Q3 2024 Selective Insurance Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by. Welcome to Selective Insurance Group Incorporate 3rd Quarter 2020 for earnings call.
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Speaker Change: Please be advised that today's conference is being recorded. I would like now to turn the conference over to Brad Wilson, Senior Vice President, Investor Relations, and Treasurer. Please go ahead.
Brad Wilson: Good morning. Thank you for joining Selective's third quarter 2020 for our earnings conference call. Yesterday we posted our earnings press release financial supplement and investor presentation on the investor section of our website, Selective.com. Our replay of the webcast will be posted there shortly after this call.
Speaker Change: John Marchioni, our Chairman of the Board, President and Chief Executive Officer, and Tony Harnett, our Senior Vice President and Chief Accounting Officer, will make remarks and address your questions. We're also pleased to have Patrick Brennan, our new Executive Vice President and Chief Financial Officer, join us.
Speaker Change: Our comment here today references non-gap measures we and the investment community use to make it easier to evaluate our insurance business.
Speaker Change: These non-gab measures include operating income, operating return on common equity, but just as both value per common share.
Speaker Change: We include Gapah reconciliation for any reference non-gap financial measures in the financial supplements posted on our website.
Speaker Change: We will also make statements and projections about our feature performance.
Speaker Change: These are forward-looking statements under the private security litigation reform act of 1995. Not guarantees of future performance.
Speaker Change: These statements are subject to risks and uncertainties that we disclose in our annual quarterly and current reports filed with the SEC.
Speaker Change: We undertake no obligation to update or revise any forward-looking statements.
Speaker Change: Now I'll turn the call to John.
Speaker Change: Thanks for adding to morning.
John Marchioni: Before we discuss the quarter's results, I'm pleased to introduce our new executive vice president and chief financial officer Patrick Brennan.
John Marchioni: Many of you are familiar with Patrick from his prior company. He has significant insurance, sex experience, and a deep background in corporate finance. We believe he is ideally suited to lead our finance and investment operations.
Speaker Change: I'll ask Patrick to make a few introductory remarks before we discuss the quarter's results. Patrick?
Patrick Brennan: Thanks, Dan. I'm really excited to be here. I've known of selective for a long time dating back to 2006 when I sent next to Greg Murphy at an investor conference and left not only impressed with him, but also the company he led.
Patrick Brennan: Selective as an industry leader with a differentiated operating model and track record and run way for profitable growth. The company's competitive advantages, strong foundation, and excellent market reputation for why I join the team.
Patrick Brennan: I'm very excited to pardon with John, the other executives on his management team, and our finance team to help lead selective into the future.
Patrick Brennan: I want to thank my new colleagues for their warm welcome and they're eagerness to help. I especially would like to thank Tony for his study leadership at interim CFO and for his generosity and helping me quickly onboard and get acquainted with selective.
Brad Wilson: I know many of you from when I sat in Brad's role at my prior company many years ago and I look forward to meeting those of you I haven't yet met
Brad Wilson: Over the coming months, I'll be speaking with you about how we're allocating and investing your capital and focusing on long-term value creation.
Brad Wilson: Thanks John for this opportunity. It's great to be here.
John Marchioni: Thanks, Patrick.
John Marchioni: I'd like to acknowledge Tony Harnett for his work as interim CFO. He is done an excellent job running our finance team and preparing for this transition.
John Marchioni: Tony will continue to serve as our chief accounting officer and remain a key executive leadership team member reporting to Patrick.
John Marchioni: Let me now turn to results.
John Marchioni: For the quarter, we generated operating earnings per share of a dollar 40 and an operating RRE of 12.1%.
John Marchioni: Given the very elevating to pass review losses.
John Marchioni: that added 13.4 points to our combined ratio. These results highlight our underlying profitability and strong contribution from investment income.
John Marchioni: You're today operating RLE is 4.8%.
John Marchioni: Our full year guidance implies we will deliver an operating ROE in the high single-digit range.
John Marchioni: This is below our 12% target. I merely do our reserving actions in the first and second quarters.
John Marchioni: Alora catastrophe losses of rubber expectations in the first nine months of the year.
John Marchioni: He Ford discussing segment results. I want to reinforce where our team is focused on creating value.
John Marchioni: Priority 1 is delivering combined ratios in line with or better than our 95% target in each and short segment.
John Marchioni: Our tactics vary, due to market dynamics and our competitive position in each segment. When we always strive to be a stable market for our distribution partners and customers, generate a long-term returns for our shareholders, and invest in our business, employees, and communities.
John Marchioni: In recent quarters, we've discussed social inflation and its impact on severity trends.
John Marchioni: We believe these dynamics are impacting both selective and the industry.
John Marchioni: The prudent reserve actions we've taken in recent quarters strengthen our balance sheet and we experience no further prior accident year development this quarter, our total of casualty portfolio and general liability in particular.
John Marchioni: Despite this result, lost transit remain elevated and social and evolutionary pressures persist, demanding our continued underwriting and claims discipline, burdens and execution.
John Marchioni: We continue to leverage our discipline and detailed planning process based on our latest quarterly reserve review and incorporate future pricing and loss trend assumptions to set realistic and achievable perspective combined ratios.
John Marchioni: We update our model monthly with actual previous written and rate changes, allowing us to quickly establish appropriate underwriting and pricing actions.
John Marchioni: The output from our planning process is also used to calibrate our risk selection, pricing, and claims management tools that provide risk-level guidance to our underwriting claims staff.
John Marchioni: The actions we are taking to achieve renewal pure price increases and refine our book of business position us for the future success.
John Marchioni: Selective as long-demistry to these capabilities.
John Marchioni: and I'm confident that we have the tools and teams that execute in this environment.
John Marchioni: As mentioned, achieving our target profitability remains our top priority.
John Marchioni: and Standard commercial lines, we have post-pricing higher, responding to the loss of margins and elevated severity in recent quarters.
John Marchioni: While new business has moderated, we are willing to treat growth for profitability in the current of the most-trended virus.
John Marchioni: For renewal of business, we deliver a meaningful increase in general liability pricing from 7.6% in the second quarter to 10.2% in a third quarter.
John Marchioni: At the same time, we know pure pricing and commercial property was 12% and commercial auto was 10.9%.
John Marchioni: Holding steady with levels reported in recent quarters.
John Marchioni: Our regional teams achieve this renewal pricing while maintaining retention of 86% in standard commercial lines as we look to protect a high quality renewal portfolio and increase our pricing targets.
John Marchioni: Standard commercial lines are dual pure price accelerating this quarter to 9.1% up 120 basis points from the second quarter to 7.9% and 200 basis points higher than a year ago.
John Marchioni: Commercial lines pricing, excluding workers' compensation increased 10.2%.
John Marchioni: Exposure growth added 3.9 points contributing to a total renewal premium change of 13.4%.
John Marchioni: Adding you states and growing in states with lower market share should further diversify our property book and provide ample market opportunities within our existing appetite.
John Marchioni: We added Washington, Oregon, and Nevada as standard commercial line states in early October, bringing the total number of states we have entered since 2017 to 13.
John Marchioni: We now offer standard commercial lines in 35 states.
John Marchioni: Kansas, Montana and Wyoming are the next three states we expect to enter over the next two years.
John Marchioni: After that, our pace of geographic expansion will moderate as we move closer to our goal of operating across the country and our flagship standard commercial line business.
John Marchioni: Across our entire footprint, standard commercial lines net premiums were in group 8% in the quarter, driven by 13.4 points, a renewal premium change.
John Marchioni: Our combined ratio of 99.2 was above our 95% target due to elevated catastrophe losses.
John Marchioni: While no single event was above our net re-insurance retention.
John Marchioni: Hurricane Holi represents a significant portion of total catastrophe losses.
John Marchioni: Despite the variability corner to quarter, we were being comfortable with our net catastrophe exposure, which we managed through strict coastal guidelines, appropriate risk-based pricing, property aggregation management, and our conservative reinsurance program.
John Marchioni: While we price and manage our business based on the all-in performance, we note the underlying combined ratio which excludes these catastrophes.
John Marchioni: was an excellent 87.7, 2.7 points lower than a year ago.
John Marchioni: Access and surplus lines, now representing 12% of net pretty used written, continued its strong performance.
John Marchioni: Netpring is written increased 28% in the quarter, with an 83.2 combined ratio.
John Marchioni: Despite the higher commission's paid in the E&S segment.
John Marchioni: Our Spencer issue of 30.7 in the quarter reflects our investments in building scale.
John Marchioni: Our focus in E&S is on maintaining very favorable levels of underwriting profitability and taking advantage of attractive growth opportunities.
John Marchioni: Personal lines, net praise, written, decreased by 2% in the quarter, reflecting our actions to improve profitability.
John Marchioni: We continue to take significant rate actions and promote growth in areas with rate adequacy.
John Marchioni: So I'miltaniously, we're limiting new business and not redoing underperforming business in state-seeding additional radio purables.
John Marchioni: Reed O'Pure pricing was strong at 22.8% and our average policy size increased by 90% as we shifted towards our target mass-appledance segment.
John Marchioni: The climbing new and renewal policy counts offset those increases.
John Marchioni: Retention of the quarter was 75% down 13 points from the third quarter of 2023.
John Marchioni: Across homeowners, we are growing in the subset of our book where coverage A values are over $500,000.
John Marchioni: We are progressing towards personalized profitability as the quarters underlying and bin ratio improved by 15.3 points, or 12.6, including the impact of NFIP claim handling fees.
John Marchioni: Comparison the third quarter of 2023.
John Marchioni: Nonetheless, we have more work to do and we need highly focused on achieving rate adequacy and transitioning our book toward the mass affluent segment.
John Marchioni: So far, 2024 has been a challenging year.
John Marchioni: I am proud of our team's focus and commitment to executing our strategy.
John Marchioni: Our strong capital position gives us flexibility to manage through these market dynamics.
John Marchioni: Despite the quarter's elevated catastrophe losses, we delivered an operating ROE of 12.1% in why we are targeted. We are confident in our ability to create value as we move forward.
Speaker Change: Let me now turn the call to Tony who will discuss our quarterly financial results in more detail.
Tony Harnett: Thank you, John , and good morning, everyone. We reported fully deluded net income of $1.47 per share in the third quarter and non-GAAP operating income of $1.40 per share. As a result, our year-to-date return on equity is 5% and operating return on equity is 4.8%.
Tony Harnett: Our gap combined ratio was 99.5% in the quarter, including 13.4 points of catastrophe losses.
Tony Harnett: Catastrophies were widespread with 19 events impacting results. Hurricane Haleen was the most significant causing an estimated 85 million pre-tax loss.
Tony Harnett: There was no net prior year casually reserved development in the quarter, modest favorable development of 10 million, 5 million in both workers compensation and bonds, was offset by 10 million of reserved strengthening and commercial oil.
Tony Harnett: The favorable development in workers compensation in bonds was related to accident years 2021 and prior. The commercial auto action was severity driven, related to accident year 2023. As a result, we also booked an additional 5 million of current ear loss costs in commercial auto.
Tony Harnett: As we noted last quarter, our updated familiar guidance reflected our decision to increase the current year loss ratio by approximately 1.5 points reflecting the severity margins we observed in the 2023-23 accident years. This informed our loss ratio selection for the 2024 accident year.
Tony Harnett: To that end, we recorded a 16 million increase to current your loss costs as we earned the corresponding general liability premiums over the course of the third quarter. This run rate adjustment drove the total current your loss cost of 21 million or 1.9 combined ratio points in the quarter.
Tony Harnett: Nonetheless, our underlying combined ratio was excellent and improved 4.1 points from a year ago, mainly due to a 4.4-point reduction in non-cutastory property losses.
Tony Harnett: Property Results are benefiting from renewal to our price increases and modifying coverage terms and conditions.
Tony Harnett: And, it totally, we are seeing lower loss outcomes from implementing cosmetic damage exclusions, higher wind and held deductibles, and roof depreciation schedules. Even with these positive changes, non-contestary property losses are inherently volatile. We assume they will return to a more normal level in the fourth quarter and have embedded that expectation in our full year guidance.
Tony Harnett: National Flood Insurance Program right your own claims handling fees primarily related to Hurricane Haleen, benefited the underlying combined ratio.
Tony Harnett: These these were 4.7 million producing the overall loss in LE ratio by 0.4 points and the personal lines in LE ratio by 4.3 points in the quarter.
Tony Harnett: Our expense ratio in the third quarter was 30.6%, 30 basis points better than a year ago. The expense ratio improvement was due to reductions in expected profit-based employee compensation from our updated view of 2024 underwriting performance.
Tony Harnett: Our investment portfolio remains conservatively positioned, fixed income and short-term investments with an average credit quality of AA- and a duration of 3.9 years represented 92% of the portfolio on September 30.
Tony Harnett: F-attacks net investment income was 93 million in the third quarter of 16% from last year and contributed 13.1 points of our weight. Alternative investments, which report on a 1-quarter lag generated 7.1 million of F-attacks income, up from 5.1 million a year ago.
Tony Harnett: In the third quarter, we invested nearly 800 million of new money at an average pre-tax yield of 5.8%.
Tony Harnett: This increased the six income portfolios overall pretext book yield modestly, ending the quarter at approximately 4.9%.
Tony Harnett: The higher both fields embedded in our fixed income portfolio should provide a durable income source moving forward, even with the 50 basis point reduction in the federal funds rate during the quarter.
Tony Harnett: Our Capital Position remains strong with a gap equity of 3.2 billion and statutory surplus of 2.8 billion.
Tony Harnett: Book value per share, entry 7% from your end, and adjusted book value per share, increased 2%.
Tony Harnett: At the end of the quarter, our death at Capitol Ratio was 13.8 percent, Wilcollo our internal threshold of 25 percent. Given our operating caseloas and borrowing capacity, we have the financial flexibility to support organic growth and execute our strategic initiatives.
Tony Harnett: During the quarter, we repurchased approximately 113,000 shares of common stock at an average price of $84 in 34 cents for a total of 8.7 million.
Tony Harnett: That left 75.5 million remaining under our share-reported authorization at Quarter-End. We expect to continue to use this opportunity to click.
Tony Harnett: With our outlook for continued profitable growth, our Board of Directors declared a quarterly dividend for common share of 38 cents and increase of 3 cents or 9%.
Tony Harnett: For 2024, we now expect our Gap Combine Ratio to be 102.5% up from our previous guidance of 101.5%.
Tony Harnett: The one point increase reflects our higher catastrophe loss assumption, which is now seven and a half points.
Tony Harnett: Better than expected, non-cattastory property losses in the third quarter, partially offset this. Leading us to reduce the full year underlying combined ratio by 1.90%.
Tony Harnett: It is too early to provide a specific estimate to Hurricane Milton, but based on its path, our Minimal Exposure in Florida and very early claims reporting, we expect our losses from the event will be immaterial.
Tony Harnett: Consistent with our typical process, we assume no additional prior casters of reserve development.
Tony Harnett: Our after-tax net investment income estimate of 360,000,000, including 32 million from alternative investments remains unchanged.
Tony Harnett: Our guidance includes an overall effected tax rate of 21% with a 20.5% effected tax rate on investments and 21% on all other items.
Tony Harnett: Fully polluted weighted average shares are estimated to be 61.5 million and we make no assumptions for share-re purchases under our existing authorization.
Speaker Change: Before we get to questions and answers, I would like to take this opportunity to thank John , the rest of the executive leadership team, and the board of directors for their unwavering support over the past year. After 25 years of service, it was an honor and a privilege to serve as the company's interim CFO .
Speaker Change: It has also been a pleasure telling the selective story and getting to know so many of you in the investor community.
Speaker Change: As I turn my focus back to being the Chief Accounting Officer, I would like to take this opportunity to officially welcome Patrick to the Selective Team.
Speaker Change: With that, I'll ask the operator to please start our question and answer session.
Speaker Change: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. And please stand by what we compiled the Q&A roster.
Speaker Change: And the first question comes from Michael Phillips with Up and Hymmer. Your line is now open.
Michael Phillips: Good morning. Thanks everybody. I guess it was going to have this question and then I definitely want to ask that for Tony's comments on some commercial auto stuff. So it's, I guess, for clarification, sounds like you added 10 to the current year. I just want to confirm that, right Tony?
Tony Harnett: Yes, that's correct, $10 million for a lot of those current acts in here Okay, so my question would be I guess given I guess given the nature of comments over the last few quarters Not just for you guys of course, but from everybody else on the impacts of social inflation
Tony Harnett: I guess maybe help us get comfortable with.
Tony Harnett: The extent to which that could spread more to commercial auto. You took 10 last quarter, 10 this quarter. I think it took 10 last quarter, pretty sure, and then 10 this quarter. So just help us get comfortable on the commercial auto reserves and the extent to which.
Tony Harnett: and what we saw for GL may not spread over, because it's still 20 million, it's pretty small for the size of your commercial auto-book.
Speaker Change: We need to look for GLs and pretty extensive. So, you have to take a couple of minutes to show out of reserve, I guess, what's the difference is that across the question.
Speaker Change: My thanks for the question. This is John. I can start on that. I guess a couple of things and I believe we've highlighted this before. I think the trends
Speaker Change: We've seen it from Ursulato have been persistent for longer. We saw them start earlier and we've seen them persist.
Speaker Change: and to your point, the actions we've taken.
Speaker Change: On prior year, are relatively small and largely focused on the 23 accident year driven by
Speaker Change: And much like we did in GL last quarter, when we saw some small movement in the most recent prior year we opted to make a small adjustment to the current year. But the difference here is these trends that we pointed out with regard to commercial auto have remained relatively stable, albeit elevated.
Speaker Change: and that's been for an extended period of time. But if you look at the pricing and commercial auto, and this is a selective comment, as much as it is an industry comment.
Speaker Change: Commercial Model pricing has been a lot stronger for a lot longer. Our commercial model pricing even in the current year.
Speaker Change: is 10.9% in the quarter, 10.7% on a year-to-date basis.
Speaker Change: and if you strip out the prior year emergence and look back over the last couple of years on an accident in your basis, up and through this year, that line's running for us.
Speaker Change: right around the 98.
Speaker Change: and you've got strong and great coming through there. So I view it very differently than I do, PL, which is the emergency in PL from a severity perspective has been more recent.
Speaker Change: and evidence more recently were as you had a longer term.
Speaker Change: track record in auto that's been responded to from a pricing perspective on a more consistent basis.
Speaker Change: And my good story, just one point of clarification on the commercial auto of the prior development was 10 million and it was 10 million last quarter for prior development. The current year of year actions was actually 5 million.
Speaker Change: Okay, yep, right. Thank you. Ben, thanks for the comments. That's helpful. I'll make some. I guess let's take that maybe this more broadly on social inflation. Jon, you know, you're not unlike others who have talked about it for a while and I think the difference is that, you know, you've taken some pretty significant charges. Good, good, that you've got on my, I think to your track record of what I know about Selectives, you see, you take it really, we hear the company's, we haven't really, to me, we haven't seen the extent to which you've taken G.O. And so the question then becomes. Thank you.
Speaker Change: Do you think that how confident are you that what you've seen isn't just a microcosm of what you write and more specific to your book of business and maybe won't be widespread for the industry or if it is, then just a matter of time to everything else happens for everybody else. Thanks.
Speaker Change: Yep, so again I appreciate the question. The first thing I'll say is when your book is as stable as ours is.
Speaker Change: and you look at our portfolio over a long period of time.
Speaker Change: It's incredibly stable from an industry classification perspective, from a limits profile perspective.
Speaker Change: and even from a geographic perspective, and while we've expanded our footprint.
Speaker Change: the portfolio distribution from a geo-perspective remains relatively stable. And then you look at the pricing diagnostics on a new and renewal basis and you see a lot of stability there. It's something external that's pushing those average severity's higher.
Speaker Change: and I know I've pointed to this in the past while there's some.
Speaker Change: Jurisdictional Challenges in our footprint that I pointed out in particular states like Georgia and like New York and certain parts of Illinois. There are a number of jurisdictions not in our footprint like California, Texas and Florida that have been driving a lot of the nuclear verdicts and a lot of the active attorney engagement.
Speaker Change: that are also, you know, sort of industry-wide trends.
Speaker Change: This is not in a class specific.
Speaker Change: Environmental Shift.
Speaker Change: Any time you have a bodily injury claim.
Speaker Change: Whether that bottle injury claimed is in a construction class, or is in a retail class, or a manufacturing class.
Speaker Change: A bodily injury claim is what puts you in this environment where you have social inflation, higher litigation rates.
Speaker Change: You've got jury pools that are more willing to give out higher wards.
Speaker Change: and that's why I think we're pretty confident that this is in fact an industry-wide trend.
Speaker Change: Now, with regard to the reserveing actions, if you look back over the last several years, the GL line for the entire industry has emerged extremely unfavorably, primarily for the years, action in the years 2020 and prior. And I think on a full industry basis over the last three or four years, that adverse emergence has told somewhere in the neighborhood of $18 billion.
Speaker Change: and it's been pretty consistent. What you haven't yet seen is those more recent years emerge unfavorably and every company is going to be different. Every company has a different portfolio, everybody, every company has a different planning and preserving process.
Speaker Change: But I think it's instructive if you look company by company at where the 19 and prior years are currently.
Speaker Change: for GL.
Speaker Change: and assume they're relatively mature.
Speaker Change: and then project that forward by looking at what those companies have to close in terms of their forward loss trend assumption and what they've earned.
Speaker Change: and on a rate basis and take, you know, exercise your own judgment as to whether or not you think that all hangs together. And I think from our perspective, with the actions we've taken in the more recent years, and our updated view of Lost Trend.
Speaker Change: As well as how we're pricing on a GoFore basis is the right approach for us, and that continues to be our focus.
Speaker Change: Okay, now thank you John for all that it's very helpful. I guess congrats on the Patrick and thanks to Tony for all your help and the past year.
Mike: Thanks Mike.
Speaker Change: and the next question comes from Michael's Arimstee with the MO, your line is open.
Michael's Arimstee: Hey, thanks. Good morning. Now, maybe first question is sticking to or going back to commercial auto. I know Patrick Brennan just congrats by the way. He just started on October 1st, but progressive obviously has one of the preeminent commercial auto writers in the US. I'm just curious, did the work the charges taken as quarter or the addition to reserves on commercial auto? Is that due to a reserve study that Patrick was a part of or is Patrick going to be doing a deep dive in the coming months? Is he gets more acclimated to the company?
Michael's Arimstee: Yeah, so this is John and I appreciate the question. I know there's been a lot of speculation and discussion around this and I think it's important to reset our process.
Michael's Arimstee: First of all Patrick Joind on October 1st.
Michael's Arimstee: and we're thrilled to have Patrick on board and Patrick certainly has a strong background and a set of experiences that are added to the team and to the process and while we're competent in our processes, we're always looking for opportunities to refine it. But I think it's also important to restate the approach we've had.
Michael's Arimstee: For a long time, I see one time I'm talking decades.
Michael's Arimstee: that predate my role with the company 26 years ago when I started.
Michael's Arimstee: which is our reserve in process first and foremost.
Michael's Arimstee: The Chief Actuary in our organization and the current Chief Actuary of Insenia has been here for a long time and was prior that we'd reserved an actuary.
Michael's Arimstee: Chief Actuar reports to the CEO in our organizational structure and is appeared to the CFO.
Michael's Arimstee: and has heavily involved in the management decision relative to reserves alongside of the CFO and the CEO.
Michael's Arimstee: Tony and his role prior as chief accounting officer and then serving as the interim chief financial officer has been heavily engaged and involved in that process over the long term.
Michael's Arimstee: and it, I realize there's been speculation about the CFO change, but the way our process has worked has always worked and will continue to work.
Michael's Arimstee: There are multiple people myself included that have been involved and continue to be involved in that process that have a voice.
Michael's Arimstee: and weigh in on those decisions. With regard to commercial oil in particular, I think Patrick's background is going to be beneficial, and as I said earlier, his voice and his experience will be instrumental in those decisions we make going forward. But the process has been very consistent at our organization.
Speaker Change: Taylor's helpful. Thank you.
Speaker Change: May be going to the Standard Commercial Line underlying law ratio, you know, one of the best sort of line rate.
Speaker Change: and then...
Speaker Change: and years. You called out, you know, we can see your good disclosure on non-catastory property losses, you know, benefiting. So just kind of just want to make sure we're thinking about the right way, you know, we should we be kind of averaging non-catastory property losses over longer, longer periods of time. And is there a similar to the catastrophe load? Is there kind of an upward spend to to non-catastory property losses and total cat losses as we kind of think about the trend line there? I just want to feel to see if you're telling us not to run right the underlying this quarter.
Speaker Change: Yeah, I guess a couple of things in tonic and certainly weigh in as well. I think your starting point and we give you a lot of disclosure around trend and in more recent years we've been breaking that trend assumption down in between property and casualty and for 2024 are all in trend assumption of 7% assumes a property trend that was closer to 4%.
Speaker Change: and we're earning rate in the commercial property line in particular at around 12% if you look at last year, 2023 in the current run rate this year.
Speaker Change: of 2024, a little over 12% plus whatever portion of exposure pick up that you want to view as as profit-positive, margin-positive.
Speaker Change: We generally don't, we just focus on the rate number, but there's a positive gap there that continues to earn its way through.
Speaker Change: So I think there's a clear benefit there on the commercial and now we're starting to turn the corner on personal property.
Speaker Change: that impacts that. On the cat side, as you've seen from us, our expected cat loads have been going higher over the last several years and continue to move higher in our assumption for 2024 so far. That gets built into our forward pricing assumptions. You know, if you look at it for us, I think we've seen more volatility in the quarterly and annual cat loads for the personal lines book and we have for commercial. Well, commercials got higher. The range around variability in cat loads for commercials has been a little bit tighter or a fair amount tighter than it has in personal lines, but there's a pricing dynamic to that as well.
Speaker Change: Yeah, the only thing I would have added, Jon, was just I'd agree that the pricing has had a positive impact on the non-cap property, but obviously there's some normal variability there as well. So I think the way you describe taking a look at multiple periods and averaging them would be prudent. In fact, when you look at overall guidance, we expect a more normalization of non-cap in the fourth quarter, which is embedded in the guidance we've put out there. So I think your approach sounds reasonable.
Speaker Change: Okay, that's very helpful. I'm just lastly quickly on the personal INC flood of clean handling fees to those who continue to trickle into the Q4 and our next year.
Speaker Change: Yeah, I mean, I think on all most of them, I think we have to estimate it and contain to the current quarter, so I believe the number we put out for the current quarter is accurate. And there won't be much, if any, real bleed into the fourth quarter. And with regards to Milton, like we said, it's pretty immaterial, so we don't expect there to be much with regards to that particular storm and flood fees either. And there's a normal claim blood volume that is in our results yearly, but when you have these bigger events, you get a little bit of a higher impact from the claims revenue portion of that operation.
Speaker Change: Thank you.
Speaker Change: and the next question comes from Paul, new some with paper sand or your line is open.
Speaker Change: Tom, it's clearly in it.
Speaker Change: Kelly Gory, curious.
Speaker Change: The hurricane relief losses, if you pull those out with the cat load, these are roughly the normal zone. And if you have any other questions, I'm just curious if you thought about the mix of hurricane healing and from your perspective it was.
Speaker Change: I think it's a pretty typical for those swans just feeling they do.
Speaker Change: Yeah, so just with regard to the impact and I think we had some of this in the prepared comments, the overall impact on the quarterly cat load, or combined ratio of 7.6 points. So if you back that out, you know, it's a slightly...
Speaker Change: Above average quarter, you know, call it all at 6 or 5.8.20. So it's a relatively inline quarter.
Speaker Change: I think, and you've seen it already that the industry lost estimates for Haleen have been going higher as the storm has aged and I think it was underappreciated.
Speaker Change: with that storm is, well, there was all the focus on the, on the landfill and the big van region. The size of that windfield and as far into the, the southeast as that windfield had penetrated by the time the I made landfill.
Speaker Change: I think has generated a lot more wind-driven losses and devastation to a number of areas in Georgia, South Carolina and North Carolina. And from that perspective, it wasn't a coastal event. A lot of those impacts were felt pretty far inland. So I think that's where maybe a little bit of the misses in terms of the overall expectation for the size of that loss. And you know, we have a loss at the end of the quarter. Our focus is on getting the estimate right and getting the cat loss in the right quarter. And we've got a pretty disciplined process around that. So we feel good about the estimate. We have a 85 million for the Hurley and in total.
Speaker Change: And then maybe just one question in addition. If we think about what you're doing, some pricing, competitive perspective and the changing business that you mentioned, are we going to see or do you think you expect to see more of a shift in the business mix towards property within selective? Or do you think that at the end of the day it will kind of end up being a fairly similar mix of what you're doing? We're going to see what you're going to do. We're going to see what you're going to do.
Speaker Change: today's perspective.
Speaker Change: Yeah, I think you're likely to see a shift.
Speaker Change: towards home.
Speaker Change: But I don't think it's the magnitude's going to be all that significant. First of all, he is your average home premium continues to be much higher than we've seen historically just because there were placement costs.
Speaker Change: are meaningfully higher. I think when you look at the competitor set and the market we're targeting, think there's fewer competitors with the product offering for the mass apple and market, like we have, there are certainly some, but there are fewer competitors there, whereas the auto space continues to be much more competitive and serve by a broader competitor set. So I think both of those combined in past what likely lead towards a little bit of a shift towards home as a percentage of the overall mix.
Speaker Change: Appreciate the help as always, thank you guys.
Speaker Change: Thank you, Paul
Speaker Change: and the next question comes from Scott Helionette with RBC Capital Market. Your line is open.
Scott Helionette: Yes, good morning. I'm just curious, you guys used to give out the rate differential between your your best performing counts and kind of your lowest performing accounts. I want to know if you had that data available now. You're able to share, I'll just curious how that's kind of changed over the past year that kind of spread.
Scott Helionette: If you have that, if not, that's fine too.
Speaker Change: and I don't know if we... if we...
Speaker Change: Posted the updated investor presentation. We have the investor presentation. It's in there every quarter on an updated basis. We've had that in there for probably at least a decade now.
Speaker Change: That I would say overall, you see a pretty consistent pattern with regard to average rate by retention bucket and then retention by those those same tranches and you see a path that shows as the rate has gone higher. While the entire curve has gone higher with regard to to cohort, it certainly you see a higher rate level and therefore a lower retention. And for that worse, 10% when I say worse, based on expected forward loss ratios, so you've seen a little bit more tilt in that direction. But that is available on the investor presentation.
Speaker Change: in 2015 of the Investor Package if you're looking for it. And then just curious on the rate trajectory in personal lines that's been on the rise. Some of the others have talked about that, potentially decelerating a little bit from here. So I'm just, I'm curious what you're expecting in your book for 2025 based on your filed rate increases and how you're kind of balancing that with retention, how you're just thinking about that overall as you build out the high net worth business.
Speaker Change: Yeah, so we, you know, on a state-by-state basis, we're updating our pricing indications on a very regular basis and filing accordingly, I think, as you look.
Speaker Change: You see the blended rate number of 22.8% for the quarter.
Speaker Change: and obviously there's some significant variant state by state and certainly a few states that have still had some regulatory hurdles to getting approvals on the adequate rate level. But as we update those indications and update our forward view of lost trends, that'll drive our rate indications and we're going to continue to file our indications.
Speaker Change: and so we achieve that target combined ratio on a run rate basis. I'm not going to give you at this point a 25 rate expectation number, but certainly getting to rate adequacy on a state-by-state basis is the objective. And based on what we've filed, we have a number of states.
Speaker Change: that are at rate adequate at this point, and we expect that's where the new business growth will be coming from going forward in the states that aren't rate adequate. We've taken actions.
Speaker Change: to slow or completely curtail the flow of new business in those states.
Speaker Change: So I guess that's how I would describe it in terms of where we are and then obviously you've seen this strong improvement in underlying combined ratio. There's more work to be done there and a lot of that work will be done by the earning of the rate that you're currently seeing on our written basis through the balance of 2025.
Speaker Change: Okay, that's helpful detail. And just the last one I have was just on the lost trend in GL, was there any change on that? I think it was 9% in the second quarter, is that still running around that same rate? Any change there? Yeah, I would say there's no change in our trend assumptions and based only see and we took it through last quarter, both historical trend for the more recent accident years and our view of forward lost trends are stable from last quarter.
Speaker Change: God, thanks.
Speaker Change: Thank you.
Speaker Change: And our next question comes from Grace Carter with Bank of America. Your line is open.
Grace Carter: Hi everyone!
Grace Carter: I'm looking forward to seeing you in this good morning, I'm looking at retention in the standard commercial book this quarter. It hung in there very well even with the pre-material step up and overall renewal.
Grace Carter: Rate increases. So I guess I'm just kind of wondering if you could update us on sort of your distribution partners reactions to the rating increases you've been taking and if you expect retention to continue to to be able to stay at these levels over the next few quarters as you continue to go through these rate actions. I mean, it sounds like, you know, all of your peers are kind of reacting and shares and concerns on social inflation. And so forth, but I just kind of wanted your your updated views on that.
Speaker Change: Yeah, thanks Grace.
Speaker Change: So I guess it's important to recognize that our, the rate that we're talking about here is not a dramatic shift from where we've been running. Yes, the movement in GL has been pretty substantial and we think appropriate getting up to 10%, but on an overall basis, you know, we're at, we're at a little over 9% in the corner for commercial and a little over eight out of year to date basis.
Speaker Change: and yes, it's a move but it's not a move that creates so much disruption that it should have a substantial impact on retention. Now, that's purely speculation at this point. There's a market dynamic that will come into play here and I think that's something that will evolve over time. I will say that from a new business perspective.
Speaker Change: the GL pricing environment for new.
Speaker Change: is not necessarily as conservative as maybe some of the rhetoric which suggests in the marketplace.
Speaker Change: So the talk of social inflation is pretty consistent. The view of elevated lost trends is pretty consistent across the market, but I think there are still pockets of pretty significant competition on GL by a number of market participants. I don't know how that plays out in coming quarters, but the comments I made earlier about being at a point where our pricing objectives and our profitability targets are objective one. And if that creates a little bit of a growth trade for us, we're comfortable with that. And I think that's an important point. Now that said, when you look at the investments we've made in adding production outlets.
Speaker Change: through geographic expansion, through new agency appointments, deploying of additional resources, even if hate ratios come under pressure because our pricing stance might be more conservative than the rest of the market at this point. The addition of production outlets, I think, gives us continued path for growth and opportunity for growth on a go-forward basis.
Speaker Change: So, I complicated answers to a pretty direct question. I apologize for that, but it's a dynamic environment.
Speaker Change: Thank you. And then I guess on premium surplus, it's still a little bit above kind of the long-term target range. I guess is there a particular kind of trajectory that you'll see that, or a particular timeline that you'll see that kind of naturally returning to the target range and how much of a priority is getting that back to sort of that 1.35 to 1.55 times or is this just...
Speaker Change: One metric out of many that you'll look at and doesn't really matter.
Speaker Change: Yeah, so it's certainly it's a metric that we measure and we talk about so it matters but your point is spot on Grace which is it's one of several metrics relative to capital adequacy and obviously the biggest drawback in pre the surplus ratio is the fact that it doesn't account for holding company capital and obviously when you put that into the mix I think that's why the other capital metrics are strong as they are so again our expectation is to be in that range or desire range over time and we see a path to getting back into that range but that could be cured relatively immediately or essentially immediately into you know based on incorporating holding company capital.
Speaker Change: So it is a metric that matters but it is always viewed in the context of forward earnings potential and how other capital metrics stand.
Speaker Change: Oh.
Speaker Change: and the next question comes from my ear shields with Keith, Brut and Wood. Your line is open.
Speaker Change: Great, thanks and good morning. Two, I guess, questions on property losses. And I know you talked about this a little bit, but it was a little bit, but it was a little bit of a little bit of or talk about how you determined that the lower than expected non-tapped weather, the best not a function of the fact that there were a lot of cat losses, maybe pushing losses above the threshold.
Speaker Change: Yes, of it, this is...
Speaker Change: Let me just be clear, this is not non-cat weather only, this is non-cat property losses in total.
Speaker Change: That includes commercial property, personal property, whose auto-physical damage.
Speaker Change: and generally speaking there shouldn't be a consistent definition of what's going on.
Speaker Change: Warracats, which we do in this PCS designation for us.
Speaker Change: They should be relatively independent of each other.
Speaker Change: and there's a frequency and a severity component to your non-CAT property losses, which is what creates the variability that we've talked about historically, but there shouldn't be a favorable impact on non-CAT property when you have a higher cat loss quarter or a year. And to that point, I would just say that the two biggest lost types are auto as Jon referred to and the other would be fire losses and the two of those generally make up if you look at your date about 70% of the non-CAT property.
Speaker Change: Okay, that's very helpful. Thank you. Second question, when you thought a quarter like this with all of it, a catastrophe losses, there is quantifying maybe the impact on incentive compensation either to employees or to agents.
Speaker Change: Yeah, so I guess the first thing is our incentive compensation program for employees.
Speaker Change: is driven by Combine Ratio All-In. So we don't exclude cat losses. So a high cat year will put downward pressure on the 50% of the incentive compool that's driven by financial performance in the current year. So we don't strip that out.
Speaker Change: and I would say the same thing applies.
Speaker Change: With regard to agency compensation, our our profit sharing plan for agents includes a one year and a multi year profit component.
Speaker Change: Now, there's always a lag, and a lot of the heavy cat losses in a given quarter are going to be an IV&R, especially when it happens when the event happens at the end of a quarter. But ultimately, those payments come through. There is an individual catastrophe event cap for individual agents that mitigates some of that, but it certainly does impact profit sharing payouts. What do you have large events? Yeah, and just a tie together, the 30 basis point improvement in the expense ratio and the quarter and the almost one point for the year day is heavily driven by the employee compensation and the variability of that, as John mentioned.
Speaker Change: Okay, perfect, this one I knew, thank you so much.
Speaker Change: As a reminder to ask a question, please press star 1-1 on your telephone. The next question comes from Matt Carlady with Citizen's JMP, your line is open.
Matt Carlady: Thanks, good morning.
Matt Carlady: First question, and past quarters, you've given paths by line within standard commercial. Do you have the handy for the 100 million or so of paths of this quarter?
Speaker Change: Yeah, the property is 93.7 million. The Bob was 4.4 million in the commercial auto was 2.3 million for the total commercial lines of 100.4.
Speaker Change: All right, great. Thank you. And then my next question, a little more, a kind of longer-term specific to standard commercial, sorry, standard personal lines. Once you get past the profit improvement actions, can you just, what do you see over the next several years in terms of where you'd like to take that business? It's roughly 10% of the pie today with a relatively small state footprint. That basically kind of the size and scale that business that you hope to kind of just maintain at good profitability longer term. Or is this something that you hope to grow a little more? You know, maybe that includes extended footprint. Maybe that's just more penetration in states you already have.
Speaker Change: Yeah, now, thanks Matt. It's a great question. And again, I'll characterize this just as you ask the question, which is sort of a longer-term view. So near term, our objective is to prove that we can in fact compete successfully in this target market. And I think we're showing the signs of doing that. But when you think about having a business that targets a smaller, addressable market, which is what we're doing, I think you want to make sure that you're tapping into that smaller, addressable market. It is as maximum way as possible, which means state expansion. And I think there would clearly be opportunities for us.
Speaker Change: to address that market better by spanning our footprint. But again, that's the second step. The first step is the execution in our existing states. And I think we're on a pretty good path here to prove that we can be a strong competitor there. And then we'll start to invest in potentially expanding the footprint of that business. Again, in a disciplined way, because we also are always going to be mindful of the overall cat profile, cat exposure profile of the entity in total. So I think we would look to expand that while creating a more diversified book from a cat exposure perspective as well.
Speaker Change: Okay, great, that's very helpful. Thank you for the color.
Speaker Change: I show no further questions at this time. I would now like to turn the call back over to John for closing remarks.
John Marchioni: Well, thank you all. Again for joining us. We appreciate your time, appreciate your interest and your questions. And as always, if you have any follow-ups, please feel free to reach out to Brad. Have a nice day.
Speaker Change: This does conclude today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Thank you for watching.
Speaker Change: Thank you for watching.