Q4 2024 Selective Insurance Group Inc Earnings Call
[inaudible]
Speaker Change: Good day and thank you for standing by. Welcome to Selective Insurance Group Inc. fourth quarter
2024 Earnings Conference Call.
Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star-one-one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star-one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Wilson, Senior Vice President, Investor Relations and Treasurer. Please go ahead.
Speaker Change: Good morning. Thank you for joining Selective's fourth quarter and full year 2024 earnings conference call.
Speaker Change: Yesterday, we posted our earnings press release, financial supplement, and investor presentation on the investor section of Selective.com. A replay of the webcast will be available there shortly after this call.
Speaker Change: John Marchioni, our Chairman of the Board, President and Chief Executive Officer, and Patrick Brennan, Executive Vice President and Chief Financial Officer, will speak about results and take your questions.
Speaker Change: Our commentary today references non-GAAP measures we and the investment community use to make it easier to evaluate our insurance business.
Speaker Change: These non-GAAP measures include operating income, operating return on common equity, and adjusted book value per common share.
Speaker Change: We will also make statements and projections about our future performance.
Speaker Change: These are forward-looking statements under the Private Securities 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. We undertake no obligation to update or revise any forward-looking statements.
Now, I'll turn the call to John.
John Marchioni: Thanks, Brad, and good morning. 2024 was a challenging year. Our operating ROE of 7.1% was below our 12% target, but we ended the year with a strong capital position and the financial flexibility to execute our strategy of disciplined profitable growth.
John Marchioni: Our actions to strengthen our casualty reserves, coupled with our solid underlying profitability, have positioned us well to meet and exceed our return targets in the years ahead.
For the year, we grew net previews rated by 12%.
John Marchioni: Delivered an underlying combined ratio of 89.4 and increased book value per share by 6%. Investment performance was strong with after-tax net investment income of $363 million that contributed 12.8 points of return on equity.
Transcription by ESO. Translation by —
John Marchioni: We advanced important strategic initiatives in 2024, including adding five states to our standard commercial lines operating footprint, achieving significant repositioning and personal lines, and enhancing our technology foundation to support excess and surplus lines.
Transcription by CastingWords
John Marchioni: Our combined ratio for the year was 103, up 6.5 points from 96.5 in 2023.
John Marchioni: The underperformance relates to our reserving actions addressing elevated severities in recent accident years, particularly in general liability.
John Marchioni: Social inflation remains a headwind for us and the industry. We've extensively discussed this in previous quarters and continue to operate in an environment where lost trends are elevated.
John Marchioni: In the quarter, we strengthened prior year casualty reserves by $100 million and added $47 million to the current accident year above our original guidance.
John Marchioni: In 2024, we took casualty reserving actions totaling 411 million with 311 million or 7.1 points on our combined ratio related to prior accident years.
John Marchioni: Our 2024 actions were predominantly in general liability for accident years 2020 and subsequent, primarily impacting 2022 and 2023.
John Marchioni: Recognizing these trends over the course of the year, we increased our 2024 accident year losses by 100 million relative to our original guidance, adding 2.3 points to the combined ratio.
Patrick will go through these actions in more detail.
Patrick Brennan: Combined ratio is the primary success measure for our insurance operations.
Patrick Brennan: Our 2024 underlying combined ratio, which excludes catastrophe losses and prior year casualty development, was 89.4, a 90 basis point improvement from 2023.
Patrick Brennan: The personal lines underlying combined ratio improved 9.6 points in 2024, as we implemented significant price increases, took meaningful underwriting actions to address underperforming business, and continue transitioning to the mass affluent market.
Patrick Brennan: We remain comfortable with the overall composition and quality of our underwriting portfolio, despite the adverse emergence in general liability.
Patrick Brennan: While rate increases will continue to be our primary focus for profitability improvement, we also have been making underwriting refinements.
Patrick Brennan: including managing limits and coverage grants and challenging jurisdictions, driving improved terms and conditions, and focusing production on better performing classes of business.
Patrick Brennan: Consequently, new business growth and commercial lines moderated in the past two quarters.
Patrick Brennan: This quarter's commercial lines renewal pure pricing of 8.8 percent and retention of 85 percent were both in line with last quarter's results.
Patrick Brennan: Exposure growth added 3.8 points contributing to our total renewal premium change of 12.9%.
Patrick Brennan: Commercial lines pricing, excluding workers' compensation, increased 10.1%, the same as in the third quarter. Renewal pure pricing and commercial property was 11.3%, and commercial auto was 10.7%.
Patrick Brennan: General liability renewal peer pricing was 10.6% up from 10.2% in the third quarter, 7.6% in the second quarter, and 6.5% in the first quarter.
Transcription by ESO. Translation by —
Patrick Brennan: Excessive surplus lines delivered a strong year with 29% growth exceeding 500 million of net premiums written for the first time.
Patrick Brennan: The 2024 combined ratio was 89.7, including four points of prior year reserve strengthening.
Patrick Brennan: We continue to pursue technology and automation investments to increase E&S scalability.
Patrick Brennan: While growth has been robust and we continue to see continued market opportunity, we remain mindful of social inflation's broad-based impacts.
Patrick Brennan: As a result, we continue to build higher severity increases into our E&S loss picks.
We also achieved strong price changes in recent years.
Patrick Brennan: While these higher severity assumptions held up relatively well, 20 million dollars of our prior accident year booking actions were from this segment.
Patrick Brennan: Growth in brokerage, our middle market E&S business, along with rate and exposure increases, drove the average E&S account size from 4,600 at the end of 2023 to approximately 5,300 at the end of 2024.
Patrick Brennan: While the average premium size increased, our appetite is generally unchanged, and we are comfortable with the pricing, terms and conditions, and mix of business.
Patrick Brennan: Our 2025 guidance incorporates strong overall profitability assumptions for the ENS segment.
Patrick Brennan: In personal lines, net premiums are at an increased 4% for the year.
Patrick Brennan: However, we saw a 3% decrease in the fourth quarter. Our strategic repositioning and significant actions to improve personalized profitability contributed to a combined ratio of 91.7 per quarter and 109.3 for the year. Both are meaningfully better than the prior year.
Patrick Brennan: 2024's underlying combined ratio was 89.3, with a quarter at 86.
Patrick Brennan: Renewal pure price increased 27.3% for the quarter and 20.6% for the year.
Patrick Brennan: In states where we have filed and received approval for adequate rates, we are focusing on growth in the mass affluence segment.
Patrick Brennan: With the actions we have taken, we expect Perth & Lyons will produce an underwriting profit in 2025.
Patrick Brennan: In summary, our team responded well to 2024's challenges, improving our position for 2025. In this uncertain environment, we are focused on rate and non-rate actions to drive underwriting profitability while prudently growing the business.
Patrick Brennan: I'll now turn the call over to Patrick, who just completed his first full quarter at Selective.
Patrick Brennan: This significant insurance experience and deep background in corporate finance has added a new perspective to our executive leadership team, significantly enhancing our ability to manage the challenging environment and restore our profile of strong and consistent underwriting results.
Speaker Change: Thanks, John, and good morning. We reported $1.52 of fully diluted EPS in the fourth quarter and $1.62 of non-GAAP operating EPS.
Speaker Change: This produced a return on equity of 12.7% and an operating return on equity of 13.5%.
Speaker Change: For the full year, fully diluted EPS was $3.23, and non-GAAP operating EPS was $3.27, down 44% from a year ago.
Speaker Change: Return on Equity was 7.0% and Operating Return on Equity was 7.1%.
Speaker Change: This was disappointing after 10 consecutive years of double-digit operating ROEs.
Speaker Change: However, we think the actions we've taken in 2024 position us to quickly return to meeting or exceeding our ROE target. Our gap combined ratio for the quarter was 98.5%, including 8.8 points of prior year reserve strengthening.
Speaker Change: Catastrophe losses reduced the combined ratio by 90 basis points due to very low event frequency and reduced loss estimates for prior period catastrophes.
Speaker Change: The third quarter $85 million Haleen estimate has held up well.
Speaker Change: For the full year, our combined ratio was 103, 7.5 points higher than our original guidance.
Speaker Change: Catastrophe losses of 6.5 points exceeded our original guidance by 1.5 points, and prior year reserve strengthening added another 7.1 points to the full year combined ratio.
Speaker Change: The 2024 underlying combined ratio of 89.4 was 110 basis points better than our original guidance.
Speaker Change: The expense ratio and non-cab property losses were favorable by almost 3 points, but the current accident year casualty loss ratio was unfavorable by 1.9 points.
Speaker Change: Reserving actions accounted for 2.3 points that were partially offset by business mix changes.
Speaker Change: The expense ratio for the year was 30.6%. Our 2025 guidance assumes that the expense ratio will increase to approximately 31.5%, partially due to greater profit-based compensation from expected underwriting improvement.
Speaker Change: We remain focused on expense discipline while investing to support our strategic objectives.
Speaker Change: Turning to reserves, in the quarter, net prior year casualty reserve strengthening was $100 million.
Speaker Change: At the line level, $25 million of favorable prior-year workers' compensation development was more than offset by strengthening of $100 million of general liability, $20 million in E&S, and $5 million in personal auto. There was no commercial auto development in the quarter.
Speaker Change: We booked $47 million of increased current accident year loss costs in the fourth quarter compared to our original guidance. This included 41 million or 14.4 combined ratio points in general liability and 6 million or 4.2 combined ratio points in E&S.
Speaker Change: The quarter's $47 million increase builds on the third quarter's $21 million increase, the second quarter's $28 million increase, and the first quarter's $4 million increase.
Speaker Change: Our 2024 accident year actions are predominantly in general liability and driven by movement in recent prior accident year severity, as 2024 frequency emergence has met our expectations.
Speaker Change: We believe these actions are prudent considering the elevated uncertainty in the external environment and its impact on our reserving diagnostics.
Speaker Change: We will continue to respond to emerging information, incorporate our view of risk factors, and book our best estimate.
Speaker Change: These relatively small factor changes are applied to all accident years.
Speaker Change: Run rate profitability in this line, for us and the industry, continue to be impacted by significant negative bureau filed rate changes, even as favorable prior year development benefits results.
Speaker Change: After-tax net investment income for the fourth quarter was $97 million, up 24% from a year ago.
Speaker Change: For the year, after-tax net investment income was $363 million, slightly above our 2024 guidance of $360 million, and up 17% from 2023.
Speaker Change: We invested $683 million of new money during the quarter at an average pre-tax yield of 6.1%. As a result, the average pre-tax book yield increased by 3 basis points to 4.9% at year-end.
Speaker Change: We expect this embedded book yield will provide durable, elevated investment income.
Speaker Change: In 2024, investments generated 12.8 points of return on equity, up 40 basis points from 12.4% in 2023.
Speaker Change: The portfolio remains conservatively positioned. Total fixed income and short-term investments represented 92% of the portfolio at year-end, with an average credit quality of A-plus and a duration of 4.0 years.
Speaker Change: Alternative investments, which report on a one-quarter lag, generated $8.4 million of after-tax income in the quarter and $29.3 million for the year, up 38 percent from full year 2023.
Speaker Change: We successfully renewed our property catastrophe reinsurance program effective January 1, maintaining our $100 million retention, while increasing our coverage exhaustion point to $1.4 billion from $1.2 billion.
Speaker Change: The increased limit reflects the growth in our book's total insured value.
Speaker Change: The top layer of our program is 75% collateralized and provides $600 million of coverage in excess of an $800 million retention. With attractive market conditions, we completed the renewal with risk-adjusted price decreases and improved terms and conditions.
Speaker Change: We also supplemented our main tower with a new personal lines only buy down layer. This coverage attaches at a slightly lower return period than our broader catastrophe program, providing additional protection as we transition to the mass affluent market.
Speaker Change: Our peak peril, U.S. hurricane, is well within our risk tolerance at 4% of gap equity for a 1 in 250 year net probable maximum loss.
Speaker Change: Our reinsurance program includes casualty access and property per risk treaties that renew on July 1st. The treaty retentions are currently $2 million per occurrence for casualty and $5 million per risk for property.
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Speaker Change: Turning to capital, our capital remains strong with $3.1 billion of gap equity and $2.9 billion of statutory surplus at year end.
Speaker Change: Book value per share decreased 2% in the fourth quarter, with increased after-tax unrealized losses for fixed income securities offsetting profitable results.
Speaker Change: For the year, book value per share increased 6% and adjusted book value per share was up 4%.
Speaker Change: Our debt-to-capital ratio of 14% and strong operating cash flow provide ample financial flexibility to support organic growth plans and execute our strategic initiatives.
Speaker Change: We did not repurchase any shares during the quarter, so our authorization had $75.5 million in remaining capacity at year-end.
Speaker Change: We currently view our organic growth within our insurance operations as the most attractive opportunity to deploy capital.
Speaker Change: Turning to 2025 guidance, we expect our gap combined ratio to be 96 to 97%, including six points of catastrophe losses.
Speaker Change: With no personal lines or standard commercial exposure in California, we expect the devastating Los Angeles and Southern California wildfires will not significantly impact our first quarter results.
As always, we assume no prior accident year reserve development.
Speaker Change: After-tax net investment income is expected to be $405 million. This is a 12% increase over 2024, reflecting growth in our invested asset base and slightly higher book yields as we prudently manage the portfolio.
Speaker Change: Our guidance includes an overall effective tax rate of approximately 21%. Weighted average shares are estimated to be $61.5 million on a fully diluted basis without any share repurchase assumptions under our existing authorization.
Now, I'll turn the call back to John.
John Marchioni: Thanks, Patrick. We entered 2024 with an expected loss trend of 7%, including 4% for property and 8% for casualty. Our renewal pure price last year, excluding exposure change, was 9.5%.
John Marchioni: Nonetheless, we increased our loss picks because of the unfavorable emergence in recent accident years.
John Marchioni: These actions reflected further elevated severities, primarily attributable to general liability and excess and surplus lines.
John Marchioni: Our 2025 guidance implies an underlying combined ratio in the 90 to 91% range, up from the 89.4 we reported in 2024. We expect our expense ratio to increase about one point to approximately 31.5.
John Marchioni: The guidance reflects elevated uncertainty in the external environment and embeds an overall expected loss trend of approximately 7% in line with last year. It assumes an expected loss trend of approximately 3.5% for property and 8.5% for casualty.
John Marchioni: Our reserving actions, pricing response, and progress on our strategic priorities in 2024 have us well positioned to quickly return to delivering operating ROEs at or better than our 12% target.
John Marchioni: Our 2025 guidance implies an operating ROE of approximately 15 percent.
I'll now ask the operator to begin our question-and-answer session.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster.
Speaker Change: And our first question is going to come from the line of Michael Phillips with Oppenheimer & Co. Your line is open.
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Michael Phillips: Hey, good morning. Thanks. John, first question is kind of a basic one on reserving methods.
Speaker Change: It's been a couple of decades since I sat in the seat of a reserve and actuary role, but I think the mechanics haven't changed that much. Look at a bunch of reserving methods, get a range, do some weighted averages, come up with a best estimate or a point estimate, and then book something.
I guess, you know, sometimes when we hear a company.
Speaker Change: Take a felicity of a reserve charge. We sometimes hear comments about how the booked amount is different than what that embedded
Speaker Change: point estimate is, and therefore some more may be built in. Can you speak to that? And in your GL book for the current year, calendar year, you have 300 plus million dollars.
Speaker Change: What kind of embedded extra margin might there be in that relative to either your own best estimate or maybe the external actuaries if that's happened already? Thanks.
Speaker Change: Yeah, thanks, Mike. So just a comment relative to the reserving process and while the fundamentals haven't changed.
I think the level of detail and insight.
and the expansion of methods.
Speaker Change: has continued to evolve and be refined. So yeah, the underlying approach is very similar, but I think the depth of
analysis and the insights we have.
Speaker Change: are much better than they were a couple of decades ago. So that's just with regard to your first question. On the second point, we have consistently had a process whereby we carry a position or a risk margin above the actuarial best estimate.
The New York Times,
Speaker Change: And that position and the magnitude of that position is always determined by our view of the risk factors that we observe. And what I can tell you is that risk margin has been very consistent over time and would be consistent with what we've seen in more recent years if you were to look at the position a year in 2024.
Speaker Change: Okay, John, thank you. Second question, if I heard you right on the end of your comments about the casualty loss trends embedded into your guidance for 2025, I think you said 8.5%. I feel like that's a little bit lower than what you said last quarter, 9%. I want to make sure that's right and kind of what's behind that.
Speaker Change: Yeah, so the 9% we've been talking about is for GL, and that continues to be where we have GL on a forward trend basis. We've given you a casualty trend number, which is all in, including workers' comp and commercial auto. But yeah, the GL trend...
Speaker Change: That we were citing more specifically at around nine actually a little bit north of nine From a severity perspective is what we continue to embed in our 25
Speaker Change: Okay, perfect. And then last one, kind of a numbers question. Your primary casualty versus your kind of excess and commercial umbrella, I think that's about a two thirds one thirds split on a premium basis. Can you say how much of your GL calendar 2024 charge was it? How much of that was primary versus excess and umbrella on commercial arms?
Yeah, it was, it was predominantly GL.
[inaudible]
Speaker Change: There was there was some umbrella movement, but there was predominantly GL and predominantly in the 22 and 23 accident years
Speaker Change: And remember, I think it's important, you know, the difference with with us, not not for against all competitors, but against many, is our umbrella book is entirely written on a supported basis. So that gives us an earlier indication of frequency because we have the underlying auto and or GL that's triggering those umbrella losses.
Speaker Change: Yes, we did. We did see some, but it was predominantly GL.
Okay, cool. Thanks, John. Appreciate it.
Speaker Change: Thank you. Thank you. And one moment as we move on to our next question.
Speaker Change: And our next question is going to come from the line of John Newsome with Piper Stanley. Your line is open. Please go ahead.
Good morning, Paul.
Speaker Change: I wanted to see if you could give us just a few more comments to make us comfortable about the potential for just higher accent year.
loss ratio picks.
Speaker Change: as we go forward. Remarkably, in general, the underlying combined ratio was...
Speaker Change: pretty good, very good. But with all of these casualty charges and workers' comps deteriorating a little bit, things of that nature, you would think you'd have pretty substantial higher loss picks. I realize there's some conservativeness in your guidance, but
Speaker Change: If you could just give us a little bit more as to why those lost picks, in your view, are the right lost picks as you look forward into next year.
Speaker Change: impacted the total combined ratio, the 24 underlying, by a total of 2.3 points.
Speaker Change: and 2.6 points in commercial lines. So that sort of increases the starting point. And as you look forward to 2025,
on an overall basis, you have casualty.
expected loss ratios moving a little bit higher.
Speaker Change: despite strong rate. But we have that higher trend assumption. And you've got property continuing to improve. Because as we've cited, the property trend has been running in the three to 4% range.
whereby whereas rate on the property lines have been running.
Speaker Change: in the 10 to 12% range. So that's giving some positive influence on a go-forward basis. But from a casualty perspective,
Speaker Change: year over year, we have been increasing our severity trend assumption, and that is all baked into the 2025 guidance of a 90 to 91 underlying. And then you also had the expense ratio change year over year.
which also needs to be incorporated in there.
Speaker Change: But I guess the key point from my perspective to highlight is
Speaker Change: We've reacted quickly to an increase in severity trends in relatively immature accident years, and our 25 casualty loss ratios assume that severity increase continues at a similar pace in 2025.
Speaker Change: And you could describe that however you'd like. You could call it conservative. I will call it prudent. But I think that's an important fact that underlies our guidance and I hope would give.
Speaker Change: Most of you comfort that we have an appropriate level of severity increase baked into our 2025 expected loss ratios for the casualty lines of business and GL in particular.
Speaker Change: That makes a lot of sense, but just a little bit more to beat the dead horse and casually, you know, sequentially, we've seen additions to reserves.
Speaker Change: Just to make sure I get this correct, essentially, are we seeing sequentially elevated levels of...
Anthony Harnett, Patrick Brennan, Brad Wilson, Unknown Executive
Speaker Change: So, what we saw in the quarter would potentially be just.
Speaker Change: A reaction to what we saw from a casualty reserve charge would be just a reaction to what you saw in the quarter.
if I got that right.
Speaker Change: You are right, we do a full reserve review for each major line of business each quarter. There's no big year-end process that differs from what we see in the quarters. For GL, Patrick mentioned the workers' comp TAIL study. That is one of the areas we do an annual review on.
Speaker Change: But there's no question, we're reacting to the data that comes through the reserve analysis in the quarter, but we're also using that data to project ultimate.
Speaker Change: loss ratios for those lines of business. And we're reacting to what we're seeing. So you've got case and incurred activity that happens over the course of the quarter. And then obviously, on immature accident years, you're you're you're projecting those
changes that happened in the quarter to ultimate
Speaker Change: and we think it's appropriate to be reacting more quickly based on what we've seen historically. And if you look, and I know there's been a lot of focus on the 2016 to 2019 accident years for the industry, most of that emergence
Speaker Change: that was social inflation and severity driven by all accounts, wasn't recognized
until 2022 and 2023.
Speaker Change: And we're sitting here now saying, based on the elevated trends we're seeing early,
Speaker Change: We're reacting very quickly to the 22 and 23 action of years and more importantly.
Speaker Change: Despite frequencies behaving well in 2024, we thought it was prudent to boost the 24-year with very little reported claim activity, which then incorporates into our 2025 expected loss ratios.
Thank you, as always, much appreciate the help.
Thank you. Thank you. One moment for our next question.
Speaker Change: Our next question is going to come from the line of Jing Li with KBW. Your line is open. Please go ahead.
Hi, thank you for taking my questions.
I'm
Speaker Change: I'm just wondering, can you add more colors on what you see behind the data that comes in?
Some of the peers are saying that some stayed out.
Speaker Change: that used to be more core friendly have changed. Are you seeing the same trend? Or anything you can add?
Speaker Change: to the drivers behind the data that you saw this quarter that made you decide to be more prudent. Thank you.
Speaker Change: Sure. So just a couple of comments. Number one is, I think our commentary on this question in the past is consistent to how I view the question currently, which is social inflation is broad based in nature.
Speaker Change: It impacts all jurisdictions, and where on the GL front it impacts more significantly is with regard to bodily injury.
accidents, not property damage liability.
Speaker Change: So that's the first thing and we do, but we do view this and see this as broad based. Now that said, and I pointed this out a few quarters back, there are certain jurisdictions that either because of statute or because of case law.
Speaker Change: are see a higher, a more exacerbated impact of social inflation. And I cited some of those states and some of them are in our footprint. A state like Georgia is a state that we have taken significant action to curtail growth.
Speaker Change: Because there's been some recent challenging case law and some challenging statutes there that exacerbate the impact of social inflation.
Speaker Change: But those are widespread, and I did see one of my peers who I think is
Speaker Change: Very accurate in his commentary point to other states like, Texas
Speaker Change: that have been less of a hotspot that have more recently become a hotspot. Now a state like Texas and Texas and Florida, California, Louisiana are the states that are driving more than nuclear verdicts. Those states are not in our standard commercialized footprint.
Speaker Change: So yes, it's widespread. Yes, it is exacerbated based on individual state statute and or case law, but those states that are hotspots are fairly widespread. Some are in our footprint, some are not in our footprint.
and the
Transcription by ESO. Translation by —
Got it. Makes sense.
Speaker Change: I also have a follow-up on the U.S. casualty research of 20 million. It seems to indicate some emerging loss trend. Are you addressing the rising appetite and pricing in this segment going forward?
Speaker Change: Yeah, thank you. A couple of additional comments on E&S because we've made these points in the past and I think they continue to hold. First of all, what we've said to this point on E&S is the same social inflationary trends
Speaker Change: have been evident in ENS casualty like they've been in standard insurance ops.
Speaker Change: or admitted casualty. The difference has been on a couple of fronts. Number one for us in our book,
There's been a much more pronounced decline in frequency.
Speaker Change: over the last several years, in part because of underwriting exchanges that we've proactively implemented to improve profitability.
Second thing is, we've been embedding
Speaker Change: Much higher assumed severities in our expected loss ratios for ENS for the more recent accident years.
Speaker Change: And then the third piece would be that pricing has been a lot stronger in E&S casualty than it's been in admitted casualty for us in the market broadly. And I would say our updated view of that at year end would be the frequency trends continue to remain favorable.
Speaker Change: The casualty pricing environment continues to remain favorable, but we thought it made sense for us to top up some of our severity assumptions.
Speaker Change: across a number of more recent accident years and the impact on any given accident year.
is not all that significant.
Speaker Change: And let's also remember that, you know, we're talking about a segment that's generating a slightly under 90 fall in combined ratio. So we're reacting quickly. It's not a substantial move, but we think it's an appropriate one based on what we've been seeing in other segments of our business.
Got it. Thank you.
Michael Zaremski, Paul Newsome
Speaker Change: Our next question is going to come from the line of Michael Zarminski with BMO. Your line is open. Please go ahead
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Speaker Change: Morning, thanks. This is Dan on for Mike. I guess just first on, you know, your own reserve review process.
Speaker Change: Would you say there's something structural in the way you're, you know, reserve, you're reviewing your reserves every quarter, that would lead it to where these small bites of the apple occur versus maybe just like a one time ground up, you know, we're just looking at the cadence, the additions were last quarter, the pause relative to what we thought maybe would have been closer to a kitchen sink type charge and to Q.
Thanks.
Yeah, so again, I think...
Speaker Change: There's always recency bias. And obviously, you know, in 2024, we've acted and we've acted in a way that we think is is timely and prudent. But I think it's important to look back
Speaker Change: over time, especially to more mature accident years, to see how our reserving process and equally important, our planning process has held up over time.
Speaker Change: And I know many of you subscribe to the Dowling publications. I think there's a really interesting analysis.
by major writer of General Liability.
Speaker Change: and for the overall industry. And it shows for that group.
Speaker Change: of Challenged Accident Years 2016 to 2019, when we first started to see social inflation spike.
Speaker Change: And then you look at the initial loss ratios to where they are currently viewed. And again, I'll say these are largely mature accident years at this point.
Speaker Change: Our average increase in loss ratio from initial to current over those four years is two and a half points, up two and a half points.
Speaker Change: That same four-year period across the entire industry, those accident years are up on average about eight points.
Speaker Change: And if you look at a number of individual peers, you'll see very similar movements. And I point to those because they're more mature accident years, and I think they speak to
Speaker Change: that how well our process in terms of both setting expected loss ratios and
Speaker Change: Our reserve review process to update those views of expected loss ratios.
Speaker Change: has held up well against the test of time. And I think it's a relevant period to compare to, because it's the same driver. It's social inflation that started to manifest itself in those accident years that we think we're still reacting to.
Speaker Change: Now, we think our process of reviewing reserves from a ground-up basis on a quarterly basis
is appropriate and it's prudent.
You could do a more
Speaker Change: High-Level Review and just look at actual versus expected claim emergence.
Speaker Change: I think the concern that you would have by just reacting to actual versus expected claim emergence is you ultimately need to project those, that activity to what you think it does to your ultimate loss ratios.
Speaker Change: And we think doing that on a quarterly basis gives us more insight and allows us to more quickly respond with regard to pricing and underwriting actions when we see something change in the underlying data.
Speaker Change: Great, thank you for that. And then maybe just switching gears to auto a little bit, and maybe for Patrick, given, you know, you've been in the seat for three months now, you're coming from a major commercial auto writer, you know, what are what are your view of.
Speaker Change: The commercial auto reserves today. And, you know, just given it's the epicenter of social inflation, what gives you confidence that you know, the issues in GL necessarily don't bleed into the commercial auto reserves? Unknown Speaker
Speaker Change: Yeah, I'll hit on a few things there. Thanks for the question. You know, in terms of confidence in, you know, we may not have this bleed over into commercial auto. I think we've said in previous conference calls,
Speaker Change: We think commercial auto was actually the first shoe to drop as it relates to social inflation. And what gives me confidence is what John just outlined is our process. We have a very strong reserving process. I had the opportunity to see it on my very first day on October 1st.
Speaker Change: I was sort of right in the middle of it just to kind of see what that looked like and how that operated. And then obviously, more recently, being in it with a lot more context and background. So I have a lot of confidence in our process and our ability to
Speaker Change: react to new information as we get it and incorporate that into how we view our underlying profitability and our go-forward pricing and actions that we need to take.
Speaker Change: In terms of coming from Progressive and them being a big commercial auto writer, they absolutely are. They're the number one in the industry.
Speaker Change: I just want to sort of help people understand contextually that the type of business that we write here is not at least similar to the type of business in the P&L that I ran.
Speaker Change: When I was a product manager there, you know, we just about every policy that we write here has an additional line of coverage attached to it. And as you know, progressive
Speaker Change: has historically been much more focused on monoline business and so that factors into how we price the business and how we operate with agents and other you know third parties.
Speaker Change: So, I think, you know, contextually, I understand the commercial auto business pretty well from my experience. I feel good about our process.
Speaker Change: and more specifically the behaviors we have around seeing new information and reacting to it in a way that we think is prudent and helps us continue to achieve our long-term goals of a profitable growth and you know mid-teens excuse me
12% are we?
Speaker Change: If I could just add a couple of additional points, this is John and I appreciate Patrick's comments and I think they're spot-on, but I want to come back to the point he started with because I know there's this concern out there that commercial auto is the next shoe to drop and as Patrick said, we believe it was the first shoe to drop.
Speaker Change: And I think this is an important distinction for everybody to understand. First thing is the commercial auto BI bodily injury.
Speaker Change: has a shorter tail, has a shorter reporting tail than GL and has a shorter disposal tail than GL, which means that the ultimate severities are known sooner than the ultimate severities are known in general liability. So that's point number one.
As a result of that,
Speaker Change: If you look back, our reaction was more quick to increase expected loss trends for the commercial auto bodily injury line.
Speaker Change: Whereas, in general liability, as I mentioned, it takes longer to recognize a change in severity patterns.
Speaker Change: We and others in the industry that disclose their forward loss trend assumptions were sitting on loss trend assumptions in the 5% rate
Speaker Change: So you've got a big difference in the assumed loss ratio trends in the more recent accident years. And then equally important.
Our average commercial auto B.I. price
over the last four years, 21 through 24, is 10.3%.
Speaker Change: So you've got earned rate per year of a little over 10% on lost trends that we assumed to be around eight, and those have held up. And we've now seen GL historical trends kind of settle into that level. So I think this was recognized more quickly.
Speaker Change: We assume that elevated loss trends and our expected loss ratios more quickly, and our pricing adjusted accordingly and has been running above that historical trend level on a consistent basis. And that I think all supports the idea that we view it was the first shoe to drop, not the second shoe to drop.
[inaudible]
Speaker Change: Thank you, and I would now like to hand the conference back over to John Marchioni for closing remarks.
John Marchioni: Well, thank you all for participating. We appreciate your engagement this morning. And as always, please, please feel free to follow up with Brad with any additional questions. Thank you.
John Marchioni: This concludes today's conference call. Thank you for participating. You may now disconnect.
Michael Zaremski, Paul Newsome, Scott Heleniak, Paul Newsome
and John Marchioni,
John Marchioni: Christopher Jackson, Bob Dylan, Davie Goldham, Alan Justice, James Tubman, Brandon coarse, Nathan K gross, Heather Alderwood,
The New York Times,