Selective Insurance Group Inc Q1 FY2024 Earnings Call

Hello, and thank you for joining us. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Selective Insurance Group First Quarter 2024 Earnings Conference Call. I will now turn the conference over to Brad Wilson, Senior Vice President, Investor Relations and Treasurer. Please proceed.

Good morning, and thank you for joining Selective's First Quarter 2024 Earnings Conference Call. Yesterday, we posted our earnings press release and financial supplement on the Investors section of our website, selective.com. A replay of this webcast will be posted there shortly after this call. Today, we will discuss our financial performance, market conditions, and expectations for the next three quarters of 2024. John Marchioni, our Chairman of the Board, President and Chief Executive Officer; and Tony Harnett, our Senior Vice President, Chief Accounting Officer, and Interim Chief Financial Officer, will make remarks before we move to our question-and-answer session. Our commentary today references non-GAAP measures, which we believe make it easier for investors to evaluate our insurance business. These non-GAAP measures include operating income, operating return on common equity, and adjusted book value per common share. We include GAAP reconciliations to any referenced non-GAAP financial measures in the financial supplements posted on our website. We will also make statements and projections about our future performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and not guarantees of future performance. They are subject to risks and uncertainties that we disclosed in our annual, quarterly, and current reports filed with the SEC. We undertake no obligation to update or revise any forward-looking statements. With those introductory remarks, I'll now turn the call to John.

Thanks, Brad, and good morning, everyone. In the first quarter, we generated an operating ROE of 11.7% and grew net premiums written by 16%. Our growth was driven by strong pricing, continued exposure increases, and stable retention. The combined ratio was elevated at 98.2% and well above our 95% target due to the reserving actions we took in the quarter. We pride ourselves on maintaining a consistent and disciplined posture relative to planning, underwriting, pricing, and reserving. When we see adverse trends emerge, we respond. We reported $35 million of net unfavorable prior year casualty reserve development during the quarter. The main driver was $50 million of unfavorable Standard Commercial Lines' general liability development, partially offset by $15 million of favorable workers' compensation development. The net adverse development added 3.3 points to our overall combined ratio and 4.2 points to the Standard Commercial Lines' combined ratio in the quarter. Consequently, our insurance segments produced a 2.2 points of operating ROE in the quarter, below our expectations. We previously discussed how we increased our expected casualty loss trend in recent years. Entering this year, our 2024 combined ratio guidance reflected an overall expected loss trend of approximately 7%, consisting of 4% for property and 8% for casualty. Excluding workers' compensation, expected casualty loss trend was closer to 9% for 2024. For context, our forward casualty loss trend assumptions, excluding workers' compensation, were approximately 5% for 2021, 6.5% for 2022, and 7% for 2023. The ex-workers' compensation number is approximately 0.5 to 1 point higher than the expected loss trend we typically discuss for all casualty lines. Despite these higher underlying assumptions, we've strengthened our reserves in general liability for the years 2020 through 2023 in response to further emergence of average paid severities. We also increased our general liability loss ratio pick for the 2024 accident year by about 1 point. Our trend assumptions for the commercial auto and workers' compensation lines held up well. Every quarter, we undertake an in-depth reserve review and book our best estimate. Our portfolio has remained relatively stable in terms of hazard mix, limits profile, and industry segment, and pricing of our book relative to indicated levels has remained stable. Therefore, we believe the increased severities relate to elevated social inflation, which we consider widespread and evidenced by a higher propensity for claimants to retain attorneys and litigate, longer settlement times, and higher settlement values. Certain jurisdictions pose heightened challenges, evidenced by expanded liability theories and higher, sometimes extraordinarily higher, damage awards. We are closely monitoring these jurisdictions and the broader trends across our book. We think the social inflation and elevated loss trends we are seeing are industry-wide and will lead to an acceleration of rate increases in general liability. During the quarter, general liability and umbrella renewal pure price was 6.5%, up from 5.7% last quarter and 5.4% for the full year 2023. We expect our general liability pricing will accelerate further in the coming months. To understand the quality and pricing of our book, we regularly monitor our mix of business by industry classification, hazard grade, limits profile, jurisdiction, and other individual risk attributes. Our sophisticated tools and highly talented employees allow us to identify the areas of our book most in need of action. With our unique operating model and strong distribution partner relationships, we have a proven track record of executing rate and underwriting actions in a disciplined and targeted manner. We remain comfortable with our ability to continue doing so in this dynamic environment. Consistently achieving our 95% combined ratio target across our three insurance segments remains our primary goal. We continue to prioritize achieving renewal pure price that matches or exceeds our expected future loss trends. Overall renewal pure price was 8.1% in the quarter, up from 7.4% in the fourth quarter of 2023 and 6.8% for the full year 2023. Renewal pure price for Standard Commercial Lines increased to 7.6%, accelerating each month within the quarter. Excluding workers' compensation, commercial lines pricing increased 8.8%. Exposure growth added 4.2 points, contributing to total renewal premium change of 12.3%. At the line level, property renewal pure rate was up 13.3% with exposure increasing 4% and total renewal premium up 17.8%. In commercial auto, renewal pure rate was up 10.4%, with exposure increasing 5.1% and total renewal premium up 16%. Even with accelerating pricing, retention remains stable as our regional teams manage our renewal book in a targeted and granular fashion. Excess and Surplus lines continued its excellent performance with 24% net premiums written growth and an 87.6% combined ratio. Despite strong underwriting results and prior year reserve stability, we increased our current year loss pick by approximately 1 point, based on the severity dynamics affecting recent prior accident years and Standard Lines' general liability. The E&S market continues to present profitable growth opportunities, and we expect to continue to grow this book. We are beginning to see signs of improved performance in Personal Lines as we continue our transition to the mass affluent market and execute profit improvement plans. The combined ratio in the quarter was 105.1%, a 10.9 point improvement from the first quarter of 2023. The underlying combined ratio improved in the quarter by 2 points to 93.7%. Personalized net premiums written increased 17% in the quarter due to strong rate increases and larger average policy sizes. Renewal pure pricing in the quarter was 14.3%. We continue to expect full-year 2024 personalized renewal pure pricing to be in excess of 20%. As expected, retention decreased from these strategic profit improvement actions and was 83% at the end of the first quarter, approximately 4 points below last year's run rate. Retention is higher for target business. New business premiums in Personal Lines declined 19% with new policy counts down 37% as we took deliberate steps to curtail production of non-target business. For the quarter, nearly 90% of new home business had Coverage A values of $500,000 or greater. On the strategic front, we often speak of our competitive advantage of a unique field model that places empowered underwriting staff near our distribution partners and customers. We just wrapped up our annual agency council meetings. We continue to receive feedback that our operating model is a meaningful differentiator. Staying close to the market and having strong relationships with our distribution partners serves us well. Our customers and distribution partners value consistency, clarity, and transparency in our communication as we navigate the challenging environment. Our methodical geographic expansion continues to represent an attractive long-term growth opportunity and further diversifies our portfolio. We have a repeatable process and successful approach that has allowed us to accelerate this important strategic initiative in recent years. In April, we added Maine and West Virginia to our Standard Commercial Lines footprint, now covering 32 states. We expect to launch Oregon, Washington, and Nevada later in 2024; and Kansas, Montana, and Wyoming in 2025. Our revised guidance, which Tony will discuss in more detail, implies an ROE exceeding our 12% target for the full year. With that, I'll turn the call over to Tony.

Thank you, John, and good morning, everyone. We've reported $1.31 of fully diluted EPS in the first quarter, down 11% from a year ago. Non-GAAP operating EPS was $1.33, down 8%. This translated to a return on equity of 11.5% and an operating return on equity of 11.7%. Our GAAP combined ratio was 98.2% in the quarter, up 2.5 points from a year ago. Catastrophe losses of 5.3 points were 0.8 points better than the first quarter of 2023, and we continue to see a lower expense ratio. Underlying performance, which I will return to later, continues to be strong. However, net adverse prior year casualty reserve development of $35 million or $0.45 per share impacted our results. This reduced our annualized operating ROE by 4 points and added 3.3 points to the combined ratio. $50 million of general liability adverse development was partially offset by $15 million of favorable development in workers' compensation. As John described, preserving and strengthening in general liability was severity driven as we experienced increased paid loss emergence in the quarter. We attribute this mainly to the continued elevated impacts of social inflation. Frequencies continue to remain in line with or somewhat better than expectations. In the fourth quarter of 2023, we strengthened general liability reserves by $55 million attributed to the 2015 through 2020 accident years. This quarter's $50 million increase was spread mainly across accident years 2020 through 2023, with 80% attributed to accident years 2021 and forward. The reserve adjustment is 3% of our net reserves for general liability and represented approximately 1.5 to 2 points on the combined ratio across each of the impacted accident years. Workers' compensation produced $15 million of favorable prior year reserve development in the quarter. This was primarily due to lower loss severities in accident years 2021 and prior. In Personal Lines, $5 million of adverse prior year auto reserve development offset $5 million of favorable prior year homeowners development. For the current accident year, we took action in General Liability and Excess and Surplus lines, impacting each line's combined ratio by approximately 1 point. Severity dynamics in standard lines impacting recent prior accident years drove the adjustments. As a reminder, we have various reinsurance treaties in place to manage our net exposure to individual large losses and catastrophic events. In the context of social inflation and its impact on severity, our casualty excess of loss treaty, which renewed on July 1, 2023, covers 100% of $88 million in excess of our $2 million retention. The treaty covers our Standard market and E&S business. The overall underlying combined ratio was a strong 89.6% for the quarter, 1.4 points better than the first quarter of 2023 and slightly better than approximately 90% run rate in recent quarters. Our expense ratio was better than our expectation and improved 1.7 points compared to the prior year period, benefiting from our disciplined expense management and elevated top-line growth. Additionally, non-catastrophe property losses were better than our expectation and 0.1 points lower than the first quarter of 2023 as we earned substantial rate increases in the property and commercial auto lines. After-tax net investment income was $86 million in the first quarter, up 17% from last year and contributing 12.3 points of ROE. Alternative investments, which report on a one-quarter lag, generated $5.4 million of after-tax income in the quarter, down slightly from $6.1 million a year ago. We invested $581 million of new money at an average pre-tax yield of 5.8% in the first quarter. The fixed-income portfolio's overall pre-tax book yield increased modestly in the quarter, ending at approximately 4.8%. The meaningfully higher book yield embedded in our portfolio provides a durable source of income as we move forward. The portfolio remains conservatively positioned. The higher interest-rate environment allows us to deploy capital in investment-grade securities at attractive levels, raising the bar for investing in risk assets. Fixed-income and short-term investments represented 92% of the portfolio at March 31, with an average credit quality of A+ and a duration of 4 years. Our capital position remained strong with GAAP equity exceeding $3 billion and statutory surplus of $2.8 billion. Book value and adjusted book value per share increased 2% from year-end, and our premium-to-surplus ratio ended the quarter at 1.55x. This is at the top end of our internal operating target of 1.35x to 1.55x, although we are comfortable moving above that range if attractive growth opportunities persist. Debt-to-capital was 14.3% at the end of the quarter, well below our internal threshold of 25%. This ratio, together with our operating cash flows, provides us the financial flexibility to support organic growth and execute our strategic initiatives. We did not repurchase any shares during the quarter and had $84.2 million remaining under our share repurchase authorization. We expect to take an opportunistic approach to share repurchases and view organic growth within our insurance operations as the most attractive opportunity to deploy capital. For 2024, we now expect our GAAP combined ratio to be 96.5%, up from our original guidance of 95.5%. The 1 point increase reflects the full year 80 basis point impact of the first quarter adverse prior year development. Current accident year bookings in general liability and E&S casualty in the first quarter drove the remainder of the increase. We assume no additional prior accident year reserve development. While our planning and monitoring process allow us to respond quickly to trends, we acknowledge the elevated uncertainty of the loss trend environment in which we are operating. Other key estimates remain unchanged, with 5 points of catastrophes and after-tax net investment income of $316 million, including $32 million from alternative investments. Our guidance includes an overall effective tax rate of 21%, with a 20.5% effective tax rate on investments and 21% on all other items. Fully diluted weighted-average shares are estimated to be 61.5 million. This does not reflect any assumptions for share repurchases we may make under our existing authorization. I'll now ask the operator to open our question-and-answer session.

Our first question will come from Mike Zaremski from BMO Capital Markets.

Thank you for moving the call to 8:00 a.m. My first question pertains to the insights you've shared regarding the adjustments made to the reserves and loss trends over the accident years. I'm observing a trend seen across various carriers, not just Selective. Despite your remarks about anticipating a higher loss trend and adjustments in reserves, the underlying inter-commercial loss ratio has remained relatively stable year-over-year. Am I perhaps placing too much emphasis on the underlying loss ratio? What explains its stability in light of the developments over the year to date?

Thank you for the question, Mike. I'll break it down for you while focusing on the current year and its underlying factors. First, let's separate property from casualty. Non-cat property performed better than expected in Q1, contributing to some underlying stability. Regarding casualty and general liability, as mentioned by Tony, we adjusted our guidance for the current year. This adjustment raises the current year's all-in basis by 80 basis points. There are a few offsetting factors at play here. To delve deeper, we've consistently provided casualty loss trend assumptions year-over-year. For 2024, we assumed an 8% casualty trend, which, when excluding workers' comp and concentrating on general liability and auto liability, was closer to 9%. While we don't update our current year loss trend assumptions quarterly, we do so annually. The effective impact of about a 1-point change in loss ratio is roughly equivalent to moving your trend assumption by about 2 points. So, while we noticed an increase in the underlying loss ratio due to the casualty adjustment, there was also a counteracting effect from non-cat property.

And Mike, just to clarify one point, the impact that we made change to the current accident year was 20 basis points within our guidance, the 80 basis points was the prior year development.

Thank you for the context. For my follow-up, I'll keep it brief for others in the queue. Given that time has passed and you've been noticing increased loss trends, do you think this is stemming from specific types of business beyond just the general lines like GL and Umbrella? Is Selective experiencing this particularly in construction, or are there any broader portfolio trends you have identified as contributing factors? Lastly, you mentioned Umbrella frequently; could you share what percentage of your reserves is attributed to Umbrella, as I don't see that stat available?

Okay. So I'll handle the first part of the question, and then I will come back to you with regard to the Umbrella question. But just with regard to where this might be emanating from, I would say, at the highest-level, we continue to view this as kind of a market-wide shift in average severities. Now I'll go a little deeper on that because there's no question, and I think this has always been the case, and I think this is also an industry dynamic. There are certain jurisdictions that have and have always had or at least in more recent memory, have had more tough legal environments. So think states like Georgia and South Carolina, New York, New Jersey, Pennsylvania, Illinois. And I think when you have social inflationary trends like we're seeing, if you have more challenging legal environments and cases where you have either case law or statute that has expanded theories of liability, I think you do see a more outsized impact as these social inflationary factors hit. But the states I just took you through are pretty large states and pretty consistently in most companies' portfolio. So I think that's point number one. There are certainly some geographic differences in the magnitude of the impacts. But I think that what we're talking about in terms of social inflationary trends are pretty evident across the board. I think the other important point to highlight is, and I think this is where we gain confidence in viewing this as a social inflationary trend. In addition to the fact that it's hit pretty consistently across all accident years, all open accident years over the last several years, if you look at our mix of business over the last decade and including the more recent years, the limit profile of our book has been very consistent over that time frame. In addition to the underlying limit profile, our reinsurance attachment point on casualty has remained at $2 million. So, you've got stability there. From an industry classification perspective, percent contractors versus percent manufacturing and wholesaling or mercantile and service has also remained quite consistent. Our hazard grade distribution; low, medium, high hazard has remained very consistent. So there's no shifts in the underlying portfolio. And the one shift, and honestly, it hasn't been all that dramatic is, as we've expanded geographically, we've seen a little bit of a shift in our geographic footprint. But based on the states I just took you through, that tend to be the hotter spots from a litigation environment perspective, you would generally view that geo expansion as a diversifier from that vantage point. So I think when you put all those pieces together, that kind of gives us the confidence to make the statements around the overall dynamics at play here. And Tony, why don't you just touch on the second question?

Yes, we can follow back up after the call. We don't have the split right in front of us on the Umbrella versus GL. But as a total, I would just sit there and say our general liability reserves represent about 40% to 50% of our reserve position.

And as I mentioned, that $2 million retention means that our umbrella exposure and as we review that quarterly in our reserve adjustment, is really that one layer.

Appreciate the color.

Your next question will come from the line of Michael Phillips with Oppenheimer.

John, the question is about the timing of reserve reviews. This topic comes up occasionally, so I want to clarify. When you provide us updates on general liability reserve changes, that's a summary of all the detailed data you have that we don't access. I’m not sure how many segments contribute to your general liability during your independent reviews of each individual component. Whatever that total is, it will be reflected in the general liability figures we see. So when you report a charge like today or a favorable outcome on a quarterly basis, does this mean that you review all those parts each quarter, or are some reviewed in one quarter and others in another? I'm asking, John, because I have two parts to my question. Firstly, what did you observe this quarter for the current accident years that you might not have seen last quarter when you took the charge for the older accident year? Was it due to timing or something you didn't review? Secondly, what are the implications for the future? Are there components you haven't evaluated yet that could affect upcoming quarters?

Yes, I appreciate the question. We conduct a reserve evaluation at a somewhat segmented level within General Liability, focusing on excess, products, and non-product GL exposure, which we do consistently every quarter. Therefore, there’s no significant change between Q1 and Q4. We do have a few things we look at, such as the annual workers' compensation tail study conducted in Q4. Generally, the emergence we observed this quarter results from our quarterly exercise. This is a key point regarding the first part of your question. As for the second part of your question, in Q1, we noted a reaction to the emergence related to paid severities. This is important because when considering the immaturity of these accident years, the percentage of claims paid at this stage compared to the ultimate expected percentage is relatively low. For instance, for the 2023 accident year, the paid percentage relative to what’s expected is likely in the upper single digits to a maximum of 10%. In contrast, going back to 2021, the paid percentage now is probably in the 30% to 40% range. Thus, we are responding to paid data while also looking at historical development factors based on what we know about payments and adjusting our responses accordingly. When we say we’re reacting quickly, we mean that it’s a small portion of the paid percentage compared to what we ultimately expect. Our actuaries provide various methods that assess paid claims on both unadjusted and adjusted levels, as well as incurred losses that include paid claims and case reserves on both levels. These adjusted methods take into account changes in reporting patterns, disposal rates, and the strength or weakness of case reserves. We apply different weights to outcomes based on our understanding of the environment, and it was largely the changes in paid methods, acknowledging their immaturity and the small paid activity, that prompted us to respond at this point.

Yes. And Mike, maybe I would just add that in the current year, there's nothing specific we observe. It's a really immature accident year at this point. However, if you look at the years that we did make adjustments to, it's those years that are informing our position on the current accident year and the adjustment we made.

Yes, the second question has a different tone regarding your growth in commercial lines at around 15%. This growth is clearly driven by strong pricing and substantial exposure growth. I'm curious about how much of this is due to acquiring new customers. You mentioned new business growth, but I assume much of it is also related to exposure. How aggressively are you trying to bring in new customers in commercial lines, especially given the current uncertainty? Additionally, you're expanding into new states, which is commendable. However, my main question is how focused you are on acquiring new customers right now. Is this a priority, or is it more beneficial to pause and consolidate your position?

Yes. No, appreciate the question, Mike. And listen, I think we're not a growth-on, growth-off company. The way we think about it is, we have pricing expectations for new business, and where those pricing expectations are relative to where the market might be, will drive our hit ratio and ultimately drive our new business production. If you look at the pieces underneath that growth, and I think we had this in the prepared comments, but just to reiterate it, the total renewal premium change for commercial lines was 12.3%. Retentions were strong and stable. Generally speaking, policy count is up in the low-single digits. And remember, we continue to add agents in our existing footprint. We've continued to open up new states that will create some organic growth opportunities, but we're not sitting there saying, put the pedal down on growth. And when I look at our new business pricing diagnostics, so we don't disclose these because they're not as specific because you've got a different basket of policies relative to your renewal book. Our new business pricing metrics show that pricing has continued to be strong on new business. So what that tells you is, we're writing business new at the price point we want to be writing it at, and the growth is really driven by how that's currently perceived in the marketplace. But it's really driven by rate and exposure and strong retention on an overall basis.

Okay. Thank you, John. That makes a lot of sense.

Your next question comes from the line of Dean Criscitiello with KBW.

Hi, you guys talked about looking for rate increases within the general liability line. And I was wondering if there are maybe any states that are likely to either oppose or slow the approval of such rate increases?

No, that issue is more of an issue for Personal Lines. Generally speaking, with regard to commercial lines, you have a number of other pricing tools that you evaluate on an individual risk basis through scheduled debits and credits, and you've got multiple companies filed in any individual state that gives you a lot of pricing flexibility. And our pricing expectations in commercial lines are well within the ability of us to use those tools to achieve that.

Okay. And my next question was on sort of the profit improvement plan in Personal Lines. And obviously this quarter, both new business and retention ticked down a bit. Were there fundamental changes happen in this quarter that didn't happen in the last quarter? And I'm sort of asking in the context of slowing growth within personal auto, like how should we think about growth going forward? And like, how long do you think these corrective actions are going to persist within the Personal Lines book?

I believe the situation in Personal Lines mirrors what I mentioned about Commercial Lines growth. Our renewal pricing has consistently increased, going from around 9% in Q4 to about 14.3% in Q1. New business pricing, which does not experience the same lag as renewals, has been approximately 18.4% this quarter. This is positively affecting hit ratios and overall growth, as well as retention to some degree. We anticipate that this trend will continue throughout the year and expect full-year pricing to exceed 20%. Consequently, we expect this upward pressure on the top line to persist. As we begin to earn this rate and move closer to our target combined ratio for this segment, we expect to see a return to a more normal growth rate next year.

Your next question will come from the line of Matt Carletti with Citizens JMP.

Could you provide some insights into the reserve charges in general liability over the last few quarters? I'm trying to understand the extent of management conservatism applied to those reserves. Specifically, how much of the current figures aligns with actuals versus reported figures? It might be helpful to compare where you stand now against a midpoint or some similar metric from six months ago before these charges were taken.

Yes. I guess what I would say is, we continue to have a consistent approach and philosophy regarding the reserve decisions that we make. And I realize this might not be satisfying, but based on the different methods we evaluate and you have to weight those different methods, we're reacting to early paid emergence in the last few accident years. And I think that's about as much as I could tell you. We had a trend assumption for each of the last few accident years. You now start to get more insight into what's actually happening with average severity change. That's what we're responding to, and that's what we've been responding to by increasing our forward trend assumptions over each of the last five years. And I think it was even a bigger move into 2024 when we raised that casualty trend assumption embedded in our loss fixed at 8%, and above that for ex-comp. I think that's how you want to think about it from our perspective is, very consistent underwriting portfolio, as I mentioned earlier, from a limits industry classification perspective, very consistent approach to evaluating and booking reserves and having a very consistent approach relative to establishing and updating our trend assumptions, and all of that goes into the process, and I think that process has remained fairly consistent. And how we think about reserve booking decisions is always in the context of what we think about in terms of the risk factors to reserves that are out there that we need to make sure we're contemplating. And the risk factors we've been highlighting over the last couple of years is not just elevated loss trends, but more uncertain loss trends driven by social inflation and driven by what still is the pandemic effect in your experience period, in the '20 and '21 years in particular.

Could you provide a breakdown of the cat losses within Standard Commercial by the different sublines such as commercial auto, commercial property, and BOP?

Sure. Within Standard Commercial, we had the $38.5 million of cat losses. Commercial property was $32.9 million, our BOP line of business was $4.2 million, and commercial auto was $1.4 million.

Our next question will come from the line of Grace Carter with Bank of America.

I wanted to dig into the updated guidance for the combined ratio a little bit. Just kind of considering the 58.4% core loss ratio this quarter, if I assume flat expenses year-over-year or a flat expense ratio year-over-year, like I get roughly 59% implied core loss ratio for the year. I know you all had mentioned some favorable non-cat property losses this quarter, but I just kind of wanted to make sure that my assumptions on that are correct, just kind of as we think about sort of the computing impacts of the higher liability loss cost trends that you all are thinking about versus potential tailwinds from improvement in the Personal Lines book and just kind of where that deterioration might come from?

Yes, Grace, this is Tony. Regarding the non-cat amounts you mentioned, I want to highlight that we have accounted for the favorable variance we experienced in the first quarter against our expectations. We have adjusted our assumptions for the remainder of the year, so we do not expect that benefit to continue throughout the year because of the inherent volatility associated with property.

And that's the primary difference.

Okay. You also mentioned your casualty reinsurance. I was curious about the upcoming renewals. We've heard that reinsurers are becoming a bit more cautious on casualty lines. I was wondering how you are approaching that renewal, particularly in light of the social inflation environment, and if there are any adjustments you would like to make. Additionally, how are you considering this in relation to a potential tightening from the reinsurers?

Yes, Grace, we're in the early stages of our renewal process, which occurs on July 1. We have begun initial discussions and, as with all our reinsurance programs, we will assess our perspective on pricing based on proposed program terms to determine if any structural changes are warranted. This $2 million retention has been consistent for many years, dating back to the late 1990s, and we will review it according to pricing. This approach is similar to how we handled changes in the property market. We will evaluate the indicated rates against expected ceded losses and make decisions based on the economic factors involved, as well as our strategy for managing volatility in our combined ratio results. It is still early, and we are having preliminary discussions, remaining adaptable as we proceed and ultimately make our decision.

Your next question will come from Bob Farnam with Janney.

I'm not trying to add more to the discussion about general liabilities and reserves, but I’m curious if you believe that litigation funding is influencing some of the claims in your business. I'm not sure if the size of the claims is different for you compared to your peers, but I’d like to know if you think litigation funding is a factor.

Yes, I believe litigation funding has an impact across the board. While it may not be the primary driver, it extends beyond just high exposure cases on the product side. There's no doubt that litigation funding is more widespread than that. When examining our litigation rates, we've observed only a slight increase in actual litigation rates, which applies to both general liability and auto liability. It's clear that in certain states, there is a more active plaintiff bar, especially in areas with a challenging litigation environment where aspects like phantom damages are permitted, expanded premises liability exposures exist, and statutory liability theories are broadened. This is where litigation financing tends to focus its investments. Therefore, it affects accounts and books of all sizes, although there is no doubt that these funds are primarily concentrated on larger limits, and our limits profile is somewhat below average.

I was wondering if having your $2 million under limits is as appealing as larger limit companies. Do you feel that moving forward, there will be increased involvement with claims? It seems like this could be a trend that continues as long as the plaintiff bar is successful in their efforts. Are you anticipating facing more litigation in the future?

One of the reasons we discuss the uncertainty ahead is due to the industry's struggle to understand long-term social inflation trends. This is just a data point. In commercial auto, the impact of social inflation was felt more quickly because it has a shorter tail. We're observing some moderation in severity trends within commercial auto, and the pricing environment in that sector has been stronger than in general liability. This might indicate that severity trends are finding their balance. However, the trial bar will persist in seeking opportunities. Ultimately, for change to occur, we need either legislative action to address detrimental statutes or case law, or we need precedent-setting case law that corrects existing bad rulings in that state. From a public policy standpoint, the industry is likely to face challenges until this becomes a consumer-driven issue. In the short term, this affects underwriting companies' results, but eventually, it will influence the cost of goods sold, impacting both personal and business consumers. Once consumers become more engaged with this issue, I believe it will transform the discussion around reform on a state-by-state basis.

Great, that's very good color.

And we have no further questions at this time. I'll turn the call back over to John for any closing remarks.

Well, thank you all very much for your participation. And as always, please feel free to reach out to Brad for any follow-ups. Thank you.

Ladies and gentlemen, that will conclude today's call. We thank you all for joining, and you may now disconnect.