is an absolute change in frequency and severity that's already evident in our portfolio. We like the business. We're writing we constructed our rate plan.
<unk> targeted for that segment of the marketplace and again I think the other important point is we didn't.
We didn't cut prices.
In the middle of the pandemic like many of our peers did so our starting point was a little bit different we opted to do premium credits that we felt were appropriate but didn't change the underlying base rate structure. This is not to suggest we don't think rate needs to go higher and as I mentioned in my prepared remarks.
While the impact of the rate changes were taking in both auto and home are going higher but I do think it's a little harder to compare our results because we are in the middle of this meaningful transition of the book of business.
Thank you.
I guess in light of.
Widespread expectations for substantial increases in property reinsurance pricing.
Given lower exposure to cat prone regions in your books, you would probably compare pretty favorably versus peers.
Trying to renew things at a reasonable price, but if you could just kind of help us think through how you were thinking about.
Coming reinsurance renewals.
So we've been a great and we appreciate your comments at reinsurers should view our program is very attractive on a relative basis.
I'll hand, it over to Mark to let him talk more about what theyre seeing in the market.
Good question.
So I won't repeat all of the industry information Thats out there on the state of the reinsurance market, but at the highest level is clearly a need for primary to the U S to buy more in the back of exposure growth that we've seen this year.
To see next year, and clearly a little bit of a lack of for perhaps capacity given results.
Lack of retro and other factors and alternative investment markets, but.
I think you summed it up nicely for us reinsurance as a core part of our capital management program. It's important we have a well priced well structured.
Reinsurance program across property, <unk> casualty, <unk> and property cat to manage volatility and solvency and we trade with highly rated reinsurance partners. We have a really extensive panel of reinsurers, whether thats in London with the Lloyds syndicates, whether that's in Europe .
With us in Bermuda or other U S.
Take a really long term view and a partnership approach to managing our reinsurance relationships.
One of the things that I think it's a little bit differentiated about selective as the exposure management around property cat and so much of that is the preferred.
We have been running.
Property cat or a cat loss ratio and the overall combined almost two points below the industry as a whole.
When you think about the last six years going back to 2017, all the loss activity Thats happened, but thats in Florida, whether that was in Texas, whether that's in California.
Having a book of business, that's well managed.
And aggregation perspective, but outside of those peak perils.
It differentiates us against the peer group from a reinsurance marketing perspective, but as we look ahead to one one our cat Treaty does swing it 111.
We'd look to place that it has been a very clean and generated very strong profits for the reinsurance, but it's also well priced from a buyer's perspective, and we'll continue to look to get the.
To get the reinsurance purchases that we need to protect our balance sheet to reduce the earnings volatility.
<unk>.
They get that at a reasonable price, but we do recognize that there is a market dynamic that's happening.
And suffice to say I think as a whole as we all know reinsurance prices are likely to rise.
One one for property cat.
Thank you.
We have the next question from the line of Matt <unk> of JP JMP. Your line is now open you may raise your question.
Hey, Thanks, good morning.
I just had a follow up on <unk> question related to personal lines.
Could you help us a little bit with I know you said the kind of pure pricing is I think in the quarter or kind of a half a percent increase and you spoke a little bit about kind of pushing for more.
Can you could you talk a bit about inflation guard features or other exposure type.
No.
Features that might be particularly in some of the home policies and if if youre getting kind of exposure increases there that act like rate and to what magnitude that might be helping things.
Yes, Matt sure.
I wanted to just make sure we're clear on this we need to increase rates in our homework and we're filing to start to increase rates your homework, but to your question as an offset to the inflationary impacts received an exposure increased does serve to mitigate that and I know oftentimes people use the term acting like rates, but do you want.
To be clear on what that means we view it as a loss ratio neutral measure not a loss ratio benefit.
No.
Dresses the trend that youre seeing our actual exposure change year to date on the home book is 10% roughly 10%.
And we've got very disciplined process, we rely on a third party that updates replacement costs and repair costs on a regular basis loans feed right into our automated renewal process and while there is a month or so lag and any updates to that that automatically flows through the renewable portfolio. So yes pricing.
These to move and will move in our home book, but we're still getting the exposure you automated exposure increase and it's running around 10%.
Perfect very helpful. Thank you.
Thank you.
We have the next question from the line of Mike <unk> of BMO. Your line is now open you may raise your question.
Okay.
Okay great.
On the.
Sima of slide six.
Mark I think you said it was $2 million is that.
Do you expect more to come in the coming quarters and should we still think that the majority of that hits the bottom line.
Yes, good question, Mike it's molecule.
One 9 billion that we booked in the quarter.
It happened right before quarter end, our objective and booking.
The estimate is to think about the ultimate fees that we expect to collect based on an expectation of frequency and severity.
Floods that happened principally in southwest, Florida, but other parts of Florida, and the Carolinas as well so that one nine reflects our ultimate estimate.
So we would not expect that to set.
Set up while fee income on a go forward basis, but I will highlight at the event that happened right at quarter end.
Quite a few estimates to come up with ultimate claim frequency and severity and to come up with one nine but I wouldn't expect that to move materially on a go forward basis.
Okay got it and so did most of that make.
Make it to the Bottomline into core income.
In terms of the margin on that.
Yes, yes, that's exactly right. So that is just fully owned as we recorded it.
Effectively shows up in the postal mines segment, and other and its a reduction of the loss and loss adjustment expenses. So it's a little bit of a benefit maybe you lost what is shipped with it puts the lines in the quarter.
So that shows up but it's fully on.
Okay great.
And.
Switching to the expense ratio.
I believe.
I need to read the transcript you talked about.
Inflation and higher reinsurance costs kind of changing your outlook on the expense ratio, maybe you can unpack.
Especially the economic inflation element that wages or just a mix of a lot of things.
Yes, Thanks, you did pick up on that correctly.
If I take a step back for a second I think we've been on a journey to improve the overall operational efficiency and selective over the last five years.
We've taken just over three points up the expense ratio, which.
Which is the meaningful and we continue to expect to drive operational efficiency in the expense ratio down over time.
This year as you might recall embedded in our guidance with an implicit expectation of a 32 five expense ratio and we expect to come in a little bit better than expected for the full year, which is embedded in our updated full year guidance, we had expected to take.
Close to the 32, which is a longer term target for 2022 and we hope.
<unk> that can keep that going into next year.
Highlighting is when you think about the potential for higher reinsurance costs. So we'll come out with the guidance.
We delivered fourth quarter results early next.
<unk>.
But when you think about the potential for higher reinsurance cost. So we don't know exactly what that is today, but.
But also some pressures from economic inflation coming through in wages and other line items and then also enjoy the I shouldn't say enjoyed was had a little bit of a benefit in 2022 on the expense ratio in terms of having a slightly higher level of attrition that would see that the policy and we do expect labor markets to cool off of.
A little bit of that to come back to us and therefore, having the right head count within the organization and you put all those factors together, we just wanted to highlight that compares to our prior expectations. We are expecting perhaps a little bit of a drift up in the expense ratio going into next year than we had thought perhaps a quarter or two ago.
So a little bit disappointed on that we continue to look for expense ratio improvement over time, but I think we're going to face them.
Some headwinds going into 2023.
Okay.
That's helpful.
Lastly.
In terms of the great color you guys provide.
On loss cost trends.
Can you talk about casualty claim frequencies have.
Emerging better than you all expected and also below pre pandemic levels are you willing to are able to kind of unpack.
But by broader casualty lines is that coming more so workers' comp or is it also commercial auto and general liability and any color there would be great.
Hi.
Yes, I think it's been I would say, it's fairly consistent across the casualty lines.
We're seeing that apparently similar dynamic.
There is no age when you break it down as far as I want to go into the individual lines, but as a general rule. If you look at on levels frequencies adjusting for the impact of rate change. They are all behaving relative to expectations and they are all down a little bit relative to what we saw pre pandemic.
Got it.
Maybe lastly, sticking to loss costs.
Because I feel like and you guys have done a much better job on commercial auto than the industry and not to be negative but yes.
Yes.
The context, you provided is that the higher than expected to come from that.
Physical damage side, and just I just want to make sure youre not seeing a creep up in the non physical damage severity because I feel like.
That was one of the issues the industry was having during kind of the last.
Hiccups for the industry.
To lesser extent commercial auto.
Im wrong.
The issue back then too but thanks.
Yes, no I think your question is a good one and an important one.
I'm actually glad you are asking and hope you are asking of others.
Severities in auto liability has been going higher the last few years for us and for the industry <unk> seen some fair amount of commentary around that.
And we embedded that assumed higher severity.
In our 22 markets for the auto liability line, but again, you've got to think of everything on an on level basis and for us generating north of eight point essentially eight seven points in the quarter on commercial auto liability or commercial loan total excuse me is part of it.
Our response to that continued severity pressure on that you don't want a liability of mine. So I don't want you to think that the liability to severity hasnt been moving higher has been weak.
Reflect that in our loss picks and it was reflected in our 'twenty two loss pick that higher severity persisting and thats in our casualty reported numbers that you are seeing come through I can't speak to whether others.
Assuming that severity to continue or not but I can tell you. That's our philosophy, it's part of our prudent and consistent planning process and Thats why we continue to achieve higher rate level in commercial auto and expect to continue to do that going forward.
And do you feel the industry pricing commercial auto.
Adequate levels.
Competition.
Especially given that the low in frequency is that kind of heightened competitiveness. There. Thanks, that's right that's right.
Promise Thats My final question.
Yes.
I think the industry is.
Pricing conservatively I would say, it's not an aggressive market, let me put it that way for commercial auto.
But I think we're talking about keeping up with higher severity trends with the current rate levels. The bottom line is there's more work to be done because the starting point for commercial auto industry wide.
A reasonable amount of risk.
Our risk adjusted combined ratio target.
It's not a rational.
It's certainly favorable and I think in line with the severity trends that we're seeing and is it for the industry, but it still needs more improvement, which would suggest higher rate as needed.
Thank you.
Thank you Mike.
Okay.
We had the last question from the line of Jamie Inglis of Matthew. Your line is now open you may raise your question.
Hi, good morning, guys.
Could you give more sense of where the <unk>.
Personal lines growth is coming from.
Are you just gaining market share or is it particular.
Geography that youre getting bids or is it the type of competitor that youre gaining business Paul.
Yeah, So the growth and we pointed to this in the last couple of quarters is driven by that.
The strategic shift we made to <unk>.
To compete in the mass affluent market.
That's driving that it's in our existing footprint that we've had for personal lines and that's really where the growth is coming from.
Really sort of deemphasizing, the mass market personal auto and pursuing a segment of the market everything placements higher value on coverage and service and <unk>.
Much better alignment with our business philosophy, and our operating model.
Right I understand that but there are others that are in that business.
Where you're getting that business from.
Who is giving that business up I guess.
So I guess there are others in every business segment that we compete in and we compete successfully against and we've got an organization a reputation for offering really good products really good underwriting and pricing discipline and really good service and we've got very deep agency relationships as a result of that that foundation.
Organizational strategy and that benefit benefits us in the personal lines affluent market no different than it benefits us in the commercial construction market and the commercial manufacturing market and the E&S market.
Okay.
Let me start I wanted us to swing does something I think John you mentioned that.
Invested assets per dollar of equity is.
$3 40.
Is that sort of I would say noticeably from the ended end of last year.
I assume that's not a measure you managed to it's just a result of how you run your business.
Is that true.
This is mark Yeah, that's exactly right the leverage ratio for invested assets to common equities an outcome not a metric that you really have a lot of control over it. It's obviously a function of growth in invested assets, which is a function of cash flow and valuation changes and then also earnings.
Denominator on how much you retain versus how much stock you buy back any other capital management activities.
<unk> et cetera, So I think what you see with that ratio increasing over the last couple of quarters for the 338 at 930 is the fact that investment valuations are down that's impacted GAAP equity with leverage of three to one or more of an impact on the ratio.
The denominator is going down pretty significantly in <unk>.
Yes.
Overall invested asset leverage, but not unless you unless you.
Perhaps significant capital ashwin transactions, including issuing debt et.
Et cetera, it's difficult to move that ratio around that manage sort of in the short run it really just an outcome.
Okay Thats great. Thanks.
At this time speakers there are no questions on queue. You May proceed.
Great well. Thank you all for joining us and as always feel free to reach out to Ron with any follow ups and we look forward to speaking with you again.
Thank you.
And that concludes today's conference. Thank you. So much everyone for joining you may now disconnect and have a great day.
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