SELECTIVE INSURANCE GROUP INC Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Underwriting Challenges: Industry-wide social inflationary trends put upward pressure on general liability severities, leading to a 116.1% combined ratio in the quarter, resulting in an operating loss and negative operating ROE. The underlying combined ratio of 91.4% (including updated general liability run rate) positions the company well moving forward.
• Reserve Actions: Recorded $176 million of net unfavorable prior year casualty development, with $166 million in general liability, mainly for accident years 2020-2023. Confidence in reserves for older accident years (2019 and prior) has increased due to modest further development.
• Segment Performance Details: E&S had strong growth with 39% net premiums written increase. Personal Lines made progress towards profitability but needs to strengthen rate plans. Standard Commercial Lines saw renewal pure price for general liability increase to 7.6% in Q2, expected to rise further in H2.

Segment Performance

• Commercial Lines: Suffered an operating loss of $1.10 per diluted common share with an operating ROE of negative 9.6% for the quarter, and year-to-date operating ROE of 1.1%. There was $176 million of net unfavorable prior year casualty development within the segment, with $166 million in general liability and $10 million in commercial auto. The GAAP combined ratio was 116.1% due to reserve strengthening and catastrophe losses.
• Excess and Surplus (E&S): Experienced excellent top line growth with a 94.6% combined ratio despite elevated catastrophe losses. Net premiums written increased 39% in the quarter, driven by strong contributions from contract binding and brokerage operations.
• Personal Lines: Net premiums written increased 6% due to strong renewal pure pricing and larger average policy size. The underlying combined ratio improved by 3.4 points compared to Q2 2023, but the segment remains focused on achieving rate adequacy.

Guidance

• Revised full year guidance implies GAAP combined ratio of 101.5% (up from previous 96.5%), driven by adverse prior year casualty reserve development, current accident year bookings, and increased catastrophe loss assumption to 5.5 points. Underlying combined ratio is expected to be 91%.
• After-tax net investment income estimate remains unchanged at $360 million, including $32 million from alternative investments. Effective tax rate is projected at 21%. Fully diluted weighted average shares estimated at 61.5 million.

Risks

• Industry-wide social inflationary trends continuing to put upward pressure on general liability average severities.
• Catastrophe losses and reserve strengthening impacting the combined ratio.
• Uncertainty in loss emergence for more recent accident years, leading to prudent reserve actions.

Question and Answer

Q: On commercial renewal pricing and retention, how does Selective's approach compare to peers and expectations for future pricing movement?

A: John Marchioni stated that Selective feels good about the direction of Commercial Lines pricing, noting that industry recognition of loss trend needs for pricing increase is occurring. Expectations are for pricing to continue moving up with no significant retention impact, and if needed, a trade-off with retention is seen as appropriate in the current environment.

Q: Regarding reserve issues in general liability, have you seen much of the 2020-2023 accident year issues in 2024, and is this a selective issue?

A: John Marchioni responded that the 2024 accident year is extremely early, but reserve adjustments in the current year are driven by higher expected loss ratios for 2022-2023 years. The portfolio is stable in mix, and trends are widespread across the industry, not selective, with states driving nuclear verdicts and social inflationary trends affecting severity.

Q: On workers' comp and capital ratio, what are the trends and implications for capital deployment?

A: John Marchioni mentioned workers' comp is a smaller portion of reserves, with frequency trends leveling off and medical CPI components slightly changing. Capital position is strong with debt-to-capital ratio at 14.8%, and growth is self-funded with evaluation of capital options based on profitable growth prospects.