Selective Insurance Group Inc Q2 FY2020 Earnings Call

Good morning, everyone, and welcome. We are simulcasting this call on our website, selective.com, and the replay will be available until August 28, 2020. Our supplemental investor package, which provides GAAP reconciliations of any non-GAAP financial measures referenced today also is available on the Investors page of our website. Today, we will discuss our results and business operations using GAAP financial measures that also are included in our filings with our annual quarterly and current report filed with the U.S. Securities and Exchange Commission. Non-GAAP operating income, which we use to analyze trends in operations and believe makes it easier for investors to evaluate our insurance business. Non-GAAP operating income is net income excluding the after-tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities. And statements and projections about our future performance. These forward-looking statements under Private Securities Litigation Reform Act of 1995 are not guarantees of future performance and are subject to risk and uncertainties. For a detailed discussion of these risks and uncertainties, please refer to our annual and quarterly reports filed with the U.S. Securities and Exchange Commission, which includes supplemental disclosures related to the COVID-19 pandemic. You should be aware that Selective undertakes no obligation to update or revise any forward-looking statement. On today’s call are the following members of Selective’s executive management team, John Marchioni, President and Chief Executive Officer; and Mark Wilcox, Chief Financial Officer. Now, I will turn the call over to John.

Thank you, Rohan, and good morning. I will make some introductory remarks and then focus on some high level themes impacting the industry and our company. Mark then will discuss our financial results and I will return to highlight how we continue to invest in strengthening our platform and have remained well-positioned to generate continued superior financial performance. Let me begin by saying, I remain extremely proud of how our employees have navigated through this difficult period, delivering exceptional service to our customers and distribution partners, despite the various challenges posed by COVID-19. As we stated in our earnings pre-release, elevated catastrophe losses, which were well in excess of the historical mean for the industry, alternative investment losses that we report on a one quarter lag and the impacts of COVID-19 obscure the strong underlying results of our business. Our premiums written growth remained solid, despite the challenging economic environment and we are pleased to report a profitable all-in 98.4% combined ratio, despite the higher catastrophe losses. From a financial standpoint, for the second quarter of 2020, Selective reported non-GAAP fully diluted operating earnings per share of $0.40 and an annualized operating ROE of 4.4%. There were three main items that negatively impacted our results during the quarter. First, we reported $83 million of catastrophe losses, which was a historically significant loss for us. These losses related to numerous catastrophe events. Those more meaningful to our results included $43 million of losses related to two April storms and $20 million of claims related to civil unrest. Second, alternative investment losses totaled $16 million compared to a gain of $7 million in the year ago period. We report alternative investment performance on a one quarter lag and the results reflect a decline in investment values during the first quarter. With the market rebound in the second quarter, we expect our third quarter return on alternative investments to be much stronger. Third, COVID-19 related items, including the continued earnings of the $75 million audit premium accrual booked during the first quarter and a slight increase to our premiums receivable allowance for doubtful accounts, totaled $10 million and added 1.3 points to the combined ratio. In addition, we returned approximately $20 million in premium credits to our commercial and personal auto customers, but offsetting reduction in reported losses for those lines of business. Partially offsetting these items was continued net favorable casualty reserve development, lower than expected non-catastrophe property losses and ongoing expense management initiatives. I’d like to highlight a few key topics. First, with respect to the COVID-19 pandemic, this is an ongoing and tragic event that is impacting the health and livelihoods of numerous people around the country and across the world. From a financial standpoint, we took a prudent and proactive approach during the first quarter to reflect our estimates for potential exposures to the event, and with the passage of another quarter, these estimates have largely helped. The following three estimates are recorded in the first quarter. Number one, a $75 million return audit and mid-term endorsement premium accrual to reflect the anticipated decline in exposures on our in-force premium for the workers’ compensation and general liability lines of business, for which through June 30th, the remaining accrual stands at $61 million. Second, a $10 million in property IBNR for losses related to a small portion of our property policies that have specific sublimit coverage for extra expense associated with a government ordered cleaning. To-date, we have not incurred any claims against this IBNR. And third, a $10.5 million increase in our allowance for uncollectible premiums receivable, reflecting potential policy cancellations and non-payment of premium. In the second quarter, we increased this allowance by $3 million. Despite the COVID-19 exposures, loss trends were generally favorable, benefiting from the lower level of economic activity. This was particularly evident for the auto lines, where driving activity declined substantially due to various governments’ shelter-in-place directives, although this was far more so for personal auto than commercial auto. While claim frequencies were down during the quarter, we maintained our Casualty Lines loss ratios on plan for non-auto lines due to the long tail nature of these exposures, the inherent uncertainty projected by COVID-19 and the current volatile economic environment. The reductions for our personal and commercial auto insurance loss ratios reflect the earned impact of the premium credits, which reduced premiums and losses for those lines of business. The second topic I want to highlight was a significant level of catastrophic loss activity for us and the industry during the second quarter. Insured catastrophe losses were well above historical second quarter averages as measured by property claim services or PCS and driven by numerous smaller events rather than a few headline events. None of these events reached our excess of loss catastrophe reinsurance program, which attaches at $40 million per occurrence. While quarters like this do happen on occasion, the annual impact of catastrophes on our loss ratio over the past 15 years has averaged 3 points and compares favorably to AM Best estimated industry average of 5.3 points. We attribute this differential to our conservative underwriting and pricing philosophy and strong reinsurance program. Third, we continue to successfully execute on our strategy of consistently generating profitable growth, despite challenging market or economic conditions. Overall, second quarter reported net premiums written growth of 3%, was reduced by 3% points due to the aforementioned auto premium credits. Our strong distribution partner relationships continue to present us with excellent opportunities for growth without sacrificing our margin targets. Our field-based employees and underwriting, agency management, claims, and safety management were able to seamlessly transition to a virtual environment, while maintaining highly responsive, personalized service and support to our customers and distribution partners. Finally, with respect to pricing, industry-wide Standard Commercial Lines pricing continues its upward trajectory, driven by an interest rate environment that is expected to be lower for longer, increased volatility in catastrophe and non-catastrophe property losses, a firming reinsurance market, and ongoing concerns over increasing loss trends. Our second quarter Commercial Lines renewal pure pricing was up 3.9%. Our successful track record of achieving renewal pure price that has matched or exceeded our expected loss trend in each of the past 10 years positions us well with a high quality and adequately priced in-force book of business. The sophisticated and granular approach to risk selection and pricing is also deployed in the acquisition of new business. Looking forward, we see opportunities to achieve higher price levels in property, auto, and general liability, while workers’ compensation is expected to present a continued drag in the upcoming quarters. Now, I will turn the call over to Mark to review the results for the quarter.

Thank you, John, and good morning. I will review our consolidated results, discuss our segment operating performance and finish with our updated outlook for 2020. For the quarter, we reported net income per diluted share of $0.57 and $0.40 of non-GAAP operating earnings per share. We generated an annualized ROE of 6.2% and a non-GAAP operating ROE of 4.4%. For the first half of the year, we generated a non-GAAP operating ROE of 6.7%. While our operating ROE is well below our 11% target so far this year, we feel good about the strength of our business, which continues to perform well, despite some short-term volatility from COVID-19 catastrophe losses and alternative investments. We believe we are well-positioned to generate strong profitability for the balance of the year. Consolidated net premiums written growth was 3% in the quarter and it includes about $19.7 million of COVID-19 related return premium credits for our personal and commercial auto lines of business. These premium credits were accounted for as a reduction in net premiums written and were fully owned in the quarter and were offset by a reduction in auto order, bodily injury, and physical damage losses. The premium credits had the impact of reducing our growth rate by 3 percentage points in the quarter. Strong renewal retention, overall renewal pure price increases averaging 3.9% and steady new business volumes helped drive the solid growth. Year-to-date, our net premiums written are flat with 2019. Our year-to-date net premiums written were significantly impacted by COVID-19 related items, including the first quarter $75 million audit premium accrual and the $19.7 million second-quarter audit premium credits that collectively reduced the top line by 7 percentage points. As John mentioned, we endorsed $14 million of workers’ compensation and general liability premium against the audit accrual during the quarter related to lower exposures and that brought the accrual down to $61 million at quarter end. It will be well into the latter part of 2021 until the premium audit is complete, and we know the full extent of the impact of the reduced exposures on our auditable premiums. With GC estimated to be down around 6% in 2020, we feel good about the order premium accrual, but we will continue to evaluate it quarterly. We reported a combined ratio of 98.4% for the second quarter, an excellent result in light of the significant level of catastrophe losses and the ongoing impact of COVID-19. Catastrophe losses totaled $83 million and added 13.2 percentage points to the combined ratio, favorable net prior year casualty reserve development of $15 million helped the combined ratio by 2.4 points. On an underlying basis, so excluding catastrophes from prior year casualty reserve development, the combined ratio was 87.6%, a significant improvement compared to 91.1% in the prior year period. For the first six months of 2020, the underlying combined ratio of 90.4% reflects 170 basis points of margin improvement. Underlying margins have benefited from lower than expected non-catastrophe property losses and reduced underlying operating expenses. Included in the underlying combined ratio are the COVID-19 specific underwriting accruals that reduced pre-tax underwriting income by $9.6 million in the second quarter and increased the combined ratio by 1.3 percentage points. These specific items include $6.6 million of reduced underwriting income due to the earned impact, net of reduced underwriting expenses and losses of our first quarter $75 million audit premium accrual. We also increased our premiums receivable allowance for doubtful accounts by $3 million in the quarter due to the COVID-related billing leniencies. These items reduced our second quarter EPS by $0.13 and our ROE by 1.4 points. Year-to-date, the specific COVID-19 related pre-tax underwriting charges totaled $34 million and have increased our combined ratio by 2.4 points. These items have reduced our year-to-date EPS by $0.45 and our ROE by 2.4 points. Moving to expenses, our expense ratio was elevated to 34.3% for the quarter. The earned impact of the COVID-19 related premium items reduced our premiums earned by $50 million in the second quarter. This coupled with a $3 million increase in our allowance for bad debt added 2.2 percentage points to the expense ratio. Absent these COVID-19-related items, the expense ratio of 32.1% for the quarter and 32.6% year-to-date was better than expected and reflects expense management initiatives. Some of these initiatives, however, can be seen as temporary and relate to lower travel and entertainment expenses, some short-term deferrals of projects and new hires and lower employee compensation. In addition, as premium volumes come under pressure from a further economic slowdown, the expense ratio will continue to face some upward pressure due to our operating costs being spread over a smaller premium base. The expense ratio will also face pressure if our customers’ finances are further impacted, which could result in us having to increase our allowance for bad debt. That said, we continue to seek out ways to improve our operational efficiency, leverage our infrastructure and drive our expense ratio down over time, while continuing to invest in our business. Corporate expenses, which are principally comprised of holding company costs and long-term stock compensation totaled $6.3 million in the quarter, compared with $9.6 million in the year-ago period, driven by lower stock-based compensation expense. Turning to our segments, in the second quarter, Standard Commercial Lines reported a 5% increase in their premiums written, a solid result in light of the challenging backdrop and reflects the strength of our field-based model and our deep and long-term distribution partner relationships. The growth is inclusive of the $15.4 million impact of the April and May commercial auto premium credits that reduced our Standard Commercial Lines quarterly growth rate by 2 percentage points. New business was flat relative to a year ago, while retention was very strong at 86% for the quarter and the renewal pure price increases were stable at 3.9%. The combined ratio was 96.7% and the underlying combined ratio was 89.6%. Catastrophe losses accounted for 10.1 points on the combined ratio. Net favorable prior year cash and reserve development reduced the combined ratio by three points and included reserve releases of $15 million in workers’ compensation and $10 million in general liability, partially offset by unfavorable prior year reserve development of $10 million in commercial auto. The increase in the commercial auto prior year reserves was driven by higher severities, putting pressure on 2016 to 2018 accident years, as well as higher than expected frequencies in accident year 2018. As John mentioned, while the current accident year reported claim frequencies were down during the quarter, except for reducing losses in the commercial auto line related to the premium credit, our 2020 casualty loss ratios for the same Commercial Lines remain on plan. Due to the long-term nature of these risks and the inherent uncertainty presented by COVID-19 and the volatile economic environment, we do not believe it is appropriate to reflect the temporary reduction in frequencies at this time. Our Personal Lines segment reported a 5% decline in net premiums written, driven by $4.3 million of personal auto premium credits offered in April and May, which impacted the growth rate by 5 points, renewal pure price increases averaged 3.1%, retention remained solid at 84% and new business was up 13%. The segment produced a combined ratio of 108.8%, which included an elevated level of catastrophe losses of 36.2 points. There was no prior accident year casualty reserve development. The underlying combined ratio was 72.6%, benefiting from lower non-catastrophe property losses. Our E&S segment generated 3% points in net premiums written growth, renewal pure price increases averaged 5.5%, and new business was up 13%, a high level of catastrophe losses this quarter added 11.3 points to the combined ratio and resulted in a 100.9% combined ratio for the quarter. There was no prior accident year casualty reserve development and the underlying combined ratio was a solid 89.6%. Over the past few years, targeted price increases, business mix changes and exiting specific underperforming parts of the business have contributed to the improved combined ratio performance in this segment. Our investment portfolio remains conservatively positioned. As of June 30th, approximately 91% of our portfolio was invested in core fixed income securities and short-term investments with an average credit rating of AA- and an effective duration of 3.6 years and offering a high degree of liquidity. We increased risk assets modestly during the quarter from 8% to just over 9% of the overall portfolio as we found valuations attractive. We will continue to evaluate further increases to risk assets, depending on market and economic conditions. After-tax net investment income of $28.5 million was down 40% for the comparative quarter, driven primarily by $16 million of pre-tax alternative investment losses, which we report on a one quarter lag. The alternative investment losses came in at the lower end of the estimated $15 million to $20 million range that we disclosed last quarter. We do, however, expect a rebound in the valuation of these investments and this is reflected in our updated net investment income guidance, which I will discuss in a minute. The overall loss-to-tax yield on the fixed income portfolio, including high yield was 2.7% for the quarter. The average after-tax new money yield on fixed income purchases during the quarter was also approximately 2.7%, with purchases more heavily weighted than earlier in the quarter when spreads were wider. Total invested assets include an increase in pre-tax unrealized gains in the fixed income portfolio of $220 million in the quarter, driven principally by a narrowing of credit spreads. The total return on the portfolio was a very strong 4.2% for the quarter and 2.3% year-to-date. Our capital position remains strong, with $2.3 million of GAAP equity, which is up 4% from year-end. Book value per share increased 9.5% in the quarter. Our net premiums written surplus ratio was 1.4 times. Cash flow was strong, with $187 million of cash flow from operations year-to-date, up 20% from last year and represented 14% of net premiums written. We have $324 million of cash and investments at the holding company. During the second quarter, we repaid the $50 million that we drew on our line of credit out of an abundance of caution in the first quarter. We currently expect to repay the remaining short-term borrowings by year-end. Overall, our strong balance sheet and holding company cash and liquidity provide us with the resources and financial flexibility to continue to invest in our business and grow our insurance operations. As we have laid out in our earnings prerelease, we have revised our full year 2020 guidance as follows, a GAAP combined ratio, excluding catastrophe losses of between 90% and 91%. This represents an improvement from our prior guidance of a range of 92% to 93%. This also assumes no additional prior accident year reserve development. Catastrophe losses of 6 points on the combined ratio, which is a 1.5 point increase from our prior guidance, reflecting higher than expected cat losses through the first half of the year, as COVID-19 has not been designated a PCS event, such losses are not included in this ratio. After-tax net investment income of $170 million, a $10 million improvement from our prior guidance of $160 million and includes up to $5 million in after-tax gains from our alternative investments, an overall effective tax rate of 18.5% and weighted average shares of $60.5 million on a diluted basis. Our 2020 guidance reflects the estimated full-year impact of COVID-19 on our underwriting results. Our guidance this year has a high degree of uncertainty than in prior years due to the dynamic and fluid nature of the impact of the COVID-19 pandemic on the U.S. economy, our business, and our operations. With that, I will turn the call back over to John for our closing comments.

Thanks, Mark. We continue to navigate through this challenging environment in concert with our distribution partners, ensuring we have not sacrificed in any way our high standards for customer experience. While the topline growth outlook may get more difficult depending on the depth and duration of the economic downturn, we will maintain a disciplined approach to underwriting, seeking to obtain risk-adjusted pricing that meets or exceeds our loss trend expectations. We are extremely pleased with the quality and embedded profitability of our overall in-force book and are well-positioned to continue to generate strong financial results. Our success is built on three primary competitive advantages, number one, franchise relationships with best-in-class distribution partners, two, a unique field model enabled by sophisticated tools and technology, and three, the ability to deliver a superior omnichannel customer experience. These competitive strengths have served us well for decades and have positioned us for continued success over the long-term. We also recognize that without a highly engaged, aligned, and committed team, our success could not be realized. Our employees remain our greatest competitive advantage. We have a unique culture at Selective, one built on diversity, acceptance, and inclusion, key values to driving innovative thought. Recent events, some violent and tragic, have focused long-deserved attention on racial and social injustice. As an industry, we can and must do more to advance racial equality. At Selective, we continue to challenge ourselves to do more to increase diversity at all levels in the company and the ranks of our distribution partners and foster an environment of even greater inclusion. We have always believed that if we deliver for our employees, our customers, and our distribution partners, our shareholders will be consistently rewarded. This focus is highlighted in our inaugural ESG report published earlier this year. It can be found on the Investor Relations page of our website and I encourage you to read it. With that, we will open the call up for questions.

Thank you. Our first question comes from Mike Zaremski from Credit Suisse. Your line is open.

Good morning, Mike.

Good morning, everyone. This is Charlie standing in for Mike.

Good morning, Charlie.

Good morning. If I missed this in the opening remarks, I apologize. In the past, you have provided rate and retention metrics for higher quality versus lower quality accounts in Standard Commercial Lines. Could you share those metrics and some insights on the trends?

Yeah. Yeah. And we did not include those in our prepared comments, but that was not for any change in the actual results. I can tell you that the variation between best and worst performing segments on a forward outlook basis remains around 7 points of rate differentials. So when you think about it, our highest quality accounts are continuing to retain in the, call it, low 90% on a point of renewal basis and we are seeing an offsetting reduction in our low and very low expected buckets, call it, in the mid-70%s to lower 80% range. So you have got, call it, about a 5% differential in retentions and about a 7% differential in rate, and remember, that above-average cohort represents about half of our premium. So that continues to drive our mix improvement. So when we talk about profit improvement, you have got two factors driving it. Number one is, the differential between earned rate and loss trend, and then the second is, mix of business change and we think that’s the best way to measure that mix change.

Got it. That’s helpful. And then on the $15 million in reserve development in the quarter, can you kind of give us a feel of what lines that was in?

I will begin, and Mark can add on. We had a favorable adjustment of $15 million from the prior year related to workers’ compensation and another $10 million from the general liability line. However, there was a $10 million adverse adjustment in the commercial auto sector. This adjustment is distributed across the four prior accident years from 2016 to 2019, resulting in small adjustments in each of those years. In the 2016, 2017, and 2018 periods, the main factor was some movement in severity, while in 2019, it was a small combination of both frequency and severity.

Okay. That’s helpful. And one more, if I can, you detailed a lot of the moving parts in the core loss ratio in your opening remarks. I am just wondering if you can maybe just pull it apart again and to give us a sense of what may be recurring versus more a one-time benefiting from less activity in the quarter?

I think, and Mark can give you the specific pieces, I think, clearly, the biggest driver in the improvement from an underlying combined ratio basis, when you strip out all the moving parts, is the benefit to non-cat property being lower than expected and lower than prior year. And that, I would say, that makes up the majority of it. In terms of how that looks going forward, as we have said, you do have some volatility in both catastrophe and non-catastrophe losses in normal times, but as long as the economic environment remains under some strain, you could very well see some of that favorable volatility persist. But I think and it’s no different than we talked about on Casualty Line side, your severity on those losses, whether individual losses or catastrophe losses could bounce around from period to period, but that’s the primary driver.

Yeah. That’s exactly right. And Charlie, the only thing I’d add is that, obviously, it’s been an unusual year with a lot of moving parts between catastrophe losses, a reduced level of economic activity that impacts those catastrophe property losses and expenses, and then, obviously, the COVID-19 specific accruals. When you kind of parse through all of that and all of the moving parts, I will kind of take you back to the beginning of the year as we laid out our combined ratio forecast, which was essentially 140 basis points of margin improvement from last year and expectation of a 91.5% for the full year on an ex-cat basis accident year. If you look at where we are year-to-date, we are at 90.4% on accident year ex-cat basis. Our guidance that we put forward for the full year at 90% to 91%, that’s on an ex-cat basis. If you adjust for the reserve development that we have recorded on a year-to-date basis kind of annualize that, that puts the underlying combined ratio expectation at a 91% to 92% for the full year, so kind of split the difference. It sort of gets you back to where we were at the beginning of the year the guidance of 91.5%. Now embedded in that are quite a few moving parts, we have the earned impact of the audit premium accrual. We have all the bad debt that we recorded, and as John mentioned, the $10 million of COVID-19 related specific IBNR for the potential for some specific coverages for BI within property. But then you also have some offsets, as John mentioned, related to non-cat property losses and a reduced level of underlying expenses. But I would kind of take you back to kind of the 91.5% expectation for the full year when you kind of parse through all the moving parts in the quarter.

Got it. Thanks, guys. Congrats on the quarter.

Thanks, Charlie.

Thank you.

Thank you. Our next question comes from Matt Carletti from JMP Securities. Your line is open.

Good morning, Matt.

Hey. Good morning. Good morning. How are you?

Good. Thank you.

Just a few questions, I was hoping to start off maybe just on the topline on premiums. I was hoping you could help us get a feel for just how things progressed across the quarter, because clearly, conditions economically and the lockdown and stuff changed from April to May to June. So whether that’s premium growth levels or submission flow or just any way you can help us kind of get a little bit of a picture of the progression as it went across the quarter, and of course, I know it’s just the last day of July. But if you have any insight into how July looked, that would be helpful, too.

Thanks, Matt. This is John. I will focus on our main segment, Standard Commercial Lines, which constitutes about 80% of our premium. Throughout the quarter, we experienced a progressive improvement from a topline perspective, ending with an overall growth of 3%, or 6% if we exclude the influence of audit premiums. For Commercial Lines, approximately two points contributed to the 5% growth. Overall, this reflects a solid growth rate for Standard Commercial Lines that improved slightly over the quarter. While it wasn’t drastic, our performance has been consistent. In July, we still have two days left for booking premiums, and I expect that July's Commercial Lines premium will surpass what we saw in the second quarter. This is due to strong pricing, retention, and solid new business performance. I believe it's crucial to note that we continue to thrive in this environment. Achieving a 3% growth rate, even with premium credits, in a quarter where GDP is affecting the broader economy showcases our market positioning and the continued willingness of our distribution partners to grow alongside us. We remain committed to utilizing our tools, including a recently launched tool that helps agencies evaluate their portfolios against our underwriting standards to identify potential accounts that would be a better fit with Selective, contributing significantly to our growth. Overall, we feel optimistic about our ability to grow the Commercial Lines business despite potential economic challenges ahead this year.

Yeah. I think and…

Go ahead.

I was just going to add just one observation to that that, and John is exactly right, the performance has been exceptional and the growth rate has continued through July. The one caveat I think we would be remiss not to mention is we did let the billing hold to early July. And depending on whether our customers come in line with their premium payments, it could be a little bit of an offset in terms of some cancellations coming through to August and September. But that’s a little bit of a wild comment at this point, we don’t expect that to be meaningful, but there is some potential for some pressure on the topline related to some cancellations due to the leniencies we had in place.

Okay. Perfect. Makes sense. Then the other question I want to ask you is, there’s been in the press in the past week kind of just, I guess, a Task Committee, the New Jersey COVID presumption bill for workers’ comp and I know it’s a rebuttable form. Just your thoughts on it and kind of in relation to your book of business and your workers’ comp exposures and what you make of it?

Thank you, Matt. This is John. We discussed this a bit during our first quarter call. As long as regulations focus on essential employees who interact with the public, they are manageable. The New Jersey law, which is currently up for discussion, appears reasonable in its present form. However, we have progressed far into this pandemic, and have a clearer understanding of reported workers' comp claims, including those covered and not covered. These presumption bills complicate the claims process since it's challenging to deny claims from employees required to work in essential roles who can demonstrate that they contracted the virus through their job. So far, the reported frequencies do not indicate that either way, the claims activity among the working-age population will lead to significant severity. It’s worth noting different segments, like first responders and healthcare workers who frequently encounter COVID-positive patients, face a different situation, which doesn’t reflect our workers' comp portfolio. Therefore, I cannot comment on their specific experience.

Great. And then one last just numbers question. I apologize if I missed it, but the cat losses in the Commercial Lines segment, do you have the split between the kind of three different lines that at least historically catch cat, the property, the auto and the BOP?

Yeah. Just give us...

Yeah. We did that breakdown.

Yeah. Within Commercial. Yeah.

Yeah.

Yeah. For the quarter, the impact, let’s make sure, exactly, so the cat losses also not cat profitable. Yeah, so 37 points on the Commercial Property Line, Commercial auto was just under a point at 80 basis points and BOP was 52.1 points on the combined ratio in the quarter.

Right. For a total of 10.1 points for commercial in total.

Got it. Great. Thank you very much.

Thank you, Matt.

Thank you.

Thank you, Matt. Next question comes from Paul Newsome from Piper Sandler. Your line is open.

Good morning, Paul.

Good morning. Could you elaborate a bit more on the competitive landscape currently, especially among regional players? We've noticed significant growth in your sector, particularly highlighting financials. It appears that unlike other areas, there hasn't been much pullback in competition among similar companies. I would appreciate your insights on whether you have observed an increase or decrease in competition given the current turbulent environment.

Yeah. Paul, this is really hard to evaluate, because I think, the information flow with the pandemic ongoing is a little bit more challenged and it’s also hard to really unpack some of the drivers of different companies’ performance between new business and stronger retentions. We pick our spots and we always have picked our spots, and our agents are providing us with opportunities, as I have said and we are our hit ratios, actually if you want to think about hit ratios as a proxy for the competitive environment. Our hit ratios have actually been fairly stable across small, middle and large accounts, which I think, would suggest that there hasn’t been a radical shift in the competitive environment. But I qualify that by saying that, I do think some companies have struggled to maintain the level of interaction with their distribution partners because of the disruption in their operation. And I think and I can’t speak for other companies, whether regional or national, but our operating model has underwriters that are specifically assigned to agents as opposed to broken out by class of business. What that does is it gives you a great line of communication to the individual producers on an account. So our ability to feed off of those relationships and maintain them with outbound calls to request opportunities is different from companies who might have more of a centralized underwriting approach where there’s not an established relationship between the account producer and the individual making that underwriting decision. So for companies that are structured like us and there might be one or two others that you would put in that category, are probably having an easier time identifying opportunities and creating submission flow.

Could you discuss the current state of claim cost inflation in more detail? You've made some strategic comments regarding whether we're observing an increase in the underlying inflation for the business. It's understandably challenging to assess this amid other concurrent factors, but do you have any additional insights on this topic?

I don’t think our commentary contradicts what you've been hearing. We have always maintained a disciplined approach to our casualty loss assessments, incorporating an expectation for future loss trends. While actual frequency and severity trends in recent years influence our loss ratio for the Casualty Line, we consistently anticipate future trends. Over the last couple of years, our expectation has risen from around 3% to just under 4% for Commercial Lines. It's important to note that with the recent quarters, it’s challenging to determine if this trend has changed. However, over the past decade, our track record shows we have reliably met or exceeded our expectations for rates and retention in conjunction with loss trends. We do believe there is a need to adjust our pricing outlook, driven by various factors. One of those factors is the shifting loss trend, but we must also consider the volatility from both catastrophic and non-catastrophic losses. The prevailing low investment environment means companies will likely see reduced returns from their investment portfolios unless they increase their risk profiles, which is not our approach. This translates to a need to adjust our combined ratio targets downward, subsequently raising our pricing indications. In summary, we acknowledge an increase in loss trends, but within our portfolio of smaller to mid-sized accounts, which generally involve lower limits, we do not observe the significant loss trend movements that some other companies might be highlighting.

But my apologies, I didn’t mean to say you were contradicting the industry, I just think we have seen a lot of different views for everybody this quarter.

Yeah. No offence taken.

Thank you very much.

Thank you.

Thank you.

Thank you. Next question comes from Sean Reitenbach from KBW. Your line is open.

Good morning, Sean.

Good morning. Can you provide insight into the workers' compensation claim counts observed throughout the quarter, particularly as it approached the end? Additionally, could you share your thoughts on pricing, especially in light of discussions suggesting it may be nearing a bottom?

I will begin by noting that we don't delve into many specifics regarding individual claim counts for the quarter. However, based on my earlier comments about the workers’ comp presumption discussion, we have not observed a significant level of COVID-related workers’ comp claims. That said, there has been a decrease in non-COVID claims reported throughout the quarter. I can mention that we have started to see a return to a more normal run rate, although it remains below our historical levels. As Mark and I mentioned in our prepared remarks, we haven't adjusted our approach to casualty frequency. It wouldn't be wise to do so, given the severity factors affecting casualty losses and the necessity to allow more time for those losses to develop before making any changes. Regarding claim counts, in terms of pricing, I've seen the commentary about workers’ comp pricing bottoming out, which I find to be a reasonable assessment. However, it is essential to frame this properly; it is bottoming at a considerable negative rate, and it will likely continue to be negatively impacted. While it may become somewhat less negative as we progress into 2021, it is still expected to adversely affect future loss ratios for that segment. Additionally, you might observe something we have previously mentioned—besides the bureau filed rate changes, which remain negative, there has been some aggressive pricing activity in the market. This could lead to improvements in pricing, but we still anticipate ongoing negative filed rate changes, though they may be slightly less negative than before.

Thank you. That’s helpful. Secondly, can you give what kind of feedback have you guys gotten on the personal auto rebates and how are you thinking about Personal Line exposures to some of the bigger auto insurers potentially enacting rate decreases?

Yeah. We did provide the premium credits for the months of April and May and at this point, have not extended that. And I will tell you what we have seen is the actual reported claim activity as the quarter went on has bounced back a fair amount, still a little bit below where it’s historically been, but not meaningfully below. With regard to the actions of the bigger auto writers, it’s just not an area we compete in. We are generally writing companion accounts that package up the auto and home and we are generally competing for more of what we would describe as a consultative buyer, who’s going to focus a little bit less on price and a little bit more on making sure they are buying the right product with the right coverages to protect their not just their auto, but their home as well. So I won’t say that change in competitive environment among the bigger players won’t put pressure on auto hit ratios. But it was a small segment of business for us. You have seen us struggle to generate consistent topline growth in auto, in part because of that competitive pricing environment and the pressure that puts on our hit ratios and we think that will probably continue with some of the actions that we have seen from some of the bigger players.

Okay. Thank you very much. Be well.

Thank you.

Thank you.

Operator, we have any more questions on the line? Yes, sir. We have a question from Bob Farnam from Boenning. Your line is open.

Yeah. Hi there and good morning.

Actually two smaller pieces here, I wanted to talk about the Excess and Surplus Lines market. You have had a lot of companies saying they are pretty excited about the prospects in that line in that business rates going up, submissions going up. So I just kind of want to get a feel for what you guys are seeing in that line and what we should expect going forward?

Yeah. Thanks. We saw a solid growth quarter out of the E&S, not extraordinary, obviously. But in light of the economic circumstances, pretty solid growth and pretty solid improvement from a pricing perspective. I think it’s important to recognize that what we write in E&S tends to be the smaller it’s a $3,000 average policy size, predominantly in the binding authority space, kind of lower end from a severity perspective and complexities perspective in the E&S market. So I think some of what you might see in terms of the headline growth that the E&S tends to be focused on is cat exposed or coastal property and some of the higher casualty, and certainly, Excess is one of the areas that’s running pretty hard from a market firming perspective. I would say the one area that we have seen some migration from the admitted to the non-admitted market would be avocational and that’s a segment that typically does bounce back and forth between admitted and non-admitted at times like this and that is presenting some opportunities for us. But that’s also a bit of a challenged segment from a pricing perspective and it’s an area in need of rate level.

Got it. Okay. And one other smaller point, apologies to Mark maybe I missed it. But other income went up in the quarter more than I expected it to. What was driving that, is that one time or should we expect some strength there going forward?

Yeah. The other income line, there’s a couple of different items in there. So as we net that off again, other expenses within the expense ratio when you look at the combined ratio. There’s nothing in particular that stands out in terms of kind of ongoing run rate in other income.

Okay. Great. Thanks.

Thank you.

Thank you. Our next question comes from Charlie Lederer of Credit Suisse. Your line is open.

Good morning.

Hey, guys. Hey, guys. Just one more, on the Commercial Standard Lines pricing, just wondering if there’s anything to kind of glean from the decelerating quarter-over-quarter, just looking at the supplement?

I wouldn't characterize it as deceleration; we saw movements of 4% and 3.9%. The minor shifts, which are only 10 to 20 basis points, include a slight decrease in workers’ compensation and a similar decline in property insurance, going from 4.7% year-to-date to 4.5% this quarter. Overall, I would describe the pricing as stable in recent quarters. We do believe there are possibilities for improvement in the property segment, while workers’ compensation may still show a slight decline, and general liability continues to increase. We expect property to maintain its current run rate. Overall, we’re confident about the pricing environment, and this quarter reflects stability in our results. I also want to emphasize, as I have mentioned before, that we have a high-quality, well-priced in-force book in Commercial Lines that is contributing positively to our performance. Our underwriters are focusing on maintaining that renewal book, and you may have noticed this emphasis during the quarter, especially given the economic challenges.

Got it. Thanks again, guys.

Thank you.

Thank you. And that concludes today’s conference. Thank you all for joining. You may now disconnect.