Selective Insurance Group Inc Q3 FY2022 Earnings Call

Good morning, everyone. We're simulcasting this call on our website, selective.com. The replay is available until December 4. We use three measures to discuss our results and business operations. First, we use GAAP financial measures reported in our annual, quarterly and current reports filed with the SEC. Second, we use non-GAAP operating measures, which we believe make it easier for investors to evaluate our insurance business. Non-GAAP operating income is net income available to common stockholders, excluding the after-tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities. Non-GAAP operating return on common equity is non-GAAP operating income divided by average common stockholders' equity. Adjusted book value per common share differs from book value per common share by the exclusion of total after-tax unrealized gains and losses on investments included in accumulated other comprehensive income. And GAAP reconciliations to any referenced non-GAAP financial measures are in our supplemental investor package found on the Investors page of our website. Third, we make statements and projections about our future performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They're not guarantees of future performance and are subject to risks and uncertainties. We discuss these risks and uncertainties in detail in our annual, quarterly and current reports filed with the SEC, and we undertake no obligation to update or revise any forward-looking statement. Now I'll turn the call over to John Marchioni, our Chairperson of the Board, President and Chief Executive Officer, who will be followed by Mark Wilcox, our EVP and Chief Financial Officer.

Thank you, Rohan. Good morning, and thank you for joining us today. Before getting into the details of our performance for the third quarter and year-to-date, I think it's important to put these results in the proper context. We are operating in a very challenging environment defined by historically high levels of economic inflation, elevated catastrophe losses and capital market volatility. Despite this challenging backdrop, Selective continues to deliver consistently strong top and bottom line results. Through the first nine months, net premiums written were up 11% and our non-GAAP operating ROE was 11.6%. Based on our updated 2022 guidance, we expect to produce a full year operating ROE of 12%, marking our ninth consecutive year of double-digit ROEs for our shareholders. While pleased with our overall results, our underlying combined ratio has been under pressure due to higher severities in the property and auto physical damage lines of business. We remain disciplined in addressing this through a combination of pure price and exposure increases. On the flip side, higher inflation is also the impetus for the higher interest rate environment. This has allowed us to pick up significant book yield in our investment portfolio and boost overall returns now and into the future. Moving on to results in the quarter. Growth in net premiums written of 11% was driven by strong renewal pricing in Standard Commercial Lines and Excess and Surplus Lines, strong retention rates and new business growth in Standard Commercial and Personal Lines and positive exposure change. Our combined ratio was 96.8% in the third quarter and 95.2% for the first nine months. Catastrophe losses accounted for four points during the quarter, which was in line with our expectations and included a $10 million estimate for the ultimate net loss related to Hurricane Ian. However, non-catastrophe property losses were 3.3 points above our expectations. For the first nine months of the year, non-cat property losses were 1.8 points above our initial expectations, with approximately 60% of the excess losses attributable to the auto physical damage lines. While we've been highlighting this the past few quarters, this increase primarily relates to economic inflationary pressures. Across all property lines, current year severities were up approximately 12.5% year-to-date. While frequencies were up slightly in the third quarter, they are generally in line with our expectations for the year-to-date. We continue to be diligent about adjusting building and contents values to reflect these higher repair and replacement costs. Year-to-date renewal premium change was 12% for our commercial property book and 10% for our E&S property and homeowners portfolios. For the commercial auto physical damage line, loss severities continue to reflect inflationary pressures for factors such as repair parts, used vehicles and labor. Our efforts to address the ongoing profitability challenge in the commercial auto line have centered on price increases, which averaged 8.7% in the third quarter and 8% for the first nine months of the year. On the casualty side, we remain confident in our current year loss ratio selections, which included a 5.5% assumed loss trend. In addition, we continue to see favorable casualty emergence from the prior accident years. In the current accident year, reported casualty claim frequencies continue to emerge better than expected and remain below pre-pandemic levels. Renewal pure price increases for the Commercial Lines segment averaged 5.8% in the third quarter, which was 100 basis points higher than the first quarter and 50 basis points above the second quarter. Our retention rate of 86% remains strong. Exposure growth during the third quarter was 3.8%, and total premium change in our Commercial Lines renewal book was approximately 10%. We intend to remain disciplined and consistent in seeking price increases that, over time, match our forward loss trend expectations. This long-term approach to obtaining the appropriate price across the market cycle has defined our strategy for the past decade. As we look towards 2023, we expect the commercial lines pricing environment to remain constructive as industry-wide loss trends remain elevated and the reinsurance market continues to firm. I also want to share a few thoughts on catastrophe losses, which have been well above expectations for the industry over the past five years. While Hurricane Ian was not a significant loss event for Selective, this catastrophic loss of life and property reinforced the importance of understanding and managing exposure to large events. Over the past 20 years, our actual catastrophe losses have been below the industry average as measured by points on the combined ratio. Our catastrophe risk management efforts are centered on being disciplined around modeling catastrophe losses on both expected and extreme event bases, establishing clear guidelines around underwriting coastal properties, aggressively managing our aggregate limits exposed in markets that present the highest exposure and prudently purchasing reinsurance to protect the balance sheet. Turning to investments. The higher interest rates so far this year have negatively impacted the value of our investment portfolio and reported GAAP book value. However, we have managed the portfolio to take advantage of the higher rates and enhance investment portfolio yield. As of September 30, yield on the fixed income and short-term investment portfolio was approximately 80 basis points higher than at the start of the year. With a 3.4x investments to equity ratio, every 100 basis points of higher return on the investment portfolio translates to over 260 basis points of additional ROE. We are an underwriting company, first and foremost. We view an increase in investment ROE contribution as an opportunity to exceed our ROE targets, not as an opportunity to forfeit underwriting margins. I'll close with a few quick business updates. We continue to execute on our major strategic priorities. Our commercial lines geographic expansion plans discussed on recent calls remain well on track. Geographic expansion is a lower-risk way of leveraging our skills and infrastructure to grow the business in lines that we understand well. In October, we began writing new commercial lines business in Alabama and Idaho. We have previously opened Vermont in the second quarter. We will continue to open additional states over the next few years. While our personal lines results were again marked by catastrophe losses, we continue to make solid progress in migrating our business towards the mass affluent market. Our new business growth in this segment largely reflects the ongoing migration. Heading into 2023, we expect to obtain additional rate and exposure changes to further offset higher loss severities. Filed rate increases in the third quarter averaged 6%. Our E&S business remains a strong contributor to our financial results. It is a segment that continues to offer attractive business flow opportunities and margins. Although we are seeing heightened competition for casualty-driven classes such as construction, we are well positioned to deliver our continued growth in this segment. However, we will not do so at the expense of profitability. As I look to the remainder of the year and into 2023, we are well positioned to navigate this challenging environment and continue to produce the strong and consistent results we have delivered over the past several years.

Thank you, John, and good morning. I will review our consolidated results for the quarter and for the first nine months of the year, and we'll discuss our operating performance and financial position. I will then finish with our updated guidance for 2022. For the third quarter, we reported net income available to common stockholders per diluted share of $0.66, a non-GAAP operating EPS of $0.99. Despite a high level of attritional non-cat property losses and a small loss from our allocation to alternative investments this quarter, we reported an annualized non-GAAP operating ROE of 10.5%. Based on our full year guidance, we are positioned to deliver solid results for the year with a 12% operating ROE, which is above our 11% target. Given a higher expected cost of capital going into 2023, we expect to increase our operating ROE target for next year. Turning to our consolidated underwriting results. We reported 11% growth in net premiums written for the quarter and year-to-date, driven by strong growth in each of our segments. We reported a consolidated combined ratio of 96.8% for the third quarter, down from 98.6% in the year-ago period. The combined ratio included $34 million of catastrophe losses, or four points, and $16 million of net favorable prior year casualty reserve development, accounting for 1.9 points. We booked $10 million in ultimate net losses for Hurricane Ian related primarily to losses for the second landfall in South Carolina as we do not have a meaningful property exposure in the state of Florida. In addition, we reported $1.9 million in estimated claims handling fees from Hurricane Ian from our participation with FEMA's National Flood Insurance Program. On an underlying basis, or excluding catastrophes and prior year casualty reserve development, the third quarter combined ratio was 94.7%. This was 4.3 percentage points higher than the year-ago period, driven principally by higher non-cat property losses. For the third quarter, non-cat property losses accounted for 19.6 points on the combined ratio, which was 3.5 points higher than in the year-ago period. The higher losses were primarily due to elevated auto physical damage and commercial property severities and were driven by the economic inflationary factors that John mentioned. We also experienced a somewhat higher level of frequency in the third quarter compared to the first half of the year. As a reminder, attritional property losses do experience a level of volatility from period to period. Also impacting the underlying combined ratio in the quarter was the recognition of $9.3 million of ceded earned casualty reinstatement premium related to development on three losses for the 2018 and 2020 treaty years. While these losses are fully reinsured under our casualty treaty, the reinstatement premium added approximately 0.8 points to the consolidated combined ratio this quarter. We've otherwise stayed on our casualty loss picks for the 2022 accident year. For the first nine months, we reported a 95.2% combined ratio or 93.1% on an underlying basis. Catastrophe losses accounted for four points on the nine-month combined ratio, which is better than expected for this year-to-date period. The non-cat property loss ratio of 18.3% is running about 1.8 points above expectations year-to-date. This is the principal reason why our underlying combined ratio is projected to be higher than expected in 2022. Moving to expenses. Our expense ratio was 32.6% for the third quarter, which was in line with the prior year period. For the first nine months, the expense ratio of 32.4% was also in line with our expectations for the year. While we are focused on further reducing our expense ratio, the impact of economic inflation and the potential for higher reinsurance costs may collectively put some upward pressure on our expense ratio in 2023. Corporate expenses, which are principally comprised of holding company costs and long-term stock compensation, totaled $5.5 million in the quarter compared to $4.3 million in the year-ago period. Turning to our segments. Standard Commercial Lines net premiums written increased 11% in the quarter, driven by renewal pure price increases averaging 5.8%, excellent retention of 86%, new business growth of 5% and exposure growth of approximately 3.8%. The Commercial Lines combined ratio was 96.8% for the quarter and included 2.6 points of catastrophe losses and $16 million or 2.3 points of net favorable prior year casualty reserve development. The favorable prior year casualty reserve development was driven by $20 million from workers compensation for accident year 2019 and prior; $8 million from the business owner's policy line also for accident years 2019 and prior; and $3 million from bonds for accident year 2020. These reserve releases were offset in part by $15 million of net prior year unfavorable reserve development in the commercial auto line driven by higher severities with $11 million attributable to the 2021 accident year. While frequencies continue to remain below expectations for the 2021 year, we now expect higher ultimate severities in this line and took action in the quarter. Commercial Lines underlying combined ratio was elevated to 96.5% for the quarter. The 5.1 percentage point increase from the year-ago period was principally driven by 4.2 percentage points of higher non-cat property losses. In addition, the ceded casualty earned reinstatement premium added 0.9 points to the combined ratio and elevated our current accident year loss ratios for the general liability and workers compensation lines, in particular. Commercial auto physical damage severities, which we highlighted last quarter, remained at elevated levels, and non-cat commercial property losses were also higher than expected for the quarter. In our personal lines segment, net premiums written increased 11% relative to the prior year period. Renewal pure price increases averaged 0.5%, retention was up from a year ago at 85%, and new business growth was strong. These metrics reflect the successful execution of our mass affluent strategy as much of the growth was within our target market. The combined ratio, however, was elevated at 101.8% as a result of 14.9 points of catastrophe losses. The underlying combined ratio of 86.9% was 1.6 points lower than the prior year period. In our E&S segment, net premiums written grew 9% relative to a year ago. Renewal pure price increases averaged 6.7%, retention remained strong and new business was up 8%. The combined ratio for the segment was a profitable 93% in the quarter and included 5.4 points of net catastrophe losses. The underlying combined ratio of 87.6% was 3.1 points higher than in the prior year period, driven mainly by higher non-cat property losses. Moving to investments. Our portfolio remains well positioned. As of quarter end, 92% of our portfolio was invested in fixed income and short-term investments, with an average credit rating of AA-, and an effective duration of 4.2 years, offering us a high degree of liquidity. Risk assets represented 10.3% of our portfolio at quarter end, down 60 basis points in the quarter as we continue to derisk against a more uncertain macroeconomic backdrop. For the quarter, after-tax net investment income of $51.5 million was down relative to $74.7 million in the year-ago period, driven by alternatives. Alternative investments, which are reported on a one-quarter lag, generated $4.4 million of after-tax losses compared to a $34 million after-tax gain a year ago. Year-to-date, we've generated $18 million of after-tax gains from our alternative investments. Our current best estimate is for approximately $7 million in after-tax income from alternatives for the full year, implying an $11 million after-tax loss from alternatives in the fourth quarter, principally reflecting the negative third quarter performance of public markets. As a reminder, while we provide our best estimate of alternative investment income for the full year, there is a high degree of imprecision in estimating alternative investment income in any given period. The after-tax yield on the total portfolio was 2.7% for the quarter, which translated to 8.9 points of ROE contribution. While generating underwriting income remains our primary focus, we continue to manage the investment portfolio to optimize our risk-adjusted investment yields in what is an attractive fixed income market. We invested approximately $2.3 billion of new money in fixed income securities during the first nine months of the year. As we put this new money to work, we've taken the opportunity to move up in credit quality, improve liquidity and increase our book yield. The average pretax new money yield for the quarter was up significantly to 5.1% relative to 2.2% in the year-ago period and came in well above the pretax yield of our portfolio. In addition, approximately 14% of our fixed income portfolio remains invested in floating-rate securities. And these securities are resetting at higher benchmark rates, helping increase book yield and investment income. Since year-end, we've increased the pretax book yield of our fixed income and short-term investments portfolio by approximately 82 basis points, which includes approximately 36 basis points from the third quarter. About half of this increase year-to-date has come from our floating-rate exposure. We expect another uplift in book yield from fourth quarter floating rate resets. In addition, we expect to put an additional $300 million to work in the fixed income purchases in the fourth quarter from organic cash flows from maturities, coupons and operating cash flow. After-tax net investment income, excluding alternatives, which principally reflects our allocation to fixed income securities, was up 37% in the quarter compared to the prior year period and is up 19% year-to-date as these higher reinvestment rates are starting to benefit our results. This will accelerate as we look ahead to next year. While the current investment market is helping drive significantly higher investment income from our fixed income investments, this environment has negatively impacted the total return of the portfolio. The investment portfolio and total return was negative 2.6% in the quarter and negative 8.8% for the first nine months of the year. Turning to capital. Our capital position remains strong with $2.4 billion of GAAP equity as of September 30. Despite statutory capital and surplus remaining at year-end levels, on a GAAP basis, book value per share was down 7% in the quarter and is down 20% for the first nine months of the year, driven mainly by after-tax unrealized losses within fixed income. Adjusted book value per share increased 1% in the quarter and is up 10% for the trailing 12 months after adjusting for dividends. Our holding company cash and liquidity position remains strong with $506 million of cash and investments, which is well in excess of our longer-term target. Our net premiums written to surplus ratio stands at 1.45x, which is in the middle of our target range of 1.35 to 1.55x. Our debt to capital ratio of 17.2% is also conservative. Overall, despite the unrealized mark-to-market investment losses, we remain in a strong capital and liquidity position, which is available to support our growth. For the first nine months of the year, we repurchased 165,000 shares of our common stock at an average price of $75.20 per share for a total of $12.4 million. As of September 30, we had $84.2 million of remaining capacity under our share repurchase program, which we plan to continue using opportunistically. In addition, our Board of Directors approved a 7% increase in our quarterly cash dividend on common stock to $0.30 per common share. I'll conclude with an update on our guidance. We currently expect a GAAP combined ratio this year, excluding catastrophe losses, of 91.5%, inclusive of net favorable casualty reserve development in the first nine months of the year. Our guidance assumes no additional prior accident year casualty reserve development. Our catastrophe loss assumption assumes 3.5 points on the combined ratio. That puts our full year expected combined ratio expectations at 95% for 2022, which is consistent with our guidance at the start of the year. The component parts, however, have changed with the benefit of lower-than-expected catastrophe losses, a better-than-expected expense ratio and favorable casualty reserve development being offset by higher-than-expected non-cat property losses. Our after-tax net investment income assumption of $215 million remains unchanged from last quarter as lower after-tax investment income from alternative investments of $7 million is offset by higher investment income from fixed income. As a reminder, we started the year with an expectation of $200 million of after-tax net investment income, including $20 million from alternatives. An overall effective tax rate of approximately 20.5%, which includes an effective tax rate of 19.5% for net investment income and 21% for all other items, and weighted average shares of 61 million on a diluted basis, which assumes no additional share repurchases we may make under our authorization. Overall, a solid first nine months of the year and our updated guidance implies a non-GAAP operating ROE of around 12% for the year. This would be a solid result against the macroeconomic backdrop that this year has presented and another year of elevated catastrophe loss activity for the industry. As we look ahead to 2023, we remain well positioned to continue delivering strong, disciplined, and profitable growth.

I guess I want to focus on your commercial pricing is up sequentially. I'm trying to get a sense of how much of that is property versus casualty. As I compare, John, your comments on the casualty loss trend, you're still assuming 5.5%. So I kind of want to focus on the casualty side of that for a second. I'm assuming that the property rates are moving up pretty hard in reflection to the inflation. So I assume that's a pretty easy fix over next year. I want to see how much cushion there is in the current price on the casualty side as we think about your 91.5% this year and what that might look like next year.

Yes. Sure, Mike. Thanks for the question. And I think there's a lot of pieces in answering that question so I'll try to work through them. Just at the highest level, that the 5.8% in the quarter for Commercial Lines pricing, the workers' comp continues to be a negative impact on that. So workers' comp pricing continues to be relatively flat. So excluding comp, the overall pricing is at 6.6% for the quarter, 6.1% year-to-date. Commercial property is at 7.5%. Now I think that's an area that we expect to see go higher as we move into next year. And like you've heard from many of our competitors, when you think about the inflationary impacts on loss trends and the inflationary exposure adjustments for commercial property, in particular, the blending of rate and exposure were up about 12% this year. So again, we'll think about it in those terms. But I think it's important to recognize that while the exposure increase provides a loss ratio offset, I won't call it a benefit but it sort of neutralizes the impact of some of this inflation, it shouldn't be mistaken for replacing the needed rate in that line of business for us and the industry. So yes, you want to look at them together in terms of the changes in severity but rate continues to be a need for that line of business. So that's kind of how we think about it overall. And as I said earlier, we see, when you look at our retention and as strong as our retention continues to be, that the market remains constructive and will remain constructive. But I think the other part of your point, and I just want to clarify that the 5.5% loss trend that you cited, which we've also cited, is the casualty loss trend embedded in our '22 loss picks. We are always evaluating a view of forward loss trend and we'll continue to do that, and we'll provide you that along with our updated guidance as we get into the beginning of 2023. But I would say if you look at this on a casualty versus property basis, and I think that's the best way to look at it for a company like Selective, about 2/3 of our premium are in casualty lines. And if you deconstruct that 5.5% loss trend we have assumed in our 2022 casualty loss picks and exclude comp because comp continues to exhibit very different loss trends and more favorable loss trends, that embedded loss trend in our casualty lines, ex comp, is a little over 6%. And our price for those casualty lines, excluding comp, is a little over 6%. So I think when you look at that, you view that as a relative offset for casualty. The remaining 1/3 of our premium is in property lines, and that's a combination of true property and auto physical damage. That's where you look at the combination of rate and exposure in that 10% to 12% range, 12% for commercial and around 10% for E&S property and for home. And our actual severities, and I hesitate to call this a trend, actual severities on the property lines are up about 12.5% for the year-to-date period. Because economic inflation is the primary driver of that, I think that's what creates the forward uncertainty, but you would expect it to track relatively closely with forward economic inflation on the component parts of the CPI that hit the property lines. I'm not sure I hit all the pieces of the question.

Mike, this is Mark here. That's exactly right. I would say it's been a very constructive environment for fixed income investing this year. We've put new money to work in much higher reinvestment rates than we've seen in quite some time. And as I mentioned in my prepared comments, we've been able to increase the embedded book yield within our fixed income and short-term investment portfolio. We've taken it up from 2.97% to 3.79% in just the first three quarters and we expect to see that to continue. We have cash flow we can put to work. We can opportunistically, with a few constraints, trade the portfolio. And we continue to have the allocation to the front end of the curve with our funding rate exposure. And we've seen LIBOR, SOFR, whichever benchmark you want to use, increase significantly, and that's increased significantly since quarter end as well. So we're going to continue to optimize our risk-adjusted returns in the investment portfolio. And I think that's going to continue to deliver a higher level of core fixed income, investment income over the next number of periods.

To reinforce the point Mark made about our investment philosophy, we view the increase in investment return on equity as a positive development. In the short term, this acts as a partial counterbalance to the challenges related to underwriting margins we previously discussed regarding property. However, our main focus is on enhancing the underlying combined ratio and addressing inflationary pressures in the property sector. This situation provides a valuable offset, and we will strive to maintain balance to achieve greater overall operating return on equity. We also anticipate ongoing improvements in underwriting margins in the future.

I want to revisit the idea of how we should approach the potential for margin expansion in the future. I'm looking for feedback on my basic thoughts. I believe around 10% of the business relates to workers' comp, and I might have a perspective on whether the margins there could contract or expand. If I exclude workers' comp, it seems that roughly two-thirds of your business comes from liability insurance, and currently, the rates seem to align with that ratio. The challenge appears to lie in the other approximately one-third to one-fourth of the business that involves property, where the rates may or may not be exceeding the current ones. Do I have the calculations correct? Is the main concern whether I believe that the 12% inflation on property will persist and how that might impact margins in workers' comp? Is this a reasonable way to analyze the situation?

Paul, it is a fair way to look at it. I think the way you split the book up is right in terms of the property, the casualty split and with and without comp. And I think, to your point, you've got an assumption relative to comp margins going forward and that is what it is. But I think that's exactly right. The pressure we've seen in our underlying combined ratio this year is entirely driven by non-cat property losses, and that those non-cat property losses, in our estimation, are not an underwriting concern. There's nothing in our portfolio that's dramatically shifted. It's purely a severity being pushed higher by the cost of repairing and replacing property, be it commercial property, personal property or auto physical damage. And the direction of that alongside of the direction of rate plus exposure on those property lines is where you ought to think about margin impact on a go-forward basis.

So I want to follow up on the last question, if I can. When you talk about risk selection, are the ideal risks in an inflationary environment the same as the ideal risks in a less inflationary environment? Does that change the standards for risk selection?

I don't think it should be a concern because you should always aim to accurately assess your exposure. As long as you do this, the inflationary environment shouldn't impact risk selection. It's an interesting question, and I'm considering how to respond as I speak. However, nothing stands out to me that suggests we should view this differently. If you maintain good organizational discipline in obtaining accurate exposures upfront, and remember that premium is calculated as rate times exposure, you need both components to consistently be accurate. Additionally, you must understand where your rate level should be based on various underwriting characteristics, including the age of the building, its damageability, the age and type of the roof, and occupancy protection. All these factors should be considered in your underlying rate. If you have them correct and your exposure is accurate, there shouldn't be a difference in risk selection based on inflation, whether it increases or decreases.

Sure. So the cat losses for the quarter, if the focus is Standard Commercial Lines, let me start there in commercial auto, $1.4 million; in commercial property, $13.3 million; in BOP, $3.4 million. With a little rounding, that should add up to the $18.2 million that's in the financial supplement. Did you need the year-to-date or any of the other segments or does that...

On the FEMA flood fees, Mark, I think you mentioned it was $2 million. Do you anticipate more will come in the upcoming quarters? And should we still consider that the majority of it contributes to the bottom line?

Yes. Good question, Mike. It was, yes, $1.9 million that we booked in the quarter. The event did happen right before quarter end. Our objective in booking that fee estimate is to think about the ultimate fees that we expect to collect based on an expectation of frequency and severity for the floods that happened, principally in southwest Florida but other parts of Florida and the Carolinas as well. So that $1.9 million reflects our ultimate estimate, so we would not expect that to have more fee income on a go-forward basis. But I will highlight that the event did happen right at quarter end. There were quite a few estimates to come up with ultimate claim frequency and severity and coming up at $1.9 million. But I wouldn't expect that to move materially on a go-forward basis.

Okay, great. Now about the expense ratio. You mentioned inflation and increasing reinsurance costs affecting your outlook on the expense ratio. Could you elaborate on that, particularly the aspect of economic inflation? Is it related to wages or a combination of various factors?

Thank you, Mike. You are correct in your observation. If I take a moment to reflect, we've been focused on enhancing the overall operational efficiency of Selective over the past five years. We've successfully reduced the expense ratio by over three percentage points, which is significant, and we plan to continue improving operational efficiency and lowering the expense ratio moving forward. This year, as you may remember, our guidance included an expectation of a 32.5% expense ratio, and we anticipate slightly exceeding that expectation for the year, as indicated in our updated guidance. We had aimed for around 32%, which is our long-term target for 2022, and we hope to maintain that into next year. It's important to consider the potential for increased reinsurance costs, which we will address when we release our fourth-quarter results next year. At this moment, we cannot specify what those increased costs will be, and we are also facing some inflationary pressures on wages and other expenses. Additionally, we experienced a slight benefit in 2022 regarding the expense ratio due to a higher level of attrition than in previous years. However, we expect the labor market to stabilize, which may lead us to adjust our workforce accordingly. Taking all these factors into account, we wanted to clarify that compared to our earlier expectations, we are forecasting a slight increase in the expense ratio for next year, which is a bit disappointing. We are still aiming for expense ratio improvement over the long term, but we anticipate some challenges as we head into 2023.

Yes. I think your question is a good one and an important one that I'm actually glad you're asking and hope you're asking of others. Severities in auto liability have been going higher the last few years for us and for the industry. You've seen some fair amount of commentary around that. And we embedded that assumed higher severity in our '22 loss picks for the auto liability line. But again, you've got to think of everything on an on-level basis. And for us, generating north of 8 points, actually 8.7 points in the quarter on commercial auto liability or commercial auto total, excuse me, is part of a response to that continued severity pressure on the auto liability line. So I don't want you to think that the liability severity hasn't been moving higher. It has, but we reflect that in our loss picks, and it was reflected in our '22 loss pick, that higher severity persisting, and that's in our casualty reported numbers that you're seeing come through. I can't speak to whether others are assuming that severity to continue or not. But I can tell you that's our philosophy. It's part of our prudent and consistent planning process. And that's why we continue to achieve higher rate levels in commercial auto and expect to continue to do that going forward.

Could you give me a sense of where your Personal Lines growth is coming from? Are you just gaining market share or is it a particular geography that you're getting business? Or is it a type of competitor that you're getting business from?

Yes. The growth, and we pointed to this the last couple of quarters, is driven by the strategic shift we made to compete in the mass affluent market. That's driving it. It's in our existing footprint that we've had for Personal Lines, and that's really where the growth is coming from. It's really sort of deemphasizing the mass market personal auto and pursuing a segment of the market that we think places higher value on coverage and service and is a much better alignment with our business philosophy and our operating model.

Yes, this is Mark. That's exactly right. The leverage ratio for invested assets to common equities is an outcome rather than something you can control directly. It reflects growth in invested assets, which depends on cash flow and valuation changes, as well as earnings in the denominator and how much of that you retain compared to stock buybacks and other capital management activities like dividends. The increase in that ratio over the past couple of quarters to 3.38 at September 30 is due to lower investment valuations impacting GAAP equity. With a leverage of 3:1, this has a more significant effect on the ratio as the denominator decreases notably, which increases overall invested asset leverage. However, unless there are substantial capital management actions, including debt issuance, it's challenging to adjust that ratio. In the short term, it is primarily an outcome.

At this time, speakers, there are no questions on queue. You may proceed.

Great. Well, thank you all for joining us. And as always, feel free to reach out to Rohan with any follow-ups. And we look forward to speaking with you again.

Thank you.

And that concludes today's conference. Thank you so much, everyone, for joining. You may now disconnect, and have a great day.