Selective Insurance Group Inc Q4 FY2020 Earnings Call

Good day, everyone. Welcome to Selective Insurance Group’s Fourth Quarter 2020 Earnings Call. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations and Treasurer, Rohana Pai. You may begin.

Good morning, everyone, and welcome. We are simulcasting this call on our website, selective.com and a replay will be available until February 28, 2021. 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.

Thank you, Rohana, and good morning. I will make some opening remarks and then turn it over to Mark to provide the details on our results for the fourth quarter and the year. We generated excellent financial results in the fourth quarter with an 18% annualized non-GAAP operating return on equity (ROE). For the full year, our 10.5% non-GAAP operating ROE was strong in the context of the myriad challenges for the industry, including COVID-19, record low interest rates and significantly elevated catastrophe losses. In addition, the decline in interest rates has resulted in $5.09 of after-tax unrealized appreciation in book value per share, which lowered our non-GAAP operating ROE by 1.2 points. 2020 was our seventh consecutive year of double-digit operating ROEs. While our 2020 operating ROE fell just shy of our 11% target, this long-term track record puts us in an elite group of top-performing property and casualty insurance companies. We are extremely proud of this accomplishment. Before discussing our results further, however, I wanted to highlight some of our major accomplishments, which often do not get mentioned. 2020 was, in many ways, one of the biggest challenges faced by our industry from both an operational and financial standpoint.

Thank you, John, and good morning. I will review our consolidated results, discuss our segment operating performance and finish with an update on our capital position and guidance for 2021. For the quarter, we reported net income per diluted share of $2.10, a non-GAAP operating earnings per share of $1.84. We reported an annualized ROE of 20.6% and a non-GAAP operating ROE of 18%, with the strong finish to the year driven by both our insurance and investment operations. For the full year, we generated a 10.5% non-GAAP operating ROE and increased book value per share by 15% or 17% adjusted for dividends. Each year we establish an operating ROE target based on at least a 300 basis point spread of our weighted average cost of capital, as well as other factors including market conditions. For 2021, we have established a non-GAAP operating ROE target of 11%, which is close to 400 basis points over our current estimated weighted average cost of capital. Our target sets a high bar for our financial performance, balances any performance that aligns our incentive compensation structure with shareholder interests. We enter 2021 at the strongest financial position in our company’s long history, including a record level of GAAP equity, statutory capital, surplus, and holding company cash and invested assets. We believe we are extremely well-positioned to continue delivering strong growth and superior operating performance. On a consolidated basis, it was a solid growth quarter with net premiums written up 8% compared with the year ago, driven by higher retention in Standard Commercial Lines, overall renewal pure price increases averaging 4.8%, and new business growth of 7%. For the year, consolidated net premiums written growth was 3%, but included about a 4 point negative impact related to COVID-19. This impact reflects our $75 million first-quarter order premium accrual and the $19.7 million of second-quarter premium credits. We reported an extremely strong consolidated combined ratio of 88.1% for the quarter, which included 2.8 points of catastrophe losses. Favorable net prior year casualty reserve development totaled $35 million that benefited the combined ratio by 5 points.

Thanks, Mark. I am going to highlight some of our major areas of strategic focus as we move through 2021. We are well-positioned with a high-quality book of business that continues to generate strong profitability. With the tailwinds of rising Commercial Lines pricing, we will be focused on identifying opportunities for profitable growth, including maximizing market share with our distribution partners, strategically appointing new partners and identifying new stages to expand our footprint. We continue to invest in tools and technologies that enhance our market position with our distribution partners. Our MarketMax tool provides our distribution partners with insights into their overall portfolio and positions them to expand their relationship with us. We rolled out the tool to 250 of our distribution partners and are already seeing substantial success and believe we are only in the initial stages of recognizing our full potential. The roll out of our new agency interface for small businesses remains on track and should continue to enhance our opportunities in this space by significantly streamlining the quoting and issuance process. We ended 2020 with 1,400 distribution partners and average Commercial Lines premium volume per agency of $1.6 million. We added approximately 90 new relationships net of terminations, a trend we expect to continue in the next few years. We also anticipate restarting our geographic expansion strategy. The five states we opened during the 2017 to 2018 timeframe, including a new southwest region, are all performing ahead of expectations. Over the next two years we plan to open three additional states with others planned for subsequent years. Our long-term goal is to have national capabilities, although we will follow a measured and disciplined approach to identifying and opening new markets. In Personal Lines, we began shifting our focus toward the affluent market, a customer base that is less price sensitive and derives greater value from coverage and service. For E&S, our enhanced automation platform rolled out for new business in late 2020, enhancing our competitive position in this important market. Second, we remain focused on delivering a superior omnichannel customer experience, which has been a true differentiator in the current environment. We were able to generate significant value for our customers through proactive and targeted communications based on their preferences. Enhancements to our digital self-service offerings have resulted in utilization growing to over 40% of our customer base. Our claims and safety management teams continued to enhance the customer experience and increased operational efficiency through the deployment of virtual servicing technologies. Finally, one of our biggest priorities remains building a culture that fosters innovation and idea generation as we seek to develop a deep bench of leaders to take the company into the future. Building a highly engaged team of employees and leaders is one of our core strategic imperatives. I firmly believe that creating a culture centered on the values of diversity, equity, and inclusion is essential to keeping employees engaged and contributing at their highest levels. We have already taken a number of steps during 2020 to raise awareness around this issue within the company, as well as increased the level of diversity at all levels within the organization. This will remain a major priority for us in the coming years. As we look out to 2021 and beyond, I am extremely confident in our competitive position in the marketplace and the tools, talent, and relationships on which we have built our platform. Over the past several years, we have demonstrated our ability to generate consistent industry-leading financial returns for our shareholders and I am optimistic in our ability to continue to do so in the coming years. With that, we will open the call up for questions.

Certainly. The first question is from Mike Zaremski of Credit Suisse. Your line is open.

Hey. Good morning.

Good morning.

Maybe first question, if you can try to parse apart what’s causing the topline growth to accelerate nicely and maybe you can talk about exposure changes versus the competitive environment versus, I know, probably, tough to quantify, but maybe some of the digital improvement processes you have been speaking to with your agencies?

I'm glad to address your question and appreciate it. To start with the exposure change, which you wanted more details on, remember that in Q1, we recorded a $75 million accrual for anticipated negative audit and mid-term endorsement premiums, which we have addressed upfront. This was related to the 331 enforced policies covering their full terms, impacting the unearned premium for those policies. We have removed that uncertainty from our following quarters, and there's no longer a drag since that estimate has largely held steady. Currently, we still have around $25 million remaining in accrual. When assessing overall exposure, although it can be difficult to measure, I would describe our renewal portfolio exposure for the year as roughly 1% positive, whereas a typical year for us falls between 2% to 3%. This variation is largely due to our mix of business, which is heavily weighted toward contractor classes, making up about 40% of our premium, and even higher in the auditable lines of general liability and compensation, closer to 50%. This has supported a somewhat stronger exposure base for our customers. Additionally, rates have played a role in our growth, with slight acceleration noted. As I stated earlier, our retention rate was 86%, which is 200 basis points above the previous year, reflecting our approach and the detailed manner in which we manage our pricing strategy. Another positive outcome, even in this environment with a lower average exposure across the industry, is that our Commercial Lines new business grew slightly over 2% for the full year, and we take pride in that. Our robust agency relationships and our franchise model have showcased their value, particularly in times like these, indicating that our partners are eager to collaborate and grow with us. The mix of new business remains relatively stable compared to earlier years. Small commercial non-contract accounts continue to face the most pressure for us, whereas we noted a slight improvement in larger account business, defined as premiums over $250,000. However, our strong middle-market presence, with accounts typically between $25,000 and $250,000 in premium, continues to drive our performance. I believe I've covered most points you were interested in, and these are the main drivers of our growth. It's crucial to emphasize that the same discipline and attention we apply to managing our renewal portfolio also extends to new business. We are prudent in our new business underwriting, regularly measuring its quality and pricing at a detailed level, which gives us confidence in the sources of our growth.

All right. That’s helpful. Would you say that, talking to agency partners that Selective may be asking for a little less rate increase than the industry average or certain peers, which seem to be kind of pushing potentially maybe some corrective actions more so than Selective?

Well, I won’t comment on individual competitors. I think one important point to make is when you look at where the headline price number is coming from. In many cases, it’s coming from the large, higher exposure areas, the more specialty lines of business like D&O and EPL and significant access layers, there’s not a lot of that in our portfolio. If you focus more on the sort of main lines of business, property, GL, workers’ comp, and Commercial Auto, and focus on the small to middle market end of the business, I think our pricing might be a little bit lower than average. But I think in the context of our profitability is where it should be and I think that’s put us in a good position. And again, I know we have been a bit of a broken record on this. You can look back at our disclosures at our guidance over 10 years and what you will find is a very strong discipline, not just around rate level and getting rate levels, but also having an explicit assumption for trend year-over-year and recognizing that our expectation for trend was always our hurdle rate for pricing in terms of driving that loss ratio improvement. That has put us in a good position and has allowed us to have to go out to market with significant price increases that could cause disruption for our agency partners.

Understood. If I could switch gears to John your comments about increasing diversity within the organization. I am curious, do you think Selective and I think others too, it’s tough for us to really measure whether diversity levels are increasing, do you expect to put out some metrics over time to help investors and others track the performance of these goals?

We do and I appreciate the question, and I appreciate your follow-up to the points I raised in the prepared comments, because this is a very important issue for us and we think should be for all companies across the country. We have taken specific actions and I think you probably saw our most recent Corporate Responsibility Report or ESG report, which was the first iteration from this past March and with our next-generation, our full intent is to provide more data relative to where we stand from a diversity perspective. We are more than willing to acknowledge that we have work to do on this front, and the work for us has really come on in a couple of areas. First, making sure we have not just the right practices for hiring, new hiring, but more importantly, we do have a lot of diverse employees in our organization that we have made sure have full access to the training opportunities and development opportunities and mentoring opportunities that we make available to our employees and ensure that our next-generation leadership programs are appropriately balanced in terms of the diverse makeup of those groups. This has been a big part of our focus of late. But I will also say that the other part of this that has always been one of our core values as a company is inclusion and that’s more of a leadership approach. You can do a lot to build a more diverse organization in terms of your employee population. But I think it’s equally important to make sure that you lead in a very inclusive manner so that people of different backgrounds can actually feel like they can have an impact on the organization. I would say the inclusive aspect of this has been as much of a focus for us as the diversity. A final point I will make here, and I think this has always been a topic for us, but I think you saw in the last year a real positive move here in making sure we have diverse backgrounds and experiences on our Board of Directors. We added four additional Board members this year, which was a little higher than we would normally do, but found four people with excellent backgrounds. Also very diverse individuals to our Board, which we have already seen improve the level of discourse on our Board because of the different perspectives they bring.

Okay. Great. Look forward to seeing the next Corporate Responsibility Report. My last question, probably, for Mark and is probably in your prepared remarks and I will go over the transcript. But I think you mentioned some of the reserve releases were from general liability or maybe it was current accident year benefits as well. Maybe you can talk about what you are seeing there?

Sure, Mike. So, you are right. We had some reserve releases in the current quarter, on the prior accident year it was $35 million. As I mentioned in the prepared commentary, $20 million of that came from workers’ compensation and $15 million from general liability. We also took a hard look at the 2020 accident year as we closed out the year and clearly the year was characterized by lower frequency for the shorter tail liability lines within Commercial Auto and the Personal Auto. We did respond to a portion of the loan frequency that was to the tune of $5 million in Commercial Auto and $5 million in Personal Auto that had a net benefit of 1.4 percentage points on the combined ratio in the current quarter or 40 basis points for the full year. Looking at the reserve releases for the full year, it was $85 million, $50 million from workers’ comp, $35 million in general liability. In the third quarter, we did take action in Commercial Auto in the prior year and increased the returns by $10 million, but that amounted to $5 million in total for the 2020 year.

I would just add to that, if you look back over the long-term, our general liability line has significantly outperformed the industry at a very consistent basis. You could strip out the prior year development this year and each of the last several prior years and on an accident year basis that line has a run rate around 90% for us, which, whether on a straight or risk-adjusted basis, is very strong performance. Again, I think reflective of, we do have a bigger portion of contractors and we underwrite that extremely well. Our limits profile tends to be lower. We write a fair amount of manufacturing and wholesaling, but it’s not the real heavy products exposure that creates some of that volatility. That’s just a line that we have really outperformed on and feel like we are in a really good position relative to the underlying performance, and I think you have seen that over the long-term.

To be more specific, was the positive development in the GL prior year reserve spread across many previous accident years, or can you provide insights on the accident years?

When you look at GL, I will be, if everything goes according to plan, filing the 10-K in the next two weeks, so we have quite a bit of reserve information in there that follows service on statutory books at the end of February. You will get all the specificity. GL was sprinkled across multiple accident years. Going back, there is no particular accident year that jumps out on the workers’ compensation side. We typically do an annual tail factor review in the fourth quarter, so that impacts the older accident years pre-2010 and that was a big driver of the fourth quarter's $20 million reserve release. We have also seen already some favorable emergence in the ‘16, ‘17, and ‘18 years of workers’ compensation as well, but no specific year stands out in general liability.

Thank you very much.

Thank you.

Thank you. The next question is from Matt Carletti of JMP. Your line is open.

Hi. Thanks. Good morning.

Good morning, Matt.

John, I was hoping I caught in your comments about Personal Lines. I think you said you are kind of shifting more toward the mass affluent market. I was hoping you could just dive in a little deeper there and kind of flip in on how the product might be changing, whether it be service levels, coverage levels, things like that? And then how we should expect to see that as you kind of go state-by-state or what the timetable is?

Yeah. No. Sure. Thanks again for the follow-up question on that. You do have it correct. Our move in the Personal Lines space is into a segment of the market we think is a much better fit for how we do business, and it’s the mass affluent market. You are generally talking about income levels between $200,000 to $1 million and net worth in the $1 million to $5 million. It’s not the high net worth or ultra-high net worth; it’s sort of that middle slice in that tier. I would actually say from a product and service perspective, we have the majority of what we need to serve that market. There are some items around the edges in terms of product a little bit on the service side that we intend to start rolling out on a country-wide basis in mid-’21 and there are a couple of additional items that will roll out in the latter part of ‘21 into the early part of ‘22. From a product and service perspective, I think there isn’t a lot more we need to do. I think it’s more about clarifying our appetite and our message to agents in terms of our desired market segment. Our agency partners, our current distribution partnerships are well-positioned. This tends to be a lot of what they focus on from the Personal Lines perspective. This really allows us to ramp this up quickly, and we expect to roll it out in all of our Personal Lines states on that same calendar starting in, call it, early third quarter of this year.

Okay. Great. Very helpful. Maybe just shifting real quick to Standard Commercial and circling back to one of the questions Mike had on working through topline growth trends. How should we think about Q1? I am not asking for guidance or anything like that, but just if my notes are right, you guys took about a $75 million headwind in Q1 ‘20 from audit premium, mid-term endorsements, kind of COVID-related stuff. Is the right way to think about it that that was a one-time and as we anniversary that, that kind of goes away, so kind of add $75 million back to Q1 ‘20 and that’s the starting renewal level if you will and then we can assume whatever macro trends we want to assume from there? How should we think about that as we get to Q1?

Yeah. Matt, this is Mark. You are absolutely right. I would add the $75 million back to the topline to get a better sense as to what the NPW number is and really that’s important for comparison for Q1. If you look back at Q1 2020 for Standard Commercial Lines, we were down 5%, but we had a pretty significant negative impact from that audit premium accrual that went through and the actual underlying growth rate was closer to 8% to 9%, 8.5% was the growth rate in that. Now, just as a reminder, the $75 million was an NPW number and that was run over the remaining life of those policies, which go all the way through till March 31, 2021. Most of that was fully earned in the 2020 year. There’s a little bit of a tail that trickles into Q1 ‘21, but on an annual basis, it won't have much of an impact in the fourth quarter because it really reflected two weeks of the earnings of that adjustment from when COVID-19 started. I would just highlight the impact versus the net premiums written impact as well.

Okay. Great. And then my last question, focusing on the Standard Commercial. I assume that this mainly pertains to Standard Commercial. When you consider the accident year guidance excluding catastrophe losses, which is set at 91% combined, how should we generally view the positive and negative factors? You certainly have auto lines that benefited from lower frequency in 2020, but it may be reasonable to not assume that those benefits will continue. Conversely, should we anticipate that in some of the other lines where rates are increasing ahead of trend, there could be a positive influence on the accident year results?

Yeah. It’s a good question because when you look at the guidance of 91%, the actual reported underlying was 90.1% in 2020. Both John and I provided commentary in the prepared comments, but really the best starting point is to adjust out some of those one-times as clearly 2020 was an unusual year. Not to get into too much detail, but I provided most of these items in my comments. There was the 1.1 points of COVID-19 negative impact that will reduce the starting point. We have the non-cat property, which is favorable, by 1.2 points the current accident year’s development, which is favorable in the fourth quarter. You have to back out that which was 40 basis points. The underlying expense ratio ex-COVID-19 is favorable by about 70 basis points and that’s about 20 basis points of other. That kind of gets you back to 91.5%, which was our initial expectations going into 2020, as a better starting point of comparison when you roll from ‘20 to ‘21. When you roll from ‘20 to ‘21, we typically provide a pretty detailed waterfall chart at our Investor Conference in early February that we will probably do again this year. A couple of the puts and takes would be when you start with that 91.5% rolling to a 91%, you have about 50 basis points to 60 basis points of headwind from reinsurance comps that I mentioned, reflecting the higher risk adjusted pricing on the roll out of our programs for 2021. We don’t have to worry and we have trend and our expectation is that rate will continue in 2021 on a loan basis to see trend. We have some underwriting and claim benefit that will drive some underlying margin improvement and then we expect to drive the expense ratio down in 2021 as well. When you put it all together, that’s about net, net about 50 basis points of margin improvement year-over-year and a portion of that really is driven by the rate trend of expectations that, of course, varies by line of business.

Great. Very helpful. Thank you.

Thank you, Matt.

Thank you. The next question is from Meyer Shields of KBW. Your line is open.

Thank you. I wanted to go back to the Personal Lines plan again. John, I think I understand what you are saying you have the capability to service this market adequately despite higher demand. Is there going to be any impact in the mix between loss and expense ratio on that book?

I am sorry, Meyer, you really broke up there. You are looking for the difference between loss and expense ratio on that book, sorry.

Yeah. In other words, as you shift to higher net worth customers, is there a different allocation of combined ratio to expenses rather than the losses?

Actually, no. I wouldn’t think there would be honestly a significant difference between loss and expense, a lot of the servicing expense, the commission loans, which is a major driver of expense ratio aren’t going to be meaningfully different. I think this is more about a book that you would expect to have a higher persistency, which over time would also generate a little bit of loss ratio benefit. I wouldn’t view this as necessarily a segment of the market that’s going to command a higher expense ratio in terms of the performance.

I think the other point on Personal Lines for the expense ratio is, we have really worked hard to drive the expense ratio down. You can see some improvement in 2020 versus 2019. We believe we need to continue to drive that down a bit to be competitive in that space.

And the other point is to the extent there are additional coverage enhancements that are contained in a program for a certain customer base. We are going to assume that the incremental price that underlies that enhanced coverage is adequate and should be loss ratio neutral to the extent those coverage and enhancements were added on a policy-by-policy basis.

Okay. That’s very helpful. If I can switch gears a little bit, and I am wondering if that can be answered. But what would it take before there is like an official acknowledgment that some of the frequency benefit in workers’ compensation or other lines that are longer-tailed, will this take before you will have comfort saying, okay, that’s it?

Well, I will start and I appreciate your lead into the question, because there is no clear answer to that question and it’s going to be very company specific. Our philosophy around reserving continues to be the same, which we do a full reserve review for all major lines of business on a quarterly basis. Obviously, the longer tail lines that you are referencing, the severity on those lines, which includes the claim reporting, certainly takes well beyond the end of the accident year to comment on the full view. Is the frequency decline that we saw across all lines real? Yes, it is. I think as we mentioned previously, the question remains what is the offsetting severity impact and how long will it take for that to emerge in a manner that we have confidence with? The only way I can really answer the question is to say, with each passing quarter and with the future associated reserve review, our level of confidence on the accuracy of our views of ultimate frequency and ultimate severity by line will continue to grow in confidence. We did take a little bit of action in Commercial and Personal Automobile, because that is a line that has a slightly faster reporting pattern and a slightly faster development pattern, and we felt that what we saw gave us the confidence to make those small adjustments for the 2020 year in the fourth quarter, but for GL and comp, it’s a much longer maturation process to really get a good insight into the accident year.

Okay. That’s helpful. Just a final question on that, should we assume that same conservative, I think the answer is yes, but the same conservatism underlies the pricing that you are putting in place for these lines of business?

Yeah. So we have got a very disciplined process and the results of our reserve review feed all of our accident year planning. Our accident years are fully baked into our pricing indications from our actual pricing team. Those pricing indications don’t just drive our rate filings in Commercial Lines. They also inform the pricing guidance that we provide to our underwriters on an account-by-account basis. What you see in terms of our view of the 2020 accident year is fully reflected in how we think about pricing on a go-forward basis. As those numbers adjust, your pricing indications adjust accordingly, as you have got multiple accident years that are built into your pricing indication process.

Okay. Excellent. Thank you so much.

Thank you, Meyer.

Thank you. The next question is from Bob Farnam of Boenning & Scattergood. Your line is open.

Yeah. Thank you, and good morning.

Good morning.

So, given your guidance and your commentary, it sounds like 2021 is set up pretty well for you guys. But what are your biggest concerns as we move through the year? What do you worry about the most, particularly regarding your ability to reach your objectives for the year?

Yeah. So I think obviously we continue to be in a pandemic, and the pandemic is certainly having some economic impacts. Some of those economic impacts, as we mentioned, are impacting our expectations for investment yield on a go-forward basis, which supports the need for additional margin improvement. We are assuming that the pricing environment remains constructive and remains a tailwind, and we think that that’s going to be a support for us. In terms of achieving our objectives, as investment ROEs continue to drop, you need a corresponding drop in everybody’s combined ratio to make up for that difference. To the extent we see competitors look at 2020 and view it as something other than an anomaly and view it as some sort of a fundamental shift in frequency and severity trends that could create a little bit more headwinds in the market. That will not knock us off of what we are focused on because I think we have demonstrated we can manage pricing regardless of the market environment overall, but I would say that continues to be a risk. The longer we go with the economic pressures, it could ultimately start to impact exposures more significantly than it has at this point. So are those concerns? Yes. But I think the way you opened the question is, which is how we think about it, we are very well-positioned and, with our higher operating leverage, it requires less underwriting combined ratio improvement to make up for that loss of investment yields. I think other companies that are operating at a 1 to 1 or even lower have a bigger gap to make up for that loss in investment ROE.

Right. Good. Thanks for the color. And my last question is on share repurchases. Given your new authorization, what goes into your decision to repurchase shares rather than use your excess capital some other way?

Yeah. Thanks. Good question, Bob. I will start with the best use of our capital is to deploy it into our insurance operations and to grow our franchise. We generated very strong and attractive returns in our business, and that’s what we want to continue to do. We are looking to grow in a disciplined and profitable way. We are looking for ways to continue to accelerate the growth rate. John talked about the strategies around retooling the Personal Lines strategy, the GL expansion, the new technology with access and surplus lines. That really is the number one use of our capital is to put it back into the business. To the extent that we do have excess capital above what we need to run the business, above the tests, we are a conservative company. We would like to have a buffer, a little bit of headroom. When we get into a position where we have, what we would call returnable capital in excess of our access, then we looked at different ways to think about using that, which would include a variety of capital management objectives including share repurchases. We look at different metrics. We look at internal rate of return calculation versus cost of capital for share repurchases. We look at book value accretion time period in terms of looking at share repurchases. We look at very different metrics. Today we have executed under the share repurchase program. As we mentioned, when we put that into place back in December, we would be opportunistic and disciplined in terms of share repurchases. We view it as a nice tool to have in the toolkit today. It allows us to return capital to our shareholders over time and part of our deliverable growth in book value per share plus accumulated dividends over the long run. It’s not only delivering strong ROEs as John mentioned seven consecutive years of double-digit ROEs but also being a good steward to the company’s capital into these that we do have a returnable amount, and it’s a good return and we will look to execute on the share repurchase program.

Okay. Very good. Thanks, Mark.

Thank you.

Thank you. The next question is from Ron Bobman of Capital Returns. Your line is open.

Hi. Thanks a lot, and good morning to everybody. Hope everybody’s well.

Good morning.

Good morning.

I had two questions. One, just curiosity sort of what percentage of your office staff, maybe headquarters are coming in on a regular basis, I was just sort of curious about a rough figure? And then I had a question about the wholesale business, what is the recent sort of trend lately, whether it would be fourth quarter and maybe even early in January, generally speaking, as far as sort of application count, the level of competitiveness among other competing markets? Thanks.

Sure. Thanks. Yeah. With regards to the percentage of our employees in our corporate headquarters at one of our physical locations, it’s roughly 75 employees across all of our offices, out of 2,400 employees, so a very small percentage. Again, we have said this previously, and part of this is our strong distributed employee model that we have always had and a lot of work-from-home employees, but all of our employees have the tools to work remote. It’s really just some folks in our data center, which happens also to be here in Branchville, New Jersey and some folks who need to come in and do some mail scanning to distribute mail electronically to folks that are considered essential and coming in on a regular basis. With regard to the E&S business, if you look at our performance for the year, we saw some pretty strong new business growth. I think we had some mix pressures that have created a little bit more topline volatility in total, but our new business was up around 20% for the full year, which is pretty strong, and that is driven by some higher application activity, higher submission activity. There are pockets of competitiveness, and I think we did see a little bit more success in new business on the brokerage side than we saw in the small binding authority side. For us, again, brokerage is not the higher hazard open brokerage business. It tends to be business that’s just a little bit above our binding authority constraints that we offer to wholesalers. I feel pretty good about the flow of new business opportunities. I haven’t seen any significant shifts in the competitive environment, although, there are certainly a lot more opportunities coming in for wind exposed and coastal property, which is not part of our appetite for E&S. I think a lot of what might appear to be a significant uptick in opportunity is actually due to the tightening of capacity for coastal wind among many markets. That’s just not really helped us based on the underwriting philosophy we have for that segment.

Okay. And then as far as whether it’s the fourth quarter compared to the third quarter or even January compared to the fourth quarter, any change in the trend line, the trajectory as far as submission flow in, again, the E&S business were not noticeable?

I would say it’s not noticeable. For us, we are pretty excited about the new automation platform we just rolled out and it rolled out in the latter part of the fourth quarter on the new business basis, which we really think helps improve our competitive positioning in this space and makes us a lot easier to do business with in the small binding and the small worker side as well, and that’s something we do expect. Regardless of what the overall market dynamic is in terms of opportunity, I think that by improving our standing from an ease of doing business perspective, we expect to provide Selective with momentum moving into the first quarter and the balance of ‘21.

Great. Well, congrats and good luck with that. Hope and again, stay well.

Thank you.

Thank you.

Thank you, Ron.

Thank you. The next question is from Scott Heleniak of RBC Capital Markets. Your line is open.

Hey. Good morning.

Hi, Scott.

I was just curious that I don’t know if you can share this or not, but the geographic expansion you mentioned, the three states. I don’t know if those are ones you want to share, if not that’s completely fine too. I was wondering if those will be in both Commercial Lines and Personal Lines or one of the other or is that still kind of being worked out?

Yeah. So, yeah, I am happy to answer the question. I think we have talked about the states we had on our list of targets. I don’t know if we specifically disclosed the three, but I don’t know if we will. The next three that we have for expansion, which are going to be launched, call it, in the latter half of ‘22, but the work is starting in earnest as we speak, would be Alabama, Vermont, and Idaho. Those are really round out states and adjacent states for our existing footprint. They don’t have the same opportunity in terms of market players as some of our more recent states. But as we restart, those are the three most obvious candidates and we’ve got a number of others we are evaluating for the next tranche where the work will start in earnest in ‘22 as these states are starting to roll out.

Okay. Will that be in both Commercial Lines and Personal Lines?

Commercial Lines only. Sorry, I know you asked.

Commercial Lines only. Okay. Okay. Got you.

Commercial Lines only.

I am curious about the agency plans. It seems they will remain similar to what you've seen in 2020 and in recent years. I was wondering if COVID-19 had any effect on new appointments or the high net worth Personal Lines initiative, and how that might influence your perspective on it.

It hasn’t, Scott. There was a bit of a wobble in terms of new appointments coming on board in, call it, April to June timeframe as agents were scrambling to get their lives in order in this remote environment. Our prospecting process takes a long time, and we engage pretty actively before we make an appointment and go through a process to ensure that it’s a good fit. So that pipeline is pretty robust and allowed us to continue to make appointments. I would say this year, we are probably a little bit more backloaded in terms of when the newer appointments came on. However, a number of 90, net of a small average termination number, is a run rate we would expect to continue for the next few years, and that doesn't anticipate new states. These states will obviously be additive to that number. But this is all within the context of our longer-term targets of achieving a 3% market share, pushing on two levers, the share of wallet, which we talk a lot about, and the agency control of the markets that we are in being at least 25% across all of our states. We have got the headroom there; we are about 22% on average across our footprint. So this is still within our strategic framework of franchise value as we push toward that 25%.

Okay, understood. My last question is about Personal Auto. You mentioned the increased loss picks and noted that everyone is experiencing lower frequency. Rates seem to be decreasing across the board, with some competitors also lowering rates in certain states. I'm curious about how you view growth opportunities in light of these declining rates and whether there has been a significant shift in the competitive landscape since March with COVID-19 and the favorable frequency many auto insurers are seeing. Can you share any insights on this?

Yeah. No. There is no question. The competitive environment for standalone auto has definitely become more competitive. This ties into the earlier discussion about how you view 2020 and how you modify your base pricing on a go-forward basis to incorporate the results of 2020, which is certainly what’s happening in Personal Auto. Personal Auto is also set up to respond more quickly to the extent frequencies and severities normalize based on the annual policy cycle and the fact that base rate file changes actually immediately make their way into their policies on an earned basis as you renew policies. Unlike in Commercial lines where base rates are just one piece of the equation for managing price on a year-over-year basis. So, yes, the competitive environment has tightened, but I think this is also sort of underlines our shift in strategy. Our expectation is, and we have already been writing a fair amount of business on a multi-policy basis where we are writing both the auto and the home. As we sort of migrate to the affluent market, price still matters, but price isn’t the deciding factor like it is in the mass market for Personal Auto. That business model will require more underwriting acumen and service improvement.

All right. Great. That’s very helpful. Good luck. Thanks.

Thank you, Scott.

Thank you.

Thank you. That’s our last question on queue. Speakers, you may proceed.

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Oh! That’s our last question on queue. You may proceed.

Great. Well, thank you very much for attending and for your time this morning. I appreciate the questions, and as always, any follow-ups, please reach out to Rohan. Thank you.

Thank you.

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