Q4 2022 Selective Insurance Group Inc Earnings Call

Speaker 2: I.

Speaker 3: Good day everyone. Welcome to Selective Insurance Group's fourth quarter 2022 earnings call. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President Investor Relations and Treasurer Erwin Pai. Sir, you may begin.

Speaker 4: Thank you and good morning everyone. We are final casting this call on our website, Selective.com. The replay is available until March 5th. We use three measures to discuss our results and business operations. First, we use GAAP measures , reported annual, quarterly and current report files with the SEC.

Speaker 5: Second, we use non-GAAP operating measures, which we believe make it easier for investors to evaluate our insurance business.

Speaker 6: Non-GAF operating income is net income available to common stockholders, excluding the abstract impact of net realized gains or losses on investments and unrealized gains on losses on equity securities.

Speaker 7: Non-GAP operating return on common equity is non-GAP operating income divided by average common stockholders equity.

Speaker 8: Adjusted Book Value per Common Share differs from Book Value per Common Share by the exclusion of total after-tax unrealized gains and losses on investments excluded in accumulated other comprehensive income.

Speaker 9: Gap reconciliation to any reference non-GAAP financial measures are in our Supplemental Investor package found in the investors page of our website.

Speaker 10: Third, we make statements and projections about our future performance. These are forward-looking statements under the Private Security's litigation reform act of 1995. They are not guarantees of future performance and are subject to risks and uncertainties.

Speaker 11: We discuss these risks and uncertainties in detail in our annual, quarterly, and current report filed with the SEC, and we undertake no obligation to update or otherwise revise any forward-looking statement.

Speaker 12: Now, I'll turn the call over to John Martione, our chairman of the board, President and Chief Executive Officer, who will be followed by Mark Wilcox, our Executive Vice President and Chief Financial Officer. John ?

Speaker 13: Thank you, Rohan, and good morning.

Speaker 14: We're pleased to report strong fourth quarter results, capping off another excellent year for Selective.

Speaker 15: With an operating ROE of 15.6% in the quarter and 12.4% for the full year, 2022 marks our ninth consecutive year of double-digit non-GAAP operating returns on equity.

Speaker 16: Over that timeframe, our operating RRE average approximately 12% exceeding our rate of average cost of capital by about 400 basis points.

Speaker 17: We delivered these results alongside disciplined, net previous written growth that averaged 8% annually, nearly doubling the size of the company over that timeframe.

Speaker 18: tangible book value per share plus change and accumulated dividends, which we view as the best longer term indicator of value creation in our industry, increased 10% annually over the past nine years, and our annualized total shareholder return over that period was 15.9%.

Speaker 19: If you and our industry can match that track record of consistent growth and profitability.

Speaker 20: Although we face several industry-wide headwinds as we look out to 2023, we expect to continue to maintain our performance level well into the future.

Speaker 21: I'll come back to this point shortly, but first I'll review a few highlights of our performance for the quarter and year.

Speaker 22: Net printing is written we're up 14% in a quarter and 12% for the full year. All three insurance operating segments contributed to this result.

Speaker 23: Growth for the year was driven by overall renewal pure price increases that averaged 5.1%, solid renewal retention, exposure growth, and strong new business.

Speaker 24: Our 95.1% combined ratio for 22 included 4.3 points of net catastrophe losses, partially offset by 2.5 points of net favorable prior to your casualty reserve development.

Speaker 25: Our net catastrophe losses for the year are largely marginally above our expectation of four points, despite winter storm LA being a significant loss, reflecting our catastrophe risk management efforts.

Speaker 26: The underlying combined ratio of 93.3% for 2022 reflected elevated non-kit tax-reviewed property losses from inflationary cross-pressures in our property lines.

Speaker 27: Underwriting results contributed 5.4 points to our full year ROE.

Speaker 28: That investment income after tax was $232 million dollars for the year.

Speaker 29: We actively managed our fixed income portfolio to optimize risk-adjusted returns in a rising interest rate environment.

Speaker 30: During 2022, we increased the pre-tax embedded book yield in the fixed income portfolio by approximately 115 basis points.

Speaker 31: while also moving up in credit quality.

Speaker 32: The overall investment portfolio generated 9.4 points of ROE for 2022.

In addition to delivering excellent financial results, I want to highlight some of our other key accomplishments.

We have built the organizational muscle and a decade-long track record of effectively managing commercial lines pricing in a dynamic loss trend environment, positioning us favorably coming into 2023.

Our long history of underwriting discipline positioned our property portfolio was strong insurance to value ratios.

And our underwriters have worked hard to maintain IPV against this backdrop of rapid inflation.

Our top-line growth was very strong in 2022, a testament to our excellent distribution partner relationships and sophisticated pricing tools.

Our unique field underwriting model remains highly valued by our agency partners.

Our market max tool which provides our distribution partners with insights is their overall portfolio and Identifies target accounts to grow their business with us has been instrumental in generating high quality new business opportunities

We expanded our commercialized footprint at the three additional states in 2022 opening Vermont, Idaho and Alabama, and we remain on track to open Maine in West Virginia in early 2024.

We completed the implementation of our new automation platforms for both standard commercial and small business and E&S, both of which dramatically enhance ease of use for our distribution partners.

And we appointed 118 new agencies during the year, bringing the total to approximately 1,500 agencies represented by 2,600 storefronts.

While pleased with our overall performance in 2022, our team is steadfast in our focus on addressing the areas in need of improvement.

Factoring in our operating leverage, investment asset leverage, and long-term investment return expectations, we target a 95% combined ratio to consistently meet or exceed a 12% operating ROE hurdle over time.

Our 2023 combined ratio guidance is 96.5 or 92% excluding catastrophe losses.

Reflected in our combined ratio guidance is an overall loss trend of approximately 6.5%, which is up from 5% a year ago, largely due to inflationary impacts in the property lines.

For property, we are currently incorporating a loss trend projection of about 7% compared to 4% a year ago, reflecting our increased estimate of inflationary impacts on average claims of errors.

We increased our casualty loss trend more modestly to 6% from 5.5%.

The 6% trend per casualty reflects our view of economic inflation, but more importantly, captures our view of social inflation impacts as well.

We will continue to pursue rate changes in line with training to support our profitability in these lines.

Along with claims and underwriting initiatives focused on more granular drivers or profitability.

In selecting these trends, we consider both frequency and severity impacts within the portfolio.

Whereas 2022 continues to benefit from favorable frequencies in certain lines.

going forward we are assuming generally flat frequency.

Therefore, the trends I quoted can be considered largely severity driven.

We remain comfortable with the quality of our portfolio, and therefore we do rate an inflationary exposure adjustments as the primary tools to address the higher severity trends.

In 2022, the combination of pure rate and exposure generated total average renewal premium change of 12% in commercial property, 12% in commercial auto physical damage, 8% in homeowners, and 9% for E&S property.

Given our recent success coupled with the state of the property marketplace, we expect this pace to continue in 2023.

Our casualty lines overall continue to produce combined ratios in line with our target.

As such, our focus remains on achieving renewal fuel rate increases that remain in line with our expected loss trend.

However, within casualty, commercial and personal auto liability are producing above target combined ratios, and we have a series of rate and underwriting actions to address these ones.

We believe the pricing environment across all three business segments remains favorable.

In standard commercial lines, we achieved strong renewal pricing throughout the year, and at third-fourth quarters were strongest with renewal pure pricing increases averaging 5.8% and 5.6% respectively.

We saw an acceleration of pricing in January with a renewal pure rate of 6.5%.

The NS pricing was also strong throughout the year with 4 quarter renewal period at 7.9% and the full year at 7.3%.

In personalized, our ongoing transition from the mass market to the mass affluent market caused us to blow behind the market in pricing trends. We expect to close that gap in coming quarters.

In the fourth quarter, we file rate changes in nine of our states averaging 8.8% and plan to continue that pace over the next several months.

We expect investment income to positively impact our financial results in 2023. Through active management of our fixed income portfolio, we have optimized for higher investment yields while maintaining conservative credit and duration positions.

Based on the projected investment yields and our investments to equity ratio, we anticipate that investment income will contribute over 200 basis points of additional ROE in 2023.

Our updated investment income expectations and combined ratio guidance for 2023 translate to an ROE above our 12% target.

Our target sets a high bar for our financial performance, challenges us to perform on our best and aligns our incentive compensation structure with shareholder interests.

Overall, I'm pleased with our excellent execution, consistent track record of results, and plans to generate consistent and profitable growth.

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

Thank you, John , and good morning. I'll review our consolidated results, discuss our segment operating performance, and finish with an update on our capital position and initial guidance for 2023.

For the fourth quarter, we reported a strong finish to the year with $1.38 of fully diluted EPS, $1.46 of non-GAAP operating EPS, and a non-GAAP operating ROE of 15.6%. These results are inclusive of a full retention cat loss from which is normally which reduced our EPS by 75. Let's continue our final uploads.

dollars and three cents. Our non-GAAP operating ROE of 12.4% for 2022 was particularly strong in light of significant industry catastrophe losses, capital market volatility, and the elevated inflationary environment that put upward pressure on lost costs.

Turning to our consolidated underwriting results, for the quarter we reported a consolidated combined ratio of 94.7%, included in the combined ratio of $45.7 million of net catastrophe losses or 5.2 points and $38 million of net favorable prior year casualty reserve development of $4.4 points.

As we pre-announced on January 20th, we reported 46.1 million of pre-tax net catastrophe losses related to winter storm Elliott, or 57.8 million inclusive of a re-instatement premium.

The winter storm produced freezing temperatures and strong winds across the majority of our commercial lines of firm 135 million of gross losses were predominantly water-related and we're driven by the sustained period of freezing temperatures

This caused considerable water damage as a result of burst pipes, largely from pressurized by suppressant sprinkler systems within commercial properties.

While the losses were spread across our footprint, much of the impact was concentrated in our southern region. Cl Cameron still takes Derivatives at're at disbeyexplreported

The net impact of the combined ratio was 6.5 points for the quarter and 1.7 points for the year. So despite Winter Storm Elliot being a meaningful catastrophe for us, it was manageable and the event of this size is not unexpected.

Obviously, upsetting winter snowmallows was a modest reduction in prior quarter catastrophe lots aftervi-

including the reduction in our ultimate loss for Hurricane Ian from 10 million to 5 million.

For the year, we reported a 95.1% combined ratio compared to our original guidance for the year of a 95% combined ratio. Variable prior year casualty reserve development, which we don't expect or budget for, provided 2.5 points of benefit, but was largely offset by about 2 points of unfurried well-known cap property losses compared to expectations.

ratio was 32.1% for the fourth quarter and 32.3% for the year, both modestly improved relative to 2021. As previously discussed, we have several cost containment initiatives in place, but we do expect some modest upward pressure on our expense ratio in 2023 due to higher reinsurance costs.

which is reflected in our 2023 combined ratio guidance. Over the medium and longer term, we remain focused on lowering the expense ratio through various initiatives while ensuring we are investing appropriately to support our long-term strategic objectives.

Corporate expenses, which principally include holding company costs and long-term stock compensation, totaled $6.7 million in the quarter and $31.1 million for the year.

Turning to our segments, for the fourth quarter, standard commercial lines net premium revenue increased 13%, driven by renewal fuel price increases averaging 5.6%, solid retention of 86%, and new business growth of 22%. Inclusive of exposure growth and endorsements, the renewal premium change in the quarter was the healthy 10% increase.

the winter storm all year with 6.9 points on the combined ratio inclusive of the rain statement premium.

The Fayetteville prior year casualty reserve development was driven by $30 million for the workers' compensation line related to accident years 2020 in prior and $3 million for the pop liability line.

Partially upsetting this was a $5 million increase to the commercial auto bodily injury line for the current accident.

The commercial lines underlying combined ratio was 94.5% for the quarter. For the full year, net premiums written growth was a healthy 12%, the combined ratio was a profitable 94.8%, and the underlying combined ratio was 94.3%.

You know, a personal line segment never prevents the ripening increase 20% in the quarter, reflecting our initiatives to expand our presence of a mass-apploid market and favorable competitive dynamics.

The combined ratio of the quarter was 99.9% and included 5.3 points of net catastrophe losses.

The impact of winter storm Elliott was 6.1 points on the combined ratio, inclusive of the reinstatement premium. The underlying combined ratio was 94.6%. For the full year, MPW growth was 9%, the combined ratio was 102.4, and the underlying combined ratio was 88.8%.

In our ENS segment, net premium rate improved 14% for the quarter relative to a year ago. Renewal fuel price increases averaged 7.9%, retention remained strong relative to a year ago, and new business was up 5%. The combined ratio for this segment was an extremely profitable 84.3% in the quarter.

and included 1.6 points of debt capacity losses and 5 million, or 5.6 points, of debt variable prior to capacity reserve development.

The impact of winter storm failure was 3.2 points on the combined ratio, inclusive of the marine statement premium.

The underlying combined ratio is 88.3%. For the year MPW gross was 16%, the combined ratio was a very profitable 90.9%, and the underlying combined ratio was 89.5%. Overall, our ENF segment has continued to build on its successes in recent years and reported that the strongest years and for platforms inception, the slower a decade ago.

Moving to investments, our portfolio remains well positioned. As of year end, 92% of our portfolio was in fixed income and short term investments with an average credit rating of double A minus and an effective duration of 4.1 years. Risk assets represented approximately 9.8% of our portfolio as of year end.

down from 11% a year ago, as with modestly dearest portfolio against a more uncertain macroeconomic backdrop.

For the quarter, after taxed investment income was 65.5 billion, slightly relative to 64.5 billion in 2021, given by significant growth in investment income from our fixed income portfolio, and offset by a reduction in income from alternatives.

Alternatives, which are reported on the one-quarter lag, generated $100,000 about the tax gains compared to $19.6 million about the tax gains a year ago.

The architecture yield on the total portfolio is 3.4% for the fourth quarter. So, thanks ladies for a healthy, 11.5 points of our e-contribution.

During 2022, we invested approximately $2.7 billion of new money in fixed income, taking advantage of higher investment yields and simultaneously improving credit quality and liquidity. The average pre-tax new purchase yield for the quarter was up meaningfully to 6.1% from 2.7% in the year ago period.

and was well above the pre-tax yield on our existing portfolio.

Approximately 10% of our fixed income portfolio remains invested in floating rate securities, although that's down from 14% at the end of the third quarter. The floating rate allocation reset at high benchmark rates throughout the year, helping increase book yield and investment income. While this was a meaningful tailwind in 2022, more recently we've been lowering the number of sign someone saves the analysable value of the clock tip that may settle that ad microphone and attention point. sphere of drift bubble issues retro ALSO QUALITY wonderful stuff focusing on market sewing sustainable

of our fixed income portfolio by approximately 150 basis points, which includes approximately 34 basis points of income and yield in the fourth quarter. Every 100 basis points of high yield on our total investment portfolio translates to about 2.7 points of ROE.

The total return on the investment portfolio was 1.8% in the quarter, but negative 7.2% for the full year, reflecting the rapid rise in interest rates in 2022.

Let me turn to our Reinsurance Program. We successfully renewed our main property capacity program, which covers both our standard market and the ENS business, effective January 1st. For the 2023 underwriting year, we went to market with $915 million of limit in excess of a $60 million retention.

Compounds are expiring $835 million of limit and excess of about $40 million retention. As a reminder, our $40 million retention has been constant since 2006, while our net premiums written in capital base have more than doubled in size over that period.

The purchase of additional limit at the top of the program was driven by exposure growth. Net-of-Po-Pot participation, we placed 810 million of up-level for 2023, who paid the $776 million in 2022.

As of January 1st, a 1 in 100, a 1% net probable maximum loss of PML for US hurricane. Our peak peril is a very manageable 3% of gap equity. And our 1 in 250 net PML of 0.4% probability stands at 7% of gap equity. These are both well within our risk tolerances.

After a meal, we also eliminated our ENFs only cover given the modest exposure in that portfolio and our strong capital position.

pricing on our CAT program was up on a risk-adjusted basis, but in line with that of lost free accounts in the US. In addition, tons of conditions tightened modestly for the placement. As a reminder, our returns program also includes a purchase stream, which limit the impact to us from large losses to 2 million per occurrence per casualty.

and 3 million per person property. These treaties were new on July 1st.

So any capital, a capital position remains extremely strong with 2.5 billion of capital equity and statutory capital in surplus as of year end. But very per share increased 4.4% during the quarter with declined 16.6% for the year due to the off-detects unrealized losses from fixed income securities.

Adjusted book value per share was up 5.2% for the year.

Our parent company cash and investment position stands at $484 billion, which is well above our long-term target. Our net bring is written to surplus of 1.44 times, is in the middle of our target range. Our debt-to-capital ratio of 16.6% is on the conservative side. These metrics provide us with significant financial flexibility to support our growth and execute on us. Thanks for watching today's broadcast.

First, we expect a gas to mine ratio of 96.5%, inclusive of 4.5 points of catastrophe losses.

This assumes no prior accident gear reserved development on an underlying basis or excluding the catastrophe losses of prior accountual reserved development. On 2023 combined ratio guidance implies a hundred-thirty basis point of improvement relative to 2022.

The high cathode reflects the more recent trending cathmosis, as well as a slightly higher retention and re-entered to go to the COVID-19 participation on our May's Property Catharine Chords Program.

After tax net investment income of $300 million, including $30 million in after tax gains from alternatives. After tax net investment income is up $68 million in total, or 29% from 2022. That overall effective tax rate of approximately 21%, which includes an effective tax rate of 20%.

for that investment income and 21% for all other items and weighted average shares of $61 million on a deluded basis, which does not reflect any share repurchases we may make under our authorization. As John mentioned, this guide implies a healthy ROE outlook for 2023.

and one that is above 12% topics of the year. With that, I'd ask the operator to open up the call for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, you may dial Star and then the number one. They record your first and last name and company name when prompted. To cancel, you may dial Star and then the number two. One moment please for the questions.

Our first question comes from the line of Mike Zyrnsky from BMO. Your line is now open. You may proceed.

Okay, good morning. Thank you.

I guess a first question is on loss inflation. You guys have been kind of a very, you guys have given very good disclosure over the past year plus or really forever about kind of what you're seeing puts and takes. I'm curious, you know, you, you, you, you, you, you, you,

It looks like some of the data you, you know, selective has seen an uptick in loss inflation a little sooner than some peers that are now talking about loss inflation. Just curious, do you ever analyze whether you feel that, you know, some of the loss inflation you're seeing is just simply due to...

you know, selective specifics due to the business mix. And you know, that, you know, and maybe the other, the rest of them, some of your peers are more immune to inflationary pressures, you know, taking into account that, you know, appreciating there's some different business mixes like, you know, your.

Underweight workers comp relative to some, but just just curious if you feel like.

collective is much more unique.

Well, so I would say we're unique in a lot of ways relative to our operating model and how we interact with our agents and what our underwriting philosophy is. But with regard to loss trend, I would say no. You did say why the business mixes, which could differ, and clearly loss trends vary.

based on the individual line of business. But the trends we've seen and the trends we've incorporated on a go-forward basis are largely driven by environmental factors. And I think that's both on the frequency and the severity side.

And as we've talked about in the past, I think it's always important to have a discussion around lost trends.

specifically for casualty and then for property because you really have to think about them differently. For casualty we have been over the last couple of years moving up our lost trend expected.

Part of that is evident in movement and historical loss trends, but remember your historical loss trends are impacted not just by inflationary considerations impacting severity, but actual changes in frequency and severity. And as we've talked about in the past, frequencies, generally speaking, have leveled off a little bit below. Have a look at economic effects in the year 2021, at our website. You'll find the link below to tailoring this year's ing populations.

where they would have been pre-pandemic. And when you look at your historical loss trends, that provides a little bit of an offset to some of the severity impacts that were more inflationary driven, be it economic or social inflationary. We've moved that again, and as we talked about a pair of comments.

have increased our casualty loss trend by about 50 basis points. And we do attribute much of that to our outlook for social inflationary impacts going forward. And again, everybody seems to be talking about social inflation and return to social inflationary trends.

we're actually showing you how we're specifically building it in to our loss ratio selections for casualty.

But again, there's nothing different in our portfolio. For those others that write standard commercial lines, kind of small, big market and lower end of the large commercial market.

Property is a little bit of a different story. Property, if you look at it and where we are, we've got a 7% forward loss trend on property. And looking back, our historical loss trends have also had some of that benefit of lower actual frequencies and at a really high severity year in 2022. And that along with our forward outlook for

inflation going forward, we've got that set at seven and we feel good about that. So again, I appreciate you recognizing we've been transparent about this for a long time. But we also think it's important that we're not just talking about social inflation, we're showing you how we incorporated into our forward view of lost trends.

and how that's embedded in our loss ratio selections.

Okay, that's helpful. My next question is on...

the return on equity guidance. And I'm asking it in a positive light, appreciative of the volatility of select as RLE has been much lower than peers too. But just curious, a lot of management teams or maybe a mix of investors to expect.

your commercial peers to operate or many of your commercial peers to operate at a new fully higher ROE's, you know, for thinking about 23 and 24 versus the historical averages for the industry. That's, you know, it's a bit of the case for selective but not as much so. You know, there was just a...

that you know, selective, is this something you're thinking about or is it just the opportunity set, you know, a low double digit ROE is the right way to think about things in order to kind of continue growing and at a faster pace than your peers. Yeah, so let me tackle this first, if you're on anything else.

our variable compensation for all of our employees, including the executive team. So that's an important point number one. The other point I would make is

When we see years like we have coming up, where you would expect your investment income and the ROE contribution from your investment income to be higher than your long-term expected return on your portfolio, we expect to generate a higher rate of income

higher than our target ROEs in those years. And that's why this is an important point. In my prepared comments, I went through how we get to a target combined ratio of 95 on a long-term basis. So that assumes our operating leverage, it assumes our invested asset leverage, and it assumes a normal gas equity environment.

essentially adjusting for the impact of either an unrealized gain or loss position. And then how we think about the expected returns on that portfolio. So in a typical year that 95 would produce the 12% ROE.

Our guidance is here of a 96 and a half. It's obviously above that.

Now because of that higher return from our investment portfolio as we talked about that will produce a combined ratio in excess of our target.

RLE of 12%, but that 96-5 is still a point and a half above our combined ratio target. And therefore, we would pay out lower from a variable compensation perspective. So that's how we put it all together, and we do specifically tie that combined ratio target.

to our compensation plans. And again, it goes into the idea that when you have out-sized investment income, you should be delivering higher than expected, are we?

I'm not sure I got to your question there Mike, but that's how we think about it and that's how we structure our targets internally and compensate all of our employees. And again, to your point, we can see in the proxy that some of those peers.

don't see their bar isn't as high as I guess you use the term aspirational. So they're not comped on that maybe higher ROE. My last question was just curious, you know, when we think of one of the best competitive advantages it's,

you know, you're closer than many of your competitors to your agents, insurance brokerage agents in terms of your model. You know, now that we're, you know, a couple of years, you know, you're not, you know, you're not, you know,

you know, the pandemic. Is anything changed? You know, are your insurance brokers not in the office as much? And you've had to kind of maybe change kind of your strategy a bit in terms of how you're interacting with your insurance brokers or is it mostly business as usual now?

Yeah, great question. You know, there's, there's clearly been some change. Now, I'll say this. I would say the significance of agency relationships from our perspective and from the agency's perspective is no different.

I think how you build and maintain those has shifted because like much of the U.S., our agents have modified in-office schedules and therefore they're in office on a less regular basis than they used to be. And that just changes the manner in which our field underwriters operate. But a balance of their time was always split between field work and office work from an underwriter perspective.

And they just had to shift how they managed that balance.

And then I think just the other point of this is having long standing relationships and being able to maintain those in a more heavily virtual environment. I think it's been a huge benefit for us. And I think a lot more of that in-person focus, which is more limited than it used to be, is focused on building new relationships, whether for people within an existing age.

Thank you.

Thank you. Our next question comes from the line of Mark Dwell of RBC. Your line is now open.

Yeah, good morning. A couple questions. With respect to the 96.5 combined ratio guide, as Mark pointed out, that's about 130 basis points of improvement relative to this year. And I guess what I wanted to do was kind of drill down in terms of thinking about...

Out of that improvement, what portion of that is loss ratio relative to expense ratio? And then similarly, just kind of what are the key levers that are driving your ability to get that improvement relative to last year?

This is Mark, maybe I'll start and I'm sure we'll jump in.

There are a couple different ways to think about the guidance for 2023. One is 130 basis points of improvement from actual in 2022 on an underlying basis, but it is also up about 100 basis points from our expectations a year ago. We expected an underlying combined ratio of 91.

So into 2022 and then we felt the pressure particularly as we've talked about all year on a short-tailed property line that impacted the non-cap property losses. So that's why we have a target of the 95 versus the other guys of the 965. We really feel like this more work that we need to do to improve the underrated profitability of the organization.

But when you think about the 96-5, we talked about the 4.5 points of catastrophe losses. That's up a little bit from the four points we expected in 2022. We came in a little bit above that on the back of all the way. It leads in the end. But when you look at the more recent trend, particularly over the last five years of catastrophe loss activity, we do think.

There is an elevated level of frequency and severity for the cash interface. And so we raised the cap loss element to that. When you look at the expense ratio, we came in at a 32.3 for 2022. I talked a little bit about the upward pressure on that in 2023 on the back of slightly higher returns

for 10 basis points in 2023. So there's about three basis points of deterioration in the overall expense ratio, including dividends. And that gets you to kind of an underlying loss ratio of about 59.3 for the full year 2023.

Now, when you think about that 130 basis points of improvement, another way to look at that is about half of it is really normalizing out the unusual reinstatement premiums we had in 2022. We had the casualty, seated reinstatement premiums in Q3 and then the

Elliott driven, Cat read statement premiums in Q4 to the tune of about $20 million in total between the two. And then about the other half really represents a mix of business.

So I would kind of put it into those forward strokes in terms of reconciling from 2022 to 2023.

The second question that I had was related to personal lines in the fourth quarter specifically. The accident year loss ratio was kind of the highest of the year. The expense ratio in the quarter was kind of the lowest of the year or nearly. Was there anything you know particular to either of those or is it just kind of the obvious pressure on loss trend on the former or any expense saves on the latter? You know I'd say for personal lines in the quarter we personalize did absorb its share of.

losses from Elliott and there is the offsetting reinstatement premium. And that does put a little bit of a drag on on the ratios when you have a lower denominator on the back of the reinstatement premium. We did also see some pretty significant non-cap property losses.

within personal lines in the first quarter to the tune of 45.7 percentage points. If you look at the run rate on those, it's a meaningful increase. And actually, when you compare it to our internal expectations, that's a full 10 percentage points above what we would have expected for the quarter.

as a positive item in the personalized commission line. That would be the only other outstanding item. But with regard to casualty movement, either current year or prior year, there was none in personalized. Okay, those are my questions, thank you. Thank you, Mark. Thank you. Our next question comes from the Land of Miershaels of KBW. Your line is now open. Great, thanks, morning. When you look at, I think predominantly the regional, maybe the mute.

to all competitors that are out there, is there a sense that they're less able to grow because of their exposure to the same sort of higher attachment points and higher re-insurance costs that are out there? Yokai

Yeah, I think it's a great question, Meyer. I think without having full insight into what happened with everybody's one-one renewals, I do think that in many cases those competitors will be more highly dependent on reinsurance than anybody.

that certainly, assuming they were loss affected, and even if they weren't, likely under the same pressures as everybody else in the market to raise the attachment point and meaningfully impact the cost. So I would assume that you're seeing a more outsized impact on that group. Now, and I mentioned this, and I think this is indicative of what's happening in the market.

just broadly, it was in my prepared comments and I want to make sure it didn't get lost, is that our January commercial lines pricing was six and a half percent, up almost a full point from Q4. And my sense is, actually more than my sense, it was driven by a pretty meaningful movement in the property line.

So I think that's indicative of a shift in the marketplace and whether that's smaller versus larger or across the board. I couldn't really tell you, but I think your original point is pretty accurate in terms of where the impact of the re-insurance renewal was felt more than others.

Okay, another tremendously helpful and I guess that answers my next question which is, your willingness to add a little bit more net property risk just given pricing conditions.

for commercial property, sounds like you're saying yes.

Yeah, so that's really not how we manage the business in terms of opportunity looking line by line. We continue to be a package underwriter. We continue to acquire new business based on the individual risk underwriting and the individual risk pricing guidance we provide to our underwriters. I think they make really good decisions.

And our growth will be driven more by that individual decision making in the context of the opportunities that are presented that it will be opportunistic around our current few of more pricing as far as it possibly.

Okay, so that's there. That's more sophisticated than the way I was looking at it. And it's two quick questions I can. First, is it reasonable to assume that your year end 22 casualty reserves incorporated the 7% trend that you're looking for for 23?

So, now, again, that's a question that's a little challenging to answer. I would say that our casualty reserve position at the end of the quarter continues to reflect our best estimate, as it always has. And I think.

We don't plan for this we don't budget for it, but we have a track record of favorable emergence and casualty that we're proud of And I think it speaks to the manner in which and this was part of my response to an earlier question the man It matter in which we actually build our forward expectation of loss trend into our casualty loss picks But that initial casualty loss pick

is influenced meaningfully by actual historical loss trend. So the actual changes in frequency severity over the last number of years is your historical loss trend. That sets your starting point for a casualty loss pick. We then add that six and a half, or six and a half for casualty forward loss trend.

I'm sorry, 6% for casual forward loss trend into a soon loss ratio.

So it's in there on a go-forward basis, but the starting point is influenced by your actual historical trend

Okay, no, that helps. And then Mark, if I can be tedious and get the, the cap by product line for the quarter. Sure, it's certainly so going through the different lines of business, starting with standard commercial lines for the quarter and commercial order. 0.8 million.

in commercial property 29.9 and BOMP 9.5 million. That should add up to 40.2 million to say the commercial lines.

within post aligned auto 0.9 million home 3.2 and then property within the NS 1.4 for a total of 45.7 million for cat bosses for Q4.

Fantastic. Thank you so much, guys. Thank you.

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

Hi. going back

loss ratio guidance on an underlying basis, a little bit over 59% for this year. I guess just looking at the non-cap property loss ratio last year trending up a little bit, what sort of expectations for that particular component are y'all thinking for this year, just kind of considering the expectations for loss cost trends versus the...

firm pricing environment, just trying to, I guess, understand how property versus casualty contributes to that improvement.

Yeah, it's a good question. The way we disclose the non-cap property loss ratio, it's non-cap property losses that get divided by the total net owed premium. And if you think about 23 expectations versus 22, it's basically flat.

So I believe we came into the bad 18.4 for the full year across, but we just double check that number. 18.3 for the full year across all segments in 2022, and we expect that to be basically our expectation for 2023, better than the GaNS is that to be essentially the same.

Okay, thank you. In personal lines, there is a pretty big uptick in new business this quarter. I guess I'm just curious about what you all are seeing in the shopping environment for personal lines in the target mass affluent segment of the market.

across all lines of business, but in personal lines in particular to your question, we do plan for a different loss ratio for new than renewal. And that's factored into our loss ratio expectations, segment by segment, and that's no different for personal lines. But I think it's important to keep this in the proper context with regard to our growth.

whether a new business or total premium in personal lives.

We like the mass affluent segment, but recognize that we're relatively new into this. So our growth, while it looks big on a percentage basis in terms of a real dollar basis, these are not big numbers. We grew the segment by $28 million in the year.

And for 14 million in a quarter and new business was 22 million for personal lines

in the quarter and that was that that was compared to a very low Q4-21 where we were really just starting the transition and only wrote 10 million dollars in new business. So I guess my point is saying that and I don't know that's necessarily indicative of what's happening in the car market but that's a segment of business we like and we're showing some really good results relatively.

transition from mass market to mass affluent and updated our rating plans accordingly. That led to us falling a little bit behind the market in terms of pricing trends. And you saw in the prepared comments, and I'll reinforce this point, the impact of our files!

rates in the nine states that we took action in, in the fourth quarter was 8.8%. And that'll drive what we start to have on a written and ultimately earned basis. And I would expect that pace to continue. So more work to do from a profitability perspective, but I think the other important point is on the homeowner side.

The exposure change we've kept up with so we've always had a lot of discipline around getting exposure right in our home book we've automatically fed through the updates in estimated replacement costs and and the exposure I feel like we kept pace with it was more in the pricing that we needed to do a little catch up on.

Thank you. Thank you, Grace. Thank you. Thank you.

At this time, speakers, we shall no further questions. You may proceed. Well, thank you all for joining us. As always, feel free to follow up with any additional questions, and look forward to speaking to you in the future.

Thank you. Thank you everyone for participating. You may now disconnect.

And.

Over Presidency

Yeah.

Good day everyone. Welcome to Selective Insurance Group's fourth quarter 2022 earnings call. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President Investor Relations and Treasurer Erwin Pai. Sir, you may begin.

Thank you and good morning everyone. We're fantastic that we're on our website, Delanctive.com, the replay is available until March 5th. We use three measures to discuss our results and business operations.

First, we have GAT measures, reporters at annual, quarterly and colored reports filed with the SEC.

Second, we use non-GAAP operating measures, which we believe make it easier for investors to evaluate our insurance business.

non-GAAP operating income is net income available to common stockholders, excluding the after-tax impact of net realized gains on losses on investments and unrealized gains on losses on equity securities. non-GAAP operating return on common equity is non-GAAP operating income divided by average common stockholders' equity.

Adjusted Book Value per Common Share differs from Book Value per Common Share by the exclusion of total after-tax unrealized gains and losses on investments included in accumulated other comprehensive income.

Gap reconciliation to any reference non-GAAP financial measures are in our supplemental investor package found in 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 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 obligation to update or otherwise revise any forward-looking statement.

Now I'll turn the call over to John Marchionne, our Chairman of the Board, President, and Chief Executive Officer, who will be followed by Mark Wilcox, our Executive Vice President and Chief Financial Officer. John ? Thank you, Rohan, and good morning.

We're pleased to report strong fourth quarter results, capping up another excellent year for selective. With an operating ROE of 15.6% in the quarter and 12.4% for the full year, 2022 marks our ninth consecutive year of double digit non-GAB operating returns on equity. We're pleased to report strong fourth quarter results, capping up another excellent year for the full year.

Over that time frame, our operating ROE averaged approximately 12%, exceeding our weighted average cost of capital by about 400 basis points. We delivered these results alongside disciplined, net previous written growth that averaged 8% annually, nearly doubling the size of the company over that time frame.

Pantable book value per share plus change in accumulated dividends, which we view as the best longer term indicator of value creation in our industry, increased 10% annually over the past nine years. And our annualized total shareholder return over that period was 15.9%.

Few in our industry can match that track record of consistent growth and profitability.

Although we face several industry-wide headwinds as we look out to 2023, we expect it to continue to maintain our performance level well into the future.

I'll come back to this point shortly, but first I'll review a few highlights of our performance for the quarter of the year.

Net printing is written we're up 14% in a quarter and 12% for the full year. All three insurance operating segments contributed to this result.

Growth for the year was driven by overall renewal pure price increases that averaged 5.1%, solid renewal retention, exposure growth, and strong new business.

Our 95.1% combined ratio for 22 included 4.3 points of net capacity losses partially offset by 2.5 points of net favorable prior to your casualty reserve development.

Our net catastrophe losses for the year were only marginally above our expectation of four points, despite Winter Storm Elliot being a significant loss, reflecting our catastrophe risk management efforts. The underlying combined ratio of 93.3% for 2022 is a significant loss.

reflected elevated non-catastrophe property losses from inflationary cost pressures in our property lines. Underwriting results contributed 5.4 points to our full year on our lease.

That investment income after tax was $232 million dollars for the year.

We actively managed our fixed income portfolio to optimize risk adjusted returns and a rising interest rate environment. During 2022, we increased the pre-tax embedded book yield in the fixed income portfolio by approximately 115 basis points while also moving up in credit quality.

The overall investment portfolio generated 9.4 points of ROE for 2022.

In addition to delivering excellent financial results, I want to highlight some of our other key accomplishments.

We have built the organizational muscle and a decade-long track record of effectively managing commercial lines pricing in a dynamic loss trend environment, positioning us favorably coming into 2023.

Our long history of underwriting discipline positioned our property portfolio with strong insurance to value ratios.

And our underwriters have worked hard to maintain IPV against this backdrop of rapid inflation.

Our top line broke was very strong in 2022. A testament to our excellent distribution partner relationships and sophisticated pricing tools.

Our unique field underwriting model remains highly valued by our agency partners.

Our market max tool which provides our distribution partners with insights is their overall portfolio and Identifies target accounts to grow their business with us has been instrumental in generating high quality new business opportunities

We expanded our commercial lines footprint into three additional states in 2022, opening Vermont, Idaho, and Alabama, and we remain on track to open Maine and West Virginia in early 2024.

We completed the implementation of our new automation platforms for both standard commercial and small business and ENS, both of which dramatically enhance ease of use for our distribution partners.

And we appointed 118 new agencies during the year, bringing the total to approximately 1,500 agencies represented by 2,600 storefronts.

While pleased with our overall performance in 2022, our team is steadfast in our focus on addressing the areas and need of improvement.

factoring in our operating leverage, invested asset leverage, and long-term investment return expectations, we target a 95% combined ratio to consistently meet or exceed a 12% operating oral e- hurdle over time.

Our 2023 combined ratio guidance is 96.5, or 92%, excluding catastrophe losses.

We've reflected in our combined ratio guidance is an overall loss trend of approximately 6.5%, which is up from 5% a year ago largely due to inflationary impacts in the property lines.

For property, we are currently incorporating a loss trend projection of about 7% compared to 4% a year ago, reflecting our increased estimate of inflationary impacts on average claims severance. However,u. stamps and Germans generally account for over 100,000 breakdowns of related trends temperatures.

We increased our casualty loss trend more modestly to 6% from 5.5%.

The 6% trend per casualty reflects our view of economic inflation, but more importantly, captures our view of social inflation impacts as well.

We will continue to pursue rate changes in line with trends to support our profitability in these lines, along with claims and underwriting initiatives focused on more granular drivers or profitability.

If selecting these trends, we consider both frequency and severity impacts within the portfolio.

Whereas 2022 continued to benefit from favorable frequencies in certain lines.

going forward we are assuming generally flat frequency.

Therefore, the trends I quoted can be considered largely severity driven.

We remain comfortable with the quality of our portfolio, and therefore we do rate an inflationary exposure adjustments as the primary tools to address the higher severity trend.

In 2022, the combination of pure rate and exposure generated total average renewal premium change of 12% in commercial property, 12% in commercial auto physical damage, 8% in homeowners, and 9% for E&S property.

Given our recent success coupled with the state of the property marketplace, we expect this pace to continue in 2023. Our casualty lines overall continue to produce combined ratios in line with our target.

As such, our focus remains on achieving renewal pure rate increases that remain in line with our expected loss trend.

However, within casualty, commercial and personal auto liability are producing above target combined ratios. And we have a series of rate and underwriting actions to address these ones.

We believe the pricing environment across all three business segments remains favorable. In standard commercial lines, we achieved strong renewal pricing throughout the year, and the third and fourth quarters were strongest, with renewal pure price increases averaging 5.8% and 5.6% respectively.

We saw an acceleration of pricing in January with renewal pure rate of 6.5%.

ENS pricing was also strong throughout the year with 4 quarter renewal pure rate at 7.9% and the full year at 7.3%.

In person lines, our ongoing transition from the mass market to the mass affluent market caused us to fall behind the market in pricing trends. We expect to close that gap in coming quarters.

In the fourth quarter, we filed rate changes in nine of our states averaging 8.8 percent and plan to continue that pace over the next several months.

We expect investment income to positively impact our financial results in 2023. Through active management of our fixed income portfolio, we have optimized for higher investment yields while maintaining conservative credit and duration positions.

Based on the projected investment yields and our investments to equity ratio, we anticipate that investment income will contribute over 200 basis points of additional ROE in 2023.

Our updated investment income expectations and combined ratio guidance for 2023 translate to an ROE above our 12% target. Our target sets a high bar for our financial performance, challenges us to perform at our best and aligns our incentive compensation structure with shareholder interest. Overall, I'm pleased with our excellent execution.

consistent track record of results, and plans to generate consistent and profitable growth. Now I'll turn the call over to Mark to review the results for the quarter.

Thank you John and good morning. I will do our consolidated results, discuss our segment operating performance and finish with an update on our capital position and initial guidance for 2023. For the fourth quarter we reported a strong finish to the year with a $38 fully diluted EPS, a downfall we seek the long gap operating EPS.

and a non-GAAP operating ROE of 15.6%. These results are inclusive of a full retention cat loss for medicinal malleants, which reduced our EPS by 75 cents, and our fourth quarter ROE by its own 8% point.

Our results reflect the strong, underlying earnings power of our franchise.

For the full year, we reported EPS of $3.54 and on-gap operating EPS of $5.03.

Our non-GAAP operating ROE of 12.4% for 2022 was particularly strong in line of significant industry catastrophe losses, capital markets volatility, and the elevated inflationary environment that put upward pressure on loss costs. Tony Tuck consolidated underwriting results.

For the quarter, we reported a consolidated combined ratio of 94.7 percent, included in the combined ratio with 45.7 million of net catastrophe losses for 5.2 points and 38 million of net favorable priority accounts for the observed development of 4.4 points. As we pre-announced on January 23rd, we reported 46.1 million.

of pretax net catastrophe losses related to Wintersville and Elliott, while 57.8 million inclusive are reinstatement premiums.

The winter storm produced freezing temperatures and strong winds across the majority of our commercialized footprint. $135 million of gross losses were predominantly water related and were driven by the sustained period of freezing temperatures. This caused considerable water damage as a result of those pipes, largely from pressurized fire suppressant sprinkler systems within commercial.

and an event of this size is not unexpected. Auschley upsetting winter snowmally was a modest reduction in prior cold and catastrophe loss estimates.

including the reduction in our ultimate loss for Hurricane Ian from 10 million to 5 million.

For the year, we reported a 95.1% combined ratio compared to our original guides for the year of a 95% combined ratio. Variable prior year casualty reserve development, which we don't expect a budget for providing 2.5 points of benefit. But it was largely upset by about 2 points of unbreakable non-cap property losses compared to expectation and slightly higher than expected cap losses. For the year, we reported a 75.1% combined ratio, which we don't expect a budget for the year.

The underlying combined ratio of 93.3% for the year was about 2.3 points above expectations and again was largely driven by the high and uncapped property losses. Moving to expenses, our expense ratio was 32.1% for the fourth quarter and 32.3% for the year. So it modestly improved relative to 2021.

As previously discussed, we have several cost containment initiatives in place, but we do expect some others to outweigh pressure on our expense ratio in 2023 due to high range short costs, which is reflected in our 2023 Combined Ratio guidance.

Over the medium and longer term, we remain focused on lowering the expense ratio through various initiatives while ensuring we are investing appropriately to support our longer-term strategic objectives.

Corporate expenses, which principally include holding company costs and long-term stock compensation, totaled $6.7 million in the quarter and $31.1 million for the year.

Turning to our segments, for the fourth quarter standard commercial line should have premium revenue increased 13%, during by a renewal of fuel price increases, averaging 5.6%. Solid retention of 8% or 6%, a new business growth of 22%. Inclusive of exposure growth and endorsements, the renewal premium change in the quarter was a healthy term.

the winter storm Elliott was 6.9 points on the combined ratio, inclusive of the reinstatement premium. The favorable prior year casualty reserve development was driven by $30 million for the workers' compensation line related to accident years 2020 and prior, and $3 million for the BOP liability line. Partially offsetting this was a $5 million increase to the commercial order.

3%.

In our partial line segment, that prevalence rate increased 20% in the quarter, reflecting our initiatives to expand our presence in the mass affluent market and favorable competitive dynamics. The combined ratio in the quarter was 99.9% and included 5.3 points of net catastrophe losses. The impactual winter storm area was 6.1 points on the combined ratio.

for the quarter relative to a year ago. Renewal fuel price increases averaged 7.9%, retention remained strong relative to a year ago, and new business was up 5%. The combined ratio for this segment was an extremely profitable 84.3% in the quarter and included 1.6 points of debt catastrophe losses.

and 5 million or 5.6 points of their favorable prior year casualty reserve development. The impact of winter storm failure was 3.2 points on the combined ratio, inclusive of the green statement premium. The underlying combined ratio was 88.3%. For the year, NPW growth was 16%. The combined ratio was a very profitable 90.9%.

portfolio remains well positioned. As of the year end, 92% of our portfolio was in texting government short term investments with an average credit rating of AA- and in effect the duration of 4.1 years. Risk assets represented approximately 9.8% of our portfolio as of the year end, down from 11% a year ago, as we've modestly theorized the portfolio against a more uncertain back-rock and on the back-rock.

For the quarter, after tax net investment income was $65.5 million, slightly relative to $64.5 million in 2021, driven by significant growth in investment income from our fixed income portfolio and offset by a reduction in income from alternatives.

Alternatives, which are reported on the one-quarter lag, generated $100,000 above the tax gains compared to $19.6 million above the tax gains a year ago.

The after-tax yield on the total portfolio was 3.4% for the fourth quarter, translating to a healthy 11.5 points of ROE contribution. During 2022, we invested approximately $2.7 billion of new money in fixed income, taking advantage of higher investment yields and simultaneously improving credit quality and liquidity.

The average pre-tax new purchase yield for the quarter was up meaningfully to 6.1% from 2.7% in the year-ago period and was well above the pre-tax yield on our existing portfolio. Approximately 10% of our fixed income portfolio remains invested in floating rate securities, although that's down from 14% at the end of the third quarter. The floating rate allocation reset at high benchmark rates throughout the year.

During 2022 we increased the pre-tax book yield of our fixed income portfolio by approximately 150 basis points, which includes approximately 34 basis points of increment of yield in the fourth quarter. Every 100 basis points of high yield on our total investment portfolio translates to about 2.7 points of our E.

The total return on the investment portfolio was 1.8% in the quarter, but negative 7.2% for the full year, reflecting the rapid rise in interest rates in 2022.

Let me turn to our Reinsurance Program. We successfully renewed our main property capacity program, which covers both our standard market and the E&S business, effective January 1st. For the 2023 underwriting year, we went to market with $915 million of limit in excess of a $60 million retention, compared to our expiring $835 million of limit in excess of our $40 million retention.

As a reminder, our $40 million retention has been constant since 2006, while our net premiums written in capital base have more than doubled in size over that period.

The purchase of additional limit at the top of the program was driven by exposure growth. Net of co-participation, we placed $810 million of limit for 2023 compared to $776 million in 2022. As of January 1st, a 1 in 100 net probable maximum loss of PML for US hurricanes is estimated inAND OH inch. Very Ur weave.

the ENS only covered given the modest exposure in that portfolio and a strong capital position.

Pricing on our CAT program was up on a risk-adjusted basis, but in line with that of loss-free accounts in the US. In addition, terms and conditions tightened modestly for the placement. As a reminder, our Reinsurance program also includes our Per-Risk trees, which limit the impact to us from large losses to $2 million per occurrence per casualty and $3 million per risk per property. For more information, visit www.fema.gov

These treaties were due on July 1st. Turning to capital, our capital position remains extremely strong with $2.5 billion of GAAP equity and statutory capital and surplus as of year end. Book value per share increased 4.4% during the quarter, with declines 16.6% for the year end due to the DAAP, the tax unrealized losses from fixed income securities.

Capital ratio of 16.6% is on the conservative side. These metrics provide us with significant financial flexibility to support our growth and execute on our strategic initiatives.

We did not repurchase any shares for in the fourth quarter. We have 84.2 million of remaining capacity under our share repurchase authorization, which we plan to use opportunistically in 2023.

Let me finish with some commentary on our initial guidance for 2023. First, we expect a gas to mine ratio of 96.5%, inclusive of 4.5 points of catastrophe losses.

This assumes no prior accident gear reserve development. On an underlying basis or exploding catastrophe losses of prior accountual reserve development, on 2023 combined ratio guidance implies a hundred and thirty basis points of improvement relative to 2022.

The high cap load reflects the more recent trend in cat masses, as well as our slightly higher retention and reinsurance code participation on our main Property Cap Reinsurance program.

To tax net investment income at 300 million, including 30 million and off the tax gains from alternatives. To tax net investment income is up 68 million in total, or 29% from 2022. An overall effect of tax rate of approximately 21%, which includes the effect of tax rate 20%.

for that investment income and 21% for all other items and weighted average shares of 61 million on a polluted basis, which does not reflect any share repotuses as we may make under our authorization. As John mentioned, this guide has supplied a healthy ROE outlook for 2023 and one that is about 12% total from EM.

With that, I'd ask the operator to open up the call for questions. Thank you. We will now begin the question and answer session. If you would like to ask a question, you may dial star and then the number one. Kindly record your first and last name and company name when prompted.

To cancel, you may dial, stall or end end number two. One moment please for the questions. Our first question comes from the line of Mike Zyrnsky from BMO. Your line is now open. You may proceed.

Okay, good morning. Thank you. I guess a first question is on loss inflation. You guys have been kind of a very, you guys have given very good disclosure over the past, you know, year plus or really forever about kind of what you're seeing puts and takes. I'm curious, you know, you

It looks like from the data, Selective has seen an uptick in loss inflation a little sooner than than some peers that are now talking about loss inflation. Just curious, do you ever analyze whether you feel that some of the loss inflation you're seeing is just simply due to you know

selective specifics due to the business mix. And maybe the rest of them, some of your peers are more immune to inflationary pressures. Taking into account that, appreciating there's some different business mixes like your underweight workers comp relative to some, but just curious if you feel like.

line of business mixes, which could differ, and clearly lost trends vary based on the individual line of business. But the trends we've seen and the trends we've incorporated on a go-forward basis are largely driven by environmental factors. And I think that's both on the frequency and the severity side.

And as we've talked about in the past, I think it's always important to have a discussion around lost trends specifically for casualty and then for property because you really have to think about them differently. For casualty, we have been over the last couple of years moving up our lost trend expected. Part of that is evident in movement in historical lost trends, but remember, your historical lost trends.

provides a little bit of an offset that some of the severity impacts that were more inflationary driven, be it economic or social inflationary.

We've moved that again, and as we talked about, a pair of comments have increased our casualty loss trend by about 50 basis points.

And we do attribute much of that to our outlook for social inflationary impacts going forward. And again, everybody seems to be talking about social inflation and return to social inflationary trends. We're actually showing you how we're specifically building it in to our loss ratio selections for casualties. But again, there's nothing different in our portfolio.

For those others that write standard commercial lines, kind of small, mid-market, and lower end of the large commercial market. Property is a little bit of a different story. If you look at where we are, we've got a 7% forward loss trend on property. And looking back, our historical loss trends have also had some of that benefit of lower actual frequencies.

and at a really high severity year in 2022. And that along with our forward outlook for inflation going forward, we've got that set at seven and we feel good about that. So again, I appreciate you recognizing we've been transparent about this for a long time. But we also think it's important that we're not just talking about social inflation, we're showing you how we incorporated into our forward view of lost trends.

and how that's embedded in our loss ratio selections. Okay. That's helpful. My next question is on the return on equity guidance. I'm asking it in a positive light. Appreciative of the volatility of selectors. RLE has been much lower than peers, too. But just curious, I'm...

A lot of management teams or maybe a mix of investors to expect your commercial peers to operate or many of your commercial peers to operate at a mutually higher ROE for thinking about 23 and 24 versus their historical averages for the industry.

It's a bit of the case for selective, but not as much so. There was just a management team. I know you guys couldn't hear all the conference calls that lifted their RLE guidance by a full 100 basis point, so attributable mostly to higher interest rates. So just kind of curious, anything structurally, you know.

that you think that, you know, selective, is this something you're thinking about or is it just the opportunity set is to, you know, a low double digit ROE is the right way to think about things in order to kind of continue growing and at a faster pace than your peers? Yeah, so let me tackle this versus John and then I'm...

variable compensation for all of our employees, including these activities. So that's the important point number one. The other point I would make is when we see years like we have coming up where you would expect your investment income and the ROE contribution from your investment income.

to be higher than your long-term expected return on your portfolio, we expect to generate higher than our target ROEs in those years. And that's why this is an important point. In my prepared comments, I went through how we get to a target combined ratio.

of 95 on a long-term basis. So that assumes our operating leverage, it assumes our invested asset leverage, and it assumes a normal gas equity environment, essentially adjusting for the impact of either an unrealized gain or a lost position. And then, as we think about the expected returns on that portfolio, so in a typical year that 95 would produce the 12% ROI.

Our guidance this year of a 96 and a half is obviously above that. Now because of that higher return from our investment portfolio as we talked about that will produce a combined ratio in excess of our target RLE of 12% but that 96.5 is still a point and a half above our combined ratio target.

and therefore we would pay out lower from a variable compensation perspective. So that's how we put it all together and we do specifically tie that combined ratio target to our compensation plans. And again, it goes into the idea that when you have outsized investment income, you should be delivering.

Okay, and here, one we can see in the proxy that some of those peers don't see their bar isn't as high as I guess the term aspirational, so they're not comped on that, maybe higher ROE. My last question was just curious, you know, when I only think of one of them. That didn't work for me. And k... I still don't know.

like this competitive advantages, it's you know, you're closer than many of your competitors to your agents insurance brokerage agents in terms of your model, you know now that we're you know, a couple years, you know, you know the pandemic is Anything changed, you know, are your insurance brokers not in the office as much and and and you've had to kind of maybe change your

kind of your strategy a bit in terms of how you're interacting with your insurance brokers or is it mostly business as usual now? Yeah, great question. You know, there's clearly been some change. Now I'll say this, I would say the significance of agency relationships from our perspective and from the agent's perspective is no different. I think how you build and maintain those has shifted because like much of the US, we've got plenty of Room. So I think around like the US we are matt adjust to thegate learning field in general. Usually focused on managing relationships with retailers, but you mightdk if you have these conversations in the world as well. finish good at least and keep going until the this happens.

our agents have modified in-office schedules, and therefore they're in office on a less regular basis than they used to be. And that just changes the manner in which our field underwriters operate. But a balance of their time was always split between field work and office work from an underwriter perspective. And they just had to shift how they managed that balance.

And then I think just the other point of this is having long-standing relationships and being able to maintain those in a more heavily virtual environment I think it's been a huge benefit for us and I think a lot more of that that in-person focus Which is more limited than it used to be is focused on building new relationships whether for people within an existing agency

Thank you.

Thank you. Our next question comes from the line of Mark Dwell of RBC. Your line is now open. Good morning. With respect to the 96.5 combined ratio guide, I'm looking at the RBC line of RBC.

As Mark pointed out, that's about 130 basis points of improvement relative to this year. I guess what I wanted to do was drill down in terms of thinking about out of that improvement, what portion of that is loss ratio relative to expense ratio? And then similarly, just kind of what are the key levers that are driving your ability to get that improvement.

you know, relative to last year. This is Mark Beniosto and I'm sure we'll jump in. There are a couple different ways to think about the guidance for 2023. One is 130 basis points of improvement from actual in 2022.

on an underlying basis, but it is also up about 100 basis points from our expectations a year ago. We've expected an underlying combined ratio of 91 going into 2022, and then we felt the pressure, particularly as we've talked about all year on the short tail property lines that impacted the non-cap property losses. So that's why we have a target of the 95 versus the 95 versus the 95 versus the 95 versus the 95.

the guys, the 965, we really feel like it's more work that we need to do to improve the under rating profitability of the organization. But when you think about the 965, we talked about the four and a half points of catastrophe losses.

That's up a little bit from the four points we expected. In 2022, we came in a little bit above that on the back of Elliot late in the year. But when you look at the more recent trend, particularly over the last five years of catastrophe loss activity, we do think there is an elevated level of frequency in severity of catastrophe.

And so we raised the Cat Loss Elements to that. When you look at the expense ratio, we came in at a 323 for 2022. I talked a little bit about the upward pressure on that in 2023 on the back of slightly higher roll.

as well as the impact of inflation. And I would, that the expense ratio embedded in that guidance is called a 32.6. There's the dividend component, which was about 20 basis points in 22. We're expecting that to come down a little bit to 10 basis points in 2023. So there's about 30 basis points of deterioration.

Another way to look at that is about half of it is really normalizing out the unusual reinstatement premiums we had in 2022. We had the casualty-seated earned reinstatement premiums in Q3 and then the Elliott-driven CAT reinstatement premiums in Q4 to the tune of about $20 million in total.

That pretty much nails it. The second question that I had was related to personal lines in the fourth quarter specifically. The accident year loss ratio was kind of the highest of the year. The expense ratio in the quarter was kind of the lowest of the year nearly.

Was there anything particular to either of those, or is it just kind of the obvious pressure on lost trend on the former, or any expense saves on the latter? You know, I'd say for personal lines in the quarter, personal lines did absorb its share of

losses from Elliott and there is the offsetting reinstatement premium. And that does put a little bit of a drag on the ratios when you have a lower denominator on the back of the reinstatement premium. We did also see some pretty significant non-cap property losses.

within coastal line in the first quarter to the tune of 45.7 percentage points. If you look at the run rate on those, it's a meaningful increase. And actually, you compare it to our internal expectations. That's a full 10 percentage points above what we would have expected for the quarter.

And that was really the driver on that underlying loss ratio. And then I think the expense benefit is probably a little bit more blood income from claims, probably related to the fourth quarter storms.

as a positive item in the personalized commission line. That would be the only other outstanding item. But with regard to casualty movement, either current year or prior year, there was none in personalized. Those are all my questions. Thank you.

of item in the personalized commission line. That would be the only other outstanding item. But with regard to casualty movement, either current year or prior year, there was none in personalized. Okay, those are my questions, thank you. Thank you Mark.

Thank you. Our next question comes from the line of mire shows of KBW. Your line is now open. Great. Thanks, morning.

When you look at, I think, predominantly the regional, maybe the mutual competitors that are out there, is there a sense that they're less able to grow because of their exposure to the same sort of higher attachment points and higher reinsurance costs that are out there?

Yeah, I think it's a great question, Meyer. I think without having full insight into what happened with everybody's one-one renewals, I do think that in many cases those competitors will be more highly dependent on reinsurance.

that certainly, assuming they were loss affected, and even if they weren't, likely under the same pressures as everybody else in the market to raise the attachment point and meaningfully impact the cost. So I would assume that you're seeing a more outsized impact on that group. Now, and I mentioned this, and I think this is indicative of what's happening in the market.

just broadly, it was in my prepared comments and I want to make sure it didn't get lost, is that our January commercial lines pricing was six and a half percent, up almost a full point from Q4. And my sense is, actually more than my sense, it was driven by a pretty meaningful movement in the property line. So I think that's indicative of a shift in the marketplace.

And whether that's smaller versus larger or across the board, I couldn't really tell you, but I think your original point is pretty accurate in terms of where the impact of the insurance renewal has felt more than others.

Okay, no, that's tremendously helpful. And it also, I guess, answers my next question, which is your willingness to add a little bit more net property risk just given pricing conditions.

for commercial property. Sounds like you're saying yes. Yeah, so that's really not how we manage the business in terms of opportunists who are looking line by line. We continue to be a package underwriter. We continue to acquire new business based on the individual risk underwriting and the individual risk pricing guidance. We provide to our underwriters. I think they make really good decisions.

And our growth will be driven more by that individual decision making in the context of the opportunities that are presented that it will be opportunistic around our current few of more pricing is or isn't.

Okay, so that's fair. That's more sophisticated than the way I was looking at it. And it's two quick questions I can. First, is it reasonable to assume that your year end 22 casualty reserves incorporated the 7% trend that you're looking for for 23?

So, now, again, that's a question that's a little challenging to answer. I would say that our casualty reserve position at the end of the quarter continues to reflect our best estimate, as it always has. And I think that God has led us to a point where I cower, and I think, you know, it's difficult for us to say what he has already said. But there are some issues that we've Quite frankly thought about, and I think we might

And we don't plan for this, we don't budget for it, but we have a track record of favorable emergence and casualty that we're proud of. And I think it speaks to the manner in which, and this was part of my response to an earlier question, the manner in which we actually build our forward expectation of loss trend into our casualty loss picks, but that initial casualty loss pick.

is influenced immediately by actual historical loss trend. So the actual changes in frequency severity over the last number of years is your historical loss trend. That sets your starting point for a casualty loss pick. We didn't add that six and a half or six and a half for casualty forward loss trend. I'm sorry, 6% for casualty forward loss trend into a soon loss ratio.

So it's in there on a go forward basis, but the starting point is influenced by your actual historical trick. Okay, no, perfect that helps. And then Mark's second BTDS and get the casted by Audit Line for the quarter.

Sure, certainly. So, going through the different lines of business, starting with standing commercial lines for the quarter and commercial order, 0.8 million and commercial property 29.9.

and BOMP, 9.5 million. That should add up to 40.2 million to the state of commercial lines.

within postal lines, auto 0.9 million, home 3.2, and then property within ENFs 1.4, for a total of 45.7 million for cat losses for Q4.

then postal lines, auto 0.9 million, home 3.2, and then property within ENS 1.4, for a total of 45.7 million for cat losses for Q4. Fantastic. Thank you so much guys.

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

Hi. Going back to the...

loss ratio guidance on an underlying basis, a little bit over 59% for this year. I guess just looking at the non-cap property loss ratio last year trending up a little bit, what sort of expectations for that particular component are y'all thinking for this year, just kind of considering the expectations for loss cost trends versus the...

from pricing environment, just trying to, I guess, understand how property versus casualty contributes to that improvement.

Yeah, it's a good question. The way we disclose the non-cap property loss ratio, it's non-cap property losses that get divided by the total net owed premium. And if you think about 23 expectations versus 22, it's basically flat. So I believe we came in at about 18.4 for the full year across.

Let me just double check that number. 18.3 for the full year across all segments in 2022. And we'd expect that to be basically that our expectation for 2023, better than the guidance is that to be essentially the same. Okay. Thank you.

how considering the lost cost environment, how you're thinking about any potential new business penalty as you work on that pivot towards the mass affluent segment.

Yeah, I'm sure. So as we do in our planning across all lines of business, but in personal lines in particular to your question, we do plan for a different loss ratio for new than renewal. And that's factored into our loss ratio expectations, segment by segment, and that's no different proportional lines.

But I think it's important to keep this in the proper context with regard to our growth whether in new business or total premium and personal lines.

We like the mass affluent segment, but recognize that we're relatively new into this. So our growth, while it looks big on a percentage basis in terms of a real dollar basis, these are not big numbers. We grew the segment by $28 million in the year and for 14 million in the quarter. And new business was 22 million.

and we're showing some really good results relative to our ability to compete in that space. Now, the other important point here is when you look at the loss ratio environment broadly and you look at the loss ratio for us in our personal line segment, I think we acknowledge we've got work to do. And as we've made our way through this meaningful transition from mass market to mass affluent.

and updated our rating plans accordingly, now led to us falling a little bit behind the market in terms of pricing trends. And you saw in the prepared comments, and I'll reinforce this point, the impact of our files.

rates in the nine states that we took action in the fourth quarter was 8.8% and that'll drive what we start to have on a written and ultimately earned basis and I would expect that pace to continue. So more or less to do for a profitability perspective, but I think the other important point is on the homeowner's side, the exposure change we've kept up with.

So we've always had a lot of discipline around getting exposure right in our home book. We've automatically fed through the updates in estimated replacement costs. And the exposure, I feel like we kept pace with it. It was more in the pricing that we needed to do a little catch up on. Thank you. Thank you, Grace. Thank you. At this time, speakers, we show no further questions. You may proceed.

Well, thank you all for joining us. As always, feel free to follow up with any additional questions and look forward to speaking to you in the future.

Thank you. That concludes today's conference. Thank you, everyone, for participating. You may now disconnect.